Frugality is not always a virtue

“Ang-Kong [grandfather] is so barat,” moans a third-generation Tsinoy vice president of their family food business.  “We have all heard for the millionth time how he and A-ma [grandmother] saved what they had in order to provide for the family.  Ang-Kong wears shirts with holes, patches his slippers.”

“He expects us to be like him,” the grandson continues.  “In our family constitution, our first and most important family value is frugality.  Everyone is required to be frugal.  We don’t spend recklessly, but in the business, every time we request for things, Ang-Kong says ‘no.’  How can the business expand?  He won’t listen.”

Confucian virtue

Frugality is a Confucian virtue, and historically, Chinese businesses are known for their cost-consciousness.

In their book “The Dragon Network,” Indonesian family business consultants A. B. Susanto and Patricia Susanto said:  “A Chinese entrepreneur sees the business as an empire that will be inherited by his children … [so he] reinvests their earnings… They will always spend the money carefully … to ensure that the business is in a healthy condition and has enough money by the time the children take it over… [They] are also ready to sacrifice short-term financial profit to achieve sustainable growth and development in the future.”

Cost-consciousness is necessary in business.  Much of the global recession of 2008 was caused by Western consumers living beyond their means, spending on houses they could not afford, egged on by unscrupulous bankers and other lenders focusing on instant profits instead of customer benefits.

Successful family businesses are cost-conscious, seen, say the Susantos, in “the low margin and high volume of products in penetrating markets, rigorous control on inventory to achieve low capital investments, and the reduction of costs of doing business.”

Golden Mean

Confucius also talked about the so-called “Golden Mean.”  Traits are best practiced in moderation, even virtues.

For instance, the value of hard work is also included in the constitution of the family featured here.  The patriarch worked extremely hard, and it is only right that he would expect his successors and descendants to do the same.

But while the patriarch was battling with economic survival, and worked 24/7, it may not be realistic to expect that his grandchildren will work as hard.  The grandchildren work six days a week, starting from 8 a.m. and never leaving before 6 p.m.  I do not question their commitment or work ethic, and indeed, a couple of them have fallen ill due to the constant pressures of the job.

The same is true of frugality.  Being cost-conscious is fine, but when this is pushed to the extreme, then business may suffer.  When new ventures are avoided, calculated risks not even taken, necessary investments not made—all in the name of cost-consciousness—then the business may stop growing and start deteriorating.

How can the family business survive in the face of much competition, I gently asked Ang-kong, if innovations are not made?  A couple of the grandchildren are engineers, and want to go into research and development, to attract more segments of the market.

They plan to invest in new technologies, not for reckless growth, but for economic survival.  I reminded Ang-Kong that he became very frugal because it was necessary for survival in those days.  But times have changed—scrimping on every centavo and avoiding sensible investments is not the only, and is perhaps, not the wisest, use of money now.

We need to put values in the right context.  Certain values, such as integrity, are non-negotiable.  Whether in olden days or now, trust is necessary.

But other values are not set in stone.  “Harmony, solidarity, and seniority can be maintained as long as they bring benefits to the business,” say the Susantos. “Cost-consciousness should be balanced with the ability to take calculated risks so that potential investments can be made.”

Ang-Kong asked for detailed reports on possible costs, which the third generation dutifully supplied.  Check and balance procedures were also institutionalized to minimize unnecessary expenses.  Outside advisers were hired to provide objective views on new ventures and investments.

So far the company is doing well.  Ang-Kong is still very frugal, especially in his personal life, but in the business, the various generations are working towards the golden mean. Next Friday: The Problem with figureheads.

(Queena N. Lee-Chua is on the Board of Directors of Ateneo de Manila University’s Family Business Development Center.  Get her book “Successful Family Businesses” at the University Press (e-mail [email protected].)  E-mail the author at [email protected].)