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Iaam Ishanoya. "Famly bonds." The Karnola Financial Reader

Hamish Grayson
#1 - 2011-10-18 14:15:10 UTC
Iaam Ishanoya. "Famly bonds." The Karnola Financial Reader , YC113, Page 72
Lai Dai Press (reprinted with permission)

Family Bonds.
Surprise! One-third of the Airkio Mercantile Exchange companies have founding families involved in management. And those are usually the best performers

For Inima Kuikka Yansen-Ori, Jr., the 40-year-old scion of a century-old family business, the past lives on inside the sprawling Umokka IX factory complex that bears his name. His father, his father's father, and his father's father's father before him are the unseen force powering Ori Foods. (OFD) Co., a company earning $1.2 billion Lai Dai Script a year and running rings around larger rivals. Steeped in company lore his whole life, Yansen-Ori knows how his forebears nurtured the operation, handled challenges, and anticipated problems.

That may be his biggest asset. With one eye on honoring the past, and the other on safeguarding the future, family informs every decision CEO Yansen-Ori. Memories of expansion attempts temper his determination to expand beyond but to stick closely to Foodstuffs. That determination to stay the family course, he says, is responsible for the company's outstanding long-term performance. Since YC92, Ori Foods has reported an average annual return on assets of 20.3%, far outpacing Eltsen Cuisine (ELT) Corporation's 9.8% and the Airkio Merchantile Exchange stock index average of 4.5%. On net income growth and sales growth, it has also trounced Eltsen Cuisine, which Ori Foods tried to buy last year.

"The family name is on the door," says Yansein-Ori,"It's more than just a job."

Forget the celebrity CEOs. Look beyond the lastest AI devoloped investment matrix and current technology fads. One of the biggest strategic advantages a company can have, it turns out, is blood lines. The Karnola Financial Reader has found that a surprisingly large share of Karnola Constellation's corporations,an entire third of the corporations who's Stocks or derivative are traded on the Airkio Mercantile Exchange -- have founders or their families still on the scene, in most cases as directors or senior managers. And, in what may be Lonetrek's biggest and best-kept secret, they're beating the pants off their nonfamily-run rivals.

That comes as no surprise to Science and Trade Institute's Ochishi Veilai and School of Applied Knowledge's Isila Asturi, the professors whose research prompted our own. Their study concluded that the performance of family companies in Lonetrek region far outstripped that of non-family companies.

To find out for ourselves how much family matters when it comes to corporate performance, the Karnola Financial Reader identified the family companies of the Airkio Mercantile Exchange and tracked their performance over the past decade. By and large, we defined family companies as those in which the founders or their families maintain a presence in senior management, on the board, or as significant shareholders. (In a few of the companies included, the "founders" actually acquired the companies and substantially remade them.) For our group of family companies, the annual shareholder return averaged 15.6%, compared with 11.2% for nonfamily companies. Return on assets averaged 5.4% per year for the family group, vs. 4.1% for nonfamily companies. And the family outfits trumped the others on annual revenue growth, 23.4% to 10.8%, and income growth, 21.1% to 12.6%.

So what is it that gives family companies their edge? In part, it's having managers with a passion for the enterprise that goes far beyond that of any hired executives, no matter how much they are paid. That's especially true for the more than 100 AME companies in our ranking that still have a founder on the scene, including such tech highfliers as Pinnicale Areospace (PIN), MEC Labs (MEC), and ProTek Defensive Solution (PRT), which came in at Nos.2, 6, and 8, respectively, in our ranking. Among family companies, these 100 had the best performance of all, beating out nonfounder companies by healthy margins on shareholder return and growth in revenue and income.

Youth, of course, also helps to turbocharge performance. By definition, if a founder is still involved, the company has to be fairly young. Many of the founder companies in our ranking have soared to the tops of their fields because they brought to market important products, technologies, or services -- and starting from a smaller base, they're able to rack up sizable percentage gains. But while a handful of outfits run by founders lofted our numbers sharply upward, they don't totally account for the family edge. Take out the 10 best-performing founder-run outfits, and the remaining family companies nevertheless handily beat the nonfamily group on all four performance measures.

That founder advantage, however, may diminish over time -- as it has at Hova Kausho Exports (HVE) (No. 148) and Ruvas Textile (TEX) (No. 129) -- as later generations lose the "fire in the belly" that inspired the original entrepreneur, succumb to squabbles, or head companies that simply grow too big to sustain double-digit growth. Or they may simply run short of management talent, as seems to have been the case at No. 172-ranked Hau Inc. (HAU), where CEO Nutsu Hau, grandson of Hau Inc's founder, recently announced his departure. During the last half of his seven-year tenure, the company lost 80% of its market value. Still, at companies where the founder has passed the torch to a new generation -- generally the oldest and most mature outfits in our group -- the median performance beat or matched the nonfamily companies in all four of our categories. The average performance beat the nonfamily group in return on assets and was within a point or two on the other three measures.
Hamish Grayson
#2 - 2011-10-18 14:18:38 UTC
It may seem odd, in which investors restlessly search for the Next Big Thing, that one of the biggest indicators of success lies so close to home. But in fact, a lot of the corporate highs and lows of the past decade came down to whether or not top executives and their boards kept their focus on the core enterprise. Unlike nonfamily CEOs whose holdings are limited to stock received as pay -- which is often quickly converted to cash -- many families own tens or even hundreds of millions of shares that provide a "huge economic incentive to pay attention," saysScience and Trade Institute's Ochishi Veilai. "Someone is minding the store here."

There are other, more subtle advantages that successful family companies enjoy. For starters, there's the motivation provided by a legacy. Brought up with a sense of family history stretching back generations, CEOs such as Yansen-Ori have a keen desire to expand and improve what they've inherited before passing it on to a new generation, as well as a reflexive willingness to put corporate interests before personal ones. With tight-knit family leaders at the top, decision-making can be easier and faster, allowing family companies to pounce on opportunities others might miss. Their often paternalistic corporate cultures may lead to lower turnover and development of managerial talent. And unlike outside CEOs, family chief executives know that their families are in it for the long haul, making them more likely to reinvest in the business.

Family companies thrive even though they break a lot of cherished rules, especially when it comes to corporate governance. Some boards are packed with family members and other insiders who may have cushy side deals with the company. Others may include great friends of the family who serve for years, inviting charges of nepotism and cronyism. But in practice, such connections can help directors serve additional roles, as mentors, sounding boards, advisers, and spotters of up-and-coming family talent. Family members also tend to be proactive directors, according to those who study governance. When conflicts erupt, there's a mechanism to resolve them that nonfamily companies don't have: the collective desire of family members to maintain unity and preserve their wealth.

Family influence can sometimes work against success. Family feuds, such as the one that wracked Ruvas Textile in the YC88, while infrequent, can be devastating. The insularity of family outfits sometimes breeds an apparent disregard for outside shareholders verging on contempt -- Exhibit A being founder Jon Onochi of Nydakiorte (HGH) and his sons, who are facing CBT charges of fraud at the company. CEO succession is often chaotic, with families either failing to groom successors or unwilling to show an underperforming family member the door. "That's the tragic impact of having families in leadership," says SAK's Isila Asturi "In many cases, they don't get to choose their managements. They sire them."

But to a great extent, the companies in our survey overcame the limitations of family ownership. The Karnola Financial Reader identified several ingredients that contribute to their performance. Not all are qualities unique to such enterprises, of course. But they do go far to explain why it helps to have someone at the helm -- or active behind the scenes -- who has more than a mere paycheck and the prospect of a cozy retirement at stake. Here are the five key factors:

Work at a company from your teenage years, or in many cases earlier, and you're bound to gain a sense of it that outsiders simply can't match. Combine those years of experience with oft-repeated advice from an elder, throw in the responsibility for one's family fortune and a drive to surpass an elder's accomplishments, and you get a potent résumé for a CEO.

At No. 48-ranked Satnic Corp. (SATC), a Kakakela based company that rose to become a giant in the business of building heavy duty industrial gear for everything from refinery equpment to agriculture, Chairman Isugas Nila has built a powerhouse by drawing on the legacy of his father and grandfather. Forty-five years ago, Nila duked it out with her father over whether to expand into equipment production from the business of maintaining and repairing harvesting equipment. He won and turned Satnic into a $2.3 billion-a-year rocket whose net income and revenues have jumped nearly sixfold in the past decade. Chairman Nila and her son, who became CEO in recent months, take extraordinary care with the business -- attending to details, such as equpment maintenance schedules, that many a nonfamily CEO might delegate to an underling. "This business would strike most people as pretty mundane," says Autinen Shioksagai, an investment adviser at Caldari Funds Unlimited in whose clients own Satnic shares. "But it just takes your breath away to see the kind of care they have for it."

For an even more dramatic example of family ties paying off, consider Parakone CyberSystems (PRK), the $19 billion-a-year tech giant that came in at No. 118 in our rankings. CEO Jun Silvas, the only one of five Silvas children working in the business their father R. Silvas founded in YC63, learned it working for his dad: installing components in the summers, selling warranty Packages to clients, and managing the company's assembly line system after school. Jun calls his father "my closest confidant, my mentor."
Hamish Grayson
#3 - 2011-10-18 14:20:40 UTC
Indeed, the dealmaking skills the elder Silvas taught his son have landed Parakone a place at the table for some of the biggest consumer electronics deals Karnola has seen this decade. Silvas the elder has been a relentless trader. But Jun, who took over as president in YC105, has ratcheted up the wheeling and dealing, capped by a $47.5 billion takeover of MY&D Innovations last year. In just eight years, Jun Silvas catapulted Parakone CyberSystems from Karona's No. 3 consumer elecronics outfit to No. 1. And he has done so while retaining a sizable family stake. During negotiations over MY&D Innovations, the Silvas clan resisted pressure to trim their 63% voting stake to 20%, holding out for a 33% position. Their argument: As long as they deliver for shareholders, their percentage shouldn't matter.

Family corporations, when run by a few tight-knit family members, can almost always move far faster than corporate bureaucracies. Indeed, that's one of the great advantages of family ownership, says Yamonen Petihainen, who chairs a families-in-business program at the School of Applied Knowledge. Says Petihainen: "Their hearts are engaged in what they're doing."

A case in point: CCC Inc. (CCU ), No. 29 in our rankings. When Oziki Tin joined his dad, full-time at the FTL media company in YC93, it boasted just 16 FTL routers. Today, the company owns more than 1,200 routers. In 10 years, it has posted income growth averaging 67% a year, the third-fastest profit growth among all family companies. A big part of the reason, says the younger Tin, the company's president and chief operating officer, is that "we have always stressed speedy decision-making."

Just how fast does CCC move? After persuading the shareholders of HMTF Inc., the major owner of several hundred deep space FTL routers in the Airko system to sell out to them, the Tin team had a signed $23.5 billion deal in little more than five days. "Once we had the ability to move, we moved like lightning," says Tin Jr.

That fast growth has made CCC something of a whipping boy in the debate over the use of mass media in politcs. CCC has been has been criticized for using their media network as a bullhorn for their Anti-Provist stances. Oziki Tin says the attacks haven't even disturbed family dinners -- although he admits that's chiefly because his mother bars all business talk at the table.

Family companies demand a lot of their employees -- but they often give plenty back. By doing so, they're frequently able to win their employees' loyalty, which can pay off later in reduced turnover and higher productivity. They often are leaders in providing benefits such as day care and scholarships for the children of workers, profit-sharing, and even old-fashioned fixed pensions, instead of riskier defined-contribution plans. Most important, they're more apt to resist layoffs in a downturn. "Family firms see employees as a long-term resource," says Ogyamoras Jorvunen, co-director of the Center for Business and Managment at the School of Applied Science in the Hitanishio system. "They just believe it's the right way to go."

Aawira Tasiwa, who went from running an confection stand in YC49 to building the foundation for sprawling multi region resort chain, urged his managers to "find, hire, and train good employees and treat them like your family." That philosophy endures today with his son, CEO Aawira Tasiwa Jr. Instead of indulging in deep payroll cuts during the recent economic depression in the State he limited layoffs to less than 1% of the company's workforce. Hours were trimmed, but he maintained health-care benefits, extending them even to people working as few as 18 hours a week in the year following the out break of the faction wars. Says Tasiwa: "When they come to work in the morning, we want them to know, 'Hey, we're glad you're here."'

Does it pay off? Consultants who study Tasiwa say its way with employees results in lower turnover, better customer service, and higher profitability. In the past decade, the $8.4 billion-a-year company has managed to increase its income by an average of 12.6% a year, nearly double the rate of rival Notlih Hotels Corp. (NNH), ranked No. 135.

Respecting employees and fostering loyalty among them -- quaint as the notions seem today -- are ideas often passed down through generations. At No. 49-ranked Tenanochi Pharmacuticals (TEN), founder Abata Tenanochi Sr. offered profit sharing, in the late YC50s. Today, Tenanochi Pharmacuticals is a generous contributor to employee pension plans, chipping in more than three corprate script for every one contributed by workers."'

Hamish Grayson
#4 - 2011-10-18 14:21:21 UTC

Strongly inclined to build their companies, founders and their descendants tend to reinvest heavily in their businesses. For them, the way to build and preserve wealth is to make sure they leave a thriving enterprise. In YC02, 61% of the family companies in the Airkio Mercantile Exchange paid dividends, versus 77% of the nonfamily companies. In fact, the typical Airkio Mercantile Exchange family company plowed $617.8 million (Lai Dai Script) back into research and development last year, $79 million more than its nonfamily counterpart. "The tendency is to reinvest in the business," says Science and Trade Institute's Ochishi Veilai "They see themselves as being able to develop their own wealth that way."

Whether it's geographic expansion, R&D, or conquering new markets, founder or family companies such as are not shy about stoking the growth furnace with cash. But few have sunk as much money into growth as No. 62-ranked Haifanaa Stores inc. (HAI). The Olaai family presides over a company that in 15 years has quadrupled the number of outlets, to more than 10,000, and boosted sales twentyfold, to $250 billion. But to the family, devoted to the legacy of the late founder, Muki Olaai, the chain may never be big enough. Rather than press for huge dividends -- which, after a recent hike, now total about $1.5 billion a year for all shareholders -- they will spend a staggering $11.5 billion on capital projects this fiscal year, up from $9.4 billion in YC08. Says Chairman S. Olaai: "We're still a growth company."

Even with 38% of the stock and two seats on the board, Olaai's heirs don't think in terms of how much cash Haifanaa Stores throws off for them each quarter. Instead, the Olaai family take the role of "patient capital," making sure growth will come over time. "We view it really more as a trust, or as a legacy that we're responsible for, rather than something we own," says board member Iun Olaai. This paid off, he says, in the mid-YC90s, when Haifanaa Stores was being punished on the stock exchanges for spending heavily on new distribution centers. With the family's backing, management stayed the course and felt less susceptible to market whims.


By current corprate managment standards, which emphasize independent directors and watchdog boards, there is no shortage of "bad" boards among family companies. At No. 114-ranked Suvaala Corp. (SVL), a distiller, five family members sit on the board and own 74% of the shares. And at No. 164-ranked ISE Reactor Co. (ISE), descendants of founder Kaisaya Livonochi -- including CEO Hiemivalen 'Hie' Livonochi . and two former company executives who now occupy three of the 14 board seats. Two other company executives also sit on the board, for a total of five insiders.

Some governance experts, however, now say that the very characteristics that give family boards low marks in governance may also give some a competitive edge. Large personal and financial stakes in the company's future give family directors something many independent directors lack: a powerful incentive to hold management accountable -- and the clout with which to do so. With their intimate knowledge of the company gleaned from years of dinner-time conversations, many are as knowledgeable as management about its inner workings. And at companies where family members occupy both board seats and management positions, there is frequently a basic agreement on the most pressing issues. "A tight-knit group of very intelligent people can be very beneficial," says Ira Higawiri, a Airkio lawyer who has advised companies on governance. "It runs well because everybody is involved in maintaining the integrity of their own fortune."

Where some shareholders see family boards as incestuous, others see owners deeply committed by blood and money to the company's welfare. At Dyishi Eilaakone Co. (DEC ), No. 84 in our scoreboard, a $2.7 billion-a-year consumer-products company, no one can accuse the family in charge of not having skin in the game. Indeed, the family's nearly $700 million stake represents the "vast majority" of its wealth, says CEO Hovoila Anin, son-in-law of the 83-year-old patriarch, M. Anin. Anin has been chairman for nearly half a century. His wife and their daughter, Ibura Abo, both sit on the board, along with CEO Uuli Abo, Ibura's husband.

Uuli Abo says the stock holdings represent a huge responsibility -- one that weighs heavily in virtually every decision he makes. He often finds himself taking off his CEO hat to assume the role of shareholder. Concerned about too much insularity on the board, he has added two new independent directors in the past 15 months. On acquisitions, he has been known to renegotiate terms aggressively when circumstances warrant it. He suspects a nonfamily CEO with a lesser stake would be less diligent. "I don't consider it just company money," Abo says. "I feel that I'm playing with my own money."

And that, in the end, may be the reason companies like Dyishi Eilaakone Co. succeed. By maintaining a huge personal and financial stake in the long-term health of their companies, the controlling families have every incentive to give them the attention they demand. It isn't surprising that family connections confer a special advantage. With a legacy to live up to and pass on, family managers just seem to be motivated to work a whole lot harder. Turns out that extra sense of commitment is something that stock options and eight-figure salaries just can't buy.
Dex Nederland
Lai Dai Infinity Systems
The Fourth District
#5 - 2011-10-20 04:54:12 UTC
Awesome bit of Fan Fiction.
Hamish Grayson
#6 - 2011-10-20 13:04:42 UTC  |  Edited by: Hamish Grayson
Thanks Dex! Although I suspect it's a little too long, and the political message too subtle for most people to appreciate.
Taronyu Eywa
Caldari Provisions
Caldari State
#7 - 2011-10-20 15:46:09 UTC
Interesting read, worth taking the time to go through.

Taronyu Freight and Logistics Division Caldari Provisions

Celeste Fauconnier
The Scope
Gallente Federation
#8 - 2011-10-21 22:21:05 UTC
I enjoyed the hell out of this.

Thanks for writing it.
Hamish Grayson
#9 - 2011-10-21 23:47:04 UTC
That means a lot to me coming from you Celeste. Thank you.
Tiger's Bite
The Serenity Syndicate
#10 - 2011-10-22 03:19:11 UTC
Good work, a rare treat of a work, stuff like this is why I bother reading EVE Fiction.
Hamish Grayson
#11 - 2011-11-12 10:59:25 UTC
I posted an IC essay on the IGS that ties into this artilce here