Financial Adviser: 5 Family Business Lessons Everyone Can Learn from the CEO of D&L Industries Alvin Lao

There is a famous Chinese saying that goes: “Fu Pu Kuo San Tai,” which literally means “wealth does not pass three generations.”

The first-generation patriarch works hard to build the business. The second generation inherits it and grows the family fortune while the third generation eventually squanders it and destroys the business.

This was the concern of the Lao family when they started exploring the idea of going public.

D&L Industries was founded by brothers Dean and Leon Lao in 1963. The business, which sold colorants to the plastic industry at that time, was so successful that, several years later, three other brothers, Alex, Edwin and John, joined the company and helped grow it.

In 2012, D&L Industries became a publicly listed company with an initial market capitalization of P15 billion. The company’s total revenues rose from P6.4 billion in 2012 to P30.8 billion today under the management of the second-generation family.

Fifty-nine years after the Lao brothers founded the company, D&L Industries, today, is the largest and most dominant chemical company in the Philippines, with a market capitalization of over P50 billion.

Aware of the need to prepare the family business for the future, Alvin Lao, president and CEO of D&L Industries, shares how his family plans to ensure longevity and beat the third-generation curse:

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1| Treat a family business like a business, not as an extension of the family

No matter how competent they are, hiring of in-laws may put family relationships at risk due to potential differences with family members in how to run the business.

“We have a lot of family members who are involved in business but have rules before a family member can join,” Lao says. “For example, we don’t hire in-laws. Not because they are not qualified, but we have seen in many family businesses that the presence of in laws can be source of conflict.

“Especially if the boss is an in-law and reports to one of the family members. What do you do, let’s say kung nagkamali? Its very sensitive. So, in our business, we don’t hire in-laws.”

“Second, before a family member can join, he or she must be a graduate from college and has worked outside for at least two years. When they start with us, dapat start from the bottom.

“When I joined the family business, I started as a management trainee, even after I have done my MBA. I was a management trainee for one year and then walang sideline. 100 percent of energy has to be focused para walang aangal na ibang family members. Your time has to be devoted to the company.

“Actually, to take it further step, we only invite family members who can really add value to the company and work with us. If at the end of day, kung wala siyang additional value na mabibigay, why should they work for us? It sounds cruel but we need to protect the business,” he adds.

2| Keep communication lines open and promote mentoring within the family

Communication within a family business is important. Poor communication can create real relationship problems if a family member is not being heard or ignored.

“We meet regularly,” Lao says. “Every Monday night. Once a week, family members who work in the business have to meet together. At least every quarter, the council would meet. It depends, sometimes if there is something urgent, we don’t have to wait naman.

“First gen family members—they were always there. They are always great mentors to us. Never yan nawala. They are my main source of advice and wisdom.

“Actually the first gen, even if they are retired, they are still very active in the business. Meaning every morning, before 7 a.m., lahat sila pumapasok, kami mas late kami pumasok, mga 7:30 a.m.

“If it is something that you have started, in a way, you are already so attached to it. They are still very knowledgeable and familiar with customers and suppliers.”

3| Professionalize the management team and follow best practices

Transitioning a family business structure to a more professional setup can be difficult. Family members must be willing to share some aspects of control in the business with non-family professionals. But for the business to sustain growth, it has to upgrade its systems and processes and strengthen corporate governance.

“Even before IPO, we started hiring professionals from multinationals,” Lao says. “Our director for finance was a former commercial director of Unilever Philippines. He was with us for many years. He was also one of my mentors.

“As a family business, you are usually good in business, but there are many best practices. Yung mga professional accountability type and relationship transactions, they are not usually followed kasi kailangan mabilis. They say that business takes on the personality of the owner.

“In our case, we were successful and, at the same time, we were growing so fast that our infrastructure as a business in terms of people, the system was not able to catch up. That’s the value of having professionals who have worked in the other companies to help us.

“Kasi they probably have been through it, or they are probably aware of what system to implement or consider, so for us it’s a matter of being aware. I say that 90 percent of the time, maganda naman yung advise and it made sense.

“When I moved from CFO to CEO, we needed a new CFO and we were lucky to have someone from Nestle Philippines to join us. He was very senior in their finance group. Even when I became CEO, I am still learning. Iba yung perspective that he has. Iba yung 27 years of experience.”

4| Create a strong and distinctive culture that can last for generations

Every family-owned businesses can suffer from leadership misalignment, especially in the generations that come after the founder, whose vision and ambition have become part of the company’s DNA.

It is important for a family business to develop a strong culture and work ethic in the organization that can guide the succeeding generations to sustain the business growth.

“Culture is very important to us,” Lao says. “It is something that we guard very closely and we want to maintain. By culture, it is not only about how we are as a family, but also as a business as well. Things like staying low key and being humble. But we work hard; we are aggressive in business and we try to excel and so forth.

“When we hire, regardless whether someone has vast years of experience or is a new graduate, this is something we try to gauge and see if good fit sa amin.

“If anyone’s new, essential yan. In a few months, malalaman kung hindi sya fit. They won’t last long. They also won’t be comfortable. In a way they will stand out.

“Thankfully, everyone in the family is working hard. One of the tasks of the family council is to not just evaluate new family members to come in, but also look at existing family members who are in the business to see how they can upgrade or enhance their career, their learning and kung hindi na sya bagay it is also the job of the council to remove them from office.”

5| Make mistakes and learn from it to succeed in business

Encouraging family members to take risks opens up opportunities for learning. Families that practice encouragement promote each member to reach their full potential.

“One thing I am very glad is that, many times in business, there is usually a strong patriarch that is the leader that dictates what goes on. In our case, we do have patriarchs, plural, pero I am very glad they give us a lot of flexibility and leeway to do our own thing, to make our own mistakes to learn and to grow.

“I don’t see them as bosses but really as mentors. Kasi to be honest, they give us too much to do. They don’t try to control. We are given a lot of room to make mistakes. But, thankfully, that seems to be the right way to grow.

“My lolo and lola came from Xiamen, China. My grandpa was an assistant cashier in Chinabank in Binondo for 30 years, and my grandma was a teacher at Grace Christian High School. They were not entrepreneurs.

“Si Dean, Leon and Alex, lahat sila went to night school but worked during the day. School of hard knocks. You don’t often see them being very close, which is a case in our family. And for them to be working in the same company and still be close, (that’s something).

“Actually, medyo rare ‘yan. Not just also in Philippines but in many companies. That’s one great example. Pati kami mag-pinsan close din kami. I treat my cousins better than most people would treat their own brothers and sisters. Ganyan kami ka close.

“One advise that my dad would always give us is always look in the mirror to see how you are and to see where you are making mistakes because you are not perfect. Always learn from your mistakes and be humble.” 

Henry Ong, RFP, is an entrepreneur, financial planning advocate and business advisor. Email Henry for business advice [email protected] or follow him on Twitter @henryong888