Enduring Family Businesses
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This presentation is about how families successfully pass their businesses to their children and over several generations. This is directed at family businesses that are getting close to a "passing the baton" stage. Presented by Leo Valdes (leo.valdes.jr@gmail.com)
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Editor's Notes
- Leo Valdes is a business/IT consultant and a master presenter. He is the manager of the Uptown Vancouver Business Improvement Area. He is also an instructor for Washington-based City University, and the University of Phoenix within the Vancouver Lower Mainland area. He also provides advice to the Philippine government on accessibility of technology for persons with disabilities. He has worked for Procter & Gamble, the United Nations, and major companies in Vancouver. He completed his MBA in Simon Fraser University in 2003 and is pursuing a second masters on Human Resources Management and Organizational Development. Hello, cousins and sibs. Thank you for giving me a chance to make a presentation on Family Businesses. This topic, Enduring Family Businesses, is about how families successfully pass their businesses down to the next generation, and keep control of the companies. This presentation will take about fifteen minutes. Whenever you hear the beep, move to the next slide.
- Let’s start off with some trivia. Do you know what the world’s oldest family corporation is? And how old do you think it is? 500, 1000, or 1500 years old? The answer is on the next slide…
- The World’s Oldest Family Company is 1430 year old Kongo Gumi. It is a family of Korean Temple builders based in Japan. It has survived for 40 generations. It’s 40 th president, Masakazu Kongo, is an Architecture and Economics graduate of University of California. Kongo Gumi employs about 100 people.
- Kongo Gumi has lasted this long because of its singular focus. They are the best temple-builders in the world. When times are bad, they downsize. When times are better, they ramp up again. But in 1400 years, it had not grown beyond 100 employees. The family’s singular goal is to build quality temples that will last at least a thousand years, even if they are made of wood. Part of their revenue comes from maintaining the temples they have already built.
- Looking at the oldest corporations in the world, they seem to have similar characteristics. All of them have a singular focus. They try to be the best in the world in what they do. For example, Italian company Fonderia Pontifica Marinelli has delivered bells around the world for 1000 years.
- Kongo Gumi has lasted this long because of its singular focus. They are the best temple-builders in the world. When times are bad, they downsize. When times are better, they ramp up again. But in 1400 years, it had not grown beyond 100 employees. The family’s singular goal is to build quality temples that will last at least a thousand years, even if they are made of wood. Part of their revenue comes from maintaining the temples they have already built.
- Kongo Gumi has lasted this long because of its singular focus. They are the best temple-builders in the world. When times are bad, they downsize. When times are better, they ramp up again. But in 1400 years, it had not grown beyond 100 employees. The family’s singular goal is to build quality temples that will last at least a thousand years, even if they are made of wood. Part of their revenue comes from maintaining the temples they have already built.
- Kongo Gumi has lasted this long because of its singular focus. They are the best temple-builders in the world. When times are bad, they downsize. When times are better, they ramp up again. But in 1400 years, it had not grown beyond 100 employees. The family’s singular goal is to build quality temples that will last at least a thousand years, even if they are made of wood. Part of their revenue comes from maintaining the temples they have already built.
- Another common characteristic is that they remained small. Most of the oldest companies employ less than 100 employees.
- Another common characteristic is that they remained small. Most of the oldest companies employ less than 100 employees.
- Another common characteristic is that they remained small. Most of the oldest companies employ less than 100 employees.
- We also know that family members have led these companies for all those generations. What we don’t know is how they choose successors.
- Family succession in business in the United States and in Canada is not easy. The chances that the family corporation is passed on to a son or daughter is only 30%. This is the same case when transferring from the second to the third generation. So, there is only a 10% chance that the family corporation is run by a family member from the first to the third generation!
- What can go wrong when planning for succession? First, new family corporations that are successful usually grow faster than older corporations. So, they are targets of buy outs. When the children of the founding generation don’t show much interest in the company, the founders sell the business and retire with their gains.
- Secondly, there are no mechanisms for succession. In some corporations, the founder wants to keep control until there is a health crisis. Then, it is too late to get the next generation ready. According to experts, succession planning should happen when times are good, and the health of the founder is good.
- Third, the next generation is not ready or not interested. Readiness includes having the right knowledge, skills and attitude. Knowledge and skill can be learned, but attitude is based on upbringing, and it is critical. Attitude needs to be consistent with the initial intent of the business.
- But why bother transferring to the next generation? Why not just sell the businesses and distribute the proceeds? The most compelling reason is that family businesses are important to economies.
- In the United States, two-thirds of the Fortune 500 companies are family-owned corporations. All over the world, half of the working force is working for a family. Case in point: It is estimated that 10% of the Philippine’s labor force is working in shopping malls. The malls are owned by the Sys, the Ayalas, and us, the Nepos – all families. So, it is important that our family corporations endure, because we are contributing to the Philippine economy. At the same time, a good economy means we have clients for our businesses.
- So, in order for us to succeed at succession, we need to do certain things. Family succession experts recommend these: First, we need to get back to the basics. The most important basics are our guiding principles. In our case, Papang and Ima epitomize our basic principles. Despite World War II, the Huk terrorist movement, the Marcos era, Mount Pinatubo and the Asian recession, our companies have endured. The reason is self-less. It has little to do with profitability and more to do with sustaining the confidence in the Nepomuceno name. Every time we have a set-back, we rebuild. Our family corporations survive because of the principles of Papang and Ima that live inside us, and hopefully guide us in our decision-making. Articulating those guiding principles becomes our shared dream.
- As our family grows, governance will be an issue. Getting together as a family keeps our traditions and common principles intact. The biggest issue in the next few years is how we govern ourselves when there are 30+ third generation cousins instead of 10 second generation brothers and sisters.
- Finally, we must have processes in place for succession. Choosing who will run companies is not easy. Aside from the compensation issues, there is the search for the interest and the right attitude. After that, knowledge and skills can be acquired.
- Here are five possible processes we can look into when planning for succession. We have to let our children know about our corporations. This is not to groom them, but to keep them aware. If they so happen to consider a career in our lines of business, they can be candidates for the future.
- In the 80’s many of us left the Philippines to work abroad. Some of us have come back. Learning about how businesses are run in other countries, or within the Philippines, helps us get ready to run family corporations.
- Team-based management is another possibility. Several cousins work together and eventually, a leader emerges. The downside to this is that taking over a company can result in animosity against the emergent leader. Building a pool of candidates is something we are already doing with the 3 rd generation. With our 4 th and 5 th generations growing up, we also adding candidates to that pool. Finally, rotation gives our current relatives a chance to learn more about the businesses. By rotating roles, family members will find something they really like and be passionate about.
- Here are my recommendations for the those families who are close to the “Passing the Baton” stage
- To move forward, we must look back. America’s most respected companies are doing this. We need to extrapolate the vision of Papang and Ima. We need to use that vision to build our shared dream. Building a shared dream is a possible topic for a future presentation.
- Also, we need to have succession planning now, instead of when we are all in our 70s and 80s. This will not be easy. We can start by keeping the dialogue open within our families.
- Finally, we also have to start planning how we govern ourselves in the future. One family business consultant has suggested the development of what is called a cousin consortium. It is a board of cousins who are willing to govern. We have somewhat started it in the Nepo Business club. However, representation is still based on the second generation family membership. We need to ask ourselves in the next few years if we can still live with that governance structure. Beware though, of power playing. Governance is a serious matter, and should not involve feuding and personalities. A cousin consortium is a round table that helps chart the future of the whole clan.
- Lastly, I want to ask you a fundamental question. Do you want to have a lean and lasting family-run corporation or a growing and lasting family-owned corporation? Let’s look at each option quickly.
- Do we want to be like the oldest family corporations in the world? Do we want to keep our children and grandchildren in charge of the companies as long as possible? If so, can we sustain our families on businesses with a singular focus? Do we want our companies to grow slowly, stay lean and keep it within the family? When we look at the oldest corporations, they had a discipline for succession. The process was simple: the eldest son (or child) took over the company. The family values never waiver – tradition is important. The business did not stray from its singular focus. And, there is strong evidence that the families were always small, not like our large Philippine families.
- OR…. Do we want to be a lasting family corporation that grows and retains our ownerships despite who runs them? These companies have been run by family members for as long as they could, and then allowed to be run by trusted non-family members. Yet, they remain major stockholders of their companies. Think about 3M, Hewlett-Packard, Wal-Mart, Nordstrom, Procter & Gamble and Johnson & Johnson. These all started as family corporations, and they are now bigger than ever. These companies, on average are about as old as Angeles Electric Corporation, but they have grown, slowly at first, and now many times over AEC. These lasting companies have endured and grown. At the same time they are respected companies.
- Before saying goodbye, let me tell you about temple-makers Kongo Gumi today. After 1431 years, Kongo Gumi went into bankruptcy. In 2006, they were bought out by a Japanese construction company. The reason: fewer Japanese are going to temples and contributing to them. Therefore, the problem of a focused and lasting company is that there are no alternative businesses to keep it afloat.
- Thank you for your attention. I hope you liked this short presentation. If you have any questions about this presentation, email me. Thank you and have a wonderful evening.