Family Business in the Philippines: Is Your Family Business Built To Last?
Is Your Family Business Built to Last? By Jacob Reuben Cabochan
Wealth does not last three generations, echoes a famous Chinese saying.
The wisdom of the proverb seems to be affirmed by the March 2012 Forbes’ billionaire list where the five of the six Filipino tycoons included are in the first generation: Henry Sy, Lucio Tan, Andrew Tan, Eduardo Cojuangco, Jr., and Roberto Ongpin. A walk through Philippine business history yields the observation that fortune built by one generation is often lost by subsequent generations.
Kunio Yoshihara, in an article on Philippine businesses published in the December 1984 edition of the Southeast Asian Studies, outlines business leaders and notable businesses during the 1950s to 1970s. Among the highlighted movers are Manuel Elizalde, Eugenio Lopez, and Albino Sycip, and while some of the discussed enterprises are the Silverio Group of Companies and China Banking Corporation. While some of the families mentioned in the article continue to boast vast fortune, it is a wonder why they cannot now claim to be pioneers in the current Philippine economy.
For one, the Silverio Group of Companies was earlier granted an exclusive Toyota dealership during the sixties, only to be replaced later on by George Ty of the Metropolitan Bank and Trust Company (Metrobank) in the eighties when Toyota re-established its presence in the Philippines. Albino Sycip co-founded in 1920 the China Banking Corporation, only for Henry Sy to take on the bank’s reins in the nineties through SM Investments.
Another example is Eugenio Lopez’s Philippine Commercial International Bank (PCI Bank), wherein John Gokongwei bought a controlling share in the eighties. Eventually, PCI Bank became part of the Henry Sy empire – Banco De Oro (BDO). A similar story is Tanduay Distillery, sold by Manuel Elizalde in 1988 to Lucio Tan. It is clearly evident that the Taipans slowly bought into the “old rich” Filipino families, as discussed by Alfred McCoy, in his book, Anarchy of Family.
While there are many reasons why families lose their businesses from lack of strategic direction to poor general management, my experience as a consultant of Premier Family Business Consulting (PFBC) reveals that the key component of family business continuity is the philosophy of stewardship.
Ownership vs. Stewardship
Most business founders see their respective family businesses as extensions of themselves. Hence, they do not differentiate between company and personal assets, as clearly evident in the widespread practice of charging personal and household expenses to the business. The justification appears logical at first glance – that it is the right of the founder to reap personal benefits from the enterprise, as the business would not have come to life without him. Consequently, founders, and even some successors, find it difficult to shift from the mindset of “my business” to “our family business,” and to recognize a more visionary purpose of ensuring business continuity as opposed to merely maximizing personal wealth.
In the 1st Ateneo Family Business Leadership Summit, Jaime Augusto Zobel de Ayala, CEO and Chairman of the Ayala Corporation, one of the oldest conglomerates in the Philippines, expounded on their stewardship of the Ayala’s family legacy. He emphasized how he and his brother, Fernando, believe that current business owners do not merely have the right of possession over their respective family businesses; rather, they are holding their family businesses in trust for future generations.
In the same summit, Dr. John Ward, one of the world’s leading Family Business experts, echoed the same view of leadership in family business as embodied in stewardship. He shared that leadership in a successful family business is not built on charisma but humility, considering that the overriding purpose of a family business is continuity, reaching beyond maximizing profits. A family business must place at its forefront the goal of preserving the assets and fortifying the reputation of the owning family.
A 2004 study by Belen Villonga of Harvard Business School on the effect of family ownership, control and management on firm value concludes that “despite the cost associated to the family’s excess control, the benefit of family ownership make minority shareholders better off than they would have been in a non-family firm.” However, upon further analysis of the results, the positive value effect of family firms is entirely attributable to the first generation family firms. Second generation firms seem to weigh down the overall value of family firms, while third and later generations firms tend to have the same value as non-family firms.
One possible reason for the difference in value of the first and next generations can be traced in leadership. First generation firms are more valuable because the founder, the prime mover and main visionary, is still active in steering the company. There is no ambiguity in mission and strategic direction. There is one clear decision maker.
However, as the second generation becomes more active and hands on, divergent opinions arise and various viewpoints steal the helm. Necessarily, conflict follows. Luckily for the second generation, the founder is still present to marshal any dispute and younger generations almost always defer to him out of respect and/or filial piety.
One conflict management strategy usually employed by the founder is to spread the members of the next generation into different departments in the family business. As the business grows, the spread goes further into different branches or companies such that each member is given a certain degree of independence and accountability that makes him answerable only to the founder.
A web of uncertainty emerges once more when the founder passes away, akin to the dilemma faced by Apple with the untimely demise of Steve Jobs. This insecure situation is aggravated by critics questioning the sustainability of the family business: Is the enterprise truly rooted in the family or does its vitality rest solely on the founder? Jim Collins, in his book Built to Last, asks a stimulating question – Was the founder merely a time teller or a clock builder?
Family Feuds in Business
In the article Family Feuds in Big Business, Wilson Lee Flores explores the highly publicized conflict between the heirs of Ramon Siy Lai, whose family brought in the Philippines the brands Jag Jeans, Kenny Rogers and Seattle’s Best. The death of the founder exposed the absence of a planned organized succession. As a lasting solution, Flores proposes that the siblings take advantage of the diversity of their family business, separating themselves among the various ventures. Flores even shares the case of business partners Lim Ke Seng and Yu Chi Hua, co-owners of Keng Hua Paper, who purportedly decided with the toss of a coin how to split up their business. Lim eventually gained control of Aclem Paper Mills while Yu managed Keng Hua/Globe Paper.
In the same article, Flores highlights other stories where feuding family members have resulted into the family splitting up to venture into their own respective businesses. He cites Robert Kuan, who left their family business Ling Nam Noodle House, to start the now well-loved Chowking. There is also Robert Coyiuto Sr., who left family-run Pioneer Insurance to establish the flourishing Prudential Guarantee and Assurance, Inc.
While the conflict management strategy of assigning conflicting family members to different departments or ventures of the family business is apparently successful in bringing about a semblance of harmony, it escapes some founders that employing this solution actually primes the business for eventual dismemberment. The strategy provides members of the next generation the platform to establish their own respective territories, with their business assignments providing clear boundaries.
Moreover, if the founder ran the family business without underscoring in the next generation the concomitant mission of promoting stewardship, a concept that the President and Chief Operating Officer of JG Summit Lance Gokongwei describes as “giving the next generation wings,” then members of the next generation would all be too excited to gain control of their own “personal” businesses and without regard to preserving familial business unity.
With this analysis, we can revisit the Harvard Business School study with a viewpoint that the reason why second generation firms dip in value, as proffered by the study, may be that it is in this batch of entrepreneurs that businesses find themselves in danger of dissolution, as siblings entertain thoughts of independence from their own family businesses after the respective founders pass away. Once a particular enterprise survives this challenge and eventually passes an intact family business to the third generation, a strong message is communicated to the investing public – that the family is committed to the business for the long haul, and the venture may reasonably be valued the same way as a non-family firm.
Clearly, considering the family business as a family legacy whose longevity depends upon a prevailing spirit of stewardship may be the first step in surmounting that mountain of a challenge of family businesses reaching the third generation. Stewardship may be a bitter pill to swallow, especially when pride creeps into the picture. It is only in an honest admission and recognition by the founder and the second generation that on their shoulders rest the determination of the existence of a family business that may be nurtured and cherished by the next generations would a family business boast an endurance worthy of mention in the annals of Philippine business history.