Secrets to Preserving a Business Family’s Wealth and Health

Au, Kevin Yuk-fai（區玉輝）

Family-owned Luen Thai Group has spent a decade deciding how to carefully move family wealth from one generation to the next. Read the success story behind it

The following is an abridged version of the case study “Luen Thai: Governance for the Tan’s Shared Future”, which won the Coutts Prize for Family Business of Hong Kong 2013. By China Business Knowledge @ CUHK.

In June 2013, Sunny Tan, the youngest Tan in the second generation, received the trophy on behalf of the Tan Family for the first Coutts Prize in Family Business in Hong Kong, recognizing the exemplary family governance of the Tans.

His father, Dr Tan Siu-lin, founded Luen Thai in 1965. Dr Tan, together with his children and other family members, laid the foundations for this multi-billion global conglomerate over the past 50 years. With the support of the entire family, the Tans successfully adapted governance tools that were mostly developed in the West for their own family business.

Emergence of a Global Family Enterprise

As it grew, the Luen Thai Group was a conglomerate, which featured a globally diverse business portfolio. The Group ran businesses in garments, fishing, logistics, cargo shipping, travel, hotels, airlines, real estate, insurance, information technology and other related industries around the globe.

Within the Group, Luen Thai Holdings Limited focused on its apparel business, and has been listed on the Hong Kong Stock Exchange since July 2004. A number of Group businesses remained private: Luen Thai Enterprises was dedicated to nurturing new ventures, especially in China; and Tan Holdings Corporation represented the Group in Micronesia, which the family saw as their adopted home.

Dr Tan was born in Quanzhou in China’s Fujian Province, in 1930. Like many other self-made entrepreneurs, he and his wife, Lam Pek-kim, led a very humble life. They married in Hong Kong in 1952. Helping his father in a small textiles business in Manila, Dr Tan was constantly moving between Hong Kong and the Philippines.

Then, in 1961, a huge fire swept through the Manila textile market, reducing Tan’s properties and his years of efforts to ashes. Traumatized by shock, Dr Tan’s father fell sick and passed away soon after. Shortly afterwards, the young couple moved to Sabah and started a rubber plantation there. In 1965, Dr Tan returned to Hong Kong, where he launched a shipping agency and trading business, which gave birth to Luen Thai.

While the business went smoothly, Dr Tan made another move to Guam in 1972, where Luen Thai seized opportunities to expand its shipping business to other Western Pacific islands. In 1983, Luen Thai ventured into apparel manufacturing in Saipan and started the very first garment factory there.

Around the same time, Luen Thai also developed a commercial fishing business in the Western Pacific and became one of the largest fresh tuna suppliers in Asia, operating a fleet of more than 150 fishing vessels. With this solid foundation, Dr Tan explored opportunities in his hometown, Quanzhou, while gradually moving to other cities in China, while further diversifying the portfolio of Luen Thai into a global conglomerate.

Family Values Echoing Dr Tan’s Philosophies

In addition to the growing business in the 1970s, the couple saw their family grow in size. They had six children and expected high levels of performance from each of them – both academically and later at work. The senior Tan’s teachings evolved into a set of fixed interlocking family values, which Dr Tan wrote down in 1984. The couple always reminded their family to live within their means and place family interests before personal ones. From their experience, recognition had to be earned and success needed to be shared. The family also took a long-term view: family members had to think not only about today but also about consequences affecting future generations. In essence, the Tans recognized that wealth could be destructive for future generations if not managed correctly.

Ownership Decision As a Governance Trigger

Like many other business families, as the Tan siblings began to have their own families and contrasting views on business and family, the Tans gradually began to feel the tension of the family-first or business-first dilemma.

By 2002, aged 70, Dr Tan faced a tough question: How should he pass the family business on to the next generation? The second generation gathered in Dongguan, China, to discuss the issue. They reviewed their personal dreams, the designation of their own branch, and the vision of the wider family. In the process, they discovered a shared dream of the family. Thus the siblings agreed to leave the business as a group that they would share, and the family began to search for a way to keep the wider family together across generations.

Family Governance From Scratch

In the early 2000s, Sunny and his eldest brother, Henry, flew to London for a family business workshop and first learnt about family governance. They were inspired by the experience of Western families and began to seek advice from gurus in the field. These Western business experts not only brought in professional business knowledge and techniques to the family, but also initiated processes and policies to support the governance system. However, the siblings knew that without serious commitment, the governance structure would simply be empty words on paper. With much to do, Henry hired an outsider in 2008 to take charge of the Family Office, the major function of which is to take up organizational and administrative work, including coordinating the family members’ hectic schedules.

Atop all the governance structures was the Family Council, which provided structured ways to manage the family, preserve its key culture and values, and set policies and procedures for benefits and other family matters. The Family Office was established under the Family Council to handle the family’s administrative matters. Three committees were set up under the Family Office: (i) Health and Medical Committee, (ii) Education and Career Committee, and (iii) Recreation Committee. These committees carried out designated functions and centralized resource deployments which could benefit family members more. Each committee consisted of four to seven second and third generation family members. The Family Council sought to engage more family members, especially the in-laws, in these committees. The chair of these committees rotated regularly with the head of each committee reporting to the Family Council via the Family Office. A Family Assembly was open to all recognized lineal descendants of Dr Tan and Lam Pek-kim, and their spouses. In addition, the family had a written set of ‘Tan Family Principles and Policies’, intended to serve as a guide for decision-making and conflict resolution.

Family Employment Policies

The rules for entering the family business were set by the second and third generations. The second generation crafted the basic principles for family employment, while the third generation was tasked with developing implementation plans and dealing with practical issues. They set out criteria such as two to three years of external work experience.

Many third generation members received top-notch Western educations and worked in investment banks. As Henry put it, “the third generation had to accept a substantial pay cut when members came back to the business. But the family needed them, especially when the company was preparing for its initial public offering.” Within the company structure, the compensation package was largely consistent across the board and adhered to policies and market norms. Sunny expressed his view on having family executives working with non- family ones:

“We have to provide good career advancement, not only for family members but also for other employees…Employees will be happy to see this as it shows our commitment to the unit.”

On Managing Financial Wealth

The family wealth was managed by Dr Tan together with the second generation members. They maintained a central funding pool to support the wider family and its shared functions. Investment proposals for new ventures were vetted by an investment panel using a set of guidelines such as internal rate of return, deal terms and due diligence. Every year, the corporate board would decide on the appropriate level of dividends for shareholders and funds for re-investment. The Family Council would then decide how to use the dividends; although a good proportion should be allocated to family philanthropic initiatives.

The Way Ahead

Both the family and the business were experiencing transitions. The Tans were glad that they had invested their time in building a dynamic governance platform to help with these transitions. Even into his eighties, Dr Tan still took a very hands-on approach, which is a typical trait of many successful self-made entrepreneurs.

Like many other families, the Tans have experienced disputes over business issues. However, the family governance structure helped address some of these issues. Yet the Tans knew that this was just the start. The entire family was eager to find out how they could use the current governance platform to deal with challenging questions in the future. Fundamentally, what more should the family do to sustain the success of their global conglomerate while also assuring the family’s happiness going into the future?

Reference:

Cheng, C. Y. J., & Au, K. (2014). Luen Thai: governance for the Tan’s shared future. Coutts Prize for Family Business Hong Kong. In association with Coutts Bank.