Family businesses and their leaders are the ultimate entrepreneurs. They must continually innovate to grow and pass on a thriving business from one generation to the next.
The Sri Lanka Institute of Directors (SLID) teamed up with STAX Inc.(STAX) to carry out the first survey of Sri Lankan family businesses with a focus on strategic thinking; succession planning; professionalisation; and innovation. The findings were shared at an event co-presented by SLID and STAX titled ‘Taking over the Mantle’ in August at the Cinnamon Grand.
SLID Chairman Preethi Jayawardena made the opening remarks welcoming everyone to the event giving a brief description of SLID and its activities.
STAX Managing Director Ruwindhu Peiris presented the insights from the 2017 Family Business Survey findings. He shared that 77% of family businesses surveyed either have a well-defined vision or are in the process of developing one but only 58% of them have it in writing while the rest rely on a verbal agreement.
With regard to succession planning a majority of the companies had reported that they had a succession plan but some of the leaders have still not developed clarity with regard to the extent the next generation will contribute towards the business.
Despite the general lack of separation between family and business goals 71% of business in the survey agreed that in the event of conflict, business goals should take precedent over family goals. A majority of the respondents are willing to bring in external expertise for diversity and maturity in leadership teams.
Most of the family business surveyed do not consider technology as a hindrance to growth and believe that technology is the way forward. However, innovation was not only about technology but also about innovating the business model or coming up with disruptive ideas.
Peiris’s presentation was followed by a vibrant panel discussion with LAUGFS Holdings Chairman W. K. H. Wegapitiya, representing a first generation family business, Jetwing Travels Ltd. Managing Director Shiromal Cooray, representing a second generation family business and SAIG and Orion Director/CEO Jeevan Gnanam, representing a third generation family business. The session was moderated by STAX Director Dr. Kumudu Gunasekera.
Transgenerational business continuity
Dr. Gunasekera shared the global statistics that 30% of family business survive into the second generation while 70% fail in the first generation. Only 12% survive the second generation and only 3% survive the third and of the 70% that failed 25% of those was due to the lack of preparation for the next generation. He posed the question to Wegapitiya on whether he has thought about transitioning his successful business to the next generation.
Prior to answering the question, Wegapitiya shared information from a seminal discovery in 1989 by a renowned management scientist names John Ward, called the 3 generational survival trap or the 30-13-3 rule which states that only 30% survive the 1st generation, 13% the 2nd and 3% the 3rd generation. In contrast to that they found that there are exceptional family business that have avoided this trap and survived many generations.
The biggest challenge of founders of family business in measuring their entrepreneurial greatness is not assessing what they created but how timely and proactively the founder plans the transgenerational business continuity. A majority of businesses as this information proved fall into this trap and get into ‘shirt sleeve to shirt sleeve’ in three generations. His biggest challenge is to ensure how the business will survive beyond his life span.
He went on to point out that research on family business is fairly new and started only in the 1980s. Family business are the biggest contributor in every economy in the world; they are biggest contributor to national wealth creation, employment creation and creating new opportunities for innovation, acting as entrepreneurial incubators, and social welfare.
In 1989 a Harvard business professor named Schumpeter in theorising business cycle theory found that family businesses boom and bust in a predictable wave period of standard length. The length of this wave is 25 years. The wave is not bell shaped but after the peak it suddenly collapses; he likened it to a ‘tsunami wave’. Therefore, founders like him should proactively understand that when it comes to 20 years the founder’s biggest responsibility is to ensure how to continue this curve. They have to practice two things – ensure ownership succession and management succession.
He questioned how the founder could bring someone equally capable or equally talented with entrepreneurial capabilities to take the baton and continue the curve – a ‘photocopy’ of themselves. This is the dilemma that he is now facing. Although he has built a big business, if he doesn’t act prudently and professionally, he cannot be certain that the business will continue forever.
Dr. Gunasekera shared another statistic of the 70% that failed 60% failed due to a lack of communication and trust. Wegapitiya was of the view that this was not the case. Researchers have found that the only success factor for transgenerational business continuity is if you imprint entrepreneurial orientation. It’s a paradox.
He stated that there are three inevitable things that an entrepreneur will face – own death, retirement and succession. Many companies fail because their founder believes that they will live forever. They do not bring in succession planning at the correct time. They have to then retire. The biggest mistake founders make is not letting go. How do you bring that talented succession? The popular recommended practice is professionalising.
Two aspects – institutionalising professional management practices needs to be done whether family members or outsiders are brought in. Handover management to nonfamily managers. The biggest problem that the researchers found was imprinting the entrepreneurial orientation on nonfamily professional managers. This was in Wegapitiya’s view the reason why family businesses failed.
Communication and trust
On the communication and trust angle, the moderator Dr. Gunesekera asked Gnanam as a third generation family business how the St. Anthony’s Group managed to circumvent this. Gnanam stated that his grandfather, the founder of the family business, instilled certain values.
One of the first things he did was that when they were growing he used to share stories with them. One of the rules that he had made was that the family meet for lunch every Sunday. That brings the family together and they follow this rule today. He went on to say that communication was not perfect and that it was something that they need to work on.
When he joined the business he said that no information was given to him and it was a ‘sink or swim’ situation which made him more entrepreneurial. He and his cousin had got all the third generation cousins together and sat with the second generation and discussed things that were unclear to them. He thought that it was those kind of little things that will help in communication between the two generations.
One of the fundamental problems is when the pie is not growing. Dr. Gunesekera queried if there was any advice he would give on how you could survive in a company that is not growing. Gnanam stated that St. Anthony’s was not one of those cases as they were looking for more people to take up the leadership roles. He saw family as an asset where each one has a different skill set. He suggested bringing in the different skill sets and understanding what their roles are within the organisation.
Strategic plan and clear vision of growth
On strategic plan and clear vision of growth, Dr. Gunasekera commented that from the outside it looks like Jetwing had a structured strategy in place. He asked Cooray how this came about and what the secret was for the company growing in the second generation. Cooray explained that they have been focused on the hospitality sector as it was one of their strengths.
It was a clear vision that was given by her father who wanted the company to be the best in Sri Lanka, the best in hospitality. He had defined what hospitality meant including sustainability and environmental good practices. All this had been instilled in them from the time they were growing up and is now a part of their DNA. It has helped in their progress and has been their core. They also have had a very clear mission.
The moderator commented that there is evidence that globally when companies try to grow outside their business they have a higher likelihood of failing, which is counterintuitive in Sri Lanka especially for family businesses. Cooray explained that this was not the case for them as their mission is different – they want to be the best in what they do and not the biggest. They do diversify but it is always to a related field.
Is there a need to diversify in Sri Lanka because the market is small? Wegapitiya explained that these very strong founder firms, which are in the first stage where the founder directly manages the business have the entrepreneurially-oriented spirit which find lot of opportunities and they are daring enough to go after these opportunities.
He went on to say that there were two things each generation needs to avoid. The first generation should avoid the trap known as ‘founder’s pride’ and the second generation must avoid the ‘cousins’ tournament’. Therefore, diversification is always good as these opportunities won’t be there forever. He said that often he is questioned about why he has so many different companies within the LAUGFS Group, and the three underpinning reasons for this diversification was that they are all cash-based, second is that they are essential commodities, third, they are within the top three players in the sector. Over a period of time he said that they will shed the businesses that are not core.
Gnanam was asked whether every Sunday a ‘cousin’s tournament’ was played. He said that each one of them try to keep their emotions aside when doing business and are more data driven. For example he had seen the value of real estate to the construction business of St. Anthony’s Group and brought it into the business.
Gut-based versus fact-based
Gut-based versus fact-based – Is it hard to make fact-based decisions when in an entrepreneurial environment? Gnanam didn’t think that this was the case. He was of the view that the information would not be 100% accurate but 60% accuracy was sufficient to make a decision where the rest was gut based. Cooray agreed that it was a balance between the two, but Wegapitiya did not agree. He said that facts were historical and the basic elements of entrepreneurship is that you have to be able to see the unseen, not knowing the risk, innovation and autonomy. All these are not based on facts. Dr. Gunasekera commented that the differing views was an excellent example of the differences between the first generation and the others.
Nature vs. nurture
You are not going to find your successor with this entrepreneurial spirit. So what will you do about it? Wegapitiya stated that there is a debate to whether entrepreneurs are made by nature or can be nurtured. Scientific studies have found that you can nurture an entrepreneur. It is recommended for family businesses to do three things; have Strategic education; entrepreneurial imprinting; and strategic succession. He concluded by saying that if you can imprint this entrepreneurial orientation on your successor you can have a ‘photocopy’ of yourself!
Positioning the third generation to take over
In terms of positioning the third generation to take over, are the family goals and business goals the same? Cooray said that their thinking is different as their father did not force them into the business and it was never a given that the business would go to the children. Although her brother joined the business soon after college, she never wanted to join and was working at a different company. As she matured she came into the business.
Similarly the next generation will not be expected to join but already two have joined and they have been educated in their respective fields. As a family, the goal will be to grow the wealth and they are in the process of doing the family constitution and it is better to do it before conflict starts. She said that the key thing was to retain family unity.
Why do you want the company to continue? If the family goal is financial security for generations to come, you can sell the company use the cash? Have you thought of that? Cooray pointed out that lots of family businesses have been sold for whatever reason and it depends on the situation at a particular time. Wegapitiya commented that one option to ensure good professional management and governance was by listing and making the ownership broad-based. He said this is what he has done with his company.
Attracting good talent to a smaller family business
Jayawardena asked, how do you attract good talent to a smaller family business? Wegapitiya said that there is a wrong perception of what a family business is. He cited research done by Chua, Chrisman and Sharma 1993 who defined family business as being owned, managed and governed by a family.
Wegapitiya stated that all businesses are family business. It is not just a ‘mom and pop’ shop. If the business is governed by a family member or a coalition of family members it is a family business. Cooray agreed that it is a wrong perception that family businesses don’t have ethics and governance and that if people see that the company is well run it is not difficult to attract good talent even if the company is small.
The closing remarks were delivered by SLID CEO Chamindā de Silva who thanked the Event Gold sponsor and co-organiser STAX, SLID’s Annual Corporate Partners Janashakthi Insurance, IronOne Technologies, and Pyramid Wilmar, Annual Print Media Partner Wijeya Newspapers, Event Hospitality Partner Cinnamon Grand, the panel and the participants for attending the event.