Running an enduring family business
CATHERINE LIPANA-GOMEZ
The importance of knowing how to run and grow a family business lies with the fact that families own around 80 percent to 90 percent of the companies in the Philippines. Even the biggest conglomerates in the country started as small family businesses and up to now are family-led: SM Group, Ayala Corporation, JG Summit, and Aboitiz Group, to name a few.
Despite this statistic, not all family businesses thrive. Studies show that the average life span of a family business is three generations, and merely three percent survive the third generation. It’s the responsibility of the current generation to successfully pass on the baton to the next. Yet, according to the PwC Family Business Survey 2016, only 15 percent of family firms have a ‘plan’ for their succession process.
Inherent strengths
What makes a family business? In the Philippines, the head of the family is most likely also the head of the business. And in most cases, it’s the father, with the eldest son as next in line. The owner-head has control over decision-making and sets the overall strategy. Having that control cultivates the entrepreneurial spirit, which lies at the heart of many family businesses. He becomes more innovative and can take on more risks because he’s only accountable to himself and his family, as opposed to running a business for unrelated stockholders.
On the other hand, this accountability also allows the owner to look at the long-term and create a legacy for the family. Building a business for future generations provides good balance with the risk appetite of an entrepreneur.
A family business also has very strong culture and common values. While a corporation strives to build a corporate culture to easily maneuver itself into its strategic direction, a family business has an inherent culture that naturally comes from the family’s way of life and values. Preserving and passing on this set of values is key to the sustainability and longevity of the business.
And since the business is primarily run by family members, there’s direct communication that’s coupled by a common vision, resulting in faster decision-making.
The big hurdles
When we think of a family business, three main areas of concern arise: professionalizing the business, professionalizing the family, and managing and increasing family wealth.
Professionalizing the business involves adopting good governance framework, strong finance function including robust financial reporting, and tax compliance practices. A family business shouldn’t wait until it becomes big before it worries about these important issues. Neglecting these matters may inhibit faster growth.
On the other hand, taking care of such will allow owners to focus on and achieve strategic goals. They should also make an effort to separate interlocking family concerns and business concerns, such as having separate accounts and expenses for personal and business uses.
Professionalizing the family also entails managing or resolving conflicts within the family. In Ayala Group, a family member is employed because he has earned it, and not because it’s his birthright. As Jaime Augusto Zobel de Ayala puts it, “While they are encouraged to work for the business, they have to prove their worth like anyone else.”
Increasing family wealth is also important as the family grows and incumbent owners hand over both ownership stake and responsibility to the next generation. Therefore, they’ll need to have enough wealth to sustain them when they are no longer part of the business, nor derive income from it. It’s also likely the next generation and extended families will have to rely on the family business as a main source of employment and income — so the business should be big enough to support all family members who’ll depend on it.
Many family businesses dream of becoming big like the conglomerates mentioned above. But what does it take for a mom-and-pop store to become a conglomerate one day?
Sharpening the saw
One can’t rely on entrepreneurial spirit alone. It’s noteworthy that the heirs of the ‘big boys’ had acquired a remarkable education and did well in school. Lance Gokongwei, Zobel brothers Jaime and Fernando, and Christopher Po of Century Canning Corporation, to name a few, earned their degrees (most of them with honors) from Ivy League schools.
Some also worked elsewhere before joining the family business. At Aboitiz, where meritocracy is valued, some family members work for two years outside Aboitiz before applying for a position within the group. Aside from proving their credibility in the positions they aim for, working outside also gives them objectivity in running the family business.
In one of PwC’s global surveys on next generation of family businesses, 70 percent have worked outside of family business to gain useful experience before joining the family firm.
Another way to develop a family business is to bring experienced and competent outsiders, either in management or board levels. They carry fresh and independent perspectives, which complement the family’s know-how and innovative spirit.
Siew Quan Ng, Family Business Leader of PwC Asia Pacific, said, “To reach full maturity, a family firm needs a strong board of individuals with relevant experience, and a wider perspective, complemented with some independent and objective views.”
Thinking BIG…
In her interview with PwC for the 2017 MAP CEO Survey, SM Investments Corporation (SMIC) vice chair Teresita Sy–Coson shared, “Scale is the name of the game. We cannot talk about just being local. Whatever business you have, if you don’t scale up in terms of volume or in terms of spaces, either inflation would eat you up or competition will.”
Scaling up doesn’t only mean expanding existing business. One can also grow by acquiring other businesses that will bring value to stakeholders. And choosing a company requires identifying both strategic fit and possible risks.
Going public or entering into partnerships forged with a common vision also provides the opportunity to develop a family business’ potential. This worked well for the SM Group. Ms. Sy-Coson imparts, “Your partners will bring in new concepts and views. As long as you have a common vision, I think partnerships will be helpful for your growth.” She adds, “If we did not go public, maybe there won’t be other investors that will push us to do the numbers. The investors, as partners, are the ones who really push us to expand.”
John Gokongwei, Jr. shares the same view. “Unless placed under the spotlight of the public eye, a family-managed company would not be under pressure to perform. We would become soft and flabby.”
…and for the long term
In the Ayala Group, new generations are taught the difference between ownership and stewardship — i.e., the next generations have a responsibility to preserve and build on the family’s legacy through their own contributions. The current owner-managers are not only responsible for the status of their business now but also what it will be like for those who will inherit it. And they need to make sure that the business is both stable and nimble for future growth.
In SM Group, planning is likewise never short-term. “We don’t do things six months, [or]one year ahead. We always look at what can be five years from now,” SMIC chairman Joe Sio said.
And in JG Summit, John Gokongwei emphasized the importance of being family-run to achieve longevity: “…remaining family-managed would imbue the business with the stability, strong culture, and long-term vision necessary to see our investments bear fruit.”
While keeping family culture, values, and traditions is essential for longevity, it’s also vital that family businesses evolve. At this age where the big retailer Amazon doesn’t own a mall, and the world’s largest hotel chain Airbnb doesn’t own a hotel, a family business needs to continually develop to keep pace with these disruptors. It can’t just rest on its laurels, as the success of today may no longer be relevant tomorrow.
After all, the owner doesn’t only care about his family now, but also about the generations to come.
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Catherine H. Lipana-Gomez is a Deals & Corporate Finance Director of Isla Lipana & Co., a member firm of the PwC network. For more information, please email markets@ph.pwc.com. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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