fDanielle Marie C. Tan 2011 LS 143 - X Long Test No.

1 Case Analysis of The Vega Food Company

July

10,

1. What are the key facts of the case? List the factors that, in your opinion, led Mari to sell her shares.

Relationships among members serve as a very important element in the success of any family business. While a business may survive external factors such as competition, others fail to realize the importance of relationships. In the case of the Valle Family, the success of their meat processing business is without doubt. However, It initially neglected the role of the other siblings, Francisco Jrs sisters, in the management and ownership of the business thus they didnt feel secure after the founder, Francisco Sr, had already passed away. Mari, the youngest, worried that after her fathers death that her interest in the company would not be protected. The fact that ownership of the company was not divided equally and it is her brother, Francisco Jr., who got majority stake of the company didnt make her feel secure as well. Mari, who was concerned about the her own family, did not like how Francisco Jr. run the business without transparency. The kind of lifestyle Francisco Jr., was living despite the companys condition was a problem as well. Francisco Jr.s pursuance of his political endeavors led him to possible neglect his role as the CEO of the company while others were constantly kept uninformed by the company. In her consultation with the Family Business Consultant, Mari shared wish to have more information on the company. She speaks of the need to be more transparent of what each member of the family is capable of. It is important that each of us know what we have, what we dont and what we can and cannot do as shareholders.... Although the end of the 1st Family Council provided for an action plan that called more transparency, the manner of which it was to be
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executed is highly questionable. All requests for information was still directed to Francisco Jr instead of the related department. In addition, the selection of the board members remained to be in his power as well. Concerns about shareholder information, company valuation and liquidity were not addressed in the 2nd Family Council, thus no follow-up on these issues were made. By the 3rd Family Council in 1998, Mari had already sent out her attorneys to represent her. This escalated the tension between her and Francisco Jr. Other family members (the sisters and the mother), contributed to this rising conflict by choosing sides. Maris other sisters secretly rooted for her while Isabel, their mother, tried to talk the girls to allow Francisco Jr., to run the business smoothly. The sudden announcement of the estate planning during the 3rd Family Council Meeting made things worse. Not everyone was informed of the planned division of estate, causing a lot of negative feelings among the siblings. Hurt and confused with Maris actions, Francisco offered a buy-out. The influence of Maris In-Law in dictating the price of the sale eventually lead to Francisco purchase of the shares for an excessive price. In the end, what started to be an internal family business issue grew to be a much bigger problem, resulting to loss and bitterness among family members. 2. Would you have called a family council meeting when Francisco Jr did? Why or Why Not? It can be noted that the first Family Council was only conducted in 1997, 3 years after Francisco Srs death. By this time, profits have already been plummeting despite the increase in sales. Though at the end, the Family Council agreed for the company to be more transparent, the manner of which they were to request information was still directed to Francisco Jrs control. In the same note, the selection of the board members remain to be in his power as well. This, as well as many other factors, contributed to the escalating tension of the siblings with each other---something that could have been possible avoided if the Family Council was created much earlier.
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The Family Council should have been held when the founder, Francisco Sr himself, was still alive because it is highly important for the family members to understand each others perspective in order to have a better realization of their roles for the continuation and growth of the family business. As the head of the business and patriarch of the family, it would have been best if Francisco Sr was still around to facilitate the Family Council to not only ensure the smooth business transition to his successor but also reassess, if not validate, the familys shared vision and mission for the business. Since the Family Council acts as the familys working supervisory body to discuss and deliberate on family business issues, it should have been created at an earlier stage when the family had reached its critical point (e.g. Sibling Ownership Stage). This is the best time because through the Family Council, the family members may have the opportunity to coordinate their interests and concerns for the family business and at the same time, the founder, Francisco Sr himself, can address the issues of business management and transition. As part of the Councils task to act as the primary link between the family and the business, it is also their task to deal with important matters to the family business which may include creating family policies that could foster better and more harmonious relationships among the members. Moreover, since the Family Council ideally meets every after an agreed period of time, there is less chance for problems and issues to develop as differences are resolved earlier. The creation of a Family Council can create a feeling of fairness and equality in the access of opportunities within the family. If the Valle Family Council was created much earlier, it could have avoided several issues and problems including the escalating tension between Francisco Jr. and his sisters because they could have resolved their conflict earlier 3. To what do you attribute the improvement in Valle familybusiness relationships over the last couple of years? The acknowledgement of the problems present is an important step in the management of conflict. The calling for a Family Council was a good first step in trying to foster better and more open communication among the members. Although several other improvements
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are still yet to be implemented, the attendance of the members only show their willingness to address the key issues on hand. It is through the Family Council that the issues of Financial Transparency, Ownership Structure, and Lack of Professionalization among others became more transparent for everyone. It is through the identification of these key issues that the family, as a unit, is able to commit themselves to find more ways to resolve the issues. Through the Family Council, they were able to discuss and plan for the long term. The drafting of the Family Constitution also helped the members better understand their role in the system as well provide guidelines for Family Governance In the last couple of years, Francisco Jr become a more efficient and competent CEO through the help of Family Council. He soon realized the need to professionalize the business by employing key non-family managers that could complement his and Teres skills to run the business. Francisco Jr.s efforts in professionalizing the business were rewarded by the increase in profits and dividends in the company which in turn also increased shareholder trust and loyalty. The other family members, on the other hand, recommitted themselves to help in the business. The increased participation of the sisters led to better transparency and understanding of the business. As a unit, they gained a clear direction for both the family and the business. They further continued their work in the Family Foundation, showing their choice and commitment in building on the legacy and vision of their loving father, Francisco Sr. In the latter years, the Valle family had realized the importance of having a competent management, clear vision and cooperation among the members to the success of the Vega Company. In a nutshell, the family came to better comprehend the special dynamics of a family business and the role of open communication among the members for business growth and longevity. 4. What major issues should Francisco and the rest of the Valle family continue to address in order to ensure the survival of the business? Select one to three issues, and support your selection with the facts of the case

LACK OF TRANSPARENCY

Though this was already earlier addressed in the 1st Family Council Meeting, it lacked an updating in the succeeding meetings ( which only introduced new agenda like Family Organization, Charity Work, etc. but failed to cover previous issues). Moreover, requests for the documents were still directed to Francisco Jr himself which can only cause conflict and misunderstanding. Lack of Transparency remains to be one of biggest problems of most Family Businesses. Most dont feel the obligation to make any documents public since they are family. There is also lack in complete check and balance in families that manage the business all by themselves. In the case of the Vega Food Company, only family members were on the Board. Thus, should they wish to be more transparent, they must ask the help of independent directors to guide and give external opinion to the company. In overall, Francisco Jr. himself must assure the companys other shareholders that he himself is willing to be more open by initiating more efforts to be more fair and transparent. ISSUE OF WORK, OWNERSHIP AND COMPENSATION Ownership of the company remain unequal among siblings. Francisco Jr., owns majority of the shares of the company. Thus, in instances where there is voting, Francisco Jr., may come to dominate and influence the choice greatly. This is problematic since the Vega Food Company is a Family Business and with Francisco Jr., having majority of the shares, it may not even look like one. In addition, while Francisco Jr is the CEO of the company, he also is busy with his political endeavors. Yet, he is compensated fully with the salary and bonus a CEO should receive. Other siblings, who have just started to become more involved in the business may not feel this is fair, thus they might not look into being more involved in the family business in the long run. GROWTH, EXPANSION AND SUCCESSION Once the Valle Family had already resolved their issues, they may focus on on building and expanding the profile of the Family Business. The other siblings, who have decided to become more involved in the business, may be given a separate product line or company so that the Valle Family be closer to an Enterprising Family, one that has fully integrated the paradox of family business.

When this happens, succession may seem to be less complicated since there is place for each member of the family. Even for those who may not be interested in working directly for the family business may have a job that could finally complement their skills and interests. 5. What actions should Francisco take next? What should he do to promote shareholder loyalty and effective governance of the family-business relationship in the future? Francisco Jr., as the CEO of the company, must make efforts to prove himself worthy of the position. He must understand that to be an efficient leader of the company, he must drop his political endeavors, showing that he is willing to focus on his job alone. As the leader, he must concern himself with not only the continuation and growth of the business, but also the improvement of the relationship between the management and stockholders. He may do this by setting standards for the Family Council Meeting (frequency, agenda, etc) in which can provide a forum for other members to share the values, needs and expectations they have for the company. It is through this family council that Francisco Jr. may have a better grip of the shared vision they have as a family and be able to incorporate it in the strategic vision of the business. To finally make the entrepreneurial shift, it is also highly suggested that he employ the help of non-family members in the business (e.g. independent directors), especially in the aspects which he think he and Tere lack. Though he had already started making efforts to professionalize the business by hiring the Financial Consultant as the CFO, he must also look into other management aspects which he may not have full expertise of. Another thing Francisco Jr., must do is to plan for the succession of the Family Business. Since this does not come easily, Francisco Jr., who is already in his 40s, must start to plan who can succeed him before he eventually retires from being the CEO of the company. Moreover, the division and ownership of the
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shares, estate planning must also be discussed among the family members as well.

The Family Business 3-Circle Model

Lastly, to ensure effective Family Governance, Business, Family and Ownership concerns must be communicated within and across the groups. In all kinds of decision making, these three must be put into mind. It also must be understood that views of members may vary since they belong to different groups. However, this is not something to be ignored or looked down upon. In the structure of a Family Business where these three groups overlap, the environment becomes rather more complex. Rather, better understanding of the three circles can, in effect, bring better Family and Business relations.