Case study

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Book Title: eTextbook: Family Business Part I. Cases Case 5. The Vega Food Company

Case 5. The Vega Food Company

In February 2007, Francisco Valle, Jr., president of Industrias La

Vega, organized the first family council meeting in the owning

family’s history to address problems he was having with his

youngest sister, Mari, a shareholder in the company. He felt that

the problems were not of his making and were interfering with

his management of the company. Francisco, 45, had worked

closely with his father, Francisco Sr., since 1986 and had become

president of the company in March 2004, when his 72-year-old

father was killed in an automobile accident. Industrias La Vega

was a Spanish meat-processing business that produced hams,

sausages, and other delicacies for domestic and export markets.

The $104.8-million-a-year business was demanding, of course,

but Francisco Jr. felt most challenged by the family conflicts that

often overwhelmed him.

The ownership structure of Industrias La Vega had been updated

just months before the tragic accident involving Francisco Sr. At

the request of Francisco Jr., who was concerned about the

possible loss of control of the enterprise he had co-managed with

his father for years, Francisco Sr. and his attorneys had created

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two classes of stock. The voting A shares did not pay dividends.

The nonvoting but dividend-bearing B shares had a par value 10

times higher than that of the A shares.

Except for brief stints, none of the Valle daughters had worked in

the business prior to their father’s death. Ana, the second-eldest

daughter, was an artist, and she had been instrumental in

designing the image and logo of a new premium product line.

Working alongside her father, she had created the look for the

Gold Label line of meats and cold cuts. Francisco Jr. had not been

particularly enthusiastic about this new line.

Mari, 27, the youngest of the Valle siblings, was concerned about

her future and the security of her own young family after her

father’s death. She worried about how her interests as a

shareholder would be protected. She had trusted her father

completely, but she was not sure she had the same faith in

Francisco Jr. She did admit to being a little more optimistic now

that Francisco was making an effort to get closer to the lower-

level employees and be more of a leader in the company.

As it turned out, Francisco was his father’s successor not only in

the company, but also in politics. His father had won a Senate

seat in the last elections before his tragic accident. Francisco

campaigned for and won the seat, and served what would have

been his father’s term. Mari and his four other sisters chided

Francisco about being so effective in his political campaigning

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and yet unable to instill a team spirit among the company’s

employees. He was, in fact, still spending three to four days a

week on political endeavors.

The farmers and cattle ranchers of whom Francisco Sr. had been

a lifelong customer trusted him. As a major customer for their

products, he had had much influence with them. His successful

run for the Senate at the age of 72 was evidence of the degree of

this influence, even outside business circles. In the food-

processing industry, good relations with the government

represented an asset for the Valle family, from which both

generations derived competitive advantage.

The Valle Family

The Valle family was wealthy by the standards of the small town

in which they had most of their production facilities. Francisco

Valle, Sr., was a self-made entrepreneur. He married Isabel in

1967 and had five daughters and a son (see Figure D). In 2007,

Valle family members included Isabel, 71, Francisco Sr.’s widow;

Rosa, 47; Francisco Jr., 45; Ana, 42; María, 38; Tere, 33; and Mari,

27. Of these, only Francisco Jr. and Tere worked in management

positions at the family company, and Tere had joined only three

years earlier.

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Figure D Valle Family Tree

Relations between family members were warm, particularly

among the women, though several next-generation members had

created very different lives for themselves. Rosa and Maria lived

overseas but visited Isabel two or three times a year. The only

son, Francisco Jr., had studied agribusiness overseas and then

returned to run the family business.

In a traditional display of primogeniture, Francisco seemed

preordained to be the successor to his father. He took his

responsibilities toward his mother and sisters seriously, although

they all complained a little about not being involved enough, not

being kept sufficiently informed, and not being treated the same

way Francisco was treated by the company. Francisco received a

reasonable CEO salary, bonus, and benefits package. But the

sisters’ dividends were nowhere close to his take-home pay, and

Francisco, with his expensive tastes, seemed to flaunt the

Details

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difference. A palatial home, luxury car, helicopter, boat, and

assorted other “toys” all seemed essential to Francisco in his

executive post. A couple of the sisters were divorced and had

additional financial responsibilities toward their own children.

Even Isabel lived in a more modest house and drove a less

expensive car than Francisco did.

Family members characterized themselves as being

“hermetically sealed,” meaning that they were not great

communicators. This was particularly true on the subject of

money; the few conversations about finances that took place

were one on one and had the quality of family gossip. Tere

remembers one of her sisters saying, “Is it true that you receive 1

percent of the company’s profits and Francisco gets 10 percent?

That is robbery!” Francisco was often the target of the gossip, but

mostly he ignored it, except for telling himself and his advisers,

“After all, I have been the one working the business for more

than 20 years now.”

There was plenty of evidence of love, caring, and tenderness in

the family. There was less evidence of respect for titles,

organizational structure, hard work, reporting relationships,

institutions, and formality of any kind. The family seemed ill-

equipped for financial responsibility. In the past, dividends had

been distributed infrequently. Individual family members’ needs

were brought to the attention of Francisco Sr., who usually

granted requests, as a generous father would. For Mari, the

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youngest daughter, who grew up surrounded by evidence of the

family’s wealth, and for other siblings who needed money for

new houses or trips, asking was often akin to receiving.

Family Council Meeting, February 2007

Francisco took the initiative in sponsoring this first family

council meeting. It followed a day-long shareholders’ meeting, at

which financial information and the state of the business were

discussed with shareholders. The news for shareholders was not

great. Although company sales had continued to increase, profits

had plummeted in the past couple of years, and dividend

distributions had been cut (see Table A).

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With Tere’s help, Francisco had interviewed and selected the

family-business adviser who facilitated the family council

meeting. The consultant had conducted a private meeting with

  2002 2003 2004 2005 2006

Sales 42.5 51.7 57.4 69.4 84.1

Cost of sales 32.1 36.6 41.1 52.6 62.6

Gross margin 10.4 15.1 16.3 16.8 21.5

Administration

expenses

5.6 10.2 11.9 13.3 19.6

Interest

expenses

0.0 0.0 0.0 0.0 0.0

Net profit 4.8 4.9 4.4 3.5 1.9

Table A Financial Results for Industrias La Vega,

2002–2009 (in millions)

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every member of the family. A few days prior to the meeting,

Mari told the family-business consultant,

It is important that each of us know what we have, what we don’t, and what we can and cannot do as shareholders. We have to speak clearly about these things. Right now, bringing up the subject is taboo. We need more transparency in all of this. We need to recognize that we are all siblings here.

Tere observed, in her meeting with the adviser,

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The reason for these meetings is that we need Industrias La Vega to continue as a family business. In order for that to happen, Francisco needs to be supervised. There has to be more balance between Francisco and the sisters. Those inside the company have to live by corporate rules, manage with transparency, and meet the needs of the inactive shareholders. There has been too much centralization by Francisco. Financial information about the company has to be sent out regularly and explained in such a way that all shareholders understand it. Without this education, there will be no sense of justice. But don’t get me wrong; we love each other a lot. We have grown in family unity. My mother is a very strong woman and a very steadying influence.

Isabel expressed her own expectations of the meeting this way:

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In the interests of the family and the business, everything has to come out well defined and organized. Things have to be clear for everybody, after some discussion and reflection, so that there is no second-guessing later.

The meeting started with the setting of meeting goals and

behavioral norms for constructive problem solving and conflict

resolution. Feedback from the conversations with the family-

business consultant was provided for family members to discuss,

clarify, and then use to build an agenda that responded to the

identified needs, problems, and opportunities. Selected as the

two top-priority items on the agenda were:

Board meetings existed only on paper, and only family members

were on the board. Although a mini–family-business

presentation made by the consultant early in the meeting may

have influenced the selection of topics, both Tere and Francisco

the lack of clarity and organization in the ownership

structure, estate plan, and financial reporting

mechanisms for shareholders, and

the lack of a well-organized family forum and board of

directors.

(1)

(2)

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had attended a family-business course for next-generation

members and had been convinced of the need for both of these

governance bodies. Obviously, their opinions had significant

influence in the larger shareholder group. Other topics selected

for discussion included the need to define the responsibilities of

shareholders toward the business and of managers toward

shareholders, the need to define the rules guiding relations

between members of the family acting as suppliers or

subcontractors to the company, and the third-generation

scholarship fund.

By the end of this first family council meeting, an action plan had

been drafted that directed various family members to review the

ownership structure and the possession of stock certificates,

retain a valuation expert to perform a company valuation,

review, and account for the family benefits that individual

members had been granted in order to make appropriate

decisions regarding family benefits in the next shareholder

meeting, and continue to schedule open conversations about

what shareholders wanted from the business—things such as

higher dividends, more reinvestment for long-term growth, and

liquidity of shareholdings via buy-sell agreements. An agreement

was reached among family members that the company hierarchy

would be respected, and any information required by

shareholders regarding the company and its finances would be

directed to Francisco, the president, and not to accounting

department personnel. Francisco, in return, agreed to respond to

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such requests in a timely manner. Shareholders also reached

agreements regarding the other expectations they had of

management and what management could rightfully expect of

shareholders.

Finally, a discussion of family-business boards produced a

consensus on the desirability of a board with independent

outsiders and a list of board responsibilities. These

responsibilities were to promote the continuity of the business,

review the strategy of the business, review and approve financial

reports and budgets, review the compensation of key executives,

and provide oversight on large capital investment decisions. The

criteria for selecting board members were to be developed by a

task force made up of Francisco, Tere, and Rosa. The selection of

independent board members themselves and the holding of the

first board meeting were deemed to be the responsibilities of

Francisco, though shareholders wanted to be consulted.

Family Council Meeting, September 2007

The next family council meeting was held in September 2007.

This meeting addressed three new topics:

the family foundation (a study of its various projects in

the past five years had been done),

college scholarships for members of the third

generation, and

(1)

(2)

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The bulk of the meeting was focused on following up on the

action plans drafted at the February meeting. While there had

been much progress on many fronts, shareholder information,

company valuation, and liquidity concerns had not been

addressed by the time this second meeting was held. And a new

board of directors or advisory board had not been assembled.

Mari Brings in the Attorneys

The semiannual family council meeting was scheduled to take

place in May 2008. Mari felt sick, and checked herself into a

hospital for observation. This precluded her from attending the

meeting. Instead, she sent two attorneys whom she and her

husband had retained to put pressure on Francisco for fuller

disclosure of corporate financial information. The family council

meeting was canceled after a brief conversation with the

attorneys to determine the nature of their involvement.

Francisco was very upset and quite worried that if the company’s

accounting and financial records were scrutinized, they would

be found lacking and this would create more chaos and family

disharmony and possibly even result in legal ramifications. The

business, as a result of a very strong entrepreneurial culture and

unsophisticated financial and administrative systems, had very

unsophisticated accounting procedures. Francisco Sr. had never

the possibility of selling a couple of parcels of company

farmland.

(3)

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been very concerned about establishing such systems. Now, the

responsibility for historical reconstruction of financial

information had fallen on Francisco Jr. He said:

That was the reason that I could not be any clearer with shareholders about the books than I was. I was not hiding anything; they had the same information I had available to me. But I knew how shrewd those two attorneys that Mari hired were, and I was very worried for the family and the business’s reputation.

In the aftermath of the family council meeting, Francisco stayed

very close to his mother, Isabel, and consulted her often on what

to do. But, of course, all of this was very hard on her, as she did

not want this to be the legacy of her very successful late

husband. Francisco respected Isabel’s wisdom and her ability to

influence her daughters. Mari had hired the lawyers, but most of

her sisters were secretly rooting for her. They too wanted to

better understand what they considered to be rightfully theirs.

Isabel talked to her daughters on many occasions during that

period about the importance of preserving the family and about

the need to give Francisco time to run the company, get things in

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shape, and show them what he could do. But her arguments did

not dissuade Mari, who continued her inquiry through her

attorneys.

About this time, company and family attorneys finally unraveled

the details of the estate plan. It was determined that upon

Francisco Sr.’s death, Francisco Jr. held 50 percent of the voting A

shares and 20 percent of the nonvoting dividend-bearing B

shares. Each of his five sisters owned 15 percent of the B shares,

and Isabel retained 5 percent of the B shares and the remaining

50 percent of the voting shares. Voting control, therefore, rested

in the hands of the founder’s surviving spouse and Francisco Jr.,

the successor president.

Hurt and disillusioned by Mari’s actions, Francisco began the

process of negotiating with Mari and her attorneys for a buyout

of her shares. On the advice of her mother-in-law, an influential

banker, Mari asked for $10 million, but she was offered $4

million. During the last round of negotiations, Francisco,

concerned about the future of both the family and the business,

agreed to $6 million on an installment basis—a price he

considered exorbitant but worth the peace of mind and the

ability to move on, both of which he so desperately wanted. Mari

agreed to this offer, and sold all of her shares to Francisco, who,

as a result, now owned 35 percent of the B shares.

Family Council and Shareholders’ Meetings,

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October 2009

Family council meetings were not held for over a year, while the

wrangling and negotiations were going on. In October 2009,

family members held their next family council and shareholders’

meetings. (Mari, who was no longer a shareholder, decided not

to attend either meeting.) The agenda for the one-day

shareholders’ meeting and the additional day for the family

council meeting included discussion of a draft of a shareholder

buy-sell agreement, discussion of the new dividend-distribution

policy, and discussion of a draft of a family constitution. The

family constitution included an emergency contingency plan

naming Tere, the one sister active in management, as the

successor if something should happen to Francisco.

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The Pruned Family Tree Grows

All this upheaval and animosity did have several positive side

effects. Francisco dedicated himself fully to the business. He fired

several members of the top-management team who were hurting

his efforts to professionalize the business, replacing them with

competent key managers. Concurrently, he began to successfully

execute a growth strategy that had been in the planning stages

for several years. In 2008, revenues and net profit rose to $112.6

million and $6.2 million, respectively. Then, in 2009, when

revenues went down slightly, to $109.7 million, net profit rose to

2005 $181,000

2006 $322,000

2007 $639,000

2008 $1,256,000

2009 $1,488,000

Table B Dividends for Industrias La Vega, 2005–

2009

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$6.5 million (see Table A). Starting in 2008, dividends increased

significantly, which gained Francisco much respect with

shareholders.

Francisco retained a financial consultant as the CFO and, to his

delight, found that this CFO knew as much about business as he

did about finance and was a great general manager. Francisco

now had key nonfamily managers whose skills complemented

those that he and Tere brought to the corporation. Together, they

turned things around dramatically and increased company

profitability.

While Mari achieved her goal of liquidity and personal oversight

over her own inheritance, the other family members

recommitted themselves to the business and stayed involved.

The work of the family foundation continued. The foundation

was successful in getting a highway named in memory of

Francisco Sr., and all the family members got together to honor

and celebrate the family’s proud past. The increased

participation by the Valle sisters in committees, task forces, the

family council, shareholders’ meetings, and the family

foundation led to a greater sense of transparency and

ownership. As they walked to a shareholders’ meeting in the

spring of 2010, Ana reflected on the changes:

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A long time ago, my father gave one of my siblings $650,000 to buy a house. Francisco has been adjusting distributions to equalize us all with that gift. After that, we will receive our dividends based on our ownership stake and company profitability. Dividends have increased. We receive company information. We exert a great effort to be fair. We’ve come a long way.

This case was prepared by Professor Ernesto J. Poza as the

basis for class discussion rather than to illustrate the

effective or ineffective handling of a family-business

management situation. For permission to publish this case,

grateful acknowledgment is made to the chair and the

executive vice president of the company. Note that while

the case is factually accurate, the names and dates have

been changed to protect the privacy of the business family.

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