Kongō Gumi and the Six Secrets of Longevity

Kongō Gumi and the Six Secrets of Longevity
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Kongō Gumi, a Japanese construction company, was founded in 578 AD by a Korean immigrant named Shigemitsu Kongō who was skilled in the art and science of building Buddhist temples and other religious monuments. Prince Shōtoku contracted Kongō to build Japan’s first Buddhist temple, the Shitennō-ji, not far from Osaka. Over the next 14 centuries, Kongō and his descendants went on to build many of Japan’s greatest buildings.

In January 2006, Kongō Gumi went into liquidation having run up arrears of $340 million. Because of some poor business decisions, the long-established family business was taken over by another, much younger family-run Japanese construction company.

The story of Kongō Gumi provides some insights into longevity:

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First, longevity is easier if the family business operates in a stable industry essential to society’s needs.

Second, long-lived family firms have succession models that are replicated generation after generation. Historically, this has been based on primogeniture.

Third, long-standing family firms never take survival for granted, as each generation has to create value and fight to deliver the business to the next generation.

Fourth, most leaders who are unable to deliver their family firms to the next generation have either failed to maintain relevancy in the marketplace or have made bad business decisions.

The experience of Kongō Gumi is not unique. In our collaboration with some of the world’s oldest family firms, we observe that many of them share similar family and business experiences. We have identified six key elements of longevity:

Business Strategies: Agile long-term thinking builds resiliency in the face of global competition and a fast-changing economy.

Long-living family firms are often found in stable long-living industries, but they also demonstrate an uncanny ability to adapt existing business strategies to new circumstances. Moreover, business strategies feed into the intangible family assets, such as the legacy and history, as well as the family and business networks that have been developed over generations, sometimes centuries.

Transitions: Processes that prepare and engage the next generation.

Long-lived family firms know how to transfer the business from one generation to the next. Historically, these family firms have put rules and procedures in place to manage internal family succession and to guide their succession strategies in a transparent way.

Ownership: Legal structures both offer incentives to create firm value and minimise the potential for family conflicts. 

If designed correctly, the ownership model aligns the firm’s vision and strategy with the incentives for and performance of the stakeholders in the firm and the family. Sound ownership will prevent owner-managers from getting entangled in internal disputes between family members, especially over sensitive issues like dividends. In most cultures, parents are keen to divide wealth equally among their offspring.

Corporate Governance and Leadership: Identifying value creators and building the best supportive structures around them.

With each passing generation, long-lived family firms hope to produce at least one visionary family leader to lead the firm and the family. Around these valuable family leaders, long-living family firms build governance structures to provide incentives and take advantage of synergies. One key structure is a professional board with leading industry experts and a majority of non-family members.

Innovation and Entrepreneurship: Building structures and providing incentives to cope with digitisation, disruption and the Fourth Industrial Revolution.

Technologies, economies and societies are all changing at an ever-increasing pace. Long-living family businesses are not immune to such changes and fully understand the importance of innovation. They keep the spirit of entrepreneurship they inherited from their founders alive.

Family Governance: Structures and processes to keep the family united and engaged.  

Family firms have developed innovative family governance structures and mechanisms to ensure that the family can make critical decisions and resolve conflicts while preserving their family assets and managing the business on a long-term basis. These structures and mechanisms are specific to the cultural and institutional environment of the firm, the family and the country.

Morten Bennedsen is the André and Rosalie Hoffmann Chaired Professor of Family Enterprise and Academic Director of the Wendel International Centre for Family Enterprise at INSEAD, and the Niels Bohr Professor at University of Copenhagen.

Brian Henry PhD is an INSEAD Research Fellow.