Joachim Schwass directs the Annual IMD – LODH Distinguished Family Business Award
Foresight and vision have made the Votorantim Group one of the most powerful corporations in Brazil. Joachim Schwass charts the history of the family behind the business and examines the management structures that have helped it to succeed
The Votorantim Group is one of Latin America's largest conglomerates, owned and run by the third generation family descendants of the founder. In 2005 group revenues exceed $6 billion and 30,000 employees are active in eight different divisions.
The story of Votorantim is one of fate. It is the story of how the lives of the two founding characters became intertwined throughout future generations, and how the development of the firm is intertwined with the industrial development of Brazil. Votorantim is also proof of the importance of foresight and vision in business success. It was foresight into economic and political developments in Brazil and abroad that provided guidance for the early managers of the firm to enter markets and build a successful company. It is also the foresight of the current owners that has led them to restructure and reorient the group so that its value creating potential can be transferred smoothly across future generations of the group's stakeholders.
The story of Votorantim began with Antonio Pereira Ignacio who emigrated with his father in 1884 from Portugal to Brazil at the age of 10. Ignacio started his career in Brazil as a shoemaker. Believing strongly that there was a huge opportunity in edible oils, in 1905 he established the Fábrica de Oléos de Santa Helena and went to the USA to study that business. In 1918 Ignacio expanded his business ventures by buying a small textile factory on the verge of bankruptcy. The enterprise was renamed Sociedade Anonyma Fabrica Votorantim. By 1923, the SA Fabrica Votorantim had become one of the largest textile producers in São Paulo, employing more than 3,400 workers.
During a trip to Switzerland with his daughter Helena, Ignacio had a chance encounter with José Ermírio de Moraes, a member of a prominent business family back in Pernambuco, Brazil. José Ermírio had studied engineering at the Colorado School of Mines, graduating in 1921. Upon his return to Brazil, José Ermírio – a strong believer in the industrial development of Brazil's rich natural resources – got a job mapping mineral deposits for the government of the Brazilian state of Minas Gerais. While in Switzerland, he convinced Ignacio that going into the business of cement and metals would be much more profitable than textiles and food oils. In 1925 José Ermírio married Ignacio's daughter Helena and took over administration of the Votorantim textile factory. The couple had three sons and a daughter: José Ermírio de Moraes Filho (1926), Antônio Ermírio de Moraes (1928), Maria Helena de Moraes (1930) and Ermírio Pereira de Moraes (1932).
Working together, José Ermírio and Ignacio took their small textile firm to new heights. However, it was to be short-lived since the Great Depression eliminated US demand for the firm's products, putting it in a difficult position. Not easily dissuaded, Ignacio and José Ermírio found inspiration and direction in their shared conviction of the great business opportunity represented by cement and metallurgy. They had a vision for Brazil, believing that their country was at the edge of impending industrialisation, and that significant investments in infrastructure would be undertaken. Producing raw materials for construction would thus represent a promising investment opportunity. In alignment with this vision, throughout the 1930s and 40s their strategy was to broaden their company by entering key basic industries such as cement, steel, chemicals and heavy machinery. Most of the expansion during this period was by starting operations from scratch.
The first strategic move was entry into the cement industry. In 1933 construction of the Santa Helena Cement Plant began, which later became Votorantim Cimentos. The plant's first kiln was inaugurated in 1936 and provided cement for the construction of the Viaduto do Chá, an overpass that is one of the landmarks of the city of São Paulo. Later, in 1935, the firm acquired Tubize, which by 1937 had blossomed into Nitroquímica for the production of rayon and other chemical products. In 1938 Votorantim entered steel production when it set up the Barra Mansa Steel Mill. During World War II, it expanded its cement and metals business and in 1948 created Votocel to develop its presence in the paper and pulp industry. By the end of the 1950s, the group comprised 46 companies, which employed 28,000 people – Votorantim was one of the largest industrial conglomerates in Latin America.
In 1951 Antonio Pereira Ignacio died. José Ermírio's deep involvement in the firm helped to assure a smooth succession in leadership. He assumed the presidency of the group and was joined by his two oldest sons, José Ermírio Filho and Antônio Ermírio in the management of the company.
The second generation
By the 1950s, in tandem with the rise of the second generation of the family into the management of Votorantim, the group began producing aluminum and hydroelectric power, as well as refining sugar. José Ermírio's decision to enter the aluminum market – hitherto dominated by US producers – was hastened by the import substitution policies of the Brazilian government. Yet it was not an easy market to enter, as Votorantim lacked the production technology to establish its own operations and US companies refused to share their aluminum production technology. However, resourcefulness on the part of Votorantim led to a deal to license production technology from an Italian firm. Votorantim borrowed heavily to finance the creation of a 120-pot smelter plant, which it inaugurated in 1955 as the Companhia Brasileira de Alumínio (CBA). Yet the output of the plant was of poor quality, and its operation required far too much energy, making it uneconomical. After struggling to solve the problems, Antonio Ermírio took the painful, yet necessary, decision to demolish the aluminum factory built only four years before. The company still had to pay the loans it had made to build it and spent the next 15 years teetering on the verge of bankruptcy, struggling to pay down debt. It was not until the mid-1960s that the group achieved financial stability. The agonising experience of the heavy debt burden left a deep imprint in the firm's management psyche – a lesson that has been taken to heart. The experience induced an operational culture that eschews debt and instills a healthy respect for risk management.
During the 1960s Votorantim also entered the zinc industry and expanded its operations in hydroelectric power and aluminum production. In 1960 José Ermirio transferred control of the company to his three sons and his son-in-law, Clóvis Scripilliti. At that time, the group consisted of 46 companies with more than 30,000 employees. While José Ermirio retired from the firm, he did not retire from public life and in 1962 was elected Senator of the Republic of Brazil by the state of Pernambuco, through his membership in PTB – Partido Trabalhista Brasileiro (Brazil's Labour Party). José Ermirio de Moraes died in São Paulo in 1973.
The third generation
The 1980s marked the arrival of the third generation of family managers. José Ermirio's successors began a strategy of both related and unrelated diversification for the group by expanding into new lines of business, as well as into other regions of Brazil. In 1988 it entered the pulp and paper business and in 1989 the agribusiness with Citrovita orange juice.
In the early 1990s, recognising that the financial sector was counter-cyclical to industrial activity, the group entered this sector through Banco Votorantim, diversifying cash flow and opening a new growth avenue. The group adopted an unofficial policy that debt should never exceed 33% of the capital – even if this meant slower overall growth.
Relying on the closed Brazilian market, while profitable in the short run, also threatened to weaken the company in the long run. Thus, during the 1990s the management realised the detrimental effects such an operating environment could have upon the efficiency and competitiveness of the company in international markets, especially in the cement industry. In 1990 Brazilian President Collor introduced major market reforms, eliminating or significantly reducing almost all import tariffs overnight. Suddenly, Votorantim had to compete with the best and most efficient producers on its home turf. Members of this generation had to make some painful decisions and restructure the company in order to reach a cost structure that was competitive with the rest of the world. Votorantim as a group took the decision to focus on businesses in which it could lever the richness of Brazil's natural resources to compete effectively in international markets. The group shed operations in industries in which it had ceased to have a competitive advantage, such as textiles, rayon and sugar refining – businesses that had much emotional value because of their history within the group.
Increased domestic competition led the group to diversify its portfolio so that it could hedge the risk of any one business unit performing poorly. The group's strategy served it well. In spite of the volatility and stagnant growth of the Brazilian economy in the last few decades, the group has grown at an annual rate of 7%. In 1991 the group created Votorantim International to provide a locus for the group's international operations and develop a strategy for expansion.
As part of its drive for innovation, and to gain foresight into future business and attractive investment and expansion opportunities, Votorantim New Business Ventures was created by members of the third generation. The search for new businesses with the capacity to generate value in the long run has characterised the performance of the group, which has constantly added new activities to its portfolio, such as biotechnology and information technology.
Finding a new structure
For most of its history, the Votorantim group was structured around independent business units, each of which was run by a different family member. For example, Antônio Ermírio de Moraes, ran metallurgy; Clóvis Scripilliti managed cement in the north-east of Brazil. The owner-manager philosophy had served the family business well over the first two generations. However, it was becoming apparent that with the transition to the cousin generation a larger number of family members would arrive and a new governance structure would be needed.
The third generation of owners, rising to the highest levels of responsibility for the firm in the late 1990s, took on the task of organising the family succession to ensure the survival of the group. Aware that few family businesses successfully make such a transition, the leaders of the firm and family decided to tackle the issue head on. While the third generation already had 23 shareholders within the four branches, the rising fourth generation would have at least 60. The corporate model of their predecessors would not be workable – a new model of corporate governance was needed.
While the family had consistently taken a proactive approach to thinking about the group's future governance, a report by McKinsey & Co on family-owned companies served as a strong signal for them to significantly transform the group's structure and the family's relation to it. The report showed that less than 10% of family-owned companies survive the third generation because the number of family members becomes too large, resulting in in-fighting.
The family set out to restructure the firm. Board members studied successful family owned and managed conglomerates throughout the world. Based on their findings, they crafted a two-pronged governance structure with two boards, separating family from executive matters. The family board would oversee family matters and social investment, seeking to incorporate the family values and safeguard transparency in business. The executive board, with oversight of the businesses of the conglomerate would pursue the creation of value for shareholders and for the conduct of business.
Thus, in 2001 the 23 members of Votorantim's third generation broke away from eight decades of tradition in response to changing circumstances. In total, 13 cousins who worked throughout the group removed themselves from direct management positions. Their places were taken by non-family managers. The third generation family members accepted this revolutionary reorganisation. Third generation family member Regina Helena Scripilliti Velloso said, "This fundamental change was made possible since underneath we are a happy family together."
Family members retain overall responsibility for the main decisions and business strategies undertaken by the group. To exercise such control, the executive board controls Votorantim Participações SA – the main holding of the group that controls three business areas: Votorantim Industrial, Votorantim New Business and Votorantim Finance, each of them containing several business units. The executive board is made up of eight family members with two representatives of each of the four branches. It runs four committees, which are finance and controlling, human resources and compensation, businesses and investments, and institutional affairs.
The group today
Votorantim is among the largest business groups in Brazil. Its companies are leaders or have large shares in all the markets in which they participate, such as cement production, cellulose, paper, aluminum, zinc, nickel, long steel, chemical specialties and orange juice. It also has an important share in the financial sector through Banco Votorantim. The group has an active participation in the energy sector; both in the self- generation destined to supply its productive units, as well as in the public sector for which it distributes and markets electricity. The group operates nine different business sectors, employs 30,000 professionals and has three production units abroad (Peru, US and Canada).
Today, the group's growth strategy relies on expanding its international operations, while retaining leadership in its core markets in Brazil. As a first step toward internationalisation, in 2001 Votorantim Cement acquired St Marys in Canada from Lafarge, with plants and operations in Canada and the Great Lakes region of the US. Then in 2003 Votorantim continued its international expansion with a 50% stake in Suwannee American Cement, based in Florida. The technology of its highly advanced Brazilian plants was transferred to the newly acquired North American plants.
Loyal to its high environmental and social conscience, the Votorantim Group has allocated resources and intelligence to these areas, investing in improving the standard of living of the communities in which it acts through several programs related to education, culture, health and the environment. The Instituto Votorantim was founded at the end of 2002 with the objective of lining up and guiding the numerous initiatives that Group Votorantim develops within the social investment area. During its first five years of activity, the institute targeted young people, promoting projects in the areas of education, health, sport, environment and culture, so as to encourage their development within the family, school and community.
The family has arrived at a consensus that with 52 members in the fourth generation the family might become too large to rely on informal means of leadership development and building family identity and cohesion. The family council has been restructured to this end.
A series of educational and professional development programs provides the necessary skills for a successful career – whether in or out of the family business. The development programs include individual coaching provided by outside human resources specialists. Policies are in place for those family members who aspire to a role as a board member in the Votorantim Group. A professionally staffed family office provides support services for family members. It also ensures the safeguarding of all relevant family-related documents including an archive for a substantial collection of photos and videos. Communication amongst all family members is supported by an Internet website.
The core values of the business form part of what is called the Votorantim DNA – the genetic code that defines the identity of the group as a whole and guides all activities across business areas and markets. These values originated inside the owning family who defined and lent credibility to them.
Third generation family member Carlos Ermirio de Moraes, chairman of the executive board said: "We were trained by our parents to run the business the same way as they did: from the plant floors. But we had to tear down 'internal fences' in order to create a new role for the larger number of family members in our generation in order to better serve the business. And we are now training the fourth generation, our children, to be good shareholders."
The willingness of the family and the business to redesign itself, while both continue to grow, will be fundamental for its ongoing success.