Family Business Law Declassified: How to Beat the Third-Generation Curse

PREFACE

THE MERCHANTS OF MENACE

Business is a combination of war and sport.

— Andre Maurois

Every old man complains of the growing depravity of the world, of the petulance and insolence of the rising generation.

— Samuel Johnson, The Rambler (1750–52)

If you cannot get rid of the family skeleton, you may as well make it dance.

— George Bernard Shaw

Mere money-making cannot be regarded as the legitimate end of business since with the conduct of business human happiness or misery is inextricably interwoven.

— Louis D. Brandeis

The world is our oyster!

Rock & Rule!

FAMILIES ROCK THE world. Starting with Adam and Eve, the history of humanity is a rich tapestry of tragedy and comedy. Remove the family from the equation and mankind’s narrative looks dull. The family is the cornerstone of humanity. From birth to death, wrote Barbara Bush, former First Lady of the United States, our first responsibility on earth is to our families. A country is only as strong as its families. Families come in different varieties, and some families are luckier than others. They have fewer baggage and prodigal scions. Others are hopelessly dysfunctional, breezing through a life of tedium, wandering aimlessly in this world with no profound purpose in life, dissipating valued resources on frivolities. "Many rich people are secretive," wrote Robert T. Kiyosaki in Why We Want You To Be Rich (2013), a book he co-authored with Donald J. Trump. "Many rich people would rather be anonymous. They either do not want to be known and/or they do not want to share their secrets." This book hopes to unveil and explain some of the well kept secrets of the rich and famous family businesses.

While luck and genes have some bearing with family business success, the more significant factors in the prosperity of any enterprise are trust, talent, tenacity, technique, timing, and flexibility. Family businesses make the world go round, but they go through the peaks and valleys of any business. Some exceptional family businesses have lasted for several generations with no end in sight. Others are doomed from inception. There are vivid vignettes of the ghastliness of the time when impetuosity, calumnies, diabolical plots, and downfalls buffeted family businesses. In The Family Business Guide (2010), Frederick D. Lipman, a Harvard Law School graduate, revealed his findings after interviewing members of a number of family businesses that are over 100 years old. He found that although each one is unique, they share many of the following characteristics, the first of which is the most important: 1) The family business presents a good economic opportunity for family members compared to their alternative careers; 2) The family business typically involves a staple product or service such as food manufacture or distribution; and 3) The family has developed mechanisms to resolve disputes within the family without resorting to major litigation that ruptures family ties and leads to selling (Lipman, p. 25). Some family business owners are the merchants of menace, the new Shylocks scouring the cosmos for their pound of flesh. In truth, many families are the soldiers of solace, God’s gifts to mankind, the sources of relief and consolation, saving the earth from devastation, cruelty and abject poverty.

Origins

Family: the early sense recorded referred to all the descendants of a common ancestor as well as the servants of a household or the retinue of a nobleman. The word comes from the Latin familia household servants, household, from famulus servant. It is now used in contexts where there is an idea of grouping of related people or things: one example is in modern scientific classification where a family is a group of allied genera. The word is used, chiefly in the U.S., as a slang term for the members of a local unit of the Mafia, popularized in the 1972 film The Godfather directed by Francis Ford Coppola. On the other hand, the term business comes Old English bisignis, meaning anxiety. The sense state of being busy was used from Middle English down to the 18th century, but is now differentiated as busyness (Glynnis Chantrell, ed., The Oxford Dictionary of Word Histories, 2002). Six million years ago, walking erect, according to the latest theory, encouraged the development of the family, with its highly efficient divisions of labor, and established the traditional male and female role of bread-winner and home-maker. Since the newly seasonal environment put food sources farther apart, the best foraging method logically would have been to split up: the female remained close to the home base, giving birth to more offspring and providing them with better care, and the male ventured across the plains to gather food (Charles Panati, The Browser’s Book of Beginnings, p. 39, 1984). Now, the nuclear or conjugal family is the basic unit of family organization in virtually every society. It is generally defined as a married couple and their children (including adopted and fostered children, as well as the couple’s natural children). Family and kinship are among the most important aspects of human society. They play a central part in the social organization of people throughout the world. (The New Encyclopedia Britannica, Vol. 19, p. 59, 1990)

Flexible

The family is the oldest of all human institutions, wrote Theodore Zeldin in An Intimate History of Humanity (1994), because it is the most flexible. Its goals, over the centuries, have changed again and again. With one or two children, it has little in common with the households which included retainers, lodgers, servants and illegitimate offspring as well as kin of every generation. A century ago, even in France, which pioneered small families, half of all children had at least two brothers or sisters. It is a fact of life that the family is always changing its mind about what it is trying to be, and how to achieve its aims (Zeldin, p. 371). Peter F. Drucker wrote in Managing in Turbulent Times (1980) that in troubled waters, the enterprise has to be managed both to withstand sudden blows and to avail itself of sudden unexpected opportunities. And in turbulent times, the first task of management is to make sure of its structural strength and soundness, of its capacity to survive a blow, to adapt to sudden change, and to avail itself of new opportunities (Drucker, p. 1). A family may be flexible, but it has a snapping point. When the family is stretched too far, the strings will break. Every family business must do everything to stay afloat or they will drift into obsolescence. Stephen R. Covey, in his classic book The 7 Habits of Highly Effective Families (1997), wrote: In the midst of pressures — particularly regarding work and career — many people are blind to the real priority of family. Dr. Covey, who holds an MBA from Harvard and a doctorate from Brigham Young University and a professor of organizational behavior and business management, wrote that "your role in the family will never end. You will never be replaced. Your influence and the need for your influence never ends. Even after you are gone, your children and grandchildren and great-grandchildren will still look up to you as their parent or grandparent. Family is one of the few permanent roles in life, perhaps the only truly permanent role" (Covey, p. 116). There is no escape from your family. You may as well enjoy the experience of being with your family, doing business together. Everywhere you go, you will stay connected with your family members. Intergenerational wealth transfers are acts of love that are implemented through wills, living trusts, gifts, insurance, pension and retirement accounts, sales, payment-on-death bank accounts, investments in family business and non-probate properties, and other probate avoidance techniques and modes of transfer.

Major League

Family businesses cannot afford to march in place or remain in the state of inertia. They must change with the times or face oblivion. Countries are in the state of constant contention, just like family firms. States are only as progressive as the family businesses that dominate their economies. In How Countries Compete (2007), Richard H. K. Vietor wrote that countries compete to develop. This is one result of globalization. They compete for markets, for technology, for skills and investment. They compete to grow and raise their standards of living (Vietor, p. 25). The global competitive playing field was being leveled, Thomas L. Friedman writes in his classic work The World Is Flat (2006). He insists that it is now possible for more people than ever to collaborate and compete in real time with more other people on more different kinds of work from more different corners of the planet and on a more equal footing than at any previous time in the history of the world — using computers, e-mail, fiber-optic networks, teleconferencing, and dynamic new software (Friedman, p. 8). In 2006, the world’s largest family-owned companies are: BMW (Germany) — the Quandt family owns 47 percent; Cargill (United States) — Family owns 85 percent; Carrefour (France) — Families control 40 percent shares; Fiat (Italy) — the Agnelli family owns 30 percent; Ford (United States) — the Ford family owns 40 percent of voting shares; IFI (Italy) — the Agnelli family owns 100 percent; LG Group (South Korea) — the Koo and Huh families own 50 percent; Peugeot-Citroen (France) — Family controls 42 percent; Samsung (South Korea) — the Lee family controls 22 percent; and Wal-Mart (United States) — the Walton family owns 38 percent. (Miskowitz, p. 132)

Asia’s Family Fortunes

Family, wrote Keren Blankfeld in her article Bloodlines and Bottom Lines published in Forbes magazine, is at the core of many of Asia’s biggest and most far-flung conglomerates and some of its best-known brands. In its special inaugural issue released on October 2015, Forbes unveiled its ranking of Asia’s 50 richest families. To qualify for inclusion in this exclusive list, Blankfeld wrote that a family’s wealth and participation in building that fortune has to extend at least three generations. Three Filipino families, namely, Sy, Zobel and Aboitiz, are included in this elite cluster. On top of the list is South Korea’s Lee family, the clan that controls the Samsung Group, with a combined wealth of $26.6 billion. Completing the list of the top 10 richest families of Asia are: No. 2 — the Lee family from Hong Kong ($24.1 billion); No. 3 — the Ambani family from India ($21.5 billion); No. 4 — the Chearavanont family from Thailand ($19.9); No. 5 — the Kwok family from Hong Kong ($19.5 billion); No. 6 — the Kwek/Quek from Singapore, Malaysia ($18.9 billion); No. 7 — the Premji family from India ($17 billion); No. 8 — the Tsai (Financial) family from Taiwan ($15.1 billion); No. 9 — the Hinduja family from India, U.K. ($15 billion); and No. 10 — the Mistry family from India ($14.9 billion). Among the Filipino family firms in the 2015 Forbes list, the Sy family is highest ranked at No. 13 with an estimated net worth of $12.3 billion. The Zobel family is ranked No. 35 ($4.2 billion). The Aboitiz family is ranked No. 44 ($3.6 billion).

Family businesses are alive and well in the Philippines, and more than a dozen were worth more than a billion dollars at the end of last year. Most of the country’s major banks are owned by local billionaires or near-billionaires, many of whom want to hang tight to these crown jewels (Paolo G. Montecillo, Philippine Daily Inquirer, August 19, 2015, p. B4-4). The Philippines has its share of influential major league business families. Among other their investments in big companies, the Sy family owns 100 percent of SM Prime Holdings, 31.45 percent of Banco de Oro, and 67 percent of SM Investments. The Lopez family owns 52.8 percent of Lopez Holdings, 60.3 percent of ABS-CBN, and 46.6 percent of First Philippine Holdings. The Gokongwei family owns 68.45 percent of JG Summit, 67 percent of Cebu Pacific, and 100 percent of the Robinsons Retail Group. The Ayala family owns 51.15 percent of the Ayala Group, 44 percent of Bank of the Philippine Islands, and 30.4 percent of Globe Telecom (Source: Investvine). There is no time to waste over trivial matters. Petty differences must be set aside in favor of working together as a team to achieve common goals. Family businesses must focus their core skills, products and services to survive and prosper in a highly competitive global business and legal environment.

Legal Stuff

Law is everywhere. It touches every aspect of human life. While touching on other academic disciplines like history, politics, economics, management, genealogy, sociology, and genetics in the study of family firms, this book takes a novel approach by taking into account the role of law, business organizations, and asset protection as major factors in the study of family firms. The reason is simple: Most family firms want to keep the business within the family. What is the strategic benefit of harnessing the law for the family business? The choice of a business entity alone is a significant factor in ascertaining the liability exposure of family business owners. Are they going to have limited or unlimited liability? What is the scope of investors’ rights to transfer their interests to other people? How does a family business use the law to keep their company in the family? Knowledge of contracts, torts, taxes, corporations, partnerships, securities, labor relations, intellectual property, crimes, mergers and acquisitions and many others can spell the difference between gore and glory for the family firm.

James E. Hughes wrote Family Wealth — Keeping It in the Family (2004) in which he expounded on the hopes of every family to confer advantages that are more than material and financial — to inculcate character and leadership, to insure creativity and enterprise, to help find and follow their individual callings, to avoid financial dependency and loss of initiative that can all too often be an unwanted consequence of financial success. Yet many families never succeed in realizing that vision, much less sustaining it for three, four or five generations and beyond. Hughes synthesized various academic disciplines in the study of family business including law, anthropology, economic theory, philosophy, psychology, and political history to formulate effective strategies to protect and expand the human capital and wealth of family firms.

Family businesses and publicly listed companies are constantly under siege from creditors and state regulators who use the law in lucrative shakedown operations. The formula is simple: find a large company that may or may not have done something wrong, threaten its managers with commercial ruin, preferably with criminal charges, force them to use shareholders’ money to pay an enormous fine to drop the charges in a secret settlement so nobody can check the details. Then repeat with another company. This is what The Economist (August 30–September 5, 2014 issue) calls the criminalization of American business. Toyota was made to pay a $1.2 billion settlement over alleged faults in some cars. Wal-Mart, the world’s largest retailer, is another target of this ploy. Your only defense against a legal attack is a judicial counter-offensive.

Law is essential in curtailing the family firm’s downside risk and in managing disputes. Constance E. Bagley, an Associate Professor of Business Administration at Harvard Business School, wrote in Winning Legally (2005) that many companies will succeed if managers are more adept at harnessing the empowering nature of the law. Thus, avoiding trouble is only part of the picture. Managers who view the law purely as a constraint, something to comply with and react than to use actively, will miss opportunities to use the law and the legal system for increasing the total value created and their firm’s share of that value (Bagley, p. 4). Family business owners who fail to consider the impact of the law to the success of their commercial activities are ill-starred to be shocked once a plethora of serious lawsuits come out of the woodwork.

Laws enable strangers, with different backgrounds, histories, ethnicities, and social norms to conduct business with each other with greatly reduced risk. For example, a major investment such as buying a home can be intimidating even with all the protection of property law, building codes, and insurance. Imagine what it would be like if such transactions were completely unregulated. There is a power correlation between the wealth of a society and the existence of written laws with mechanisms for enforcement and adjudication. Complex, large-scale cooperation is impossible without a well-functioning legal and regulatory system to provide protocols for cooperation (Bienhocker, p. 274). Managers of family businesses must ensure that their legal strategy aligns with their business ploys. Like information technology and human resource practices, the legal strategy must be integral to and inseparable from the business strategy. The legal dimensions should not be treated as an afterthought or an add-on to the business strategy development process. Managers must learn to spot issues before they become legal problems. If managers are not sensitive to the legal issues that might arise, then they will not know when to call in the lawyers. Once an issue has become a problem, managers have little recourse except damage control (Bagley, p. 5). Legal problems are some of the worst chinks in the armor of a family business. These could debilitate the family firm and push it to the brink of extinction. They need to be slain once they rear their ugly heads.

Managers should learn to focus on identifying opportunities and analyzing risk-reward profiles and on devising strategies for executing their business plans. Lawyers, for their part, study discrete areas of the law such as contracts, torts, and antitrust. Relatively few courses in law school even attempt to explore messy business problems, which include a combination of legal subjects and a variety of business considerations. Law students rarely study business strategy, and most lawyers are not skilled managers (Bagley, p. 7). This is lamentable because some educational institutions, here and abroad, are churning out flawed products in a miasma of academic malpractice. As a result of their opaque legal education, lawyers offer legal solutions to business problems. Often, the lixivium worsens the lesion. They end up aggravating the tribulations of family firms. Business schools hardly discuss legal matters in teaching entrepreneurial and managerial skills. This is a skewed pedagogic approach that has led family businesses to submerge into the morass of destitution.

What does it take for a family business to meet the myriad challenges posed by the third generation? The June 2015 report issued by Women Corporate Directors (WCD) and KPMG entitled Enduring Across Generations: How Boards Drive Value in Family-Owned Businesses gave some answers to the perplexing query: vision, passion, focus, dedication, good leadership, and good governance. Governance provides an edge for family businesses — roles are clear, decisions are made objectively, and the various stakeholders work together to ensure healthy growth of the business over the long term. This book probes into a persisting poser, a puzzle that has baffled experts for centuries and to unveil the mithridate to this lingering bane. Some say that even without committing plunder and other serious crimes, big money is easier to make than small money. It seems true if you look around your neighborhood. But legitimately earned money, big or small, is always difficult to amass, especially if you are running a family business. It takes time, skill, persistence, diligence, and good karma. The trick is not making money, but keeping the booty over a long haul and making it grow for future generations of family members. Starbucks’ Howard Schultz, Staples’ Tom Stemberg, Wendy’s Junior Bridgeman, and Costco’s Jim Sinegal are iconoclasts and renegades who mastered the art of reinvention. They shrugged off negative forecasts from naysayers and conventional wisdom to reach the peak of their business success. They stemmed the tide of extinctive prescription. Their ability to adapt and innovate saved their industries from disappearing from the face of the earth. They are distinctly aware that some products have become irrelevant, such as pay phones, pagers, cameras with film, Betamax, VHS players, Walkman, magnetic cassette tapes, vinyl records, and many more.

Overview

Family businesses play a meaningful role in the economies of both developed and developing countries. Based on the data from Family Firm Institute (FFI), family businesses create an estimated 70 to 90 percent of global Gross Domestic Product (GDP) annually. In Canada, around half of the country’s workforce is employed by a family business, creating nearly 45 percent of Canadian GDP. In the United States (US), the biggest economy in the world, the greatest part of America’s wealth lies with family-owned businesses. In Brazil, Latin America’s biggest economy, the majority of businesses in the country are family-owned. Family firms represent 70 percent of the largest Brazilian business groups. In Chile, it is estimated that between 75 to 90 percent of all the firms in the country are family owned and controlled. Roughly 65 percent of the medium- to large-size enterprises in Chile are family-owned. Chile’s family-owned businesses are typically well-organized corporate entities with decentralized command structures and little day-to-day control by individual shareholders. In Europe, family businesses also play an important role in big companies such as Germany, France, the United Kingdom (UK), Spain, and Italy, as well as smaller economies such as Austria, Denmark, Ireland, Norway, Portugal, and Sweden. The situation in former communist countries in Eastern Europe such as Czech Republic, Estonia, Hungary, Latvia, Slovenia, and Slovakia is no different. In almost all European countries, more than half of the businesses are owned or controlled by families. Some prominent family businesses from Europe include BMW, Henkel, Merck (Germany); L’Oreal (France); FIAT, Parmalat (Italy); H&M (Sweden); Lego (Denmark); Sainsburys (UK); and Camper (Spain) (Susanto, p. 46). The supremacy of families in the business sphere all over the world is clear. Families are the nonpareil originators of business because of the close interpersonal relationships among the owners. This is a fact that transcends national boundaries.

Around 75 percent of the Middle East’s private economy is controlled by 5,000 high-net-worth families, with their companies creating 70 percent of the region’s employment. Family businesses control over 90 percent of commercial activity. In Turkey, 90 percent of Turkish businesses constitute family firms. Sabanci Holding, the largest industrial and financial conglomerate in Turkey by profit, is one of the most prominent family businesses in Turkey. In Australia, 67 percent of the companies in the country are family businesses, in which 90 percent of them employ less than 200 people. In 60 percent of the Australian family-owned companies, the owning families are directly involved (Susanto, p. 46). U.S. family businesses account for over half of the country’s workforce and nearly two thirds of the Gross Domestic Product (GDP). (Green, p. 10; F. de Visscher and M. Bruel (1994), The Adolescence of the American Family Business, Family Business Newsletter, Volume 9)

Pinoy

Belen T. G. Medina, a professor of sociology at the University of the Philippines, wrote in The Filipino Family (2001) that the family has economic functions being traditionally an important production, distribution and consumption unit. In the rural areas in the Philippines, the whole family is involved in farming activities, cottage industries or local fishing with each family member sharing specific responsibilities. If the father is a fisherman, the sons are members of the boat crew while the mother and daughters are engaged in making and repairing nets or selling of the fish in the market and nearby towns. The younger children also contribute to the division of labor by acting as parental surrogates while the parents and older siblings are busy in production activities (Medina, p. 66). Filipinos value close family ties. The family comes first. Relatives who fall into hard times and the economic abyss are rescued by other family members. In a country in which a big chunk of the population lives in abject poverty, this family support system prevents many relatives from becoming hobos and panhandlers.

The Filipino family plays a critical part in the economic, political, religious, and educational life of the people. It is an important economic unit in farming, fishing, cottage industries and other productive activities in the rural areas. Political behavior and religious practices are family-oriented. The family has also the educational function of providing the youth with the basic skills and attitudes necessary for participation in community life (Medina, p. 71). There are many families which are involved in production activities through entrepreneurship. There are large companies which are actually family enterprises. The management structure of these companies usually follows that of the family. The father is the president, the mother the treasurer, and the adult children each head a department, section or division in the organization. Agricultural enterprises may also be owned and run by the family. Many commercial banks, department stores, restaurants, bakeshops and other businesses are family enterprises (Medina, p. 67). The Philippines, wrote Alfred McCoy in Anarchy of Families (1994), has a long history of strong families assuring social survival when the nation-state is weak. If banks and other major corporations are often synonymous with the history of a few elite families, so labor unions, Christian denominations, and even a communist party have been dominated by single families (McCoy, p. 8). In many instances, family businesses significantly affect the Gross National Product (GDP) and the Gross National Income (GDI) in most states. A country’s stability and prosperity can be intricately tied to the strength of families. Frail families lead to a fragile nation, one that easily breaks with the slightest tremor.

Youth

Your role as a parent is the highest, noblest calling you will ever have in your life, wrote Dr. Phil McGraw in Family First (2004). Parents take their role seriously in training their children to be an integral part of the family business. Age has little to do with business savvy. The youth can excel in family business. Even tots can be budding entrepreneurs by choice and training. Some have made positive contributions to the family enterprise. Family members started playing Monopoly in real life, making serious money together. Seven-year-old Faith Scriven did it with her father, as she recounted in her book I Played Monopoly With My Daddy: Financial Education for All Ages (2008). She remembers her father, Dr. Darryl Scriven, always telling her: You don’t make money from your salary. You make money from your property. Making a discourse about a cornucopia of inquiries and theories that have eluded family businesses can be an exhilarating experience. How could the life of a family business be extended beyond the third generation? How could the so-called Midas curse be conquered? How do you make family members work or do businesses together in harmony, despite sibling rivalry and other internal contentions? How could the law help prolong the life of a family business? Is there any sense trying to resuscitate a dying family business? What are the ways of protecting the investments of individual family members from being dissipated by their personal creditors? How do you keep the family business within the family bloodlines? A family business that survives one generation may be long enough. Time is the ultimate test of a good family firm. As Ned Rorem wrote in Listening and Hearing, Music from Inside Out (1967): The weeks slide by like a funeral procession, but generations pass like a snowstorm.

Closer

Business can bring families closer together — or pull them apart. Money alone can drive a wedge among family members. There is a long history of family wars among parents, brothers, sisters, uncles, aunts, cousins, and in-laws. The common belief among the superstitious is that in the evolution of family wealth, the first generation creates it. The second generation grows it. The third generation squanders it. The statistics are not encouraging for families who wish to start a business. Studies revealing the myriad risks inherent in commencing a business show that nine out of ten business startups will fail. With the staggeringly grim probabilities stacked up against family business owners, Lloyd E. Shefsky, an alumnus of the University of Chicago Law School and a Clinical Professor of Entrepreneurship at the Kellogg School of Management, posed a query in Invent Reinvent Thrive (2014): Who in their right mind would accept such odds? Shefsky notes that businesses are not inherently built to last, contending that the key to longevity in any business is reinvention. Just like the chameleon, the family business must have the ability to adapt to tectonic changes in the international and domestic business milieu. There is a sprawling graveyard of family companies that failed to reinvent themselves. Some high-profile corporate lapses include Sears, Borders, Motorola, IBM, Polaroid, Kodak, and many more. They were blindsided because they ignored the zeitgeist, the writings on the wall and imminent global upheavals. Even entire industries have been wiped out, such as film photography, silent-movies, black-and-white television, and others. Business obsolescence seems to be the rule. In the Philippines, movie houses outside of malls are gone. Classroom instruction is now threatened by online education.

Perhaps, the generational business extinction is caused by the severance of connectivity that creates a chasm among generations. Sure, businesses come and go. Entire industries and products lose their mass appeal due to cataclysmic shifts in the business and legal environment. Is this simply a natural retrogression of business — nothing lasts forever? Why stop the natural demise of a faltering, floundering family business? What seems to drive this perpetuation of the overwhelming preoccupation with the third generation? Why pin the blame on the hapless third generation when the seeds of perdition may have been implanted during the first or second generation? Why save a business that the family itself would like to wind-up and replace with a spanking new one?

The Knot

So what’s the chief problem with family business? Among others, short lifespan and low survival and sustainability rates are main concerns. Family business seems to have an intrinsic knot, an expiration date. It enters that precarious moment when grandchildren and cousins enter the scene. Many family businesses do not even survive the first generation, much less the second generation. Perry L. Cochell and Rodney C. Zeeb wrote in Beating The Midas Curse (2005) that studies have shown that where new wealth has been created by the first generation, six out of ten of those families’ fortunes will be gone by the end of the second generation. By the end of the third generation, nine out of ten families will be broke. Samuel Butler, a British philosopher and novelist, believes that more unhappiness comes from the family than from any other. I mean from the attempt to prolong family connections unduly, Butler wrote, and to make people hang together artificially who would never naturally do so. Perhaps, the short life-span of a family business may be an offshoot of Social Darwinism, a social theory that applies principles of biological evolution to human society. While the term refers to Charles Darwin’s theory of natural selection, the idea was first enunciated in the 1850s by the English philosopher and sociologist Herbert Spencer, whose initial statements of it predated Darwin’s Origin of the Species (1859). Spencer saw human progress as a matter of successful competition resulting in the the survival of the fittest. The stronger and superior will survive, while the weaker perish or are ruled by the strong, a process that leads to the continuous improvement of societies. It was responsible for US laws restricting immigration from southern and eastern Europe, forbidding miscegenation, and requiring the sterilization of criminals and mental defectives (Rohmann, p. 366). Family businesses that are not properly managed will fall by the wayside and succumb to the competition. They are so unfit and defective to continue doing business in a highly competitive society. The problem is that many family businesses are still clueless on how to temper or cure the spendthrift ways of the third generation that often lead to the extinction of the family empire.

Rebels of the Lost Art

The gratifications of one generation may not be those of the next. Rockefeller and Ford children of three removes from the founder came back from school filled with shame and regret for the alleged misdeeds of their ancestors — attitudes conveyed and cherished by envious teachers and fellow students, and how the very habit of wealth and authority, spoilage from above, encouraged them in their rebellious scorn and condemnation. This is the revenge of the have-nots or the not-yets, the more potent for the inability of wealthy fathers and grandfathers to find effective reply. On the other hand, school may suggest new and fruitful lines of activity, while marriage with people of virtue and prestige can alter a family, producing children who want to escape the money heritage for what they see as more honorific (Landes, p. 297). The lost art or old ways of the older generations do not sit well with young family members. They tend to resist the methods of the old folks in managing the family firm. Bill Bonner & Will Bonner wrote in Family Fortunes (2012) that modern times are much more like the imperial days of Rome than the days of the Roman Republic. Virgil discussed the virtues of the republic, during which time families were still more important than the central government of Rome. The republic was dominated for hundreds of years by families that guarded their honor, protected and promoted their family interest, and built and maintained family fortunes. The history of man is fraught with true stories about family glory and conquests in the battlefields, centers of state power, economic markets, academia, courtrooms and corporate boardrooms. The long history of family business is reflective of the struggles and achievements of mankind.

Happy

Everyone aspires to belong to a happy family, with or without business. John Ralston Saul holds a PhD from King’s College in London. He wrote about a happy family in The Doubter’s Companion (1994). He observed that the production of children is a basic animal function that involves no intellectual or ethical skills. The successful raising of children and the long term maintenance of a contented marriage are mysteries so impenetrable that they have kept generations of poets, playwrights, novelists and social scientists continuously employed. Nothing in history indicates that happily married leaders have been wiser, more humane, courageous, effective or intelligent, any more than personal moderation or respectability in themselves have led to good government. The list of happily married liars, thieves, cowards, and monsters in public office is as long as that of the admirable drunkards and humane philanderers. Saul further wrote that our modern insistence on a balance between private respectability and public policy has nothing to do with leadership. Not only is it irrelevant to the democratic process, it may even be aggressively anti-democratic. Either the leader is an effective representative of the citizen’s interests or he is a lifestyle model. If the latter, then we have slipped back into the traditional religious and dictatorial archetypes of noble sacrificial heroes, vestal virgins, wives of Caesar, saintly kings and virgin queens. In a democratic society, these are false standards which can’t help but put the wrong people in office (Saul, p. 156).

Business is a mere extension of the family. Family business leaders should be judged on the basis of character, compassion and competence to run the family firm, and not solely on their ability to provide for the material needs of their spouses and children. That could be too shallow and shortsighted. The ultimate goal of this book is help family business owners in their odyssey to improve and expand their company for future generations of family members. Family firms go through moments of helplessness. T. S. Eliot’s poem The Family Reunion (1939), captures the anxieties and fatalism that ostensibly overwhelm many family businesses, thus:

We can usually avoid accidents,

We are insured against fire,

Against larceny and illness,

Against defective plumbing,

But not against the act of God …

And what is being done to us?

And what are we, and what are we doing?

To each and all these questions

There is no conceivable answer.

We have suffered far more than a personal loss —

We have lost our way in the dark.

INTRODUCTION

THE LURES OF ENTREPRENEURS

People say law when they mean wealth.

— Ralph Waldo Emerson, Journals (1841)

It requires a great deal of boldness and a great deal of caution to make a great fortune; and you got it, it requires ten times as much wit to keep it.

— Meyer A. Rothchild

Every old man complains of the growing depravity of the world, of the petulance and insolence of the rising generation.

— Samuel Johnson, The Rambler (1750–52)

Each generation must out of relative obscurity discover its mission, fulfill it, or betray it.

— Frantz Fanon, On National Culture, The Wretched of the Earth (1961)

Greatness

FAMILIES ASPIRE FOR greatness — in business, literature, medicine, law, music, mathematics, science as well as in other fields of human endeavor. Family businesses have power-packed members who are trail-blazers, risk-takers, and innovators who explore the earth for opportunities to make a difference — and to find the purse of Fortunatus. Many push the boundaries and break conventions in the shrine of profit and the good life. They toil feverishly and frolic in wild abandon when they succumb to the lure of altruism, platinum, fame, power, and luxury. They are inveigled to agree with Ambrose Bierce when he referred to money in The Devil’s Dictionary (1818) as an evidence of culture and a passport to polite society. They conveniently forget that Bierce facetiously considers money as "a blessing that of no advantage to us excepting when we part with it." Some of them live to splurge, working together to whet their insatiable appetite for the good life. But many are deeply splintered. Cliques and factions operate like trigger-happy, guns-for-hire squadrons. Some are unhampered by social responsibility in their search for profligacy. They are addicted to love — of money. But money is not an end in itself. It is the pursuit of it that excites billionaires. As Martin S. Fridson wrote in How To Be a Billionaire (2000): The common thread of self-made billionaires is not the desire to rise from poverty. For some of the great wealth gatherers, periods of family financial reversal may have created an intense desire for financial security. This is the thirst that no sum of money can completely extinguish. The majority of family businesses fall prey to the ravages of ruthless competition and the pathetic state of the national economy. They fumble and eventually tumble, leaving members to fend for themselves to survive sans the support of a thriving family business. The hatchlings who have yet to earn their aviation wings could learn fresh strategies from the venerable buzzards in the aviary.

Shakespeare

Business is the lifeblood of families. A family enterprise is such a colorful, multi-dimensional organism that even William Shakespeare wrote about its elements. The Bard loved writing about plots involving family business. Henry VI epitomizes the dangers of a family business, wrote Norman Augustine and Kenneth Adelman wrote in Shakespeare In Charge (1999), passed along on the basis of birth rather than merit. Sometimes this works, but it does defy the odds. He also shows the woes that commonly befall children — especially sons — of great leaders. Is Shakespeare germane to the study of family businesses? At first blush, it might seem that Shakespeare and modern management don’t mesh. Shakespeare conjures up images of crazy princes, ugly witches, fallen kings, and sulking guys in tights holding skulls of worthy corpses. The word management conjures up images of crazy prices, ugly deals, fallen CEOs, and sulking guys in gray suits holding stacks of worthless option. But the two do mesh. Business involves people, and people — fundamentally — don’t change. The essence of business is thus remarkably constant. While accoutrements of corporate life are now dramatically high tech — dominated by e-mail, cell phones, the Web, and PCs — the basics still hinge on human nature. Corporate affairs remain dependent largely on the strengths or failings of the men and women who make up a company. The darker side of human nature — greed, overreaching ambition, ravaging jealousy, dishonesty — is as likely to undermine, even destroy, a business now as it was before the days of the Internet and pagers (Augustine & Adelman, p. xii). Family business owners are constantly interacting with each other. Their familial propinquities become perplexing when issues of fealty, competence, accountability, respect, integrity, adaptability, leadership, transparency and love start swirling around their family firm, creating a whirpool that could suck everyone down to the bottom of the ocean.

Shakespeare’s plays are full of characters that can be studied for useful corporate analogies, such as the overall leadership of Henry V (1600), and the cybercoptic speed of change in today’s business and how Petruchio, the pivotal character in The Taming of the Shrew (1592), both reacts to and implements change in people and institutions. Family members can also get nuts-and-bolts advice from Julius Caesar (1599) on getting the job done in business, such as goal-setting, recruitment, team building, operations, corporate communications, and more. Shakespeare delves into the art and danger of risk taking found in abundance in his only play named after a businessman, The Merchant of Venice (1600), and starring its most adept executive, Portia. Shakespeare also shows what happens when risks go bad or when avoiding risks makes for bad business — or when bad things just happen. Crisis management consumes Claudius in Hamlet (1603) (Augustine & Adelman, p. xvii). Founders of family firms could learn valuable business leadership lessons from Shakespeare’s kings, such as Henry IV, Richard III, Claudius, Richard II, Henry V, Henry VI, Richard III and Macbeth. Revelations of skullduggery and intrigues in family businesses could unleash tomes of studies for future generations.

Nature

It takes guts to open a family business. A family can only point to its pusillanimity if it fails to erect a commercial enterprise for the sustenance of its brood. Definitions of family business abound, ranging from very small enterprises run out of the family home or garage to large public companies. The evidence is that most family businesses are a part of the fast-growing middle market segment of the economy. The issues and problems are essentially the same in every country of the world. From the mundane to the esoteric, experts have defined a family business as a business that is owned and managed by one or more family members (W. C. Handler, Methodical Issues and Consideration in Studying Family Businesses, Family Business Review, p. 257). A family business is any instance in which two or more people from the same family work together in a business that at least one of them owns. It may be a combination of husband and wife, father and son, mother and daughter, brothers, dad and his distant cousins, and so on. This definition is used because anytime family members work together they face a unique set of problems (Fleming, p. 11). Owning a business gives family members something to work on as a group, offering them a shared sense of responsibility and pride. (Aronoff & Ward, p. 22)

The average lifespan of the family business is only 24 years, which is coincidentally also the average tenure of the founders of the firm. Approximately 70 percent of the family firms are either sold or liquidated after the death or retirement of the founders (R. Beckhard & W. G. Dyer, Managing Continuity in the Family Owned Business, Organizational Dynamics, 1983). Filipinos are some of the most entrepreneurial people on earth. Drive around the countryside and you will see sari-sari stores blanketing the landscape. Many have started their online and social network marketing business. Being a family-centered race, businesses founded by single Filipinos are transmuted into family firms managed by parents, siblings, and cousins. David S. Landes, a professor emeritus of history and economics at Harvard University, defined dynasty in his book Dynasties: Fortunes and Misfortunes of the World’s Great Family Businesses (2006), as three successive generations of family control. No small achievement. Growth, diversification, and technological advance can all work against the continuity of the family firm. The sagas of this elite cluster of family dynasties include the Barings, the Rothchilds, the Morgans, the Rockefellers, the Agnellis, the Peugeots, the Toyodas, the Guggenheims, the Schlumbergers and the Wendels.

Creative Destruction

Harvard professor Joseph Schumpeter wrote his classic work, Capitalism, Socialism and Democracy (1942), fifteen years before Bill Gates was born. He used the term creative destruction to describe a process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This is the essential fact of capitalism. He argued that "capitalism is a form of economic change that can never be stationary and that less effective firms, products, and methods must constantly be eliminated." His idea echoes of demolition for the sake of refinement. The Japanese have a word for it: kaizen, the process of making continuous improvements, a philosophy that strives for perfection, showing minuscule contentment, if not utter contempt, with the status quo.

When Charles Koch, chairman and CEO of Koch Industries, read Schumpeter’s words he took them to heart. At Koch Industries, the interpretation of creative destruction means that every business owned by the company could eventually be sold (on rare occasions shuttered) and replaced by others. Currently, the Koch Industries portfolio is composed of more than one hundred business units operating in different business groups. It deals with petroleum refining, chemicals, minerals trading and distribution, crude oils and refined products pipelines, commodities trading, nitrogen fertilizer manufacturing, mass transfer equipment, nylon fiber polymer and intermediates, consumer products, ranching and many other product lines. Over the years, Koch has sold or exited from businesses such as broadband trading, coal mining, commercial lending, business aircraft, power generation, air quality consulting, ceramic products, cryogenic systems, drilling rigs, image transmission, slag cement, propane retailing, medical equipment, pizza dough, meat processing, service stations, telecommunications, tankers, trucking, animal feed, cooling towers, tennis court surfaces, and many more (Jennings, p. 95). Clearly, Koch was not scared of change. He boldly shifted horses, dumped the albatross, and ventured into more lucrative business areas.

Kongo Gumi: The Oldest

There are family businesses that have exceeded over 1,000 years of existence. The world’s oldest continuously operating family business ended its impressive run in 2006. Japanese temple builder Kongo Gumi, in operation under the founders’ descendants since 578, succumbed to excess debt and an unfavorable business climate in 2006. To sum up the lessons of Kongo Gumi’s long tenure and ultimate failure: Pick a stable industry and create flexible succession policies. To avoid a similar demise, evolve as business conditions require, but don’t get carried away with temporary enthusiasm and sacrifice financial stability for what looks like an opportunity (James Olan Hutcheson, "The End of a 1,400-Year-Old Business, Business Week, April, 16, 2007). Currently, the oldest family business in the world, Houshi Onsen, is operating in Japan and is managed by the 46th generation of the founding family, according to Barclays Wealth and The Economist Intelligence Unit (2009). The longevity of Japanese family companies may be attributed to the practice of turning sons-in-law into true family insiders, thereby broadening the pool for successors and talented managers without involving nonfamily members. Family businesses tend to outperform nonfamily companies in most Japanese industries (Jose Allouche, Bruno Amann, Jacques