Tag Archives: chinese family business

Rule No. 3 No Extra Marital Affairs

The rule definitely appears controversial and has raised many eyebrows every time I introduce the topic during Family Governance talks. Even my best friend who is a second-generation Chinese family member weighed in on the rule that it is very “un-Chinese”.  I leave the readers to interpret what my Chinese friend said.

Lee Kum Kee Policies

But for the 129-year-old Lee Kum Kee Group, the family edict related to extra marital affairs is one of the most powerful rules that the third generation and grandson of the founder, Lee Man-tat has required the next generation shareholders to obey especially those sitting on the board.

There are equally unique and governance rules that Lee Man-tat espoused as well and these are:

Rule No 1: No Late Marriage

Rule No 2: No Divorce

Rule No 3: No Extra Marital Affairs

Any family board member who contravenes Rules No. 2 and No. 3 are expected and required to leave the board automatically and will no longer have the right to speak and participate in the family council and business decision-making process.

Family Constitution and Family Council in 2002

For Lee Man Tat, these rules are important and crucial as the family members have grown in size, some have lost personal interest in the business, the market environment has become complicated, shareholder ownership are dispersed and owners have varying versions of where the future is headed.

After weathering through two major corporate battles, the Lees agreed to finally set up a family council and draft a family constitution in 2002.

In an article penned by Jeff Pao, he highlighted the different corporate governance systems set up by LKK and what came out of the initiatives, most notable was organizing the Family Council Board and the roles of the 29-member family assembly.

Pao further contends that the family council is in charge of the family business, family office, family investment firm, family charity fund and family training center.

I will share more initiatives that the Lee Kum Kee incorporated in their Family Constitution:

a. All family members have to work at least three to five years in other companies after graduating from college if they want to join the family business

b. Family members who violate rules do not just defy the values enshrined in their Family Charter but will also lose their moral and business ascendancy to implement, enforce and discipline erring or wayward family members.

c. Another powerful value worth repeating in this article is their strong adherence to “Si Li Ji Ren“, a Mandarin saying meaning “Put Other’s First, before yourself.”

d. If family members quit the board or company for personal reasons, they can sell their shares to the company and remain as family council members

e. The next generation are allowed to inherit shares even if they are not involved in the daily business operations.

These rules are the heart and soul of Lee Kum Kee’s flourishing existence and the foundation of their commitment to pursue business excellence and stewardship so the business can be handed to the next generation seamlessly.

Lee Kum is the name of the founder, and Kee is a Chinese word that means a new family business.

The enterprise will be celebrating 130 years in 2018 and there are no signs of the group slowing down. On top of their strict observance of protocols, the other critical and indispensable governance rule that the Lee family initiated was formalizing their succession plan.

The family believes that the plan is critical to sustaining a long-lasting family business.

(esoriano@wongadvisory.com)

Shocking succession decline in Asia (part 2)

THE      subject of family-owned business is important globally, and more particularly in Asia where it is further exacerbated by the fact that many of these enterprises are first or second generation family-owned companies.

In my coaching work all over Southeast Asia, topics like succession planning are still pretty new and, in most cases, have not yet received significant attention. They are aware of the importance that a seamless succession planning can do to the organization but see no urgent need to initiate the process. It doesn’t help that the first generation are highly entrepreneurial and often tend to “forget” about succession planning until the last moment. This makes the task even harder.

Professor Joseph P.H. Fan emphasized in his book “Critical Generations – Out of the Succession Dilemma of Chinese Family Businesses” that the cause of the shocking succession decline in Asia is based on two compelling reasons. First, intangible assets such as values, skills and networks, although commonly found among the first generation entrepreneurs, are difficult to pass on to the next generation. Second, Chinese families also face various family, industrial, and institutional obstacles such as family brain drain, regulatory changes, and political uncertainty, which can devastate the families and their businesses.

To overcome these challenges, Fan has identified three critical tasks that every family enterprise must embrace. These are family governance, ownership design, and corporate governance. These effective tools should be consistent with Chinese cultural values. For the benefit of my regular readers, I have written more than a dozen articles related to these three tools. Perhaps it is important to urgently reflect on these governance tools, especially that succession is inevitable.

Procrastinating is fatal and can lead to devastating consequences.

Western influence may compromise the family business

Direct transplant of Western solutions are usually not applicable. In addition, Chinese business founders often prefer to “lock-up” the wealth and ownership of the business in some way. Family members however, expect to get a “fair” share of their inheritance and after the founding generation passes away, family fights and court action inevitably follow.

Again, my articles about the local Cosmos family and HK’s iconic Yung Kee Restaurant are two cases of a failed succession. For the Yung Kee group, the acrimonious parting happened right after the death of the patriarch, erupting in bitterness, litigation and the eventual liquidation of the business. On the other hand, for the Wong Family of the Cosmos Beverage fame, the business ended up being sold to the RFM group triggered by the demise of its patriarch, Henry Wong.

Younger members will never replicate the work ethic of the older generation

Another important observation according to Prof. Fan is that successors of family business, even if they share values and passion of their parent founders, may not be seasoned business professionals. It is therefore important to build a strong management team and put into place an effective model of corporate governance which can effectively monitor leadership and results. They must also implement more transparent accounting practices and greater checks and balances.

Chinese family founders are using a range of different methods to solve their succession problems and often these are ad hoc resulting in varying degrees of success. Ad hoc can mean employing crude means like informal delegation, allowing a bit of empowerment, rotating function, etc. But because of the higher incidence of family conflict, many Chinese business founders are now becoming more proactive on this matter and are joining classes and seeking knowledge to resolve the succession issue.

Fading traditional values

Another culprit in internal family disputes is the fading of traditional Chinese culture and values within family businesses. “The Chinese practice of bequeathing all the family wealth to the eldest son is diminishing. This tradition, although perceived by some as ‘unfair,” has helped preserve family wealth and preempt conflict. However, the new generation of Chinese family members who have been influenced by Western culture and education are adopting different family values such as equality and democracy. Succession planning says Prof. Fan is therefore, “less straightforward and more complex with greater potential for family disputes.”

The only solution to these pervasive problem is for families (and not just confined to the Chinese) to install and enforce a system of governance, internalizing shared values, consolidating family interests and putting in place a mechanism to manage conflict. Succession planning in the Asian context is really a precarious event.

Chinese values shunned by next generation leaders?

I AM back in the US for talks and family coaching sessions after only a month in Asia. Counting the many exchanges with colleagues at the University of San Francisco (USF), I finally delivered a lecture last Thursday related to Asian business strategy and growth as well as the impact of trading blocs like ASEAN and APEC.

Many thanks to those who attended my lecture most notably the department chairs, faculty members and the multi-racial business students comprising several classes belonging to USF’s School of Management.

Ateneo and USF are Jesuit Catholic universities.

USF is a top tier Jesuit Catholic university and the school’s main campus is located on a 22-hectare setting between the Golden Gate Bridge and Golden Gate Park. The hilly campus has a breathtaking view of downtown San Francisco. Belonging to the same order like Ateneo de Manila University, it’s Jesuit Catholic identity is rooted in the vision and work of St. Ignatius of Loyola, the founder of the Jesuit order.

Prof. Danny, a colleague at the Ateneo Graduate School of Business and a senior family business advisor for Chinese families at W+B Strategic Advisory Group is an MBA alumnus of USF.

Asian family business

I immensely enjoyed the interaction with students and I counted more than half of the participants of Asian origin. Most of the questions were trained at their desire to know more about the dramatic changes in Asia and validates their beliefs that there is indeed a plethora of business opportunities worth growing outside the US.

My lecture was an obvious eye opener and talks are under way to organize an even bigger event. If this major activity materializes, it will be a collaboration with the Chinese Business Studies Initiative of the University. That is another article in itself but briefly, the USF China Business Studies Initiative provides a platform for collaboration with the influential Chinese business community and bridges Chinese business leaders, public policy makers and academics. It will be an honor to be part of that initiative in the near future.

Why? I get to understand in a much deeper perspective why the present crop of Chinese leaders are deliberately asserting and re-introducing history and confucian values to overseas based Chinese. That concerted effort supported with funds from prominent Chinese businesses has gained considerable influence in practically all areas…business, academe and the political spectrum of a given community. Depending on how you look at it, my firsthand knowledge mentoring family businesses is a good starting point…I have noticed next generation Chinese family members’ waning interest in embracing Chinese values and practices.

Chinese influence has waned in family enterprises

For thousands of years Chinese rulers have wanted to build dynasties. And in Asia, family businesses remain a tradition. But something new is happening in Chinese family firms.

As the younger generation of Chinese business owners have been increasingly exposed to Western values, the gap between them and the older generation has become a source of conflict in the succession planning of family businesses.

Incidents of family court business disputes are increasing at an alarming rate, with poor succession planning as a root cause of the problem. The impact of poorly managed succession and family infighting can be significant, both for the family business and investors.

Some think the best path to future success is to ditch leadership by family members – and instead bring in the professionals.

But is this the right way forward? What lessons can we learn from the family approach to business?

Professor Joseph P.H. Fan, researcher and educator of family business governance at The Chinese University of Hong Kong wrote in his book “Critical Generations – Out of the Succession Dilemma of Chinese Family Businesses” that the market value of 250 listed family firms in Hong Kong, Taiwan and Singapore declined by almost 60 percent on average starting from five years before to the year the family patriarch handed over the business to his successor.

In other words, if an investor bought shares valued at $100 five years before the succession, the value of their shares would be reduced to an average of $40 three years after the succession. Hong Kong companies dropped the most, losing some 80 percent on average, with Taiwan and Singapore family-owned companies falling about 40 percent and 20 percent, respectively. Hence, if greater China entrepreneurs take Professor Fan’s advice, there should be a lot more public companies. He wrote that a stock market listing is a good way to distribute ownership to family members.

Chinese values are difficult to pass on

According to Prof. Fan, the reason behind the shocking succession decline is two-fold. First, intangible assets such as values, skills and networks, although commonly found among the first generation entrepreneurs, are difficult to be passed on to the next generation. Second, Chinese families also face various family, industrial, and institutional obstacles such as family brain drain, regulatory changes, and political uncertainty, which can destroy or ruin the families and their businesses.

To be continued.

Succession gone wrong: HK’s roast goose restaurant (Part 1)

A FAILURE in succession can shut down a family business almost overnight. Read on about the rise and fall of the famous Hong Kong Yung Kee Restaurant.

In Hong Kong, family business disputes in court rapidly increased in recent years because of poor succession planning by the founders. According to Prof. Joseph Fan of CUHK, nearly a third of the members of the Forbes Hong Kong Rich List are 70 years old or beyond, and the succession of new leaders has to be settled sooner than later.

As the Chinese founder gets old, he or she has to pass on the business to the heirs. And yet, many Chinese founders ended up following their family tradition as they do not want to see their own business empire falling apart as a result of partition. It is quite common that Chinese founders would want their offspring to stay together and lead the businesses they have founded.

However, this is often “wishful thinking as next generation family members often want to sell the business and move on” (Fan 2012a). Some Chinese founders in the olden days even passed away without making a will. Of course, this leads to court feuds among family members and the infighting will be even more complicated and severe if the founder has several wives or concubines, which was quite common in old Hong Kong.

One classic example that I had the opportunity to research is that of Yung Kee Restaurant, a Chinese restaurant located on Wellington St. in Central Island, Hong Kong, famous for its roast goose, not only among locals but foreign tourists as well, who take boxes of goose on their flights home to share with family and friends, giving rise to the nickname “Flying Roast Goose”. Founded in 1942 by former street food vendor Kam Shui Fai, the Yung Kee Restaurant is acknowledged as Hong Kong’s roast goose institution.

It is said that Yung Kee’s goose is much meatier and more succulent than a roast duck. The goose skin is crispy, almost crackling – oily, but not greasy. Thus, it was named by Fortune Magazine one of the world’s top 15 restaurants in 1968.

The Kam family feud is worth serious reflection for family businesses in Asia, especially those contemplating the transition from first to second generation. This case can be held up as an example that Asian family-owned businesses should invest time in addressing the family business succession planning with very story focus on family governance, ownership governance and corporate governance. All three are inextricably linked and short cutting the process can compromise succession planning.

Such is the case of the heirs of Hong Kong’s famous Yung Kee roast goose restaurant, which has finally been given permission to liquidate because of sibling rivalry.

Following founder Kam Shui Fai’s death in 2004, the restaurant was left in the hands of Kinsen and Ronald, his two sons. But Kinsen soon complained to the court that he was blocked from running the business despite holding 45 per cent of the shares, with Ronald holding 55 per cent. Days before the court ruling, however, he died, leading his family to accuse his younger brother Ronald of being behind his death. The incident has since caused the contentious dispute to erupt in bitterness.

At the Hong Kong’s Court of Final Appeal last December 16, Ronald Kam made a last ditch effort to Chief Justice Geoffrey Ma to rescind the winding up order for the restaurant. However, this was rejected by Chief Justice Ma, citing a lack of jurisdiction and the late stage of the case.

Reports say the late Kinsen’s family, who applied for the court liquidation order, demanded HK$1.3 billion or US$168 million for their 45 percent stake. But Ronald, who currently runs Yung Kee, was only willing to pay HK$1.1 billion in cash and almost HK$100 million worth of assets.

A liquidator will take over the holding company to find buyers for its assets, including the restaurant and the building it occupies in Hong Kong’s Central district.

Yet this does not mean that Yung Kee will shut its doors immediately. Lawyers say the liquidation process will likely take months if not years, and as a subsidiary of the holding company, the restaurant can keep running in the meantime.

However, if the restaurant and building are eventually sold off separately, the establishment might have to find a new home. One of Yung Kee’s most defining features, the only charcoal-fired oven on Hong Kong island, would finally end up closing shop. It is sad to note that the Yung Kee empire and an institution in Hong Kong will soon close it doors because of a sibling squabble in the next generation. How unfortunate, senseless and unnecessary!

In Part 2 of this column, I will lay down some strategies on how to prepare for a successful generational transition in the family business.

The makings of a successful Chinese entrepreneur

THE overseas Chinese or hua-chiao is a term commonly used for the Chinese in Southeast Asia. In a broad sense, overseas Chinese refers to all Chinese who have left their home in China to live and work abroad. The Chinese migration to Southeast Asia, particularly those who arrived between the 18th and mid-20th century, was mainly for economic reasons and focused in economic activities related to employment and trade. Their prime motivation was to make a decent living and survive in a practically new frontier.

Unparalleled work ethic

In my new book, “Ensuring Your Family Business Legacy”, I identified eight out of the twelve most famous Filipino entrepreneurs and included wealthy businessmen whose families emigrated from Mainland China to the Philippines before World War II when the economy was strong.

I mentioned in my last column and I wish to reiterate that even if each took a different approach, there is one common denominator among them before they became famous Filipino entrepreneurs — unparalleled work ethic.

While there are other factors that contribute to their achievements, such as being frugal, a good financial sense, and a strong network of fellow Chinese businessmen for support, the collective image of these famous Filipino entrepreneurs working hard and diligently has stuck in the minds of budding entrepreneurs in the Philippines. Indeed, if one aspires to become a successful entrepreneur, there is much to learn from the Chinese-Filipino entrepreneurs.

The following list, initially three due to limited space, gives an overview of the most famous Filipinos in business, mostly Chinese with a handful of Spanish mestizos. I will start with the four most popular and successful businessmen. I am hoping my readers can learn a lot from these icons of the Philippine business scene.

1. Henry Sy. Henry Sy came from an impoverished family in Jinjiang, a town near Xiamen, China. The entire family left China in 1936 to help the family patriarch manage a thriving convenience store in Manila.

As a child, Henry Sy used to work twelve-hours a day to help his father run their small family-owned convenience store. During the Second World War, their store was looted and burned so the young Sy switched to buying whatever he could to sell for a profit. Hard times and a humble background in retail shaped and molded the young Sy.

Today, he is touted by the business community as the richest man in the Philippines, with a net worth of 14.4 billion, according to the Forbes.com list in March 2015. With over fifty malls and stores of various sizes, the most recognized of all famous Filipino businessmen has foothold in virtually all the major cities in the Philippines. They recently expanded to Guam and China.

To date, four of the ten largest malls in the world are owned and operated by the Sy family.

2. Lucio Tan. Lucio Tan worked as a janitor in a cigarette factory. After a few promotions, he eventually resigned and started his own tobacco company. This company grew to capture a 60 percent share of the Philippine market. With its strong revenues, Tan was able to diversify.

This famous Filipino businessman now owns several prominent Philippine companies, many of them blue-chippers. The biggest chunk of his fortune comes from his Hong Kong-based Eton Properties. Among the country’s wealthiest businesmen, Tan is arguably the most enigmatic. He is the most elusive, preferring to stay out of the limelight. His 2015 net worth is $4.3 billion, according to Forbes.com.

3. Andrew Tan. Andrew Tan is a billionaire businessman from the Philippines who engages in real estate, liquor, and fast food. His network currently stands at $4.5 billion, based on the Forbes’ billionaires list. Originally a simple immigrant from China, Tan was born in the Fujian province of China. He spent his childhood at an apartment in Hong Kong shared by other families and had a short supply of basic necessities. (Please see related article last year where I wrote about his phenomenal rise).

Later, he moved to Manila where he studied accounting at the University of the East. For economic reasons, he would head to school walking rather than riding on public transportation. During his early years in business, the local government unit of Quezon City honored him as “Businessman of the Year” in 2004. Tan now runs the Alliance Global Group, Inc. (AGI), composed of four companies, namely Megaworld Corp., Emperador Distillers, Inc., Travellers International/Resorts World Manila and Goldern Arches Development Corp.

Are New Year’s resolutions and Confucian values still relevant?

Succession is a process and must be planned

One of the thorniest and often times, an extremely unpleasant topic, is the issue of succession. It is not only isolated to the founder and the successor but a complex process that involves all actors both inside and outside the family business. Resistance to succession comes from multiple levels, including individuals (founder-entrepreneur, successor, siblings), groups, the non-family employees, the family business organization and its external environments. Senior generation leaders contemplating of retiring in five years must start the planning process.

Uncertainty over who will succeed

Ownership issues are often generational and lead to conflict between parents and their children. If the senior generation is not prepared to give a definite call on when they intend to retire, the result can be frustration among the successor generation about their lack of control over the operations and direction of the business.

Confucian orientation can be a Catch 22 scenario

Chinese family businesses are heavily influenced by traditional Confucian ideology and are currently facing more challenges in succession and human resource management. The general success of Chinese overseas business firms has raised interest on the influence of Chinese ethnicity on business performance and many government officials and academics attribute the success to Confucianism.

Confucianism is a way of life propagated by Confucius in the 6th to 5th century BC and followed by the Chinese people for more than two millennia. Although transformed over time, it is still the substance of learning, the source of values, and the social code of the Chinese. Its influence has also extended to other countries, particularly Korea, Japan, and Vietnam.

Confucianism teaches that the family is the basic unit of all social organizations and the core of society is not the individual, but the family (Hofstede, 1991). The business is considered a family property. Moreover, it is claimed that individuals are indistinctly connected with and embedded in a family, a group or social organizations so that they do not exist as a separate entity (Krug, 2004).

Following the value of Chinese collectivism, family members cannot do anything that will facilitate the success or the achievement of an individual to disturb the harmonious settings within the family, thus, under the circumstance of collectivism culture, individual desires are always repressed.

The Confucian value of caring for older parents reduces fear of losing financial support. This value is a very important lesson on filial piety that is taught from childhood. One of the most famous stories about filial piety teaches how children should sacrifice themselves for the sake of their parents.

The story tells how a son used his body heat to melt the ice on a river to get fish for his sick mother. In general, Confucian ideology contributes to factors that promote successful succession. Confucianism supports cooperation, mutual trust, harmony and obedience to senior leaders’ decisions. When conflicts are not resolved, piety precedes all other virtues.

Confucianism criticized

In South Korea, there has long been criticism of Confucianism. Many Koreans believe Confucianism has not contributed to the modernization of Korea. For example, South Korean writer Kim Kyong-il wrote an essay entitled “Confucius Must Die For the Nation to Live”. Kim said that filial piety is one-sided and blind, and if it continues, social problems will continue as government keeps forcing Confucian filial obligations onto families.

Corporate succession scandal

Such dilemma came to light late last year in South Korea involving the hotel and retail giant, Lotte Group. It was a corporate succession scandal involving the intense rivalry between the two sons that led to the younger one turning against the 92-year-old Mr. Shin, his father and founder, and ended up ousting him as the general chairman.

Strait Times highlighted in its report that “while corporate succession battles are not unusual in South Korea, a son overthrowing his aged father is almost unheard of in a Confucian society where respect is valued.” This is what a catch 22 is all about, a dilemma or difficult circumstance from which there is no escape because of mutually conflicting or dependent conditions.