Introduction
Carvajal, S.A is a family-owned holding company that provides printing-related and other products and services to both the Latin America and outside markets. The company had seven other subsidiary companies.It had grown into a leading company in sectors that included yellow pages, notebooks and textbooks, and office furniture. It also funded the family’s efforts of helping the needy in the community.
Alberto Carvajal and Mary Alice Crump were worried about the financial returns and the growth of the company. Alberto, 49 years old, was chairman of Carvajal’s board. Mary, 56, was a member of the holding company board and a member of the family council. Although most business units showed growth patterns, they questioned the time with which the trend would last. The emergence of digital technology and the reduced demand for paper-based products posed a threat to the company. It was hard for the company’s products like Yellow Pages to compete with digital ones like Google. It was easier and faster to get information from Google than from the Yellow Pages.
Carvajal was also under new leadership. It had chosen the first non-family CEO, Ricardo Obregon. He had strong management track record in Columbia together with the familiarity of working with family companies. He previously led Bavaria and Colombia operation of automaker Renault, which were controlled by the largest and most successful Latin American family companies. Carvajal and Obregon had to work on finding a way that the interests of the family members and shareholders could be represented. The shrinking revenues and margins, and the possibility of the Carvajal being made a public company were some of the issues that needed to be addressed. The family also had to find ways it could meet the market challenges and at the same time be able to maintain Carvajal’s values and identity. There were communication issues concerning the communication of stakeholders on how they could effectively communicate to provide the best strategic solutions to the company.
Over the years, Carvajal had maintained its profitability. The company had a vision, with the vision statement being –“To become a leading Latin America multinational, and the preferred provider of products and services, upholding the highest standards of excellence and quality. Their motto was “doing things well”. It also strived to enhance the social values and the well-being of the people in communities within which it operated. It ensured that the moral values and ethical standards were upheld during its business practices.
Ownership and Governance
Carvajal’s ownership was transferred from one generation to the other. Most of the CEO’s in the past were family members until 2011. Alfredo was the last CEO, the last one of the third generation CEO’s. After leaving Carvajal, he became a holding company member and chaired Carvajal Pulp and Paperboard. The company operated in a way that the holding company and the operating companies had different boards with a different board of directors. Alberto was the chairman of the holding company board and had worked with Carvajal for 25 years. There was a family council that consisted of ten family members elected from different branches. It was created to provide governance for the family. Gerardo, 57, was the chair of the family council. Louis Filipe was of the 4th generation and was a member and part of the family council. He had experience in the family business. A special committee whose members were not from the family was also created to help the CEO in making decisions concerning family members working in the company.
The family had earlier on created Inversantamonica S.A, which was an investment company though it was a legally separate entity form Carvajal S.A. It was led by Alberto. It had been established to create a pool of funds to pay the dividends to shareholders if the company failed to. It was also responsible for distributing Carvajal’s “social dividend,” which was a payment to all family members to ensure they enjoyed minimum standards of living. All family members received the same social dividend regardless of their percentages of ownership. It also covered some family expenses that were not related to the business, such as payment for graduation education for the family members. In cases where a family member wanted to sell their Carvajal shares, the investment company acted like a stock redemption fund although the number of shares that could be purchased in a given period was limited.
La Fundacion Carvajal, which was the family’s foundation, owned 23 percent of the business down from an initial 40%. The remaining 77 percent was owned by family members. The foundation focused on helping the needy families that did not have the income to cover basic needs in Cali. The ownership of the business was transferred from one generation to the next. With the size of the family growing, no family member was to own more than 2 percent of the shares of the holding companies.
Challenges Facing Carvajal
Business and Financial Challenges
Advancement in technology and competition in the new millennium has continued to put pressure on Carvajal’s business, with most related businesses being mature. Subsidiary companies that focused on the packaging and education industries were the ones having strong growth potential. Technology had also reduced the barriers to entry into Carvajal’s businesses. There was also another issue on the profitability of the Carvajal businesses. They had to add millions of value every year since the family had asked for a large percentage return on the capital invested. Carvajal had in place a seven-year-plan to “reach industry standards across businesses”. The main goal was to raise the annual growth rate from the current of 9 percent to 13.5 percent. New competition and reduced growth rates are common business challenges (Poza, 2013).
Carvajal was considering making the individual operating companies or the entire holding company a public company. With this, it could gain a large inflow of cash. Some family members were against the idea of making the company public while others saw the benefits in a large initial public offering (IPO) for the entire holding company. The family had to approach the IPO issue with care to preserve its reputation. It was to prevent the public from assuming that the company was trading its name or reputation for cash. Although some independent board members were for the idea of selling shares outside the family, it would be hard with some of the family members being against the idea. If t was to go public, some of the printing-related businesses had to be fixed. The company’s operating margins also needed to be raised from the current 6 percent to at least 9 percent. Carvajal had to reduce its losses, which were estimated to be about 45 million dollars that several businesses had incurred.
Another issue was that the family was growing at a higher rate compared to the rate at which its businesses were growing. Most family businesses face this challenge (Goel et al., 2012). Every preceding generation was getting poorer. The capital was failing to generate enough returns, which could make the shareholders seek better returns from other companies. The company also needed to formalize a dividend policy since there was no enough money to pay out the dividends. The profits were down, yet the family members expected the dividend to increase or at least remain the same. The fifth and subsequent generations were most likely to sell their shares due to the low rates of returns. Since most of them had left Columbia, they were less committed to the businesses. To sustain the coming generations, the company had to surpass the current growth and returns rates. It was at a risk, which was against the family’s history of evading risks.
Organizational Challenges
Between Family and CEO
Carvajal had also been facing communication, alignment, and motivational challenges across the business and family. There was a big challenge concerning the relationship and interactions between the family and Obregon since he was new and the first non-family CEO. According to Chrisman, Memili, & Misra (2014) non-family CEO usually have a tough time relating to the family members. There were concerns on how the family could communicate with Obregon regarding family values without compromising his position or authority in the company. The family needed to help Obregon and his new team in managing the company according to the culture of Carvajal without any forms of compromise. It was challenging since the company for a long time had been led by a family member, which made the communication e easy. Keeping the family name was very important for the family, and they had to make sure that Obregon kept this in mind at all times.
The family needed to have direct communication with Obregon. They preferred communicating with Obregon without having to rely on the family directors on the holding board. Obregon had to be careful not to lose family support. If the performance of business declined, he would lose their support. It was important for Obregon to have direct communication with the family to get feedback from them. However, he had to do this without making the independent directors feel like they were left out.
There was another issue concerning metrics. Obregon had brought in a new expert to assess the company’s asset value. The expert used the economic value added (EVA) method. According to Alberto and Gerardo, more orthodox valuation methods should be used for internal stock redemption purposes. EVA could be appropriate for evaluating the company’s performance. They felt that EVA could inflate the stock value unrealistically and affect the expectations of the investors. New organizational strategies that come with new CEO’s might be contradicted by the veterans and family members (Goel et al.,2012)
Alberto was against Ricardo’s style of consulting board members before making decisions. Ricardo always waited for people’s opinions before he could make his. He believed in getting guidance from the shareholders when making decisions concerning the company. Although some were for his style, other board members felt that with the circumstances that the company was facing, it needed a more assertive management. Alberto, being one of them, said that the company could not be run as a democracy and that Ricardo needed to manage the way the company had always been managed from the past. According to him, Ricardo should not ask or rely on feedback from the family. He had to be the one making the decisions.
Between the family and the board
There was no communication between the larger family shareholders and the holding company board. The role of the boards and its relations to the family should be clear (Breton‐Miller & Miller 2013). According to Mary, they tried operating like a public company. Alberto also supported the idea saying that there needed to be a boundary between the board and the larger family so that matters of business could not be mixed with family matters. The board members had to practice their professional skills without being influenced by the family. However, they had to be in line with the Carvajal’s values and culture. They had to balance between the two, which was quite a tough thing. Choosing the right family members to represent the values and family’s perspective on strategic matters was critical.
Managing the communication between the family council and the holding company board was another issue. According to Alberto, the family council, and the holding-company board had to communicate about fundamental issues through their representatives. Deep issues, such as how the family values are represented in the management, risk levels, levels of debts, desirability of IPOs, needed to be looked into carefully. The family members had to ensure that the well-being of the company was a priority. Luis Felipe suggested that the family council needed to have access to information that was vital for making company’s decisions. The family council should have been prioritized to prevent it becoming vague.
There were also concerns about the education qualifications and managerial experience of the members of the family council. Some family members felt like the difference in qualifications and experience between the family council, and the holding company board hindered efficient communication between the two bodies. Mary and Gerardo supported that saying that members of the family council needed a better understanding of the business issues so that they can be able to communicate effectively with the board. The family council also needed to help the other family members understand and participate fully in the business.
Between the Operating Companies and the Holding Company
The fact that the holding board had more power than the operating board posed a challenge. The differences in authority between two boards that are from one company can be a great challenge (Schjoedt 2013). The differences between the two boards sometimes lengthen the decision-making time. How Ricardo related with the operating companies was not also clear. According to Alberto, the involvement of Ricardo with the operating companies CEOs was important. Despite the concerns that he focused his attention on the performance of the operating companies, Mary noted that he was more involved with the operating companies compared to the previous CEOs.
Within The Family
There were concerns regarding the commitment of the family council members. Gerardo observed that family council members had to be chased around to get things done. While other family members dedicated to the business, some lacked motivation. There was a need for council members who would dedicate their time to the business. Gerardo, for example, had prioritized the council’s work. There were also few signs of division in the family. Division is a common issue in most family businesses (Poza, 2013). It may be caused by many things. According to Mary, branches were not of importance to them anymore. Only two of the four branches were represented on the board.
Preserving Returns and Respect
Carvajal family has been known to be respectful among the other Latin America business families. There was a challenge when it came to doing what was good for the business while at the same time trying to respect the values of the family. Family businesses emphasize on family values, which may act as barriers if the company's decisions contradict with the values (Goel et al., 2012). Some of the decisions made contradicted with the values of the family. With the presence of the business challenges, it was difficult to address them while protecting the family interests too. Carvajal took long to make decisions based on its tradition of respectfulness. According to Mejia, the company took too long to make decisions. It acted very slowly without much prioritization of the situations. It tried to rescues businesses even if it meant them losing money.
Strategies
Carvajal has to find a solution for the challenges that the company is facing. However, there is a need for maintaining strong return, family values, and respect. The company has to find a way of adapting to the new market demand and trends. The new technology has posed a threat to the company. It could look for ways of diversifying its operations and production in such a way that it suits the new market demand. They could choose to technologically advance the yellow pages so that it could be able to compete with the likes of Google. In the current situation, people would prefer using Google since it was more advanced and easy to use than the yellow pages. The only way out is to consider advancing the yellow pages based on the new technology. Carvajal maintaining their current paper-based products will not match up the current paperless trends. Although the paper textbooks are still available, most of them have been converted to softcopy. Most people would prefer reading them online instead of having to carry them around. The company had to do something so that their textbooks could stay relevant. They could also choose to create online textbooks while still maintain the hard copy ones.
Carvajal could use the external capital to grow the business. Carvajal has been considering the possibility of going public. However, the family has been having issues with making Carvajal a public company, with most of them being against the idea. They could apply for loans to finance the businesses. The capital has been failing to generate the expected returns. The company's profitability rates have gone down. The businesses growth rates are not convincing enough either. The company should take a loan to finance its operations. It would later use the returns to finance the loan and pay dividends. The returns could be re-invested to increase profit margins of the company.
Subsidizing the dividends could be the solution for the dividends issue. The company has also continued to grow over the years, yet the businesses were growing at a subsequent rate. The family members expected the dividends to increase or at least stay the same, yet there was no enough money to finance dividends. Carvajal should consider subsidizing the dividend to reduce the financial pressure. With subsidized dividends, the returns could be driven up allowing for investment. The subsidizing should, however, be done in a way that it does not compromise with the values of the family. Carvajal should, however, consider adjusting some elements that need to adapt to the current situation. Such include the values or the pricing strategies.
Communication should be enhanced at all levels. Ricardo should work on his communication with the operating companies. It will help in understanding the challenges that the operating companies are facing and addressing them on time. The holding company and the operating companies should also work together. They should improve their relations and work together for the well-being of the company.
The family should also respect Ricardo’s authority despite him being a non-family CEO. Ricardo, having a vast experience, has worked in companies that the families were actively involved in the business and with others that were not so actively involved like the Carvajal. The channels of communication should be opened between Ricardo and the family. They should be able to address him directly and him getting feedback from them. The family should also manage its growing numbers since most of them are not actively involved in the business yet benefiting equally with the others. It also reconsiders some of its values so that they do not act as blocks to the company’s operations. The family should allow Ricardo to make decisions without them having to compromise.
References
Breton‐Miller, L., & Miller, D. (2013). Socio-emotional wealth across the family firm life cycle: A commentary on “Family Business Survival and the Role of Boards”. Entrepreneurship Theory and Practice, 37(6), 1391-1397.
Chrisman, J. J., Memili, E., & Misra, K. (2014). Nonfamily managers, family firms, and the winner's curse: The influence of noneconomic goals and bounded rationality. Entrepreneurship Theory and Practice, 38(5), 1103-1127.
Goel, S., Mazzola, P., Phan, P. H., Pieper, T. M., & Zachary, R. K. (2012). Strategy, ownership, governance, and socio-psychological perspectives on family businesses from around the world. Journal of Family Business Strategy, 3(2), 54-65.
Poza, E. (2013). Family business. Stamford: Cengage Learning.
Schjoedt, L., Monsen, E., Pearson, A., Barnett, T., & Chrisman, J. J. (2013). New venture and family business teams: understanding team formation, composition, behaviors, and performance. Entrepreneurship Theory and Practice, 37(1), 1-15.
