From Where We Sit

Family enterprise: To infinity and beyond

Picture for a moment a Philippines without SM, Metrobank, the Aboitiz Group, and DMCI. Creating such a picture will probably take a lot more time and effort, because it is simply unimaginable to think of a Philippines without these powerful brands. You might even be thinking how crazy I am to conceive such an absurd idea. This thought springs from the passing of the people behind these brands in recent years.

These brands are among the many owned and managed by some of the most influential families in the Philippines. A family-owned business may be defined as any business in which two or more family members are involved and the majority of ownership or control lies within a family.

According to Harvard Business School, family firms account for two-thirds of all businesses around the world. The United States Bureau of the Census reports that about 90 percent of American businesses are family-owned or -controlled. In Southeast Asia, 65 percent of total listed companies in the region are family-owned. In the Philippines, 80 percent of businesses are family-owned and -controlled. Family-owned companies continue to dominate the Philippine business landscape, according to a report by Credit Suisse Research Institute that showed the country ranking 11th globally in terms of the number of family-run firms.

The inevitable departure by demise signals the changing of the guard in most family enterprises. At least two of the large family enterprises in the Philippines are now on their sixth or later generation, yet majority of the top family businesses are still being currently controlled by the second generation. This brings me to my earlier point of powerful Philippine brands disappearing.

There is a famous Chinese saying that goes “Fu Pu Kuo San Tai,” which literally means “wealth does not pass three generations.” Based on the Chinese saying, the first-generation founder works hard to build the business. The second generation inherits it and grows the family fortune, while the third generation squanders it and destroys the business. The Chinese saying actually makes a lot of sense, since the second generation business owners are actually siblings who lived in the same house and know each other very well. The third generation, on the other hand, is comprised of cousins who do not know each other as much.

A number of research studies support this Chinese saying. Recent worldwide research shows that the mean age of family control in the family’s core company is 60.2 years. In 2010, Businessweek said that less than half (40 percent) of family businesses survive to the second generation and 13 percent continue to the third generation, while only a shocking 3 percent survive to the fourth generation and beyond. The odds are not good.

With these numbers, can we therefore say that, eventually, family enterprises will be eradicated from the face of the earth? I say if others are able to surpass the third-generation hurdle, the rest can also do the same. A close examination of family enterprises that are able to survive beyond the third generation shows four best practices:

Advertisements

First is the presence of a strong family constitution. A family constitution is a formal document that sets out the rights, values, responsibilities, and rules applying to stakeholders in the family business, as well as provides plans and structures to deal with situations that arise in the course of the family business operations. It will take a lot of openness and humility for family members, especially for the founders, to spearhead the creation of a family constitution. I have personally witnessed a founder who is already in his early 80’s, but still refuses to come up with some sort of succession plan. The founder’s reluctance to plan for succession may stem from a denial of mortality, or the fact that the business is dear to his heart. This reluctance may lead to the business not surviving.

Second, which is equally important as the family constitution, is for the founding family members to not only transfer their financial wealth, but also the values surrounding their wealth to subsequent generations. I have heard directly from a second-generation guy that his father told him to return his preowned high-end sports car to the country of origin, when he decided to bring his car from overseas after completing his education abroad. According to his father, since they are in the business of clients trusting them with their money, they should live their lives in accordance with the trust accorded to them. Up until this time, this guy who already took over some of the major businesses of the family, still lives an unassuming life. Other primary values that need to be taught include encouraging the next generation to earn their own money, philanthropy, charitable giving, and volunteering.

Third, successful family business leaders focus on the next generation, not on the next quarter. Leaders ensure that the next generation will have interest in the family business by exposing them to all facets of the business at a very young age. Earlier generations ensure that the next generation is qualified to assume leadership roles in the family business by providing them top-notch education. They put family members in critical roles not only because of blood relation, but also because of qualifications.

Fourth, the family must be willing to bring in professionals to leadership roles when necessary and at the appropriate time. We have heard of second-generation business owners retiring early to be able “to smell the roses.” They are able to do so, because they have allowed competent professional non-family members to occupy positions at the top early on.

We all want to leave a legacy behind or, to some extent, be immortal. Unfortunately, we cannot defy the laws of nature. It might sound morbid, but we will all die. There are ways to be immortal: you write, invent something useful for humanity, or build a business and ensure it will last forever. Forever does exist.

Obet Cruz is a Senior Managing Consultant of Advisory Services. P&A Grant Thornton is one of the leading Audit, Tax, Advisory, and Outsourcing firms in the Philippines, with 21 Partners and over 900 staff members.

 

As published in The Manila Times, dated 30 January 2019