Tag Archives: business bloodline

You are not my real brother…you’re just my half-brother!

MANAGING a family business is already a complex affair. “Family” and “business” are intertwined into a mix of so many challenges, from business to family values and generational differences.

In coaching family-owned businesses, I usually pay close attention to the family issues that are often carried over to the business. By default, the founder, the spouse, the next generation successors and grandchildren will continue to be relatives after the transfer of the business. Adding the issue of strong emotional experiences (both positive and negative) and it quickly becomes obvious that in most families the relational dynamics far outweigh the financial or business issues.

Governance and succession in a family business are perhaps the most critical elements among the many unique challenges of family businesses. Many marriages end in hostile separation or divorce, and many adults have children from their first marriage. Many of these parents will remarry, perhaps adding new children to the marriage, creating a blended family. A blended family can include half-siblings, step-siblings and children from the current marriage.

Managing a blended family can be a key moment for the survival of a family business, especially when families procrastinate, are unprepared, lack the strategic perspective or are caught up in emotional issues.

The do nothing or ‘bahala na sila’ attitude

A KPMG study highlights the need for an extra space to be made for complicated family trees, which may involve children from a previous marriage, offspring from an extra-marital affair, adopted children, or some other form of half sibling. Because of the potential for emotional upheaval, some owners avoid the issue entirely, adopting an attitude of “Let them figure it out when I’m gone.” This mindset to me is a dangerous setup and will have dire consequences.

Sibling rivalry is a very real problem even in “regular” families, so it is even harder to imagine the extent of competitiveness and jealousies between adopted, half- and step-siblings.

The children of a family business owner’s ex-wife, for example, may feel left out, but the children of the new wife will now have more “say” in the family business. The permutations of the family setup are numerous, but the insecurities and jealousies triggered as a result of these blended family members can manifest into a full blown conflict if left unresolved.

If the business owners/parents are not clear on explaining things, everyone can feel confused. This can breed jealousy, insecurity, hurt, competition, and significant loyalty conflicts.

Extra-marital children have rights

Legally, extra-marital children do indeed have inheritance and other rights, and any inheritance claims – provided paternity can be proven, for example – will be favorably awarded by the courts.

When incorrectly handled, the dividing of an estate or family assets can get acrimonious under such circumstances – and it could well negatively impact the future success and sustainability of the family business.

To mitigate drama and in-fighting down the line, or when you are no longer around, it’s in the best interests of both the family and the family business to ensure that the family unit is a cohesive and strong one.

To promote harmony between siblings, step-siblings and half-siblings, you can start the process of initiating governance starting in the family and then as they reach employment age transition to the business governance. The following are some tips that you can immediately implement:

  1. When they are still below the age of majority, you must start assessing the children’s preferences and determine their individual strengths, skills and talents.
  2. Initiate and create a forum where a family business adviser will facilitate discussions between siblings and half-siblings about the roles they would like to or expect to play in the business.
  3. Strongly discourage a sense of entitlement – insist that everyone exercise humility and treat each other with respect. This includes respecting the non-family members working in the business.
  4. Start the process of aligning ownership as it gets complicated when your children starts having families of their own and you reach retirement age.
  5. Create a formal sounding board – like a family council – where grievances can be aired and resolved.
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Avoiding family wars

CONFLICTS are part of a normal experience for many small startups and family-owned businesses. However, conflicts (especially the kind where every day seems like a battlefield), can actually inhibit the growth and profitability of the business—a kind of glass ceiling that keeps the family business from reaching its true potential. It causes not only disruption in the business, but hard feelings within the family. The best way to deal with potential conflict is to anticipate and avoid it rather than having to work on resolving problems after they arise.

What to do with conflict?

According to Don Schwerzler, a family business expert in Lawrenceville, Georgia, conflicts in family businesses are more difficult to resolve because there are three levels of interests at play—family issues, business issues, and ownership issues. “A dispute that occurs in one area can quickly cascade into the other areas.” And since the family is an emotional system as well, old hurts and loyalty challenges can last a long time.

On the other hand, a family business has strong points, like children learning about their company at the breakfast table and by the time they are old enough, they already know the business by heart. However, every family business is unique and complex in its own way, so boiler plate solutions don’t always work.

Here are important rules to follow to help you stave off some family business blunders.

Rule No. 1

Hiring family to work at your small business has its pros and cons. Cheap labor, unconditional loyalty and built-in familiarity are a few. Don’t put family members on the payroll if they’re not working in the company or can’t make a real contribution to the business. In a startup or family business, everybody does everything. This is where a lot of conflicts occur. Make sure that everyone has a role and responsibilities that are spelled out and are very clear, says Jane Hilburt-Davis, president of Cambridge-based Key Resources and co-author of Consulting to Family Businesses.

Establish each person’s title, job function, and compensation. And make sure that you have performance reviews for family and non-family employees alike. Don’t award a contract to a supplier who is a relative.

If you don’t have an employee handbook, this is the perfect time to get one. If not, you are asking for trouble. And there ain’t no trouble like family trouble. Policies for things like overtime, paid holidays and disciplinary guidelines must be comprehensive and you should have them in writing. Some family members might entertain feelings of entitlement – which translates into unreasonable expectations in terms of advancement, rewards and compensation.

The content of family employment policies differs from one family business to another. In developing its family employment policy, the family should focus on the rules, conditions, and processes that allow it to attract and motivate the best competence available. Once developed and agreed upon by the family, the written employment policy should be made available to all family members. This will help set the right expectations about family employment among all family members.

Rule No. 2

Special favors given to family members and friends demotivate employees and set a bad example. Don’t create two classes of employees—family vs. non-family. Be careful not to show family members special treatment, without any justifiable reason/s. Sometimes, great employees resign because they feel they can’t go up in the corporate ladder thinking that family business is open only to bloodline members.

Perhaps, your relative is a very good performer. If you reward him or her, perceived nepotism may arise. There will be people, without question, who believe the sole reason for your cousin’s success is because he or she is your family member–unfortunately, they’ll just never get past it.

Nearly anything could be construed as favoritism. Can you handle it? Is he worth it? Like any other decision in business, you need to give the prospect of bringing aboard a family member a lot of thought, and it’s imperative that you have a “back door” strategy just in case things don’t work out.

Rule No. 3

Be careful not to abuse family relationships. Meaning, don’t either reward or punish someone because they are a relative with whom you have personal history, says business and tax consultant Augustus McMillan. “If others are disciplined for bad behavior, your family member must be disciplined also.”

Of course, emotions are always involved. Think about it: How is your cousin going to feel when you, as his boss, scolds him for some mistakes committed. He’s going to take it personally because you have a personal relationship. Harboring ill feelings is not good for business.

At the same time, you need to reward and praise exceptional work. “Treat any employee, including family members or friends, special if they deserve it,” says McMillan.

To be continued.

Does a dividend policy buy peace in the family?

THE Philippines is predominantly a family business market and most businesses were set up by the baby boomer generation (born after World War II). Expectedly, a significant chunk of family enterprises are going through a generational change in the next five to 10 years.

What is alarming is that most businesses remain unstructured with no formal holding company.

Being unstructured translates to a very informal organization with the senior founder, likely to be aged between 55 and 75 years old still calling the shots purely based on gut, employing traditional methods, and likely to be very discretionary.

Additionally, you add another equation where the next generation members in their 30s and 40s, likely to have a family of their own and with family needs increasing, the issue of dividends sharing becomes a nagging concern.

According to F. Visscher, for many family firms, the lack of a dividend policy is a serious omission at best, and a recipe for a shareholder-relations disaster—or a family feud—at worst.

He opines that a dividend policy formulated without consideration of other liquidity options, and outside the context of the company’s overall capital needs, is also a serious mistake.

Family goals and business goals are different

Visscher again articlulates that the lack of liquidity is one of the most common sources of discontent voiced by the shareholders of family firms. As the family and the business grow, the disparity in the financial and economic goals of shareholders increases. The shareholders active in management want the business to grow and the stock to appreciate.

They prefer to see “excess” cash reinvested in the business, rather than frittered away on dividends.

But the inactive shareholders tend to see their equity as an investment on which they are entitled to a return comparable with other investments. Oftentimes, they view the business as more of a cash cow than a long-term family enterprise, especially if they do not have other sources of income.

For starters, dividend policies should always form part of the shareholders’ agreement.

What is a good formula for crafting a dividend policy?

Just like my colleagues coaching family businesses in the ASEAN region, I am always confronted with the same question.

Many family businesses always assume that there is a “rule of thumb” for setting dividends. For all practical purposes, crafting a dividend policy is not easy. I have had coaching work in ASEAN where family leaders have a policy of not paying dividends. For some, they distribute all available cash.

So what then is a good formula? Fundamentally, the focus should be on what’s right for your family business and what can the business afford? How much do we need to reinvest back into the business?

A most common example is to budget a set percentage of profit after tax. The usual practice is a progression of increases starting with five percent, seven percent then 10 percent, but again the rate will depend on the financial health of the company.

I normally recommend that dividends usually start with a low rate. Just the same, I have listed the following “best practices” guidelines in setting up a dividend policy:

  • A clearly articulated dividend policy is needed to establish expectations among shareholders/family members.
  • Shareholders must be made aware as to when and under what circumstances the company will pay dividends.
  • Shareholders must be made aware as to how much they can receive. I coached one family where dividend amounts have been pre-agreed in the beginning of the year and released in December.
  • While a dividend policy might represent a compromise of interests, it is important that the policy is evaluated every year.

Who sets company dividend policy?

When should dividends be paid? To whom? How frequently?

How large should the dividend be?

How flexible should the policy be?

The Ayala Corporation: 181 years of brand leadership and steady growth

IN THE world’s most dynamic region, family companies occupy the commanding heights of capitalism.

Ayala Corp. is one of the longest-running family businesses in the Philippines. For almost two centuries of its existence, it has become an icon in the business sector, as it continually adhered to its core principles and ideals for seven generations. The corporation started in 1834 and was founded by Domingo Roxas and Antonio de Ayala. It has been in existence for the past 181 years.

The family started out in agriculture then diversified into everything, from construction, to water to telecoms. Since then, the family has been moving towards a clear vision and adhered to an “enduring set of values”.

Currently, the organization is led by two brothers from its 6th generation–Jaime Augusto and Fernando. The siblings run the holding company that sets the strategy. Three children from the 7th to 8th generation are working their way up the corporate hierarchy.

Family businesses must have a shared vision to grow

Jaime Augusto has a glowing vision of the company as the driver of his country’s modernization. The company has always taken a leading role in this, from building infrastructure to supporting corporate philanthropy. But, in recent years, it has increasingly focused on the mass market in an effort at “nation-building.”

Sharing about how the family has maintained business leadership for generations, Fernando said that he takes a “professional, independent, and disciplined” approach to running its businesses. He explains that the Ayala family has remained united, and ensured orderly leadership succession through the years.

The success of the Ayala family is evident in the corporation’s diversified portfolio and increasing profits. They have professionalized and focused the company in recent years. The six main businesses, namely water concession, property, telecoms, electronics, call centers, banking and recently, infrastructure and energy, have been listed on the stock exchange and put in the hands of professional CEOs, but the family remains at the heart of the firm.

How does the Ayala Group view expansion?

Jaime once said, “We’ve always believed in the possibility of mergers and acquisitions as a way of expanding.”

That explains why the conglomerate has achieved partnerships with business leaders locally and internationally. As it is but natural for the Ayala Corp. to seize opportunities as they come, the time is right as the ASEAN Economic Integration looms. Jaime adds, “There’s a positive process that’s taking place. The momentum of lifting all the standards in the region to a new level is good for all of us. We’re all growing as countries, and the region has increased its trade among our countries. It’s an exciting time for all of us.”

He further adds, “Very entrenched domestic industries that have lived in a fairly protective environment will have a tough time, anyone who has not had the kind of pressures to bring down cost, to be more efficient, to take productivity up, to look for talent that is imaginative, find solutions. Anyone in industries that have been very closed will have a tough time adjusting.”

Ayala extends its reach to the huge ASEAN market

Among the 10 member nations of the ASEAN, Ayala has built a significant presence in Vietnam, joint venturing with the local utilities company, SAWACO (Saigon Water Company). I used to regularly visit their five-man operations in Ho Chi Minh City in a small decrepit building, and every year I was witness to positive changes in their operations.

Their expansion in Vietnam can be attributed to their huge success in 1997 when Ayala won the concession agreement from a Philippine government utility company and formed Manila Water. Today it offers reliable water supply to more than eight million customers. That success paved the way for their confidence in expanding their presence overseas.

Ayala/Manila Water’s start up years started with lending their expertise in a Word Bank-funded consulting engagement with SAWACO. Today the five–man team of water engineers has become a full-blown joint venture agreement focused on water concession. They are currently aggressively pursuing water expansion projects in Indonesia and have quietly extended their reached to ASEAN’s last frontier, Myanmar.

Family businesses must explore overseas market

GOING regional is the path small and medium enterprises (SMEs) are encouraged to go for in the Philippines. The opportunities are plenty.

While the large companies in the Philippines are eager, careful and taking every opportunity as it presents itself in the ASEAN Economic Integration on a more in-depth and long-term vision, the emerging enterprises are in the process of learning and finding ways to expand in the more basic levels.

Our SMEs are like toddlers who are starting to walk and explore. They should think strategic so they can make their products relevant. The past year, I have helped a handful of family businesses expand overseas especially in stable economies like Singapore and emerging growth areas like Indonesia and Vietnam.

At present, my coaching work requires me to handhold a number of companies seeking out opportunities in the ASEAN region. Help is available, and more changes are expected in due time to support the needs of these family enterprises.

Can family businesses from the Philippines thrive in the global arena?

As the ASEAN economic integration begins with its daunting challenges and the world economic center of gravity shifts to Asia, how can we in the Philippines take advantage of opportunities and adapt to irreversible changes? I have identified some inspiring stories of family businesses in the country who successfully hurdled the challenges. Let me start with my former boss and mentor of eight years, Dr. Andrew Tan’s listed company, Alliance Global, Inc.

Alliance Global Group, Inc.

One of the most inspiring new “rags-to-riches” billionaires of Southeast Asia is Dr. Andrew Tan of listed firm Alliance Global, Inc., the new $3-billion holding company for his three major businesses – condominium-developer Megaworld, the world’s biggest brandy producer Emperador Distillers, Inc. and 49 percent shareholdings in the nationwide Philippine franchise of McDonald’s fastfood chain.

It is difficult to believe that authentic “rags-to-riches” sagas built on honest hard work still happen in this modern and complex world. The son of poor immigrants from Fujian province, south China and himself born overseas, Andrew grew up in downtown Manila dreaming of someday owning a store or small business like many of his peers’ families (See my past columns of Andrew Tan’s rise to the top).

Emperador: A global brand after acquiring Whyte and Mackay for P31.7 B

One of the amazing accomplishments of this self-made businessman is his unexpected success in making his homegrown Emperador Brandy into the world’s largest-selling brandy in terms of total number of bottles sold. Tan’s firm sold 7.2 million nine-liter cases of brandy last year, and plans to soon expand into Thailand, Vietnam and the vast China market.

Sources said there were originally 16 groups interested in Whyte & Mackay, but these were shortlisted. Tan personally oversaw Emperador’s win in London over Western conglomerates such as the French luxury giant LVMH Moët Hennessy Louis Vuitton, American liquor group Brown-Forman (producers of Jack Daniel’s Tennessee whiskey), Italian beverage group Gruppo Campari and Russian billionaire Roustam Tariko (producer of Russian Standard vodka), after two rounds of bidding.

Despite being ranked as one of the country’s wealthiest billionaires, Tan remains unassuming and self-effacing when asked about his “rags-to-riches” saga. Here are excerpts from the exclusive interview as featured in The Philippine Star, “Bull Market, Bull Sheet”, by Wilson Lee Flores:

What are the benefits of Philippine companies going overseas?

Apart from boosting our long-term economic strength like other Asian economic powers, Philippine companies expanding overseas and going beyond our comfort zones or going to some uncharted territories, will help sharpen our management skills. This is also positive for the country in terms of raising the prestige and international profile of the Philippines as a fast-growing economy with our own foreign investors, too, going abroad. This Emperador investment in Whyte & Mackay has also increased interest in Philippine tourism among the British people, Europeans and other foreigners, who in the past might have had little knowledge about the Philippines.

Why did you audaciously decide to invest in this British distillery?

I believe this Emperador Distillers investment in Whyte & Mackay is good for the Philippines as a whole, not only beneficial to our business. I believe that our Philippine companies can be globally competitive, although not many have invested beyond Asia like going to the US or Europe. The recent notable ones are Manny V. Pangilinan’s PLDT Group investing in the German tech startup firm Rocket Internet in Europe; John Gokongwei Jr.’s Universal Robina has also this year bought New Zealand’s biggest snack producer, Griffin’s Foods. All these are positive developments, a good sign that we in the Philippines can also go global.

(sorianoasia@gmail.com)

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I am excited to deliver a very timely real estate talk on Sept. 25, 2015, a Friday, at the AIM Conference Center in Makati. The title of the one-day talk is “Anticipating a Real Estate Bubble? Manage Your Growth During Uncertainties”. To reserve slots, please call the organizer, Octopus Branding, at 0915-9108686.

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.

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!