From left: SAIG and Orion Director and CEO Jeevan Gnanam, Jetwing Travels (Pvt.) Ltd Managing Director Shiromal Cooray, Laugfs Holdings Chairman W.K.H. Wegapitiya and Moderator STAX Inc. Director Dr. Kumudu Gunasekera
Family businesses account for two-thirds of all firms around the world and contribute to an estimated 70 to 90 percent of global gross domestic product (GDP) annually. These institutions serve as engines for employment creation, contributing 50 percent to 80 percent of jobs worldwide.
However, statistics show that only 30 percent of family-owned businesses survive to the second generation; 70 percent of family businesses fail in the first generation. Then going in to the second generation, it is found that only 12 percent of businesses survive and from thereon, only three percent survive to the third and fourth generations.
To provide insights into how and why many companies fail to make it to the next generation and to give solutions to address these phenomena, Stax, Inc. and the Sri Lanka Institute of Directors (SLID) organised a panel discussion themed ‘Taking over the mantle’, which comprised three panellists representing three generations.
The panellists, Laugfs Holdings Chairman W.K.H. Wegapitiya, Jetwing Travels (Pvt.) Ltd Managing Director Shiromal Cooray and SAIG and Orion Director and CEO Jeevan Gnanam shared their perspectives on their experience by generation on how to address planning and management for family business continuity as well as how they take up challenges.
The first generation businessman, Wegapitiya said that only after 1980s that scientists started empathetically testing why this phenomenon (business generational discontinuity) was happening. He said in 1989, a Harvard Business professional when theorizing a business cycle theory found that businesses boom and bust in a predictable wave period of standard length.
“They found after reaching 200 businesses, the length of this wave is 25 years. If you analyze most of the failed companies over the successful companies, there is a wave. The length of that wave is 25 years. Therefore, the founders of new enterprises have to proactively understand when it comes to the peak of this wave. It is tsunami shaped. If you look at the collapsed companies, it goes very high and suddenly collapses in few months or years. So companies have an expiry date,” he said.
He said that according to a seminal discovery prepared by a foreign management scientist, called ‘three generational survival traps’, the 30:13:3 phenomenon, 30 percent survives to the second generation with less than 13 percent beyond that and less than 3 percent going even beyond that.
Unfortunately, many companies get into this trap, he said. However, he said that in contrast to that, it was found that there were exceptional family businesses, which managed to survive from these three generational traps and survive to many generations.
Representing the second generation, Cooray said coming from a tourism and hospitality background, they were never forced to join the business but the urge to join the business came to them automatically.
“Our father never forced us to join the business. Not everyone will want to join business. My bother joined the business earlier. Eventually as I matured, I came to the business. Similarly, even the next generation is not forced, not told to come and take this over but automatically they join our business and also they are educated in their respective fields,” she said.
“My father’s vision was clear to be the best in hospitality. He defined what hospitality meant. All these were instilled in us as children growing up. For example, before building a hotel, he would say we were building on someone else’s territory; we can’t just go and build a hotel in a place where there are small huts. We put a lot of effort to make it sustainable. It automatically came to us; it is part of our DNA. Actually you will find, whatever our hotels are, they have no fences or gates, because we live with the community. That has helped our success. The community helped us. We were able to find partnerships, which helped us to grow. That was our main core. We were able to work on partnerships,” she said.
Coming from the third generation, Gnanam said that the stories they had heard about their business during family get-togethers, since their childhood, inspired them to look at their business.
“Every Sunday the family had to meet regarding business and enjoy a meal. We had a good family affair. Close family communication worked on that. Grandfather inserted value by telling stories,” he said. Having a close family unit, these small things helped to build the family structure.
“My cousins and I basically had this idea two years ago – let’s get the third generation together and try and appeal to the second generation. We six cousins help and communicate well,” he said.
Challenges and suggestions for business trans-generational continuity
The main reasons cited for the discontinuity in businesses from generation to generation are the complacency over time, family disputes, transitional issues across generations as well as ambiguity in structures and process.
According to the findings, it is said that in 2016, 43 percent of global family firms haven’t had a succession plan in place with only 12 percent making it to the third generation. It was noted that in Sri Lanka, in 2017, 32 percent of businesses did not have a succession plan.
Wegapitiya stressed that the founders must understand their biggest responsibility is to ensure when they are moving to the peak of the wave. For example, as the length is predicted to be 25 years, when they reach 20 years, they have to find a way to continue this curve.
For that, he said one of the strategies to follow is to have a succession for management and ownership.
“It is how you bring someone who is equally capable, a talent with entrepreneurial capabilities to take the baton and continue this curve. Companies’ biggest challenge is to how to find a photocopy, who can be entrepreneurial motivated, capable like the founder,” he said.
He said that the biggest challenge for the founder of a family business is measuring their greatness of entrepreneurship not by assessing of what he created, how timely and proactively he/she plans to ensure this trans-generational survival/trans-generational business continuity.
“For me, as the founder of a new enterprise, the biggest challenge is to ensure how the business will survive beyond my lifespan,” he said.
As the family businesses are the biggest contributors to the national wealth economic creation, employment creation, creating new opportunities for innovation and social welfare and its disruption cause a lot of social issues, Wegapitiya said.
“When studying this phenomenon, researchers found in a failed and successfully survived company, only the success factor to ensure trans-generational businesses continuity is to ensure you imprint entrepreneurial orientation,” he said.
“A lot of founders think they are going to live forever. They don’t bring a succession planning at the correct time. Some founders don’t want to retire on time,” he said.
He added when looking in generational perspective, businesses must avoid two traps which are founders’ pride and the cousins’ tournament.
“When the father manages to cross that founder’s pride, then the cousins come in and they start playing,” he said.
Talking about how their business survived to the second generation, Cooray said that their business shared a very clear vision.
“We share it carefully with everybody. We had the idea where we want to be and what to do; that is what is helping us to go. Our whole endeavour is to become the best in whatever the category,” she said.
She also said that the key thing was to retain family unity.
“For example, when spouses come to the picture other aspects come into play, like they are driving a better car, travelling in Business Class. They disrupt the unity of business. The key thing is to retain the family unity,” she said.
She added that they were in the process of drawing a family constitution in order to avoid conflicts.
Discussing on the communications and trust issues that arise in the cousins’ stage, Gnanam said that when each person’s skills and roles are understood, it is easy to grow the pie.
“Each member comes with unique skills. I might be good in the IT side, another person in marketing. It’s about harnessing skills and each person to understand his/her role in order to grow the pie,” he said.
“Each of us is trying to keep our ego aside, try to make data-driven decisions,” he said.
Another issue highlighted during the discussion was the new members of the family hesitating to take the baton. The STAX report cites that 65 percent are unsure if the next generation will join the business.
The panellists stressed that to get their expertise if they are living abroad, a separate unit can be implemented to make them involved in the business.
Diversifying family businesses
Meanwhile, the STAX report also cites that in 2017, 87 percent of Sri Lanka’s family businesses have considered diversification.
In general the panellists agreed with the idea of diversification in order to avoid conflict but noted that most preferably it should be done within the core of the main business.
Cooray said that they had a bit of diversification, which was related to the core of the business. “Our real goal is to be the best in whatever areas we are in, either it’s five-star or budget hotel. That is why it is easier for us to remain focused,” she said.
Wegapitiya said that in the founder’s level the entrepreneurial spirit found a lot of opportunities, which made them to go for diversification.
“These opportunities won’t be there forever. When you look at Laugfs, we have 20 different sectors,” he said. He also said that to avoid founders’ pride and cousins’ tournament, diversification was always good.
Making decisions in entrepreneurial environment
When the moderator questioned if it was hard to make fact-based decisions in an entrepreneurial culture, the panellists expressed the following.
Gnanam said that mostly they rely on data-driven decisions.
“In our business, we always go for numbers. I don’t say it’s 100 percent accurate. If it’s 70 percent, it is enough to make decisions. Most family businesses today look at numbers, market share, projections,” he said.
However, sharing contrasting views, Wegapitiya said that they did not rely on facts as facts were always historical and entrepreneurship was always futuristic.
“In business, the most difficult task is, we talk about shared vision, but vision can’t be shared. It’s difficult to educate the managers. They will understand in different ways. Then seeing the unseen you can’t do by facts, not knowing the risks, risks cannot be managed, risk cannot be calculated. Then innovation, you can’t innovate based on historical facts,” he said.
Cooray was of the view that it is a mix for them.
How to find a succession with similar entrepreneurial skills
Wegapitiya said that there was a debate until the recent past, if entrepreneurs are nurtured or natured (born or made).
“Until recently there was a debate on whether they were born talents, when they were born they come with different capabilities. But lately when scientists were studying, entrepreneurial capability found you can make and nurture them; it is a scientific process,” he said.
To find a successor, he said that a family business owner must do three things.
First is strategic education. “That is how you groom a successor. For example, if you are having a manufacturing business, the second generation eventually owns it. You have to educate them in the particular sector. For example, if you have a printing business and send your son to the world-class printing college,” he said.
The second point was entrepreneurial bridging. “Your father must have taken you to his hotel when they were young. It is called entrepreneurs imprinting. Over the time, they see how entrepreneurs work,” he said.
Then the strategic successions: “For example, giving your son some capital to start a business. Then only you get them autonomy. The biggest problem when they work with the son, the father has gone through that cycle, then the son comes from the foreign university exposed to the digital world and then conflicts start. The best thing is to give him some capital, let them start their own business, get experience and come back,” he said.
“If you give these things, then you can have a photocopy,” Wegapitiya said.