As an entrepreneur and founder of a family business, one key thing that Sukanto Tanoto considers is the continuity of the Tanoto Family business – whether it should be by family members or outsiders. At some point of time, this question will definitely cross the minds of the founders: Are the family members even competent enough to run the business in the future?
There are many family owned businesses in this world that had a humble beginning but have grown to big conglomerates through entrepreneurial vision and energy. For example, South Korea has their ‘Chaebols’, Latin America has their ‘Grupos’, and there are also companies in America and Europe such as Wal-Mart and Estee Lauder that had similar beginnings.
Truth to be told, trends have shown that companies with family having controlling stake face a sobering reality: the statistical odds on their long-term success are bleak, with only 5% continue to create shareholder value beyond the third generation. The main reason is because the generations following the founder often may not have the drive and business acumen to match the founder. Furthermore, increasing business challenges and competitions in the market will make it more difficult for the next generation to sustain the business.
Of course, there are many other family businesses that have shown good growth and profits, made it through all kinds of turmoil (war or crisis) but yet still able to thrive generation after generation. McKinsey did a research on 11 family-owned businesses – 9 in the US, 2 in Europe – that continue to thrive generation after generation. These companies are at least 100 years old and 7 of them have revenues of more than US$10 billion.
So what is the key to survival for family businesses?
Combination of family ownership and professional management provides the best of both worlds. The mandate is for all these companies to pay attention to succession planning. Needless to say, choosing family members to run the business isn’t always the best answer. Nepotism is an obvious way to destroy family. With these family run businesses, family members who work in the company have to earn their stripe too. If they’re not competent, they’re out.
What we need is strong governance and a powerful commitment to the values passed down through generations and keen awareness of what ownership means. There needs to be a system of checks and balances for carrying out the family’s roles in the 3 vital dimensions of governance – ownership, board supervision and management. Besides the role of the family, qualified outsiders are also needed to run the company. This is especially necessary for personnel decisions during board meetings. A strong board and uncompromising standard of meritocracy from both internal and external parties is required to ensure partial and active management of business portfolio and long term financial policies.
Sukanto Tanoto knew about this potential problem of a family business, that is why he had been very firm to his children since they were young. Taking responsibility of the value system in the Tanoto Family, he instilled important values in his children to govern their lives. He ensured that his children understood the challenges of building a business and he does not believe in providing short-cuts for his children to climb to the top of the organisation. Given his firm and strict upbringing, all his children (Andre Tanoto, Imelda Tanoto, Belinda Tanoto and Anderson Tanoto) have graduated from The Wharton Business School of the University of Pennsylvania.
Besides personnel issues, family owned businesses also need to venture into diversification – into unconnected businesses with a mix of high risks and returns projects to make sure that the business is well developed in all areas. Sukanto Tanoto, founder of RGE Pte Ltd also understood the importance of this and ventured into diversified resource industry such as pulp and paper, palm oil, specialty cellulose and oil and gas industry. All his business groups are doing well now, and one of them, Satery Holdings is listed on Hong Kong Stock Exchange.