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Horizons: Family Office & Investor Magazine

Private Time with Frederick Chavalit Tsao

Monday, March 04, 2019

Frederick Chavalit Tsao, one of Asia’s leading business tycoons, shares some provocative insights and questions on the mortality and sustainability of family businesses, the self- image of families (and why “family stories” can be a trap) and the downside of “Prudence” as a core business and family value.

Mr. Frederick Chavalit Tsao is the fourth generation to start his maritime career when he joined his family business at twenty years old. He ventured out on his own whilst serving IMC Group of companies, which roots can be traced to 1906. He started several companies, listed and then delisted two companies, and turned around a bankrupt Thai national shipping line successfully. At 37, he took over the helm from his father, Tan Sri Frank Tsao. Under his stewardship, he restructured the traditional shipping company into a global enterprise with diverse business interests in more than 17 countries.

In 1995, Mr Tsao created the East West Cultural Development Centre, a non-profit organisation aimed at building more harmonious relationships in a rapidly globalised world.

Mr Tsao is a Board Member of Family Business Network – International and Family Business Foundation. He founded Family Business Network Asia, a regional chapter of Family Business Network International to promote sustainable family business. He believes that family business can make a difference to the evolution of business in the new role of business in society.

Mr Tsao has served on numerous Maritime and non-profit organizations. Notably, he served for 7 years as Chairman of Intercargo, an international dry cargo shipping organization and created a number of platforms to promote collaboration within the Maritime industry, with regulators and related non-profit organizations. He remains an Executive Committee Member of Intercargo and is also a Director of the China Ship-owners Mutual Assurance Society and a Member of the Bureau Veritas Asia & Australia Committee, and the American Bureau of Shipping.

Mr Tsao graduated from the University of Michigan with a Master of Science in Engineering (Industrial and Operations Engineering) and a Bachelor of Science degree in Engineering (Naval Architecture and Marine Engineering).

Frederick Chavalit Tsao: You know, I’m very involved with the family business community, and if you allow me to get to the heart of things, I do think there is a lack of thought leadership. People tend to be going in circles. And so rather than sharing some other family story I suggest we ask some questions that can provoke new thoughts and insights.

The statistics on family business survival post-succession don’t look good. According to the Family Business Institute, only about 30% of family-owned businesses survive into the second generation, 12% are still viable into the third generation, and only about 3% of all family businesses operate into the fourth generation or beyond. I think these numbers are actually deteriorating and that the mortality rate is even higher now. I suggest that we talk a bit today why the mortality rate of family businesses is so high?

The second theme I want to talk about with you is self-image or self-concept of a family business. What is a family business? What do we really want? Why do you want to do to this?

And then thirdly, what is family business sustainability? Everybody says they want to sustain, but what do they mean by sustain? Why do you want to sustain? Why do you want your business to be around?

First of all, any family business is a hard-planned, complex system. To manage a system, you need more complex management techniques and systems and structure to make it work. But let’s also look at what does the system actually achieve? You can also describe the system as a business or operating system of wealth creation. And generally, the family wants to maintain a status quo where the business generates the resources and financial means for the family. But, as we had seen, the chances are like 9:1 that this system won’t last over three generations. Here we have to come back again to sustainability where you are faced with the situation that no system can sustain itself over a longer term if it cannot evolve and maintain relevance.

Matthias Knab: I agree. The world constantly changes, and what has been a business three generations back needs to be a completely different business three generations later.

Frederick Chavalit Tsao: Correct, and what’s most important here is that this family business must be relevant at all times to the people and all stakeholders of the broader system. It must continue to add value to mankind. When you stop adding value or even if you stop increasing the speed of adding value, you will fall behind, the relevance of the business will reduce over time and at some point you’ll be gone.

I would add here that the business also has to add relevance to the family. Over time, the family stakeholders are changing as well and in fact the family must equally evolve. “I want to lead a good life” isn’t going to be enough. And so, like the business, if the family isn’t evolving or isn’t evolving enough, it cannot sustain. This means that we either thrive or we disappear. And the broader perspective is that we need to make sure that the environment we are all in remains conducive to growth and in balance.

Just look at the cycles in nature. Throughout time there have been disruptions like the extinction?of the dinosaurs or the ice ages or even human action where the living conditions for many species got out of balance, resulting in the loss of many life forms. We must therefore also make sure that our environments are flourishing because then everybody can potentially thrive.

These thoughts – to be constantly adding value, ideally at an increasing pace, to society and to sustain the whole ecosystem – may seem easy and obvious, but the challenge is to make them a reality in our personal life, our family and our business. To express this a bit more bluntly, if the society is going to hell, do you think your business is going to flourish? It won’t, and this is why taking good care of our system must be more than lip-service. We cannot continue to just mindlessly rob and rape the earth but gain a deeper and renewed understanding of sustainability and holism of the system, and start thinking about our family business in terms of relevance, purpose, and contribution.

I believe that something needs a purpose so that it can become a resource. Wealth is not wealth if it doesn’t have a clear purpose. If you give a monkey a diamond, it has no meaning to the monkey, but a banana will have.

A bit earlier I said that a family business is a hard- planned, complex system. However, people are usually not aware that most businesses still work on outdated and obsolete concepts and principles which in fact are mostly going back to the agrarian era. Let me explain.

The industrial age started a bit over 200 years ago and now we have reached the post-information era already. We are now working on life science, repairing and programming DNA and working on immortality. We are moving into the quantum level, so into an entire new reality.

I know that in your Private Time column you sometimes like to talk about books, so in this context let me point to Yuval Noah Harari books Sapiens: A Brief History of Humankind and Homo Deus: A Brief History of Tomorrow which I like a lot as I also try to understand as much as possible about the future and where we as human beings are heading.

So, you can see that big-time changes have already happened and will continue to happen. However, I fear that most family businesses haven’t really adapted to the new paradigms. The concept in most family businesses is that at some point the children take over the business and continue the parents’ work, and then hopefully the business grows bigger in line with the family growing bigger. Now, that idea is okay as a landlord, but not okay outside of the agrarian system. We just cannot assume that things and businesses will so easily sustain themselves. Such assumptions around a family business are actually very old, very traditional ideas. What we need though is to awaken to the new paradigm and how to operate in those, and meticulously analyze the environment we’re in. Failing to do so is one of the reasons family businesses die.

I’ll give you another reason why this awakening is so important and also so difficult at the same time. Most businesses have a set of outspoken or implicit core values. My guess is that something called “prudence” is part of that set of core values – no matter if it’s a Chinese, American, or European business, everybody seems to value prudence. Now, let’s take a moment to examine where that concept of prudence is actually coming from?

More often than not, it comes from the founder of the company projecting his fear or her fear in the name of love to the descendants. But what does it really mean? I think it also means “I believe you’re not as good as me. I believe that if you do not do something stupid, you will be okay. So, don’t do something stupid, be prudent and don’t spend too much money. Because if you spend a lot, you’re going to lose it all.”

What you then can observe is that the richer a family becomes over the generations, the more they also want to be frugal. “I need to be frugal, focus on good quality and economical value for money.” And as they are constantly taught to be prudent, they don’t take sufficient risk. However, the person who started the business, were they prudent? No, probably not, because every time you start a new business, there’s high risk.

Being prudent then also means, “Please, don’t change easily”. And yet the reality of the environment is changing all the time, while, on the other hand, often after the third generation the owners of a family business don’t want to take risk because they are afraid of it. They are afraid that they will be the generation which is going to lose it all. And then, of course, the tragedy is that with this mindset they are actually putting themselves at most risk. The drive to conserve can suffocate everything in the end.

Matthias Knab: So what you are saying is that the millennia old concept of prudence in business can also lead to limits and potentially a threat to the much desired sustainability of a family business. I would think that this is quite a dilemma then for people and wonder what to do you suggest instead? How should families and family businesses address these challenges?

Frederick Chavalit Tsao: Remember I said that a family business is a hard-planned, complex system? I think one of the keys to true sustainability is to really be aware on how that system operates and becoming aware of its limitations and implementing the necessary changes.

For example, I will replace prudence with mindfulness. Mindfulness, as I understand it, will include risk management and also opportunity management. No one wants to be the generation that loses wealth or a business, but doing nothing is high risk as well. The generation that doesn’t do anything also won’t feel guilty because they think they didn’t do something stupid, but the reality is that many generations that don’t do enough will eventually lose it. It’s better to do something and keep moving.

Of course, many other small things can come into play and affect the generations. Maybe they do not have the same emotional level of ownership or attachment to the business, or maybe they do not have the same passion.

There is another dynamic that you can see happening. Someone from the younger generation may say, “Look, do you see my mother, my father work so hard for the business? And I ask my parents, ‘Why are you working so hard?’ and they say, ‘Hey, if we don’t work hard, how do we actually live a good life?’”, and the younger generation says, ”But gee, we are already living a good life, so why do we have to work so hard? I want to spend more time with my children, I don’t want to work so hard like you. We already have a good life. We don’t need a better life.”

These conversations and issues happen because the parents did not give their kids a purpose, when you give them wealth instead of purpose.

People need a purpose before their resources can really be a resource. And, again, you are not helping your children find a meaning in anything by telling them, “Hey, you have to be prudent.” With that, you are only projecting your fear and cause harm in the name of love. And of course, applying the same mindfulness to yourself may also tell the parents they need to start with that purpose themselves, because otherwise their children will see the parents as having “no life” and then maybe rightfully question “Why would I want to have that vibe?” Unless there’s a clear, bigger purpose, why should someone have to give up so much for his or her life as a family does?

Family businesses are also very complex simply because there’s a family involved. And with a family comes family dynamics. It’s like Hotel California: After you check in, you could have checked out but you can never leave. You can run but you cannot hide. The family and family dynamics are permanently attached to your psyche. Also things like guilt, shame – so many emotions are linked up to it. No matter where you look, just the family dimension is already difficult. And unfortunately, so many are damaged by it, or simply run away from it.

In order to take the healthy, normal path and be really sustainable, we need what I call the real mother of capital.

Matthias Knab: What is that mother of capital?

Frederick Chavalit Tsao: The mother of capital is intelligence, and the mother of intelligence is consciousness or awareness. When you are aware, you become intelligent and see the opportunity that then allows you to create money and capital.

Now, today we talk about social capital, financial capital, technological capital, even about spiritual capital. But in any of those, to create, sustain and increase capital, we are really talking about raising consciousness. When you raise consciousness, you become more aware and your creativity to solve problems increases as well. Therefore, to me, working and raising consciousness is only the only way we can sustain.

Matthias Knab: In your upcoming book “Quantum Leadership - New Consciousness in Business”,published by Stanford University Press, you describe how changing a person’s consciousness is the most powerful lever for unlocking his or her leadership potential to create wealth and serve humankind.

Frederick Chavalit Tsao: Correct, with my co-author Professor Chris Laszlo we are talking about that and also describe day-to-day practices that can help achieve greater effectiveness, connectedness and well-being.

Apart from physical needs, we also have mental and spiritual needs, and I believe that particularly four areas are very important. We need to have love, we need to have purpose or meaning, we need to have value, and we need to have hope, the hope that our efforts are worth it and that tomorrow will be a better day. These are also the four aspects we have to integrate and consider when serving the ultimate needs of our family and our stakeholders.

And lo and behold, now we are talking about the second theme I mentioned in my introduction that I want to talk about with you: What exactly is the self-image or self-concept of family? How do you define your family? Well, now you can hear a lot of things, particularly when it comes to some of the older and more established families. “We are very powerful family!” Okay, but think about what that means, where it lays the focus, and how such a family is going to sustain itself. The risk here is that if you define yourself as a powerful family, you will end up in a reality where everybody will be fighting over power. Similar when you hear, “Oh, we are very respected family. We are like a dynasty, we’re very respected.”

Then we are entering the reality of soap operas which do in fact mirror those type of families in their plots. But think about that, what will be a family definition of the kind of family that you together with your descendants can aspire to sustain?

Of course, we should aspire to be or define ourselves as an evolving family, because only evolving families align with sustainability. If your family is evolving, your business is evolving.

And from that perspective, the only type of family values that we have to think about and define is the family culture, the family worldview, values and belief system that we aspire to be and have as an evolving family. By defining this properly, all can come into play: purpose, consciousness, resources, and the creation of a system that can potentially keep evolving. So this is how we can sustain.

You will recall that in my introduction I asked an additional question: Why do family businesses want that sustainability? What do we really want? Of course, the reasons why we want to sustain a family business can be many. Well, in the world of families that we are talking about here, most of the people have already enough resources before they may decide to work on something new or something else. They have already upgraded themselves to the top, and ideally created a system of sustainable resource generation. With that, you can have a quick start when it comes to new things.

When the family is really working together, there is more power behind it, and you can collectively create something greater than what yourself can create. And therefore, evolving families working on evolving relationships – also internally – and growing the family resources, then this family can collectively do great things. An individual – the next gen or also someone from outside – can get into the system and evolve much faster much earlier in life.

These are some of the benefits of the family business that you can start with resources and with what I call a development system that then over time also helps you manage your family better and keep it on the track of growth and evolution. In the end, everyone wants to realize their life’s potential, and if a family is successful in those things, they will totally align with life on many dimensions: family life, social life, even the environment and world peace.

And, as final thought, the most powerful, influential institution in the world is business. We, the people and families owning, operating and investing in businesses, are part of this giant force which is shaping our planet in so many ways.

I think that in general, the business community should be taking a long-term view and focus on a better tomorrow by serving human needs and creating wealth at the same time. This is my appeal for family businesses to start waking up to this. We have already come a long way and are a lot more aware of many things than even 50 years ago. And so we know that we’re living in a different world now. We are in a world where information and knowledge is essentially free. You don’t need to study school to be able to be involved in today’s world, it’s on your hand or in your palm. 90% of that information was uploaded in the last two years, and that process keeps speeding up.

So here you have my thoughts. We have to really reflect on why, what and how. I think that only a purposeful family which lives mindfully will evolve and thrive over the long term. At the same time, don’t take my or for that sake anyone’s word as the ultimate truth. But, as Buddha said, “Don’t take my word for it. Go and find out for yourself to see what I said is true or not.”

Matthias Knab: Thank you so much for sharing your thoughts.

Frederick Chavalit Tsao: I also want to thank you for giving me this forum to express what I think is relevant.

Of course, we also could also have had the typical family business conversation. Business started in Shanghai in 1906, and then we look at things like migration, changes within China, and the challenges of transition between generations, etc. You see, like many of your readers, I was born into this world, and the truth is that families usually want to listen to another family’s story. But in essence, it’s always the same basic story. Hollywood and the soap operas from today have the blueprint as well: It starts with the initial success, things expand and go quite well, and then comes the crisis, either internally or externally through things like wars and struggle, and then it all falls apart, until finally we get it all together again, we overcome the thing and survive. But then, of course, another problem and another crisis arise. And the cycle just keeps going on and moving through and involving many generations. We have only one story, but told by different families, and everybody is eager to listen to the same archetypal story. Don’t get stuck there because that shows that maybe you as a family and family business aren’t learning.

But why are these stories so popular in the first place? Even at family office conferences people are spellbound when families tell each other’s stories. Well, listening to another family’s story validates all the others to feel better about themselves. “See? Every family has a problem. Listen to this, they are like us!” Or, “They are worse than me. We are better than them!”

By the way, this is also validating thoughts and beliefs that “it’s okay to be in shit”, or that “it’s okay to be in pain because the other guy’s life is painful as well. So when everybody’s life is painful, let’s just accept life is painful.” Or, “family life is like that.”

As you would have thought, we once more need to question our assumptions and the way we operate as a complex family and business system. Admittedly, stories can potentially teach us a lot, but when we want to make real progress with our true aspiration of sustaining our family business, then we have to ask different questions and leave “the rags to rags in three generations” myth behind us. How can we create, how can we become truly aristocratic by truly taking responsibility and operate at the highest level of society and thinking long-term with a sustainable and relevant purpose?

The oldest family business in the world is the Hoshi Ryokan in Japan which was founded in 718 and is now run by the 46th generation and built around hot springs. The 1st generation owner Zengoro believed that Hoshi should become a proper hot spring inn to soothe both the body and mind, and that this healing water belongs to the people. 1,300 years later the purpose of his descendants is still the same. They also haven’t built a chain of 500 spas or so. I always have to think about this example when reflecting about sustainability in families and business.

Matthias Knab: Before we end, allow me to get back once more on your book about Quantum Leadership where you describe the journey to higher consciousness which combines embodied experience with analytic-cognitive skill development, and that this changes people at a deep intuitive level. You also mention that people who pursue this journey are more likely to flourish with significant benefits to both business and society.

Frederick Chavalit Tsao: The core of quantum leadership is to develop life purpose and direction and how to activate our creative power or Tao, the creative force of life. Of course our purpose should be in alignment with Tao. We are not asking people to do anything. So you don’t have to go and save the world, but maybe it’s a good idea to save yourself by really becoming mindful about yourself. The “I” is in the “We”. When we focus on the “I” and so on what’s best for yourself, then everything of the “We” will be taken care of by the “I”. At the same time, “We” is no good without a mindful “I”.

Summing up, when you’re really mindful about yourself, at the same time you are also taking care of the greater good. In the book we also discuss day- to-day practices we found helpful in developing this essential mindfulness.

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