It Runs in the Blood:
The 3rd JGSOM Business Leadership Forum

Last 1 August 2003 at the Grand Ballroom of the Intercontinental Hotel Makati, members of families running successful Philippine conglomerates shared their experiences with an SRO crowd in the Forum sponsored by the John Gokongwei School of Management of the Ateneo de Manila University. The Forum was entitled: "It Runs in the Blood: Unlocking the Secrets of Successful Family Businesses." In the audience were more than 500 family members from the first generation onward who vied for limited seats to hear insights on how to make their own businesses work.

Family businesses all over the world are some of the largest enterprises and account for a big chunk of the world economy. A more important fact is that a name and a legacy are being passed from generation to generation.

There are issues unique to family-owned businesses. In many cases, the family itself becomes the stumbling block to growth. Central to the problems in family-owned companies is the reality of conflicting personal and business roles. For one, problems in family systems require the resolution of emotional issues, while in business, one needs to be rational to accomplish tasks. Add the fact that "the rigors of the business sharpen sibling rivalries, create competition between generations, and enlarge pride and jealousy when work and home intertwine," said Ricardo Mercado, Professor of the Ateneo School of Management who teaches family business and franchising.

There's a long list of failed Filipino family conglomerates that thrived from the early part of the 20th century up to the 1950's. Some of those that still exist today have become the shadow of their former glory.

Why the demise? Cristino L. Panlilio, President of Balibago Waterworks and a descendant of an energy, sugar milling, and services conglomerate provided an insight: "The first generation were hardworking, diligent, street-smart, enterprising, honest, and frugal. The second generation [have been] sent to the best schools, live a good life, are more cultured, cosmopolitan, but are less business-motivated. They did not feel the hard times so they tend to be more adventurous, reckless or over-aggressive. The third generation [tend to be] spoiled, laid-back, are used to a leisurely life, are too independent-minded, and have a penchant for the arts or mysticism."

Some third-generation family members do not join the family business at all because they would rather not listen to their parents tell them what to do day in and day out.

There are family enterprises that endure and flourish through the years because of the foresight and business acumen of family members running them. These successful ones ensure that principles of good governance and sound management practices are well-entrenched. Others stress the importance of professionalizing the business.

A common thread running through them is a vision for both the family and the business. This vision is agreed upon by all concerned and is written down.

A case and point is the Lopez family, which is into media, power, utility, and communication businesses.

Gina Lopez, from the third generation disclosed that her father, the late Eugenio Lopez Jr., and his brothers ensured that the family vision would be handed down from one generation to the next through various structures and systems. For example, they have a family constitution that contains, among others, a code of conduct for family members, means for conflict resolution so they can resolve things internally and forge a united front to the public, and guidelines on what to do with company shares and voting rights.

The Lopezes have a family council, which is chaired by the current patriarch, Oscar Lopez. It holds periodic meetings attended by family members involved in the different enterprises. They report on how their individual businesses are doing. Other members just express what they think and feel.

But not everything is business. There are regular family dinners, family Olympics, and family reunions. The objective is to create opportunities for members to strengthen family ties. Reunions also provide them with a sense of history and make younger generations feel they belong to a larger group that believes in the same vision and espouses the same values. They have an electronic e-mail group to remind one another of upcoming birthdays, anniversaries, and other special occasions.

Mentoring sessions are in place, too. These are for the benefit of cousins and other close relatives who are not involved in the business but who read and hear about family business issues. The sessions enable them to hear explanations directly from family member involved in the business.

 ‘Memories Are Short'

Writing down and agreeing on a family constitution is far from easy. The Aboitizes, for example already have a draft but are still trying to finalize it. There are disagreements and arguments that sometimes heat up their Castillan blood.

Why is there a need to have a family constitution when the business had been doing well in the past even without one? Asked this question during the Forum, Eramon Aboitiz, a fourth-generation descendant of a family engaged in power, banking, transport, food, and property, replied: "Memories are short."

He disclosed that the heads of each branch of the family used to be the only ones who talked, and sometimes messages were not disseminated correctly. Besides, the family continues to grown and having a family constitution can reinforce the spirit of unity among the younger generations.

Unique to the Aboitizes is the mandatory retirement at age 60. "We believe this not only helps the organization remain evergreen, but also allows the younger generation to move up the ladder as people retire," Aboitiz explained.

In most family organizations, the reins are passed only when the elders decide to give up authority or when they pass away. In some cases, the founder who devoted much of his time building the business may not have been prepared to let go. At the start, he made all the decisions, probably exposing his children to only some aspects of the business operations, and only he saw the big picture. As a result, the children did not develop the same commitment. In other cases, the skills of the next generation were not honed to prepare them for the eventual turnover of the responsibility.

Echoed by all the Forum speakers was the need to professionalize the business. "Family members do not have the monopoly of skills," Aboitiz said. "We recognize the need to bring in professionals if we expect to grow and achieve our aspirations. The only way we can do this is to ensure they have all the opportunities to develop and optimize their careers with our group." In wanting to attract and retain the best and the brightest, Aboitiz said they try to remove the perceived glass ceilings for the professionals and have consciously moved family members to make way for more competent non-family professionals.

Professionalizing the business also means professionalizing the family members. The Aboitizes do not hire a family member who has no college degree. They also encourage family members to obtain postgraduate degrees after a few years of working. Relatives are encouraged to first work outside the group to familiarize themselves with the outside world and develop professionalisn before joining the family business.

What about In-Laws?

Martin P. Lorenzo, from the clan engaged in agribusiness such as Del Monte and Lapanday Foods, stressed that ownership does not determine position and that family members and outsiders should have equal opportunity. In cases of mistakes, family members can not expect to receive a les intense dressing down.

What about pay? Some family corporations put a premium on age and hierarchy. Others based it on market standards or individual merit. The Aboitizes have a different compensation structure for the family members and professionals. For family members, compensation may take the form of bonus or percentage of the earnings or a return on equity investment in the companies they run. In other words, the better they run the business, the more they get.

Where do in-laws figure? Approaches among the families obviously vary. In the Lopez clan, in-laws are welcome at family meetings and in the family council. However, voting rights are limited to those connected by blood to secure the family interest. Among the Aboitizes, some are considered shareholders, but as a rule, in-laws are not allowed to work in their companies.

(This article was written by Lala Rimando and published in Newsbreak, 29 September 2003. It's original title is "It Runs in the Blood: To thrive, famiy businesses need to be run professionally.")