Tag Archives: advisory board

India’s 117-year-old conglomerate: a model family business

THE Godrej Group is a public company and a conglomerate based in Mumbai, Maharashtra, India. It was founded by two brothers: Ardeshir Godrej and Pirojsha Godrej in 1897. The story behind the success began when Ardeshir came about his creation and selling of locks as a response to the alarming citywide crime rates. He also made vegetable oil-based soaps, which was a hit at that time. Pirojsha helped in developing the business into an enterprise that carried an extensive line of industries.

Today, the Godrej Group spans several industries that include chemical and commodities, agriculture, precision engineering, fast moving consumer goods (FMCG), services and real estate. It markets furniture, security, home appliances, and agricultural care products and its expansion extends to three consumer sectors: personal wash products, haircare and household products in Asia, Latin America and Africa.

The family-run conglomerate handles its operations through two holding companies, namely Godrej Industries Limited, and Godrej & Boyce Mfg. Co. Limited. Other subsidiary and affiliate companies are Godrej Consumer Products Limited (GCPL), Godrej Sara Lee, Godrej Hershey Foods & Beverages Limited, Godrej Infotech Limited, Godrej Properties, Godrej Agrovet, Godrej Hi Care (pest management services), and Godrej Global Solutions (ITES).

The third generation as change agent

The amazing transformation of Godrej Group from manufacturing locks and soaps to different industries during the time of liberalization to the current globalization is the result of the ingenuity and innovativeness of its present chairman, Adi Godrej, who hails from the third generation of the family business (following the second generation, which was led by Pirojsha’s grandsons Naval, Sohrab, and Burjor).

Adi is known as a business icon, an Indian industrialist who embraces change. He initiated appointing non-family members as CEOs because the management of the Godrej Group then was not flexible. He initiated and put in place a system in the management structure to make it flexible. He then moved to modernize the management of the group and incorporated new business processes. The inclusion of technology immensely benefited the family business because of his inclination to it. The Godrej Group reached the completion of its restructuring process in 2000-–10 years in the making. Now it prides itself to have formed a stand-alone company per business handled.

Adi and family are considered one of the richest in India. Their estimated net worth–a whopping $11.6 billion as of 2014! What is great about this family is their wisdom towards money. Having wealth that could afford any person almost whatever material possession they want, the patriarch at the helm of the family business has always taught the value of money to his children. As a result, the abounding wealth is from the combined effort of the family.

Adi leads Godrej Group with his brother Nadir Godrej and cousin Jamshyd Godrej. Nadir is the managing director of Godrej Industries and chairman of Godrej Agrovet. Jamshyd is the managing director and chairman of Godrej & Boyce. The 72-year-old chairman’s three children are also working and continuing the family business. Tanya, who is his eldest daughter, oversees the marketing of the Godrej Industries Limited as the executive director and president. Pirojsha, his son, serves the family business as the chief executive officer of Godrej Properties, which is considered one of the fastest growing property arms and one of the largest in terms of revenue (if not the largest). Nisaba, his second daughter, is the executive director of Godrej Consumer Products and is part of the boards of GCPL, Godrej Agrovet and Teach for India.

As we could imply, nepotism comes to mind when we see the members of the family heading the business. So, how does the group face the issue? There simply is the rule that allows the members of the family to join the group, provided they have professional training. The Godrej Group’s chairman values the importance of training his children.

Godrej Group employs 28,000 people. What does the chairman say about his people? “My grandfather, father and uncle placed a lot of emphasis on building housing and schools for employees, which have paid good dividends. Making sure your employees are properly taken care of is a strong lesson we’ve learnt from previous generations,” Adi says. The conglomerate’s chairman values the welfare of their employees, gives financial reward, and opens a world of opportunities to those who display promising performance.

117 years and going forward

That is really something for family businesses. The group is not shy of any track record, and is looking for further expansion at its fourth generation phase.

So, to those who doubt and believe that family succession is impossible for the long haul, take inspiration from the Godrej family.

(sorianoasia@gmail.com)

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I am excited to deliver a very timely real estate talk on Sept. 25, a Friday, at the AIM Conference Center in Makati. The title of the one-day talk is “ Anticipating a Real Estate Bubble? Managing Your Growth During Uncertainties”. To reserve slots, please call the organizer, Octopus Branding, at 0915-9108686.

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Singapore’s richest siblings

TO commemorate Singapore’s 50th anniversary, I have decided to dedicate this column to my favorite city-state and to write about Singapore’s richest siblings, the brothers Robert and Philip Ng.

Rated amongst the best cities to live

But first, let me briefly describe Singapore. Because of my coaching work (real estate and family business) in the Asean region, I have used Singapore as my hub for most family business sessions. Singapore is one of the world’s major commercial hubs, the fourth-largest financial center and one of the top two busiest container ports in the world, at least for the past ten years. Its globalized and diversified economy depends heavily on trade, especially manufacturing, which accounted for around 30 percent of Singapore’s GDP in 2013.

Singapore places high in international rankings with regard to standard of living, education, healthcare, and economic competitiveness and it has one of the highest per capita income and one of the longest overall life expectancy in the world. The country is also one of nine countries in the world with top AAA rating from all credit rating agencies. The Philippines is several notches below, with a fairly credible BBB rating.

Robert and Philip Ng: when siblings unite

Brothers Robert and Philip Ng are sons of real estate tycoon Ng Teng Fong and inherited their father’s real estate empire and continued to bring it to greater heights. Robert Ng is not only a property tycoon, but also a trained lawyer while Philip has a degree in city planning, as well as civil and geotechnical engineering.

The Ng family today builds one in six houses in Singapore. They are known as the HDB (Housing Development Board) of condominiums. There are different routes to success, and although their wealth might not be entirely self-made, their story is still nonetheless impressive.

Forbes listed the two as the 30th richest people in the world in 1997. As of January 2015, Robert, together with his brother, Philip Ng, has an estimated net worth of $11.5 billion. Seems like the Ng brothers are unbeatable when they join forces.

The Ng family owns property giants Far East Organization and Sino Group. Their late father, Ng Teng Fong, developed Far East Organization into a conglomerate with over 700 malls, hotels and condos in Singapore and Hong Kong worth over $6 billion. After their father’s demise in 2010 due to cerebral hemorrhage, the brothers worked together to grow the business.

When the real estate market in Singapore and Hong Kong slumped, the Ng brothers remained unfazed despite their revenues declining by nearly $1 billion to $4.6 billion. They diversified their investments and proceeded to purchase real estate in Australia.

Philip Ng is a Christian and believes in involving Christ in the workplace and practicing Christ-centered leadership. He said, “My people and I would go to our project sites on Sundays, to inspect and ensure the quality of our delivery. But I was making my employees work on a Sunday. It never occurred to me before that it isn’t right because I wasn’t a Christian then. I realized that when I became a Christian and I told everybody that they would no longer work on Sundays, which is a day of rest. What’s so amazing is that I did not know until a couple of months later that the wives of some of my Christian colleagues had been praying for their husbands to be released from this curse. God does amazing things. This is a small anecdote, but I think it had a large impact on the organization.”

Despite their massive wealth, the brothers have not forgotten their roots. In 2011, the Jurong General Hospital was renamed as Ng Teng Fong Hospital after the Ng brothers donated $125 million to the hospital. Philip Ng said, “the gift served to give back to the Singapore community as well as leave a lasting memory of our father”.

Not everyone is born with a silver spoon – some might be luckier than others.

Take Ng Teng Fong, the father of Robert and Philip, who made it from zero to hero, the epitome of a rags to riches tale. He had no rich father, no degree, but made it with determination, hard work and foresight. When he unfortunately passed on, he left behind a legacy succeeded by his sons, who helped expand the business.

Happy SG 50!

The dangers of not initiating succession planning early

ACCOUNTING for more than 96 percent of enterprises in the Asean, SMEs that are made up mostly of small family business firms, are a significant engine of growth in the region. Although perceived as small, their combined contribution to the economy has a great impact.

It is also a fact that most family businesses have a very short life span beyond their founder’s stage and that some 95 percent of family businesses do not survive the third generation of ownership.

In the Philippines, most businesses are small and family-owned. Challenges for SMEs in the Philippines include a lack of research and development, inadequate access to technology, and financing.

This article will focus on intellectual capital management as well as the lack of or inadequate knowledge perspective prevailing in small family businesses. In today’s Information Age economy, knowledge–-not natural resources, machinery, or financial capital–has become the most important factor in business activity.

Intellectual capital is a result of empirical research

Without being too academic, intellectual capital or IC is the combined value of its people (human capital), the value inherent in its relationships (relational capital), and everything that is left when the people go home (structural capital), of which intellectual property is but one sub-component. The term became widely used in academia in an attempt to account for the value of intangible assets on company’s balance sheets.

A second branch that has survived in academia and was largely adopted in large corporations was focused on the recycling of knowledge via knowledge management.

According to Karl-Erik Sveiby in his article “Intellectual Capital and Knowledge Management”, a term is best defined by its use, and therefore it is probably still correct to regard IC and knowledge Management (KM) as twins–-two branches of the same tree. Both Skandia and Ernst & Young emphasize the static properties of knowledge, that is: inventions, ideas, computer programs, patents, etc., as IC.

Correlation to family-owned enterprises

Measuring the real value and the total performance of intellectual capital’s components is a critical part in running a company in the knowledge economy and Information Age. Understanding the intellectual capital in an enterprise allows leveraging of its intellectual assets. For a corporation, the result will optimize its stock price.

In my family business book, “Kite Runner Column” (Article No. 7), I enumerated several reasons why most family-owned businesses fail and what to do about it. One of the reasons is failure to develop a succession plan. Few people find it hard to come to terms with their own mortality and it may be difficult for an entrepreneur to recognize the time when he/she is no longer the best person to run the company. The third generation has not been adequately trained to take over, thus, resulting in failure to continue the business. And this is where the knowledge management perspective comes into play.

Challenges confronting family business owners

Early succession planning ensures the continuity of management, goodwill, operations efficiency and retention of clients in the event of the owner’s departure.

The owner-manager represents the central source of competencies and capabilities in the family firm and sometimes, he retains these assets to his dying day, not knowing why and how to pass them on to the next generation. Another major challenge is in choosing a successor who will chart the future overall direction of the business as well as the highly emotional process of succession. IC plays a role in explaining the competitive advantage of the family business and the successful or unsuccessful family business succession.

One of the surrounding issues involved in the business succession process is the transfer of tacit knowledge embedded in the owner-manager’s mind to the successor. Small firms tend to be loosely coupled, founder-centered and with a low development of operative systems. As a consequence, the organization is not capable to retain and to develop knowledge independently from the owner-manager presence, and might not be able to support the succession process.

Under this scenario, the business struggles to survive and loses its momentum to transition to the next stage of the family business cycle. Inevitably, when the owner dies or loses power by reason of health, the business succumbs to internal dynamics and the pressures of the external environment.

Therefore, it is imperative that succession planning, when initiated way in advance, can be considered a capstone and legacy project for the senior generation leader.

Compensating family members the right way

THE past two months, I have been inundated with emails from readers requesting (some actually “pleading”) for an article on the subject related to compensation.

I deliberately ignored these requests, as I have my own topic calendar until I figured in three (out of seven) family interventions this month and took me aback, as all issues zeroed in on compensation!

So on my flight back to Manila, I decided to informally poll the email requests and expectedly, 70 percent of the emails came from the Gen 2 and Gen 3 family members. This made me decide to write this article pronto. Thank you my dear readers for the “push”.

Gen 2 and Gen 3 concerns

We typically refer to these two generations as the sibling and cousin generation phase. This a a phase in the development cycle of a family business where family members have extended members in spouses, in-laws and cousins, nieces and nephews.

I consider this phase a very complex one and often referred to as the multi-generational stage. When not guided appropriately, it can result in unnecessary conflict.

Is money the root?

They say, “money is the root of all problems”, but this can be prevented if individuals are clear with what is fair and just. This is true in family businesses.

Families involved in business tend to avoid talking about money matters. It is a very sensitive topic and creates so much discomfort to all parties. However, “sweeping this issue under the rug” only adds up to the confusion and dissatisfaction.

I often receive requests for guidance involving sibling and cousin rivalry conflicts. An important thing to remember is that sibling rivalry is a normal aspect of childhood and is simply about competition for parental attention and approval. But when sibling rivalry persists into adulthood, the conflict and self-doubts can be devastating.

Preparing a fair compensation plan

Compensating family members, particularly your own children, is a sticky business. Not all people are really created equal, even though they come from the same bloodline. It is also quite difficult to assess and compare the talents of siblings who are also employees. As a result of the stress that this causes, many family business owners ignore the problem. Thus, the issue of compensation becomes a breeding ground for dissension in the family.

The topic of compensation plans in the family business has found its way into many books, articles and speeches on the subject. For the purpose of this principle I will just note that any compensation plan needs to be well communicated and, of course, as such, should be written and distributed to those covered by the plan. It should contain enterprise goals and goals for individuals, particularly for the possible successors.

There are a number of family businesses that have compensation systems which simply evolved over time or were developed or imposed by previous generations of family members in control. Such systems may be the current cause of irritation, anger or even open hostility. It is very difficult for the family members embroiled in a sticky situation to, by themselves, develop a solution. In most situations, it is better to select a competent professional for proper advice.

Although it is not easy to put aside the anxiety caused by developing a fair compensation plan for your family members, especially children, it is absolutely necessary if business is to thrive.

Fair is equal, equal is definitely not fair

Compensation for members of a family of the same generation is where most problems occur. The usual systems are equal pay for members of the same generation or compensation based upon the fair market value for the position. These are the extremes and there can be variations in the middle. The equal pay system usually arises as a second generation comes into the family business. Dad and/or mom are used to treating children equally, so it seems natural and “right” to pay all the children the same, regardless of their position or their educational and other business experience. “Equal and right” may seem appropriate to dad and/or mom but the children and, unfortunately, their spouses over time may not see it that way.

A kind of creeping irritation can occur and without being addressed, can destroy all the good things about working in a family business. This usually happens after dad and/or mom are no longer in control of the business.

So if you follow the advice of experts, you will design your compensation plan according to these steps:

1. Prepare an accurate job description for each child or sibling. Include responsibilities, level of authority, technical skills, level of experience and education required for each job.

To be continued.

Creating a family employment policy: a must! (part 2)

ACCORDING to an article published by the KBH Group, a full-service chartered accounting firm based in Canada, the best way to manage these expectations—and the ensuing family drama—is to create thoughtfully-written family employment policies. Having these policies in place lets all of the relatives know exactly how the company handles the employment of family members.

In my last column, I explained the first pre-employment condition and highlighted an important rule: the requirements for being accepted into a job post at entry level.

Are the expectations of family members clear, as far as attainment of certain degrees or certifications before they join the company? If so, this should be spelled out in the employment policies, along with a timeframe required for completing the education or training. How about investment of the family business on training for special or technical skills?

At the Ateneo Center for Continuing Education (CCE), short and diploma courses on practically everything about business are offered all year round and I must admit, part of my mentoring model is to encourage family members to enroll and further reinforce their business and management skills. So far, it’s worth every peso invested by family businesses!

In today’s column I will complete the governance aspect related to family employment policies, namely:

Shared vision and mission, participatory leadership and values for teamwork

A family business is strong when all who participate in its development shares a common vision and mission. In the succeeding generations, shared objectives and course of action should be kept in line. Even if changes are needed in the business in terms of direction and management, what is important is that everyone agrees for the better, especially the siblings. Participatory leadership allows the siblings to demonstrate their leadership potentials in specific areas from which each of them is assigned. This way, team effort is centralized in the realization of common goals.

Chain of command and reporting structure

The chain of command from top to bottom must be well-structured and recognized at all circumstances so that proper instructions and orders are communicated clearly. Siblings should comply with this, even if they need to receive orders from a non-family member who happens to be the manager. Surprisingly, a non-family member could be a better option compared to a sibling as someone to receive orders from or report to. Reporting to a brother or a sister may result in over-familiarity, leaving the report unaccomplished or unattended, thinking that the sibling would not reprimand or pose sanctions.

Remuneration and benefits

The remuneration and benefits have to be reasonably provided, making sure that it is adequate (covers basic remuneration rates) and market-related. Doing business for the sake of the family’s gains is good, but it is not an upright decision when work pay for siblings is too high. It will result to budget constraints in the family business. Underpayment, likewise, is detrimental, because it shows lack of fairness and loses the siblings’ right to receive adequate remuneration despite business entitlements.

Performance evaluation

The siblings should not be excluded and given special treatment at performance evaluations. All personnel should be evaluated objectively so that in the process, the quality of service is monitored and further developed; and the productivity of the family business is identified.

Recognitions and rewards

Careful attention must be made on determining who among the siblings has become outstandingly productive and who among the siblings has shown professional participation and significant contributions. Rewards could be a little tricky to determine but like remuneration, it has to be reasonably set. Rewards and recognitions are external motivations, but what is more important in this is that it fosters appreciation where credit is due, which gives more strength for the siblings to work and accomplish excellent results for the business.

Termination and/or retirement

A clear timeline will aid the siblings about when to prepare to take over the family business. Also, when the siblings have taken over, they will be guided in the future through the timeline in knowing when they will have to be terminated (when malpractice is done) or be retired (when their term is finished).

There are other indispensable elements where governance policies can further focus on. Some of these clarify issues related to training, experience, communication and code of conduct. In the end it all boils down to the primary objective of institutionalizing these policies so discretion and conflict of interest is mitigated.

Finally, compliance and consistent application is one major step in harmonizing relationships and at the same time address sustainable growth amidst a complex business environment.

Soriano: Crafting solid agreements: your most important step (part 2)

ACCORDING to the family business firm Lansberg and Gersick, governance is concerned with all of the ways that the interests of owners are reflected and implemented in the organizational system. It is inherently about institutionalizing control.

A business first model

Working family members must realize that in business, there are targets to be made, budgets to stick to, profits to raise, deadlines to be met, a network of people to deal with, and a lot more responsibilities that need to be taken according to corporate standards.

Unfortunately, these could not be delivered if the members of the family are not on the same page, not in agreement with what is expected of them, and unaware of how their expectations would have to be limited for the good of the family business. They could be just all over the place and doing whatever they want without considering the resources and proper procedure. This is why formalizing agreements becomes an indispensable tool to institutionalize governance.

Shareholders’ agreement

Apart from the family charter or constitution, I will start with one of the most important formal agreements family business owners must document and put in writing to avoid a future, irreparable and unnecessary conflict among family members.

This agreement is sometimes referred to as an owners’ agreement but in the Philippines, we use the term shareholders’ agreement. As the word implies, this agreement highlights the need to align ownership and board level governance, as it makes known to all who are concerned about ownership. It also includes the governing aspects of their relationship not covered in the articles of incorporation. It is also an agreement that crystallizes ownership rules to suit the particular requirements of the company and its shareholders.

Another important element of the shareholders agreement also defines the qualifications of being an owner and the description of particular events that could be reasons for transfer of ownership.

In short, some questions listed below can be resolved in the shareholders’ agreement:

What will trigger a transfer of ownership?

Who can own shares?

How should an ownership position be valued?

What are the terms of the purchase?

When can I sell my shares?

To whom can I sell my shares?

I can go on and on but what is crucial is for family members to start the process of formalizing ownership and board governance policies through a shareholders agreement before it’s too late!

Why do we need one?

A common question that I usually encounter among family business leaders is, “We have no major quarrel in the family, therefore, why do we need one?”

The answer is quite clear! For as long as the family head is in full control then ownership issues are “muted”. Family members do not openly talk or assert ownership concerns while the senior business leader is still on top. It is the family members’ way of avoiding a very sensitive topic while showing respect to the senior generation members.

But what if all of a sudden the senior family member or the head of the family falls ill, or is crippled or suffers a debilitating disease and dies? Almost instantaneously, the business itself may die or be permanently disabled on the same day, not because something wrong was done, but because nothing was done!
Compelling reasons to start now

There are many reasons why every family business must formalize ownership structures. I can highlight the top three:

To avoid future disputes by defining the relationships between and among shareholders;

Anticipating the issues which could cause disputes; and

Agreeing on acceptable ways of dealing with them.

As a guide to the readers, I have also listed below a number of issues commonly covered in the agreement:

Shareholders, classes of shares and shareholdings;

Governance in the board of directors and top management level;

Funding of the company and shareholder’s loans;

Transfer and restriction of shares; and

Valuation of shares.

A shareholders’ agreement is one form of governance agreement that is both normative and legally enforceable. Therefore, it would be best to look for a tax lawyer or a tax specialist with extensive experience in ownership transfers employing tax efficient methods. A corporate lawyer can also be a good reinforcement to make the agreement legally binding.

(sorianoasia@gmail.com)

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I will be in Cebu on July 25 (Saturday) to deliver a talk entitled “Creating Growth Opportunities for Family-Owned Enterprises”. The venue will be at the Choi City Seafood Restaurant in Banilad Town Centre. This timely one-day Franchise and Marketing Seminar is organized by the Octopus Strategic Branding Group. Those interested to attend, please call Mr. Danny Wong at 0917-8900063.

Why family business owners are reluctant to hire executives

“Prof, my children have been pressuring me to get senior executives but I have time and again refused to heed their advice. You know why I am scared of hiring professionals? Firstly, my children will not have anything to do anymore and they will become lazy. Secondly, senior executives are expensive plus they have no loyalty and they might even steal my money or they might just be spies sent by my competitors!”

Is this an act of definance by the founder/visionary in his mid-sixties? Is it unfounded? I don’t think so.

Is it a confession of the uncertainties when you bring in senior non-family members in the business? Yes and possibly other real fears!

This caselet is related to what I wrote in my previous column (When Generations Collide April 28, 2015). We cannot blame the baby boomer generation, a generation born from 1946 to 64. We must instead learn to respect understand and empathize with them. It will do well for the next generation leaders to reflect on the history of the business and how the founders struggled to keep the business afloat through sheer hard work.

Two years later

That exchange took place more than two years ago, after a colleague endorsed me to coach the family with their governance and succession plan. After several sessions with the family members where we balanced the concerns of the senior generation members and the need of the next generation leaders to pursue changes to keep the business relevant, the patriarch finally relented and heeded my advise to try out one HR senior executive.

Fast forward two years later…the business has senior executives in key departments covering sales, marketing, operations, logistics, accounting and business development with one of his children appointed as COO and with full oversight control over these departments. The patriarch retained senior family members to manage the finance, purchasing and audit departments and his growth has been remarkable, registering double digits.

The first HR executive was unsuccessful and stayed briefly (he was right on the loyalty part) but the succeeding hires proved to be the turning point. He has never been happier with his decision and has expressed his intention to aggressively pursue expansion in other countries.

Business first equals growth

The success, growth and well-being of a family business depend on its ability to attract, motivate, develop and retain outstanding executives who are not kin.

Any business with the intention to continue and grow needs executives with a profile matching the business culture, organization, and strategy (Gallo, 1991; Welch, 2005). This holds especially true for family businesses, since they tend to have a specific and distinct business culture (Denison et al., 2004).

In many cases the managing responsibility is partly or even fully handed over to non-family executives. The process of bringing a non-family executive into a family business requires much forethought and planning. Because of this, family business owners think a lot about how to determine the “fit” of a prospective non-family executive in a values-driven family company.

Executive hiring that went sour

When I was consulting for an Asean-based company a few years ago, I was introduced to the newly hired chief finance officer (CFO) whose previous engagement was as finance director of a multinational corporation (MNC). The CFO had the credentials, having worked with the MNC for more than 12 years. He even confessed that his new engagement will likely be his last, as he was already seven years away from retirement age.

Four months into the job, he shared his dissapointment that the financial statements were deliberately not being shared to him by the patriarch. Only the sales figures were being disclosed. The following month he tendered his resignation. When the patriarch asked me what went wrong, I took that opportunity to gather the family members for a full session articulating the importance of critical areas that must be included when hiring professionals.

According to Becker (2005), professional skills such as practical and leadership experience, industry knowledge, a sure sense of money and risk, entrepreneurial engagement, correctness and transparency are important, but for family enterprises determined to engage and retain professionals, the answer lies in the eight overarching attributes highlighted below:

  1. The hiring process must not only involved the HR department but ideally the family advisor and a select group of senior generation leaders including the patriarch.
  2. Roles and expectations of the candidate and the business owner must be defined and put in writing.
  3. Define the relationship between the senior executive and the working and non-working family members.
  4. The fit between the candidate’s social skills and the family’s cultural and value system.
  5. The candidate’s sensibility to deal with family issues and his understanding and sharing of the family’s interests.

To be continued…