Transforming family-owned businesses: What does it take?

Published : 12:43 am May 22, 2014
By Kinita Shenoy
Most family-owned businesses revolve around their founders. Their values set the example and the tone. Their words carry gospel-like weight. Understandably, it was their wisdom along with their blood, sweat and tears that built them. These businesses differ culturally from the average corporate, and regardless of size, are more intimate. Employees work for a real person or the legacy of one, not for an entity owned by faceless shareholders.
Some family companies have grown from strength to strength, from one generation to another and are leaders in today’s complex business world while some have dropped by the wayside. In addition to the business dynamics they also face many challenges in balancing family interests in management, ownership and succession. What does it take and how did they do it?
The recent seminar on ‘Family Owned Businesses’ conducted by the Sri Lanka Institute of Directors at the Cinnamon Grand was a total sell out. The participation was unprecedented, and many enthusiastic inquiries had to be turned down as space was limited. The event featured a keynote address by Ceylon Biscuits Chairman Mineka Wickremasinghe, followed by a panel discussion including Jetwing Holdings Chairman Hiran Cooray, Hemas Holdings Group Director Abbas Esufally, Hirdaramani Group Director Vinod Hirdaramani, Brandix Lanka Director Aslam Omar, with Managing Director/CEO, Amana Bank Faizal Salie as moderator.
The evening covered a variety of topics pertinent to the theme at hand – transforming family businesses, creating growth, balancing all stakeholders in the business, and managing conflict.
SLID President Pravir Samarasinghe welcomed the crowd to the power evening, describing the SLID as “an association of directors for directors. He added that the institute’s purpose was to propagate and enrich corporate governance standards in listed and unlisted companies in Sri Lanka. Commenting on the evening’s theme, Samarasinghe said it was very topical and relevant to today’s context, as: “The engine of growth has been the private sector, with family-run businesses from small to large scale. Today we showcase five major players who are in the largest league of businesses in Sri Lanka. While they are predominantly companies with proprietary family interests, Hemas is publicly listed.”
Keynote address
Ceylon Biscuits Chairman Mineka Wickremasinghe launched his keynote with a retrospective of his own professional path. He had started his career with a short stint in planting and then tea brokering. He persuaded his father to join the tea business along with his friend, with the deal being split one-third each. They purchased tea dust when the market went down, and waited indefinitely but the market never went up. As it was necessary to pay off the brokers, Wickremasinghe started driving around, selling to retail businesses. At the time, his father owned Williams’ confectionery, and was looking to expand and wanted him to join the family business. He added: “So I went to England to learn a little about food technology and marketing. After a two-year full time course I had training at two biscuit factories, which gave me an insight into how large companies manage their recipes and processes, which put me in good stead when I returned.
“I was inspired by the imposing Maliban factory at Ratmalana. Yet, all attempts at expansion failed as the Government refused to give us the necessary licenses. Twiddling my thumbs, I got the opportunity when CARE (an aid-giving organisation) wanted to discontinue giving buns and milk to school children. This program was bound to fail due to the difficulty of monitoring 2,500 schools island-wide. Sensing an opportunity, though the ingredients of high protein flour and soya bean oil were suited for bread and totally opposite to biscuits, and in addition the high percentage of milk powder required to hydrate a glass of milk had to be incorporated in to the biscuits, I accepted the challenge.”
He continued: “After four months of extensive research and development, I succeeded in producing delectable biscuits that had the nutritional value required by CARE. I was given the pilot project. The biscuits were sent to Colorado for testing and analysis and were highly recommended. After successful completion of the pilot projects at Maradana and Kuliyapitiya, the contract was given to me to manufacture biscuits for school children. Our competitors who did not show any interest, but were both economically and politically strong wanted the tenders to be called.
“Maliban’s founder Chairman and my father were also there at the opening of the tender, which we won. The late M.J. Perera who was the Secretary to the Minister requested that we give our competitors a part of it. We agreed and gave them one-third. The biscuit program started with CBL doing the major portion. The biscuits were well accepted by schools and the school-going population increased. In the mean time, we sourced equipment and imported a biscuit and wafer plant for the domestic market, before the program concluded in the mid-eighties.
“CBL expanded after the school program ended, into other FMCG brands in other avenues such as cakes, and exported our products which grew to the current 52 countries. Our factory in the FTZ exported to various countries and testifies quality and innovation – the two cardinal factors of our commitment. Today, we have over 20 food technologists constantly safeguarding and improving our products and innovating systems and products. We have helped and taken control of companies that had met with financial difficulties such as Lanka Soya and Lanka Canneries.”
Wickremasinghe then imparted a few choice bits of advice gleaned from his decades of experience. He explained that very often, the growth of businesses makes their leaders forget the other implications that make the business successful. “Two things I strongly believe are that you have to have unfailing commitment and dedication to make it a success and go on, and that business cannot be stagnant; it must either go up or come down. When there is a downward trend, you get alarmed and change things and when you are at the top be very cautious that a slide down is irrevocable.”
Elaborating further on this point, Wickremasinghe gave a few examples of avoiding stagnation. Expansion extended to India, but the Indian Government expropriated the factory after eight years of production. He added that CBL moved on from that debacle and are now in Bangladesh and actively pursuing Myanmar.
He continued: “Successful businesses are never one-man operations. Even today, we call ourselves the ‘MuncheePavula’ – the Munchee family. In that principle, we are a success story. Even the most menial worker has access to the Chairman and the Board. It’s a good situation when you know the people are with you. I recollect we had three strikes, and in one instance we had to phone the Police and Army to get the water cannons in, so we could go home. In business, these things happen but never be vindictive when the workers return to work. I told the workers that even a wife and husband fight. It’s a healthy thing, but it doesn’t mean you divorce your wife when you have a fight. The dedication of our workers today is great, to not allow anyone to disturb the organisation politically or otherwise.”


Panel discussion: Critical success factors for growth
At the panel discussion that followed, Amana Bank Managing Director/CEO Faizal Salieh kicked off the discussion with a lively debate on the critical success factors that each panellist attributed to their company’s growth.
Faizal Saleh: What comes first – family or business?
Abbas Esufally: At the outset, it was emphasised that there is “no right or wrong way” – one has to tailor the model to what suits the family and the business. He shared the model that Hemas adopted for themselves. Hemas was a family-owned company that went through a shareholder separation about 15 years ago.
The remaining four of us were educated, looked at the business scenario figuring out what our options existed. A lot of family companies don’t get past the third generation. There were two or three key unique things that happened to us; firstly, we made a call to stay united and grow together, secondly we had to decide which came first – family or business? We had external resource personnel to assist us, and we took the call that business came first. As family unity was considered critical, we built institutions to address the family’s needs and foster our core values. This helped the process of divorcing family and business, attracting non-executive directors to bring in a culture of accountability, good governance and compliance.
At that time, in 2003, the company listed for several reasons. One – incentives to list, second – to go down the path of compliance, three – attract top people and not have any glass ceilings and finally – the need for funds.
Attracting top people was considered important – the first Chairman of Hemas was a non-family member, Deshamanya Lalith de Mel. We had a lot of people facilitating us on different levels of requirement. We are currently on the threshold of handing over the reins to a non-family CEO. This will ensure sustainability of the business.
Aslam Omar: My father started off in 1969 with Rs. 100,000 capital. My brothers, and sisters and I were young and in school. In his foresight, certain things still hold true. When he started off, in an Islamic manner, the three boys got 16% of the share ownership, and the three girls got 8% each. It was agreed that whatever we did was to be done for the company and that no one would have businesses of their own.
My brothers and I subsequently got into the holding company, and have no other personal business. That is what has kept us going. We started our life to earn money, but we’ve managed to avoid being focused on that. All earnings go back into the kitty. We had an ownership structure that still remains. We each get the same salary, and same ownership, and dividends are equal. All the money is in the holding company.
Faizal Salieh: These are some interesting insights as to how the company has separated personal interests from the running of the business, which has probably driven Brandix to its present structures. I know they follow some of the values and practices that top global companies maintain, such as risk management strategies. Let’s hear from the fourth-generation Vinod. Hirdaramani is one of those “ostrich” companies, which manages to keep a low profile.
Vinod Hirdaramani: I’m the eldest of the fourth generation, having been in the business for close to 23 years. I joined in 1991 in the apparel sector. I started in one of the 200 garment factory projects we were involved in, seeing how the whole community of the area developed from the grassroots level. I wouldn’t be here if I didn’t enjoy what I was doing. Passion and drive is important and unique in our business. Different experiences get shared. Vision and entrepreneurship is very important. One of our values is humility. I usually don’t wear a tie. We continue that even in our generation. We employ about 40,000 people throughout the region and loyalty is key. Specially during trying times, it’s great to see family come together. We’re at that stage Abbas was at 10 years ago, where we as a family have to decide on whether we put family or the business first.
Hiran Cooray: Back in 1973, my father started the hospitality business in Negombo. A Swedish tour operator convinced my father (then a building contractor) to open his own hotel. We never had a brand name, never thought of one. All these things happened accidentally. One thing that kept our business going was that our father treated my sister and I equally, and insisted on our education, giving us responsibility at a very early age. He trusted us, and appointed me at the age of 25 as the MD of the hotels side of the business. I told him it would be very difficult for me with just a paper qualification and his answer was if Castro could run a country at 29, you can run a small company at 25.
He never decided who would take over from him, and when he passed away in 2008, we didn’t know who would take the helm. The vision he had and the way he brought us up and the trust he had put in us to run the company in the same way he did, in how we treat our people. When we did not have money and struggled, we still invested in land and property, and we’re still reaping the benefits now.
Faizal Salieh: So the father took the risk of transferring responsibility to the children, which is fairly rare as founders tend to find it difficult to relinquish control. That is an interesting perspective in the Jetwing story. Could you all identify in one line, your individual core business values?
Mineka Wickramasinghe: The bonding of every person in the company. There should be no difference between any persons in the company.
Hiran Cooray: Humility, tenacity and honesty.
Vinod Hirdaramani: We are always conscious of the legacy and history of the group, and living up to the values set by our forefathers.
Aslam Omar: Trust and respect.
Abbas Esufally: Integrity and responsibility, shareholders need to see us as trustworthy. In the governance model we have created for ourselves, we ensure that our aspects are monitored via committees regularly.


Audience Q&A
Q: I’ve known each of you gentlemen and the generations before you personally. There have always been people who have taken decisions and risks. Someone who calculated his own rate of return etc, but the next generation tries to formalise these decisions via risk committees and other formal bodies. Do you think the founder ever saw these as hindrances that “blocked” decision making when confronted with a whole series of bodies. How did you manage that conflict?
Aslam Omar: My father was responsible for bringing in Ken Balendra, so he didn’t feel the constraint. More than the older generation, we feel constrained sometimes. Sometimes taking decisions on our Boards can be very difficult.
Mineka Wickremasinghe: The founder carries more weight, but the next generation has more management techniques.
Hiran Cooray: If all the rules and regulations worked, I wouldn’t be here. It is gut feeling that brings people to their decisions. When I was about 29, I recall telling my dad not to buy something as I didn’t feel we could afford it. Now of course, we have different advisors and committees. But at the end of the day the gut feeling needs to govern you sometimes. If you’re bogged down by committees, the business cannot grow.
Abbas Esufally: We have a different approach. While we encourage entrepreneurship within our company, it has to be properly evaluated for feasibility. So we have a more structured way of going through new businesses and acquisitions.
Vinod Hirdaramani: A lot of things in the early day were based on gut and emotion. Public companies and families are two different things, and we’re trying to find a happy medium. The gut feeling is exciting, but rational decisions must be made. During the war, most people focused on short term prospects with two to three-year time horizons but post-war, longer term investment policies need to be made in a more structured way.

Q: You all have a great passion for the business, but as the company grows with outsiders, can the passion be retained?
Mineka Wickremasignhe: There may be seconds that can take over the mantle, but it is difficult.
Aslam Omar: We have non-family members who are much more enthusiastic than some people in the family, so it’s really up to the individual.
Hiran Cooray: No one will have the passion of the founder. My sister and I are passionate but we don’t share the passion of our father. The founder has gone through all the hard work, whereas we had a fairly cushy life. The next generation hopefully would also have some passion, although there is a chance they may not be interested in taking over the business themselves!
Faizal Salieh: They say that founder want to keep control because of his passion, the son gets rich because of it, and the grandson becomes poor!

Q: Talking about family governance, I feel that as a first-generation entrepreneur, there may be people I have worked with for years. There are people who make a difference in the organisation, and there are loyal people who you may have to lose. Sometimes we have this fear, that when the new generation goes off to University abroad, they may try tactics that may not work in Sri Lanka. How do you go from being a process-based business to a people-based business?
Mineka Wickramasinghe: Democratic principles need to apply for a successful business to work.
Abbas Esufally: There should be no replacement of loyal people. But sometimes, when organisations grow, the job could get too big for the loyal person. I wouldn’t recommend losing them, but ensure they are in a job that has a good fit for them.
Faizal Salieh: Getting to the hot topic of governance; advisors and regulators are pushing for higher levels of governance in companies, pushing for standards and policies and independent advisors. Governance in a family business is more complicated. You can’t try and draw from a typical corporate setting because of the central role that family plays in ownership and management. In a family business, you can’t typically transform corporate governance as to who sits on boards and so on. Is there a system in the family via which a sense of direction is formulated? How do people – whether families or employees – work in order to make the right decisions? What do you think of governance in a family setting?
Vinod Hirdaramani: With us, the operational boards are run by professional CEOs reporting to the relevant family members and we maintain visibility by circulating monthly accounts and quarterly board minutes with business updates.
Hiran Cooray: In our case, it’s the role our mother plays, although she wasn’t actively involved in the business. If we took decisions without telling our father, we’d get a call from mother telling us off. So in a way, it was a form of informal governance and balance in keeping the family together.
Faizal Salieh: From what Hiran says, there are many emotional issues in a family which cannot be solved by taking a typical corporate approach. While you may have a professional/ family member, someone needs to be the ‘Chief Emotional Officer’, who puts things together at the right time, keeping the family governance balanced despite perhaps not being on the board.
Abbas Esufally: Being in a listed environment, our family governance is run by the family council and family business board which looks after the family’s interests, but doesn’t get involved in the CEO or MD’s business decisions. But of course, we have someone who speaks to everyone, soothes ruffled feathers etc. We have the separation of the family and business, but we ensure that just one message is sent out.
Aslam Omar: Our unwritten rule, with just six of us, is that whatever disagreements we have, we discuss it in the evening. As a family rule, we talk to each other every day. Not a day goes by without things being resolved at the end, and the next day it goes back to business as usual.
Vinod Hirdaramani: We too have structured family meetings once a week, discussing either business or personal aspects. No phones, no interruptions for one hour. A lot is achieved.
Mineka Wickramasinghe: If somebody wants to really know or help, they should come and discuss the problem. We discuss and implement this at a board level. As a family sometimes, you don’t have time to refer to the board and make decisions via gut feelings.

Q: Good governance means good processes to optimise the optimisation of wealth. So in projects, there will be hurdle rates. These processes remove gut feelings, these two cannot mix. As far as excellent family businesses are concerned, when are they willing to give up gut feel in order to bring in governance?
Mineka Wickramasinghe: Gut feeling doesn’t mean that you necessarily remove governance. Some sort of compromise must be there.
Aslam Omar: We evaluate projects at a holding company level. Some weight age is given to the gut feel, and some weight age to the hurdle rate. So there’s a two-tier mechanism.
Abbas Esufally: When a business grows and comes to second and third generations, processes and good governance is required. For more mature businesses, the IRRs etc are required, and gut feel comes in at a later stage, after all the processes are clear.
Faizal Salieh: You all must be managing conflicts on business decisions or strategy, or more personal issues such as divorce or new marriages which may affect concepts of ownership and such. How do you manage that?
Abbas Esufally: Conflicts do happen. Some see things more conservatively than others. We have a written-down process for conflict resolutions within the family, with structured tiers and mentors. The core thing is keeping the family united. To date we haven’t had to call on the full process yet but it’s there.
Aslam Omar: Family dimensions are different to business aspects. Work is work, and you go home and do whatever you want to do. We keep personal life different, as long as principles of morals and conduct are respected. The ultimate thing is an exit strategy. The final verdict of conflict resolution is taking your net worth and walking away, which is an agreed-upon process and structure.
Mineka Wickramasinghe: Having external directors definitely helps. That’s a great advantage. Sometimes you don’t see the manifestations of conflict when you’re too close to an issue.
Hiran Cooray: While we don’t have anything written in stone, we have our arguments, but we try to keep business at office and family issues to a glass of wine at home.
Abbas Esufally: it’s important to know that there is someone there to help resolve issues. We have a number of very eminent mentors and a set conflict resolution management model.
Aslam Omar: Things need to be thought through and planned for before the possibility of anything happening arises.

Q: The SEC and CSE want people to go public. What, if anything will convince family companies to go public?
Aslam Omar: While our subsidiaries could go public, our holding company will not. We are thinking of going public with those companies that are in the public eye and are constantly looking at best possible options and prices for our subsidiaries.
Mineka Wickramasinghe: With going public, there should be a necessity to do so. Whether funds etc. otherwise, decisions will take a longer time. It all depends on each company’s requirements.
Faizal Salieh: There are many successful family businesses worldwide. And we need to look at how they got to where they are. The bottom line is gut feel, and how do they keep it? As a banker, I can assure you that all banks are going after the SME structure rather than corporates where the margins are thin and requirements are high. On what do you base your lending decisions? What happens to banks that are listed corporates? They are lending on the gut feel of how they feel about their corporates.
Mineka Wickramasinghe: Today’s thinking is that intuitive knowledge is much more important than rational decisions.
Faizal Salieh: Why should we go public? As family businesses grow, do you want to go public and have a lot of faceless shareholders?
Vinod Hirdaramani: As Mr. Wickramasinghe said, we need to see a need to go public. Last week we went public with Alumex a company we invested in with the Hayleys Group. Going public is not the only option but the necessity of pooling resources and feasible exit strategies are reasons to go public.
Abbas Esufally: We took the step because we needed capital, and we realised the value of the share. We listed at Rs. 50, and the share traded at Rs. 100 within the day. So we gave away a fair amount of money so to speak. In this environment, we can attract top talent and managers. Furthermore some external deals and foreign investors prefer to deal with listed companies.
Faizal Salieh: The obvious reason is capital for growth. The other great reasons Abbas brought up is bringing in new employees. But there are aspects of family secrecy and glass ceilings. The other problematic situation is of hiring relatives for higher salaries which sometimes leads to underperformance. It was found that a CEO of a family business on average works fewer hours than a normal corporate CEO – perhaps due to the lack of incentive. These are the perspectives of employees at family-owned businesses. We must be aware that these perceptions exist.

Q: For Aslam and Hiran – in your cases, the next generation may have equal ownership but there are some that may not want to get involved with the business. How do you differentiate in terms of compensation between those family members who are directly involved and those who choose to not have as much involvement?
Aslam Omar: For the second generation, at an executive level they are paid the correct market salary and we get the dividends into the holding company. And there will always be one external director who is a non-family member. The key mechanism is the exit clause.
Hiran Cooray: We’ve come to a clear understanding that they will own the shares, but get paid a normal salary depending on the job they do. If they choose to not get involved, they will simply have to wait till they get the dividends.
Abbas Esufally: The next generation is not allowed to enter the company directly. First, they need to reach certain educational standards, and enter the company via normal application procedures. Perks and salaries are based on their job. A family member not in the company will not receive anything from the company barring dividends. It is easier to deal with things by coming to a decision far before an issue comes up.

Q: Assuming that your children want to join the business, what is the mechanism you would use if they do not perform?
Abbas Esufally: For the sustainability of the company, you need to have the best person for the job. So normal HR procedures would apply.
Aslam Omar: We have professionals running the business, so we ensure that no family members run the business in the highest tier of operation, which is band six.
Vinod Hirdaramani: We have family members responsible for different aspects of the business. We are getting to the stage of a having lot of non-executive directors involved.
Abbas Esufally: A lot of very clear criteria with the safety net of the family council. While we will look after our family members, there are still strong structures to ensure business comes first.
Faizal Salieh: There is no “right” model here, just whatever works for the individual company.

Q: With innovation, unless you’re really up there with new products, family-run businesses tend to become obsolete. How do you see European family-owned businesses which own stocks but are not involved at all in day to day running of businesses. How do you see that working here?
Hiran Cooray: If the children are capable of running the business, they should join on but who knows what may happen in the future, they may be uninterested and sell off the business.
Abbas Esufally: There’s a difference between family-run and family-owned businesses.
Q: The next generation is often pushed into professionalising and getting an MBA. Is there some way you have opened up paths or avenues for them to open up the avenues of gut feel etc?
Aslam Omar: We give family members the option to bring options to the table with new ideas, offering up to Rs. 3 million for a new project if it seems feasible.
Abbas Esufally: We all believe that our family must be well educated. However, if they come back with an idea, we encourage it but it goes through the normal business process. The family business board supports entrepreneurial development and is a lot more lenient than the Hemas process would be.
Q: How do you manage change? Each of the older generations have their right-hand people.
Vinod Hirdaramani: You need to manage change by introducing things in a small way, for example how we worked towards lean production. You need to have belief and conviction and prove that it works in a small way, and then the rest is easy.
Q: How have you been able to grow your business in such a small economy without drawing too much attention to yourself?
Vinod Hirdaramani: It’s never been important to us to be in the limelight. It’s in our DNA to talk less and do more.
Faizal Salieh: These corporate types have a perception of family business. What do you all think of the corporate types that you compete with?
Vinod Hirdaramani: We’ve taken the view that we respect them and partner with them where we can. More of that should be encouraged. It was very important for our younger family members to see how corporate boards operate, especially with our dealing with big publicly listed groups like Hayleys in recent times.
Mineka Wickramasinghe: Family businesses take decisions much more quickly, which is a positive.

http://www.ft.lk/2014/05/22/transforming-family-owned-businesses-what-does-it-take/