The Family Business Map

Assets and Roadblocks in Long Term Planning

M. Bennedsen, J. Fan

• Publisher: Palgrave Macmillan
• Year: 2014
• ISBN:
  9781137382368
• Topic: Business
• Subtopic: Business Strategy
• Index: Business

Combining the expertise of two consultants and academics from East and West, this book provides an international guide for family businesses, showing how to identify and implement thebest governance strategies. Packed with case studies and interviews, this is the ultimate guide for family businesses wanting to achieve long-term success.

chapter 1

Building Blocks

There are more family firms than any other type of business in the world. This book is about their uniqueness, their opportunities and their challenges. It explains how owners and families can develop business strategies to make the most of their opportunities, and governance strategies to minimize the cost of the challenges. Chapter 1 provides a first insight into the Family Business Map, a powerful analytical tool to guide families in their strategic choices.

We begin with two families: the Mulliez family and the Wang family. Their stories illustrate how family ventures in very different societies and settings share common features and challenges. One story is set in northern France, the other in Taiwan. One started a business 100 years ago and it is now in the fourth generation; the other was controlled by the founder until his death in 2008. Both reveal how successful entrepreneurs, regardless of industry, culture or continent, based their business strategies on a unique family contribution, and how they overcame the limitations of family ownership with creative governance solutions. These two stories introduce the importance of family assets and roadblocks, the pillars of our long-term planning framework.

The Mulliez family

The Mullliez family stands out in France’s business landscape. Founders of one of the largest retail distribution groups worldwide, they have refined a unique model of family venture capital and have nurtured entrepreneurial talent through four generations.

Louis Mulliez, a self-made man, started a small textile manufacturing business around 1900, which eventually became known as Phildar, working with his eldest son almost from the beginning. By the time his second son, Gerard, joined the retail sector in 1946, the brand was well known for its textiles and sewing material. The company turned to franchising to expand its distribution network – the first Phildar franchise store was licensed in 1956 – ultimately becoming one of the largest textile distributors in the world, with 1,500 stores by the end of the 20th century. It was at Phildar that Gerard Mulliez learned the retail business. He never finished high school. In the early 1960s he decided to strike out on his own. In 1961, aged 29, he opened a grocery store in Roubaix in a neighborhood known as the haut champs (high fields) – the origin of what ultimately became the mighty Auchan retail empire.

That first store failed but the family was willing to give him a second chance – this time to set up a supermarket in northern France. There was one condition – that the new business must succeed within three years. Inspired by Edouard Leclerc, the former priest and founder of the E. Leclerc retail chain, Gerard Mulliez, himself a devout Catholic, adopted the discount self-service formula.

It was an instant success. During its first year Auchan reported sales of €10 million and significant profits. In less than 30 years, Gerard Mulliez built Auchan into one of the France’s top retailers, an international retail chain and a multinational corporation. Today it is one of the principal distribution groups in the world, with a presence in 12 countries and 175,000 employees. And his relatives have been spectacularly successful in founding other retail and distribution companies: in sports and leisure (Decathlon), catering (Flunch, Pizza Pai), do-it-yourself (Leroy Merlin), electrical appliances (Boulanger), rental equipment (Kiloutou), and hard discount (Simply Market). Today, the firms owned by the Mulliez family together employ 366,000 people and have a turnover of €66 billion.

The Mulliez family has grown since the founder married Marguerite Lestienne in 1900 and had 11 children. Their eldest son, Louis Jr, was even more ‘productive’, with 13 children. Of these, Ignace and Jeanne had seven each, and Gerard six. As of 2011, there were 780 direct descendants, 550 of whom belong to the Association Famille Mulliez (AFM) the organization that control the business interests of the family.

Before launching a business or joining one of the firms belonging to Cimovam – the holding company that ultimately owns all the Mulliez firms – each family member undergoes a strict initiation from the age of 22, led by Antoine Mayaud, grandson of Louis Mulliez, fondly known as ‘Mr Human Resources’. This is one way in which the Mulliez are unique: they favor in-house training over business school diplomas. Once trained, they can become members of AFM with the approval of the supervisory board and receive shares in Cimovam. Only then are they entitled to ask for financial and advisory support for their pet projects and each must prove the viability of any prospective project. A private equity fund, CREADEV, has been set up to support enterprise creation, though it is not reserved exclusively for family members. Growth is mostly financed internally. The Mulliez despise speculation and stock markets; once referred to as ‘corporate prostitution’ by André Mulliez, one of Gerard’s brothers. Consistent with family values – that money should be reinvested in production – dividend pay-outs have remained low throughout the firm’s history.

The Mulliez have made a unique contribution to their businesses for more than 100 years. First, their strong family values are transmitted in the way they do business. The family motto, tous dans tout (everyone in everything), reflects the core values of solidarity, family heritage and responsibility towards future generations. These are based on Catholic principles such as the requirement to work rather than live off the labor of others, that wealth and property are the fruits of hard work, and that inequality is part of the natural order of things. They instill a strong sense of discipline and meritocracy. Second, they have nurtured entrepreneurship within every generation, allowing them to open up new companies (or chains) within the retail sector. The legacy and experience of over 100 years of successful business ventures provide a solid platform to develop existing firms and to invest in new ventures. Finally, the size of the family creates a deep pool from which qualified and willing talent can be drawn, unlike smaller families which have a limited number of potential successors.

It is fascinating to observe how these key family contributions have become the foundations of Mulliez business strategies, and how the value of family assets is transferred and enlarged through specific governance mechanisms, including the internal education of new generations of entrepreneurs and the private equity model of finance – all members in principle own the same portfolio of businesses (even if they manage only one of them).

But the Mulliez family has faced some major roadblocks over the generations. The most obvious one stems from the rapid expansion of the family, growing to almost 800 members in a little more than 100 years. The main challenges are how to reconcile the need to accumulate resources to finance new entrepreneurial ventures with the need to pay dividends to ensure family members can enjoy a high standard of living; how to provide incentive structures for the most talented family entrepreneurs without sacrificing the interests of the family as a whole; and how to kindle an interest in developing entrepreneurial skills among the younger generation.

The Mulliez have implemented a unique governance structure to eliminate the cost of these roadblocks. First, the board of the AFM ensures that the family’s interests prevail over personal ambitions, and the AFM is systematically represented on the boards of the individual firms. Second, each member of the family holds shares in the holding company rather than in the operating companies, hence they all have the same share portfolio. One share in Cimovam entitles them to ownership of all the family firms in a fixed proportion, ensuring that less promising companies won’t lose out to the benefit of a cash cow like Auchan, which for decades has accounted for more than half the group’s dividend.

The Mulliez are a brilliant example of how families form business strategies based on their unique contribution, and implement governance mechanisms that both enlarge the value of that contribution while mitigating current and potential roadblocks – a combination that is also illustrated by the following classic rags-to-riches tale from Taiwan.

The Wang family and Formosa Plastics Group

Wang Yung-ching, the son of a poor tea farmer, was born in northern Taiwan (then Formosa) in 1917. Despite a love of learning, he only completed elementary school. Having started work as an apprentice in a rice store at the age of 15, a year later, with the experience he had accumulated as well as support from his father who helped raise NT$200 (about US$1,000 today) and from friends and relatives, he set up his own rice store. To build his business he worked over four hours longer every day than his fellow tradesmen, eventually becoming the top-selling store in the neighborhood. Forced to close down during the Second World War, he subsequently quit the rice business and turned to lumber.

In 1954, he and his younger brother, Yung-tsai, co-founded Formosa Plastics Corporation. It was the dawn of a new era. At start up, Formosa Plastics Corporation was the smallest PVC factory in the world. Two years later, it began constructing downstream facilities and established Nan Ya Plastics Corporation. Today, after more than 50 years of development and expansion, the conglomerate has subsidiaries in the US, China, Vietnam, the Philippines and Indonesia, and over 90,000 employees around the world. It is the largest private sector enterprise in Taiwan.

Wang Yung-ching’s unique contribution gained him a reputation as a ‘god of management’ and made him a national hero. He devoted his whole life to the business until his death in 2008, at the age of 92. A man of strong principles who worked extremely hard, he planned every detail of each production process, living by the motto ‘get down to the root of the issue’ and transmitting his entrepreneurial skills and values to his children, many of whom became successful business men and women in their own right.

Wang Yung-ching had three wives: Guo Yue-lan (his first and legitimate wife), Liao Chiao (his second wife) and Li Bao-zhu (a third wife with whom he spent his later years). Altogether he had two sons, seven daughters, and three more children out of wedlock. Some worked for the family business, others ran their own companies. His younger brother had eight children. There were 20 in the second generation and ultimately six branches of the family.

Wang spent three decades planning business succession, not least to mitigate potential conflict within the family. In addition to the complex family set-up, which was prone to infighting, his estate was subject to 50 percent inheritance tax. Concerned for the continuity of the business empire, he conceived an elaborate succession model with the aim of constructing a stable ownership and management structure that would keep the group from being dissolved.

The group includes ten companies listed on the Taiwan Stock Exchange, including the four core companies: Formosa Plastics Corporation, Nan Ya Plastics Corporation, Formosa Chemicals & Fibre Corporation, and Formosa Petrochemical Corporation. Many of these are part of a stock pyramid system. The Wang family has both direct and indirect ownership stakes in the four traded companies. In addition, the group has adopted a cross-shareholding structure among the four core companies – a mechanism commonly used by family firms to leverage their control.

Unlike many family firms, ultimate controlling shares in Formosa Plastics Group are not concentrated in the hands of the family but held by a charitable foundation, the Chang Gung Memorial Hospital, set up by Wang Yung-ching in 1976 in memory of his father. Transfer of these shares is prohibited by law. Dividends can only be used for charitable purposes rather than distributed to family or non-family members. The Hospital foundation is governed by a board of directors comprised of five family members, five distinguished community leaders (most of them related to the Wangs) and five professionals (all on the staff of the hospital).

No management power was vested in the next generation. Instead, in 2006, the founding brothers handed management of the business group to a seven-member strategic committee (established in 2002) whose members included Wang Wen-yuan and Wen-chao, sons of Wang Yung-tsai; Wang Rui-hua and Rui-yu, daughters by his third wife; and three non-family managers who hold key positions in the group.

Wang Yung-ching died intestate. The absence of a will might be assumed to have created a major roadblock for the family and the business, but other concerns had to be considered. Death duty on his huge estate would clearly have been massive – with a fortune of US$5.5 billion he was the world’s 178th richest man and Taiwan’s second-richest in 2008 – the highest tax band (50 percent) would inevitably have been applied and the remainder split between the surviving spouses and his blood relatives. According to Taiwan’s civil code, if Wang’s second and third wives had evidence to support the validity of their marriages (a public ceremony with at least two witnesses), they would have the same rights as the first wife and an equal share of the inheritance. Besides the nine legitimate children, his three illegitimate children would also be regarded as blood relatives if they could prove linear descent. Perhaps Wang Yung-ching knew that no matter what he wrote in a will, disputes were bound to arise given the family’s convoluted structure. His first priority was the continuity of the business, as apparent from a letter written to his children and published after his death: ‘With your recognition and support, I would appeal to you to leave my wealth to the public for the sake of the society, so that the enterprise to which I devoted my life can perpetuate and benefit the staff and the community forever …’ His intention was seemingly to do his best to continue the empire while leaving the rest to the courts.

What can we learn from the Mulliez and the Wang families?

The business ventures founded by Louis Mulliez in Europe and Wang Yung-ching in Asia exemplify the essence of what makes family businesses c...

Table of contents

• Cover
• Title
• Copyright
• Table of Contents
• List of Figures and Tables
• Case List
• Preface
• 1 Building Blocks
• 2 Family Assets
• 3 Roadblocks
• 4 The Family Business Map
• 5 Ownership Design
• 6 Succession
• 7 Exit
• 8 Beyond the Family Business Map
• Epilogue
• Index