Leadership succession in Chinese family businesses
By Jon Fernquest[Introduction|Vocabulary|Article]
[Reading Questions|Answers]
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Successful businesses are created by hard working business people. They are founded by exceptional individuals.
Once a business is successful, it's up to the family of the original founder to keep the business alive and thriving.
Over time, as the family gets larger and larger, and the wealth of the business makes life easier and easier, competition between members of the family makes maintaining the momentum of the original founder difficult.
Modern businesses require advanced management and engineering knowledge.
Primogeniture, in which the eldest son inherits the family's wealth and business, is the traditional manner of Chinese inheritance.
This makes the eldest son both the leader of the family and owner of the company, but the eldest son is not always the smartest and most capable son.
The paradox of primogeniture is that a strict rule for succession like "eldest son takes all" leads to less of a struggle between family members to inherit the company. This will increase the company's chances of survival and success. On the other hand, the strict inflexible rule may also make the least capable son the leader, even if he is the eldest.
This problem of leadership succession is not unique to family run businesses. It is a problem that has made the life of kings and kingdoms unstable for thousands of years. Shakespeare's classic play King Lear is probably the most famous example. King Lear divides his kingdom between his three daughters and then watches the kingdom quickly fall apart.
Great succession struggles have also occurred in Southeast Asia's long history. I published an article last month on the succession struggle of the famous Mon king Rajadhirat who reigned in Lower Burma from 1383 to 1421 in the SOAS Bulletin of Burma Research. Most Thais know Rajadhirat through the Thai translation of the epic tale of his life by the minister Chao Phraya Phra Khlang in the court of King Rama I (r. 1782-1809).
Today's article is a case study of how one Chinese family that has run a famous food sauce company for over 100 years has recently coped with the problems of succession in their business.
Since family run businesses are very common in Thailand, this article should provide a lot of useful food for thought.
Reading Questions
Here are some questions to guide your reading (See answers at end):1. What issue is the current chairman of the company worried about?
2. What does "third generation" mean in the Chinese saying: "Wealth doesn't go beyond the third generation" ?
3. How old is the company? When was it founded?
4. Do the company do any international business? How important is the company in its market?
5. What is the typical problem that family run companies all over the world face?
6. How has the family traditionally selected higher level management for the company?
7. What changes is the company planning to make in the near future in the selection of higher level management? Why?
8. How was the company's famous sauce discovered? Who discovered the sauce?
9. When did the company start expanding overseas?
10. Did the company aim to capture a premium or discount market with their sauce?
[Check back for more]
Article
BREAKING THE CURSE
Chinese sauce giant tries to avoid the perils of leadership succession
Story by WILLIAM FOREMAN
The sour smell of fermenting soy beans hangs in the air at the Lee Kum Kee sauce factory as company chairman Eddy Lee explains why he's haunted by a famous Chinese saying: "Wealth doesn't go beyond the third generation.''
The family firm -- which began making sauces more than 100 years ago and is now a major global brand -- is already being run by the fourth generation. And the fifth wave is showing no interest in taking over, Lee says.
"There are so many family businesses that fail to continue. We want to break that curse,'' Lee, 50, says from a sofa in the living room of his bungalow on the factory's grounds, with a huge green lawn and a grove of banana trees.
It's the classic succession issue -- one of the most serious challenges facing family businesses around the world. How do you groom the next generation, restructure the company for new leadership and avoid the familial feuding that has sunk so many others?
The Lee family has decided to take a bold step: hiring an outsider to be the chief executive officer by the end of this year. Until now, most top management spots have been filled by family members or longtime employees.
"We believe the company is becoming big enough that it's not an easy job to do anymore. It requires more management skills,'' said Lee, whose round face flashes a boyish grin between earnest, cautious remarks about the business.
It's a huge move for a company founded in 1888 in this region of China. The firm's first product was oyster sauce, a salty and sweet condiment that's one of the key ingredients of Cantonese cooking.
Lee's great grandfather developed the sauce recipe by accident. The restaurateur left a pot of oyster soup boiling too long and discovered the broth had been reduced to a thick, dark brown sauce that was tastier than the soup. It's now a popular ingredient in stir fries and a variety of other dishes in southern Chinese cuisine.
The company moved to Hong Kong in 1946 and began quickly expanding its global business, selling its premium sauces to wealthy Chinese living San Francisco, London, New York and Hawaii who could afford the luxury product.
Now Lee Kum Kee sells nearly 300 types of sauces and condiments, including chili garlic sauce, minced ginger, sesame oil and soy sauce, in grocery stores worldwide. Lee is tightlipped about the company's financials and only shares vague figures about sales and production.
"Every year, we have 15 to 20%, at the most 25%, growth,'' Lee said. "But this is not what we want. We want breakthroughs all the time.''
Lee said the company is making a big push to become the leader in China's huge soy sauce market.
"I think if we can be No. 1 in China, we have a good chance to be No. 1 in the world in Asian or Chinese sauces. We are not far away. We're currently No. 2,'' said Lee, adding that the main competition is the Chinese firm Haitian Flavoring Co Ltd.
Lee Kum Kee produces about 100,000 metric tonnes of soy sauce each year, he said. The plant in Xinhui, a muggy city in southern China, employs about 1,400 people and has several football field-sized spaces with rows of silo-like fermentation tanks that each hold enough soy sauce to fill 100,000 bottles.
The company has a sauce factory in Hong Kong, two in China and distribution centres and sales offices in the US and Europe.
Although the business is humming along, Lee said the family can't stop worrying about the Chinese saying "Fu bu guo san dai'' or "Wealth doesn't go beyond the third generation.'' He's collected similar sayings in German, Spanish and several other languages.
Joachim Schwass, a professor and expert on family-run companies at the IMD business school in Lausanne, Switzerland, said the challenge of handing off companies to the next generation involves the way the businesses evolve.
Companies are often started by entrepreneurs who are unhappy with the present environment and want to create something new, Schwass said. "They have this huge motivation that drives them,'' he said.
But Schwass says the founders often tell the next generation to just keep doing what they did and not to touch anything. "Very often, the next generation is ill prepared for the changes and challenges,'' he said.
There's also a shift from parents who control the power to a new power-sharing structure among the children.
"So very often the next generation is badly prepared for the sharing of power and the moment the parents aren't there anymore, you see fights erupting,'' Schwass said. "The next generation goes to the model they're most familiar with, namely power control. They try to vie for total control.''
Lee said that his company tries to work out problems by having regular family retreats.
"Every three months, we sit down for five days. No other business. Usually we stay at a golf course. We discuss all our issues,'' he said.
The family -- four brothers, a sister and two parents -- also holds an election every two years for the chairmanship, said Lee, who serves until 2008.
Lee said the company has had a difficult time searching for a CEO. It needs someone -- preferably ethnic Chinese -- with global experience who understands Chinese food culture and the sauce business.
The person also has to understand how to work with the family, he said.
This is a tough time to be looking for such a person, said Maris Martinsons, associate professor of management at City University of Hong Kong.
"The Chinese economy is booming and lots of other companies are looking for the same profile,'' he said.
Martinsons said Lee Kum Kee was smart to be seeking leadership from the outside, but said there are risks for executives considering the job.
If the company is not publicly listed, it hasn't been properly vetted by the outside investment community,'' he said. "There may be skeletons in the family business' closet and that would make the executive think twice before he or she takes the job.''
Vocabulary (in article)
fermenting - a chemical process that changes the taste
a smell hangs in the air - the smell does not go away
bungalow - a small house with one level and no stairs
succession - the process of changing leadership for an important position (leadership succession often encounters many problems)
groom - prepare someone for a job by teaching them all the skills they will need
familial feuding - fighting between members of a family, often over money
earnest - very serious and sincere (treating as important)
minced - chopped up into small pieces
tightlipped - doesn't provide information, won't say anything about
vague figures - numbers that aren't meaningful or informative
breakthroughs - big achievements
muggy -high humidity, hot with a lot of moisture in the air making it very unconmfortable and sweaty
silo - tall round tower in a farm to store grain in
fights erupting - fights starting suddenly
vie for - compete for
a retreat - when a group of people goes for a short vacation to a quiet secluded place so they can rest and spend time together
publicly listed - when a company's shares are traded on a public stock exchange
properly vetted - the good candidates are chosen and the bad ones rejected
skeletons in the closet - secrets from that past that could cause problems in the future
think twice before - be careful in making a decision
Answer Key:
1. What issue is the current chairman of the company worried about?
Leadership succession. He is worried that the company will fail and the wealth of the company and family will no longer exist.
2. What does "third generation" mean in the Chinese saying: "Wealth doesn't go beyond the third generation."
It means three generations of family after the founder of the company. The founder is the first generation, his son is the second, and his grandson is the third generation.
3. How old is the company? When was it founded?
More than on hundred years old. It was founded in 1888.
4. Does the company do any international business? How important is the company in its market?
Yes, they are a very important company in the international Chinese food sauce market. They are a "major international brand."
5. What is the typical problem that family run companies all over the world face?
Leadership succession in the family business: "How do you groom the next generation, restructure the company for new leadership and avoid the familial feuding that has sunk so many others?"
6. How has the family traditionally selected higher level management for the company?
They have usually selected family members and longtime employees.
7. What changes is the company planning to make in the near future in the selection of higher level management? Why?
They are going to hire someone from outside the company to be the CEO. The large size of the company means that it needs a leader with more management skills.
8. How was the company's famous sauce discovered? Who discovered the sauce?
The sauce was discovered by accident when the current Chairman Lee's great grandfather boiled some oyster soup too long and the resulting thick, dark brown sauce tasted a lot better than the soup.
9. When did the company start expanding overseas?
In 1946 when they moved to Hong Kong.
10. Did the company aim to capture a premium or discount market with their sauce?
A premium market. They sold their sauce as a luxury product for wealthy Chinese living overseas.
