All in the family

Family-run businesses remain a dominant force in the Philippines. Some of them are, in fact, among the country’s biggest and most diversified companies that have already seen generations successfully passing the baton.

A report by the Credit Suisse Research Institute earlier this year showed that the 26 family-owned companies in the Philippines alone have a whopping market capitalization of $131 billion, while average revenue growth was estimated to reach close to 15 percent since 2006.

Family-owned firms are common as well in the Philippine real estate industry. Some have successfully transitioned management from their founders to the succeeding generations, while the younger companies are now in the process of a critical transition.

Critical indeed because according to the Conway Center for Family Business, more than 30 percent of all family-owned businesses are said to survive into the second generation, while 12 percent will still be viable into the third generation. However, only 3 percent of all family businesses operating at the fourth-generation level and beyond, survive.

So what does it take for a family business to survive and thrive across generations?

Defined parameters

Prof. Enrique Soriano, executive director at W+B Advisory and program director for real estate at the Ateneo Graduate School of Business, stressed that governance and a “business-first mindset” are key.

“As the family business transitions to the second and third generation, the business’ governance becomes more complex as more family members are directly or indirectly involved in the business, including children of the siblings, cousins and in-laws,” Soriano explained.

According to Soriano, it is crucial for family members to ensure the clarity of roles and responsibilities; define the decision-making parameters; collectively agree on the direction of the business in the next five to 10 years; and formulate a family charter that has an enforceable Code of Conduct.

Family members must also treat the business like a business and not a family piggy bank, he added.

Ensuring continuity

Soriano likewise stressed that for families to ensure continuity as well as sustained growth and relevance through generations, they should have a vision-centered organization with a road map covering five to 10 years, and a professionally run management team that is merit-based and accountability-driven.

Families must keep in mind that only qualified members must be allowed employment in the family business.

But if all goes well, there are clear advantages to having family members on board the business including shared values,  common goals, reputation, inexpensive labor, flexibility and less hierarchy, as well as commitment.

Pitfalls to avoid

There are, however, a few setbacks in having family members on board, especially when there is a lack of objectivity and vision. Such conflicts may eventually lead to succession problems.

Soriano pointed out that there are a number of reasons that can lead to the demise of family-owned businesses:

Patriarchal control and the leader’s refusal to empower members of the next generation;

The sudden death of the leader aggravated by an unprepared successor, which can destabilize the business overnight;

The next generation’s sense of entitlement and unclear rules and roles among members;

Dangerously mixing family, business, and ownership that can be a source of conflict;

Ownership or wealth transition is not planned ahead, which may cause the likelihood of conflict among the offspring

Poorly crafted or lack of succession planning; and

Disruptive in-laws.

“Approximately 75 percent of the work are highly dependent on the owner-manager making all the major decisions related to finance, marketing, sales, operations and management. As a result, leaders have no more time to think strategic initiatives. Most owners are focused on the operational side of the business and they miss out on the bigger picture,” Soriano said.

“In the next five years, 30 percent of family-owned firms will experience a change in leadership due to retirement or semi-retirement; 25 percent of senior generation family business shareholders have not completed any estate planning other than writing a will; 80 percent want the business to stay in the family, and 20 percent are not confident of the next generation’s commitment to the business,” Soriano explained.

Ensuring longevity

To ensure a firm’s longevity, Soriano stressed that families should start crafting a vision and mission statement for their company; re-energize the organization with a governance covenant (or a family constitution); align family and business values; pursue stewardship over ownership; hire the right professionals; allocate resources to invest on training family members, and formalize business processes and procedures.

Soriano said the most important thing to keep in mind is that the older generations must be able to pass on their own learnings, particularly those relating to the concept of stewardship vs. ownership, shared values of hard work, professionalism, innovation and integrity; and creating a culture of meritocracy.

Here are some stories of real estate firms that have either transitioned successfully or are still in the process of doing so.