Conflict-of-Interest Policy

This is one coaching work I am particularly proud of. After a series of sessions and weeks of intense exchanges among Gen 1, Gen 2 and Gen 3 family members, I am almost finished with the family covenant on conflict of interest and self-dealing policies.

This 5,000 strong family led enterprise with diverse interests in property and manufacturing started in the 70’s, moved their headquarters in Singapore in the 90’s and their growth has been nothing less than spectacular.

With their relative success, one may wonder what could have triggered the group from engaging my firm, W+B Family Business Advisory to revisit their vision, values and mission? And why was there a clamor from family members to review the family charter (constitution)?

With a semi-retired patriarch in his 80’s and five (5) children in their 40’s and 50’s actively managing the day to day affairs of the business plus over a dozen Gen 3 cousins joining the pool of management trainees, the time has come for them to regroup and assess the relevance of their agreement I personally initiated 7 years earlier.

One of the primary objectives of this recent policy initiative was to preserve the family business reputation for honesty and integrity, two values that have been the cornerstone of the group since its inception. The family members wanted to articulate in the strongest possible terms their integrity DNA to the succeeding generations and the only way to inject this powerful value is to adopt and enforce stronger guidelines for family members to avoid any conflicts-of-interest, real or perceived.

Let me share 8 of the many COI rules the family enacted with the hope that business owners can follow their lead and mandate members to do what is right so they can continue to enjoy a reputation of honesty amongst employees, customers, competitors, suppliers and community.

Rule Number 1: The enterprise shall not engage in business with any family member and/or spouse who has his or her own enterprise or who is employed in another company. It is the intent of the enterprise to use suppliers and service providers who are unrelated to the founding family in any way.

Rule Number 2: Family members, their spouses, and their children, whether or not they work inside the business, will not be permitted to avail themselves of the services or the resources of the enterprise for personal use.

Rule Number 3: Family members, their spouses, and their children shall attempt at all times to avoid any perception of impropriety in business matters. They may not directly or indirectly derive any personal profit or advantage by reason of their birthright.

Rule Number 4: The personal interest of family members should never prevail over the interest of the company. Their single minded loyalty to the company is non-negotiable.

Rule Number 5: Family members will not invest in companies that are suppliers of the enterprise nor seek to benefit financially from information and opportunities gained as a result of their association with the enterprise

Rule Number 6: When an actual or potential conflict of interest should arise on the part of family members, it should be fully disclosed and the concerned family member should not participate in the decision making.

Rule Number 7: When a family member has a continuing conflict of interest and it is discovered, he or she should resign or if the Family Council deems appropriate, be expelled and be meted the most stringent penalty

Rule Number 8: Copies of the Enterprise Conflict-of-Interest Policy will be distributed to all family members, company employees, and suppliers


Conflict of Interest

Case 1
The board has authorized its CEO (Second Generation family member, director and shareholder) to source for a contractor to construct plants in different locations. With this information, the CEO immediately commissioned his wife’s family (who are in the contracting business) as General contractor. His argument is that he trusts his in-laws more than third party contractors. Does this constitute Conflict of Interest (COI)?

Comments from other Siblings/Shareholders
“Prof, this is a very uncomfortable situation for family members and shareholders like us. Our brother has no sense of “delicadeza” at all. He will just end up approving his wife’s proposal. Obviously he is beholden to his in-laws and our gut tells us he will be getting commissions out of this transaction!

We also cannot imagine a scenario where this in law contractor will perform poorly or cannot deliver on time.

The operations team tasked to monitor the performance of the contractor will end up being subservient and useless!

In all these, we are lost! Should we just suffer in silence? What should we do?

Comments from the CEO
“Prof. I don’t understand my siblings! Who do they think can do a better job? I care for this business that is why I prefer to deal with a contractor that I trust.”

Case 2
A board composed of siblings as directors has approved the setting up of a new business engaged in food production. Would it constitute COI if a director (and family member) supply raw materials to the new business?

Comments from Siblings/Shareholders
Prof. it is obviously COI! Why can’t he just supply outside? Being a director and a supplier will just make life miserable to professionals assigned to check on his products!

Comments from the Director/Supplier
Why can’t the other family members understand that I am out there to prove myself. Are they not happy that I have finally decided to be financially independent? After all, I am also a shareholder.

COI issues can be so complex and there are no sweeping solutions to a plethora of situations. Instinctively, family members are programmed to help fellow family members whether its support for the business or personal issues. More so for Asian family owning businesses, where setting up a business is generally encouraged.

In both cases, it is obvious that COI was present. The issue of heavily favoring an in-law business by virtue of the CEO’s position and in case 2, the issue of personal gain.

According to Prof John Ward, there are several legitimate issues that the family owners need to be aware of:

  • What if it doesn’t work out?
  • How does it affect the perceptions and professionalism of the non-family managers and employees?
  • How does it affect the family business’ future options?
  • What precedent does it establish for other family members to do business with the family business?

My SID-SMU Governance notes presented two scenarios. Firstly, a director and or shareholder must not place himself in a position where his duty to his company and his personal interests conflict. And second, a director, being in a fiduciary position, is accountable to the company for any secret profit made by reason of that position.

In many instances, directors in family owned businesses are torn between having to decide in favor of the interests of shareholders, employees, creditors and or related companies. And it becomes all the more confusing when the director himself is also a shareholder. Why? There will always be a human element of subjectivity where family members have the tendency to cloud his decisions in his favor based on his personal needs.

Single-Minded Loyalty to the Company

What do the likes of Philippine conglomerates SM Group, Ayala Corp. and Alliance Global have in common with their Indonesian (Salim Group), Singaporean (Singapore Telecoms) and Thai counterparts (CP Group)?
They have extremely talented professionals and board members singularly focused in pursuing growth in their respective industries and still keen observers of their director’s fiduciary duty completely.
The title of this article perfectly defines what a fiduciary duty means from a Board of Directors (BOD) level perspective. The word was drawn from the Latin term fiduciarius or fiducia meaning confidence and trust. In the pecking order of things, the fiduciary duties of a director rank highest in any governance initiated event regardless whether the enterprise is a closed or a publicly listed corporation.
What then is the role and responsibilities of a director? This is a serious and important question directed to warring family members who are wondering why the business is in a state of suspended animation due to infighting, distrust and betrayal amongst siblings (and cousins).
My answer is straightforward, as a family member-director, understanding your responsibilities should always be your first task. And your primary role is to “ensure the company’s prosperity, steer the organization’s future by adopting sound, ethical, legal governance and financial management policies with the objective of enhancing long term stockholder value.”
The cause of all these senseless disagreement is due to the “culture of control and secrecy where the family tries to do it all.” totally ignoring corporate rules related to governance. In many instances where the dysfunctional family continues to cast an overarching shadow over the business, directors will never be effective and the BOD will end up being relegated as a “paper board.”
What are the qualities that a director must possess for him or her to be appointed or elected to the board?
  • Competence
  • Professional Experience
  • Network
  • Integrity
But over and above these qualities, the director must also embrace a decision-making mindset focused on his or her single minded loyalty to the company. These decision-making parameters should never be confused with the director’s relationship with other shareholders and fellow directors. Not even if the director and shareholder is one and the same.
Directors must understand that a company is a different entity. Some of its powers may be exercised by the BOD, while certain other powers may be reserved for the shareholders like the Annual Stockholders Meeting (ASM). In general, if the policy and directional making powers of management are vested on the directors, then they and they alone can exercise these powers.
What then comprises the fiduciary duties of a director? Culling from my SID SMU directorship notes (Singapore Institute of Directorships-Singapore Management University), these are the:
  • Duty to act honestly
  • Duty to act in good faith
  • Duty to exercise reasonable diligence
  • Duty to exercise care, skill & diligence and
  • No Conflict of interest and
  • No Personal gain
In my years of family business coaching and resolving conflicts, the most common problem affecting companies is always about conflict of interest (COI). The fundamental question that needs to be resolved is: Can family members (and in laws) do business with the business? Let us start with common COI cases:
You are the CEO, director and shareholder of a company and the board has authorized you to source for a contractor to construct plants in different locations. With this information, you immediately commissioned your wife’s family, who are in the contracting business, as general contractor. Your argument is that in laws can be trusted. Does this constitute COI?
To be continued…

A Real, Working Board is a Must

To ensure the survival of the business in the next generation, a real board must be in every business owner’s to-do-list before any transition happens. An authentic board is a powerful antidote to avert the next generation curse, punctuated by the Chinese version, “From peasant shoes to peasant shoes in three generations”, and highlighted by an even more striking Mexican version, “Father-merchant; son-playboy; grandson-beggar”

It is therefore important that family members be acquainted this early due to the fact that family dynamics (unconditional love, equality) naturally encompasses management (performance, meritocracy) and ownership (stewardship mindset) interests. Initiating a board comprising a mix of family and non-family members can accelerate the governance process minus the emotional baggage.

The objectivity of non-family directors or advisors during deliberations far outweighs the concerns and fears that business owners feel when adding them to their boards. However, it is not unusual for owners to resist having non family members and some of the reasons are highlighted below:

  • The perception of losing control
  • The issue of sharing confidential information with outsiders
  • The perceived cost of having a Board 
  • The Ignorance of family members on how a real board operates
  • Their limited knowledge on how to separate Ownership and Management
  • Their limited knowledge on how to connect Family, Business and Ownership  

I don’t blame owners if the closest non-family member they can field in the Board are schoolmates, club friends or those individuals who may have a long history of personal friendship with the owner.  This set up is very common in Asia and it is a good exercise to start board alignment. But having qualified and impartial directors can also provide very valuable contribution to any major decision making where the business is solely influenced by the controlling shareholder.

The first value these non-family board members can provide is for them to align the vision of the founder(s) and the goals of the company.  When making critical decisions, non-family members’ interest can always singularly focus on what’s best for the business.

There is an old adage, “what’s best for the family may not necessarily be best for the business.” A good example is when family members decide under the pretext of a board decision granting them a bigger dividend share at the expense of reinvesting the excess earnings in a new factory. Any inordinate financial decision can have dire consequences.

Second, the objectivity of non-family directors during board meetings will spare directors/family members from making irrational decisions naturally teetering towards personal or branch related interests. In a board comprising an all-family member cast, it can be quite a challenge reaching an agreement on major decisions. The only exception is when the leader is still around to break any deadlock.

But until when? What if the leader suddenly falls ill, becomes incapacitated or dies? How prepared is the family in making the right decisions without polarizing other siblings? One poor decision by untrained family members in the board can set back the growth of the business and put family relationships at risk.

In summary, it pays to have a non-family and impartial director who will:

  • Help minimize potentially damaging problems
  • Impose and institutionalize the observance of clear boundaries
  • Be effective in creating a line demarcating family issues from business matters

When a family is committed to stewardship and legacy building, the key is to have a board whose overarching mandate is to display single-minded loyalty to the company bereft of conflict and personal gain. Under corporate law, it is recognized as a director’s fiduciary duties. 

Why Do I Need a Board?

“I am the founder and have controlling interest in the business… why do I need a board to dictate to me how I should run my business?” or “I don’t need a board because I already know what’s right for my company!”

These are common condescending expressions by owners that I encounter almost daily when I start pressing them on the need to set up a real, authentic board.
Family enterprises form the backbone of any economy as it represents more than 75% of all businesses in any country. Unfortunately, the governance model is almost exclusively dependent on what the founder (or the next generation owners) wants. Where the owner goes, the rest follow and the old adage clearly says it all… if an owner tells his subordinate to “Jump”, the natural reaction of a beholden executive is to ask “How High?”
While today’s business culture isn’t as dictatorial as it has been in the past, there are still a lot of traditional thinking happening especially amongst the Silent and Baby boomer generation (born before 1945 then 1946 to 1964).
The mistaken notion of losing power and ownership as a result of having non family members in the board continue to stoke fear on owners, effectively subsuming growth in favor of control and confidentiality. This universal mindset is obviously untrue as safeguards are always available.
The bottom line is this: family businesses should have an active board with non- family members (or advisors) if they intend to stay and thrive in a complex environment. One wrong decision can change the course of business overnight.
For those unfamiliar with the 1997 Asian financial crisis, most of the companies that defaulted were family owned. A case in point is the Asia Pulp & Paper (APP) owned by the Widjaja family from Indonesia. The group defaulted on the back of a staggering US$14 billion debt in 2001.
Despite the family debacle, they have since recovered and investors are showing renewed faith in the group. The combined market value of 12 family-controlled companies listed on the Singapore and Jakarta exchanges has held steady and is estimated between US$15 B to US$16 B.
I am personally aware of this major turnaround as a colleague currently sits as an Independent Director in one of its listed companies. Their primary objective is to embed a Corporate Governance (CG) culture starting at the board level and highlighting the principles of transparency, accountability, integrity, fairness and independence.
In my W+B Family Advisory work, I always challenge business owners to nominate non-family members so they can provide value and strategic advice. These directors must also have the independence to challenge decisions when family and personal issues get mixed with the business.
The other role is also to impose discipline and check on entitled owners who may whimsically make poor judgments to the detriment of the business and the other shareholders/relatives.
Non-executive or Independent directors (NED/ID) can assist with some of the issues most family enterprises face since they can speak without fear of retaliation other than being removed from the board. This allows the ID to speak their mind and raise sensitive issues minus the emotional clutter that’s prevalent in many family enterprises.
Family expert Prof John Ward accurately pointed this out in one of his articles, “The realm of business is dynamic and unpredictable. Companies are constantly reacting to evolving markets and competition. Family businesses face the added challenge of balancing business and family issues in strategy. Business change inevitably creates stresses that impact both management and ownership interests. In this setting, the board of directors has the special role of assuring the strategic alignment of business and ownership interests.”

The Toughest Decision You Will Ever Make

High profile billionaire, real estate mogul and one of the world’s top philanthropists, Yu Pang-Lin passed away at the age 92 in 2015 but in a gathering five years earlier, he announced that he would entrust his entire wealth valued at USD1.5 Billion to a bank and the money would then be donated to charity after his death.

Yu was believed to be China’s first billionaire to donate an entire fortune to charity. He gained prominence when he acquired Bruce Lee’s home in the early 70’s and rose from toilet cleaner to billionaire. He once said, “If my children are more capable than me, it’s not necessary to leave a lot of money to them. If they are incompetent, a lot of money will only be harmful to them.”

In the West, there appears to be a growing awareness on the dangers of children entitlement. Elton John whose net worth is around USD550 Million has the same mindset. He has no plans of leaving much of it to his sons, “Of course I want to leave my boys in a very sound financial state. But it’s terrible to give kids the silver spoon. It ruins their life! Listen, the boys live the most incredible lives, they are not normal kids. But you have to have some semblance of normality, some respect for money, some respect for work.”

The world’s most savvy investor, Warren Buffet whose fortune is estimated at USD65 Billion intimated that only a very small fortune of that money will go to his three children. According to Fortune magazine, Buffet pledged to give away 99% of his wealth over his lifetime. “My family won’t receive huge amounts of my net worth. I still believe in the philosophy…that a very rich person should leave his kids enough to do anything but not enough to do nothing.”

It looks like Jaycee Chan will have to make it on his own as well.  His celebrity father, Jackie Chan, has decided to donate his money to charity instead of his son. As reported in Hong Kong media, Jackie Chan, who has a fortune estimated at USD350 Million, recently announced that he will donate all his wealth to charity. The “Bleeding Steel” star, who originally intended to split his wealth between his family and charity, has decided to give it all to the needy. Chan was quoted as saying that his son Jaycee should be capable of earning his own money now that he has his own career.

Inheritance can be tricky so discussion is often avoided. However, as the founder reaches the age of 60 and up and the children are all grown up and likely to have been forced (lured) into the business with zero outside work experience, founders can expect the following worrisome scenarios:

  • Escalating  dispute between founder and children related to management style
  • Simmering sibling rivalry on family and business issues
  • Children jockeying for power aggravated by In Law influence
  • Worsening marital spats between the founder/spouse
  • A competitive and highly regulated marketplace
  • Growing tax pressure exacerbated by different sets of Internal books
  • Urgency to align a complicated ownership structure for estate and transition planning

When these combustible issues are mixed, the process of initiating an inheritance plan can be so overwhelmingly daunting that owners tend to naturally forego the process. Procrastination or the “Do Nothing Option” then ends up as the most convenient choice.

So when an event like death or illness strikes the founder, expect the phenomenon to reappear, “Rice bowl to rice bowl in three generations”. 

Are You Really Committed to Succession?

June 26Prof. Josep Tàpies of IESE Business School in Spain is absolutely right when he remarked, “No one assumes that the son of a great violinist will also be a virtuoso on that instrument,”

So when do we consider a succession successful? First, it is when the company’s founder hands over the business seamlessly to the children, along with their spouses without any fanfare nor disturbances in any of the three critical pillars: Family, business and ownership systems.

Second, it includes the transfer of power to the most qualified and deserving next generation leader, who will navigate the enterprise together with his or her siblings. The transition to a chosen successor is a critical decision made unanimously by all the siblings, the BOD and the senior executive team.

The third element in the succession journey is that every strategic move is guided by a family agreement or a charter where governance issues are raised to the family council for approval using pre-agreed barometers. It is also essential for every member of the family council to be involved in a consensual decision-making process under a culture of transparency and respect.

In my family governance work at W+B Advisory, it can take up to 10 to 12 sessions or close to a year to create a family agreement. Why that long? There is no short cut to creating a real and authentic governance process. Just to initiate a transition from an informal set of rules to documenting formal agreements can be daunting for family members who are not used to corporate best practices.

During sessions, family members are made aware of their inherent responsibilities. They are guided on every item covering a slew of code of conduct policies where they simulate a formal meeting and collectively negotiate an acceptable governance solution to predictable problems that will likely happen in the future.

The fourth element is the creation of a Family Business Training Institute meant to inculcate good parenting programs, values formation training, business skills enhancement, shareholders education, a rigid successor program, Board level governance and institutionalizing a culture of stewardship to all family members.

And finally the last element in the succession journey is the creation of a Single Family office (SFO) that seeks to manage and preserve the family’s wealth. An SFO is a private company that manages investments and trusts for a single family. Other services include family governance, financial and investment education, philanthropy, estate planning and tax mitigating services. For ultra-high net worth (UHNW) families ably assisted by my firm, we assist family businesses in pursuing diversification strategies using private equity and liquidity investments.

Tàpies concludes, “All companies are subject to risks committed by governments and managers, but family companies, because of their very nature, can more easily succumb to a series of mistakes. The succession process is a key issue that the family company must confront. It is a long process that requires planning and collaboration with outside advisors. A well-prepared succession requires the intensive training of one or several different successors. It also requires you to establish conditions that will regulate relationships between shareholders, managers and corporate personnel in the future.”

In closing, succession is a new beginning, a process, an ever evolving phenomenon. Most of all, it is a journey. Hence, adequate preparation is key and this includes:

  • An agreement or willingness of the successors to go on the trip
  • A common destination with shared values
  • Milestones for monitoring progress
  • Fuel to sustain the journey
  • Fundamental skills for dealing with road obstacles