The destructive effect of poor succession planning (Part 2)

sEPT 18

Ensuring the solvency of a family business

Note that succession planning is not about just sending the second and third generation to the top schools. It’s about careful career planning and skill development, and more importantly, it is about making sure that the core processes in the company, including governance, communications and decision making, are such that they support succession planning. Key areas that often are in the center of this are intra-company communication routines, decision-making processes, documentation, and sharing of information.

Corporate governance, growing pains, and your family business 

Instilling corporate governance into the business model is more of a mandatory thing, rather than just a benefit. Without proper governance, a company (be it family-owned or not), can simply not survive.

The growing pains are that usually switching from the first generation “entrepreneurial” style to proper professional grade succession planning requires a major change in mindset.  Sometimes this is only possible in conjunction with the actual generation shift. However, it is much better if succession planning and governance are already addressed within the time of the first generation. This way the process is smoother and has a better likelihood of success, success including also preserving good relationships across the family members throughout the process.

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While some initiatives in my previous article including the list below are instinctively noble, Family Business author Dr. Fan refers to these leader aspirations as “wishful thinking”.

a. Family gene pool is limited but Patriarch is not keen on hiring Non Family professionals

b. Typical of founders, they would express their desire to retire but the patriarchal shadow continues to cloud the next generation members’ decision-making

c. They apportion their wealth equally resulting to a divisive and disunited next generation shareholder group where decisions are stalled

d. Patriarch will delay succession plans because of the fear of losing control

In most cases, family members who have been sheltered often want to sell the business and move on right after the death of the patriarch or matriarch.

Similarly, some leaders (especially the conservative owners) even pass away without making a will. This leads to bitter feuds and will be even more complicated and severe if the founder has several wives.

Flying Away from the Nest

Finally, with the patriarch gone, the untrained and entitled next generation members will end up clashing amongst themselves.

Limited decision making and the lack of any form of hardship experience while growing up under the shadows of their overprotective parents will take its toll on the business.

With their roles undefined for years, there is the likelihood that heirs will be confused amplified by an unproven management skills set.

Compounding the lack of preparation is when they discover that the business has liabilities (debt load) and a looming creditor intervention to exact pressure on the new leadership.

With all the problems besetting the enterprise, the natural option for heirs will be to opt out by selling their shares, effectively absolving them of any form of “hard work”. In the end, the preference to just “live the good life”becomes insatiable.

Can the bleak situation still be reversed?

This scenario is repeated many times, thus it is no secret that business owners go through many sleepless nights blaming themselves for creating entitled children.

I consider this pervasive problem one of the biggest dangers faced by family businesses in Asia where owners attempt to self-medicate by way of offering more perks to family members hoping to motivate them. The problem is in the manner the perks are equally distributed whether to the deserving, capable or inept. The other problem is whether the perks should be given in the first place.

This practice will certainly guarantee failure after failure as the incentive will translate to more entitlement for the next generation of untrained family members.

It now becomes a vicious cycle of generational tension and sibling rivalries. In the end, the business owner will end up struggling with governance, leadership transitions, ownership conflicts and even survival.

At this juncture when the patriarch or matriarch, by reason of age, rushes the process of turning over the business to the next generation and discovers their ineffective or feeble judgements, the parent will end up extending his reign until he succumbs to pressure, old age, stress and death.

There is Still Time to Exact Good Governance

It is absolutely impossible for family businesses to manage internal talent (both family and non-family) and or attract the best non-family professionals without setting up a governance best practices program.

The key is to separate the family and the business and ensure independent oversight from a professional board.

To be continued…

(esoriano@wongadvisory.com)

*****

LINK:

https://www.entrepreneur.com/article/254614

 

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The Destructive Effect of Poor Succession Planning

sept 11

Yu Pang-lin

A property mogul has decided to donate his entire £1.2 billion pound fortune to charity, leaving his wife and kids with nothing.

He had a special interest in helping those with cataracts in their eyes. Since 2003, his foundation has helped restore the sight of more than 300,000 people from more than 20 provinces and autonomous regions across China, including some poverty-stricken areas in Qinghai, Gansu, Yunnan and Guizhou provinces.

Yu attributed his desire to help others with his experiences as a young man. In the 1940s, Yu had worked as a journalist and an editor for a newspaper, learning about the hardships of people in poverty. He moved to Hong Kong in 1958, and made a living in the early years with many jobs, including as a cleaner, handyman and construction worker. He later founded his own real estate company, then expanded to other areas, including tourism, hotels and healthcare.

In the 1980s, Yu started donating money to build schools, emergency centres, public bus routes, tunnels, fountains and other infrastructure projects. In 2007, he was on the list of world’s top philanthropists selected by Time magazine.

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“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,”

Hong Kong Real Estate Billionaire Yu Pang-lin

Yu is the founder of the Yu Pang-lin Foundation dedicated to healthcare, education and disaster relief. He was believed to be China’s first billionaire to donate an entire fortune to charity.

Alarming Number of Family Business Failures

In my work as Family Business coach doing the rounds in Asia the past five years, I have witnessed a rapid increase of family business disputes bitterly adjudicated in courtrooms because of poor governance and harmful wealth and ownership distribution.

In a Family Enterprise Trend report by my consulting firm, W+B Family Advisory, it researched on the average age of business owners who are going through “rush” transitions.

The study showed more than half were 70 years old or more. The firm also identified the top five major sources of dispute:

1. Money as a result of ownership misalignment and wealth distribution

2. Control and Power struggle among siblings and or cousins

3. Poor succession programs that bred conflict

4. Wrong policies related compensation, dividend policies and incentive programs

5. Employment for everyone. Despite their lack of experience and competence, family members are thrust into leadership positions because of their surnames

Summarizing the report and analyzing why conflict and tension happens among these enterprises, it highlighted the following findings:

“Business owners in general procrastinated and did not see the urgency of initiating governance in the early stages of the business cycle. They were just too busy growing the business.

In the latter stages when health issues surface often and disagreements were becoming frequent, owners would suddenly realize that the children were not prepared to assume full control of the business when they (parents) are no longer around. In short, there was a very high probability that these family enterprises were headed to separation due to internal squabbles.”

Litigation Can Scar Family Relationshipsfor Life

My role as governance coach is to prevent and deter senseless and unnecessary family tension from escalating into a full blown and irreversible family feud. That if left to feed on its own, will spill over and convert the courtroom into the next family battleground.

With the exception of lawyers from both sides, nobody wins in a messy litigation process. They are just plain expensive, personal and can scar relationships for life.

Inevitably, whatever comes out of any court case can produce a debilitating effect not just on warring family members but also on the financial state of the enterprise.

Why is conflict pervasive?

As the business leader or visionary gets old, he or she has to naturally pass on the business to the heirs. Unfortunately, many of these owner managers follow certain traditions to a fault.

a. They do not want to see their own business empire falling apart as a result of division of wealth

b. They want their children to stay together in harmony so they can continue the business

c. They have very strong preference towards their male offspring to carry the mandate in the next generational cycle

d. But they are not open to Non family professionals joining the business

e. There are no entry and exit rules for family members and in-laws

To be continued…

(esoriano@wongadvisory.com)

 

Keeping ownership within the family

sept 5

Ownership Stages

An analysis of family business system development in 1997 led Gersick, et al to create the Three Stages of Development of the Family Business, first published in the book Generation to Generation: Life Cycles of the Family Business. 

Most family businesses start at the Controlling Owner stage with one owner (or one owner and his/her spouse) having ownership control. A family business can stay at the Controlling Owner stage for many generations if ownership remains consolidated in one person or a married couple. 

Because families tend to pass ownership equally to the next generation, family businesses typically move next to the Sibling Partnership stage. Now brothers and sisters control the business together through ownership. 

Next, family companies typically move to the Cousin Consortium stage as ownership control passes to a group of cousins. The family is larger, more diverse, and the business is larger and more complex.
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I am finally back in Manila but only for a few days as I am slated to be in Iloilo and Cebu for back to back engagements before resuming my regular advisory work for ASEAN clients in mid-September.

My two-week research and family coaching work in the US and Europe related to the dynamics of Family Enterprises was indeed a learning experience. To borrow a line from Albert Einstein…’the more I learn, the more I realize how much I don’t know.’

The series of engagements made me reflect that the more I learn about anything related to governance naturally unlocks the knowledge that there is so much more about ownership that I don’t know.

Ownership transition is a critical end stage initiative that when done early and correctly produces real growth and harmony bereft of any tension and conflict long after the founder is gone.

Ownership Governance and Stewardship

One particular meeting during my two visits in the US that is worth mentioning was with Andrew Hier, Senior Advisor and partner at Cambridge Advisors. It was another opportunity to learn the complexities of ownership as family businesses transitions from one generation to another. Like its Founder and Chairman, Dr. John Davis, Andrew is a globally recognized expert on the ownership dimension of family enterprises and has served as facilitator and lecturer at Harvard Business School’s Families in Business Program.

As he intimated during our meetings, for visionaries and founders to transition the enterprise to the next generation members successfully, leaders must rigorously pursue the following ownership programs:

  1. Craft ownership strategies
  2. Create an integrated, long-term ownership plan
  3. Put in place Ownership governance forums
  4. Develop Ownership and dividend policies
  5. Design a process in selecting and compensating board members
  6. Assess the most appropriate ownership models to include strategies for transferring ownership
  7. Work on a process for shareholder buyouts

Under a globalized economy, high net worth families and SME owners, must do more to make sure their wealth is preserve while passing the reigns of the business to the next generation. In return, next generation business leaders must grow and braced for more changes that are expected to happen in the near future.

Ownership alignment and stewardship is no longer limited to tax minimization and estate planning but has become far and wide reaching that founders of businesses must seek expert advice on how to go about crafting a future proof ownership plan. Seeking the right advice from specialists is no longer an option. It is an imperative.

Wired and Borderless Transactions

While doing research and scanning the various modalities related to ownership and wealth preservation, family enterprises in Asia, the EU Countries and North America are experiencing unprecedented regulatory changes as a result of technology and globalization.

These changes are clear manifestations that family advisors, wealth planners, estate lawyers and most importantly business owners must start embracing complex ownership models as part of their legacy building initiatives.

It is a clarion call for stakeholders to embrace change and initiate the process of stewardship and incorporating tools to further protect the purity of ownership as the family transitions to a multi-generational system.

So whether your enterprise has presence in multiple countries or is simply a small or mid-sized enterprise with local operations, business owners wishing to preserve wealth and control within their family inevitably face a multitude but unique set of circumstances.

If the ownership plan is not initiated early, the American version of losing wealth by default would always resonate…

“Shirtsleeves to shirtsleeves in three generations”

(esoriano@wongadvisory.com)

http://johndavis.com/ownership-stages/

Failed Succession is a Global Concern

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Three-Circle Model of the Family Business System

The Three-Circle Model of the Family Business System was developed at Harvard Business School by Renato Tagiuri and John Davis in the 1970s.

It quickly became, and continues to be, the central organizing framework for understanding family business systems, used by families, consultants and academics worldwide.

This framework clarifies, in simple terms, the three interdependent and overlapping groups that comprise the family business system: family, business and ownership. As a result of this overlap, there are seven interest groups present, each with its own legitimate perspectives, goals and dynamics. The long-term success of family business systems depends on the functioning and mutual support of each of these groups.

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NEW YORK, New York –– I wrote this article while on a plane bound for Frankfurt over the weekend. It is an eight-hour flight from New York and long flights allow me to reflect on a lot of initiatives related to my role as Business coach and Family advisor especially when dealing with international clients based in Asia and North America.

It has been a punishing week after flying a record eight times in the US and Canada in less than 10 days. At the end of this grueling two weeks of family business coaching work and doing research, I would have logged 10 flights and more than 30,000 miles crossing Asia, US, Canada and Europe.

On the flipside, I can say it has been a truly gratifying trip as well. The sessions and the new learnings galvanized my resolve to continue pursuing alliances with global Family Business advisors who have made significant contributions in the field of governance, succession and ownership.

My visit in Europe for a few days will be my last stop before Singapore then finally back to my home destination in Manila.

So why is my firm setting its sights in Europe? W+B has been invited to explore setting up shop a few times this year. When we researched and scanned the huge EU for advisory opportunities, the numbers that confronted us were staggering.

Collectively, I can highlight several reasons why family enterprises are naturally bound to fail if governance and succession are not introduced early in the business:

a. Giving Equal Power and Ownership to the next generation family members will breed conflict and rivalry

b. Family + Money+ Emotion = Conflict

c. Informal Rules = No Governance

d. Shift from Single Family to Multi Family System

e. Complexity of Issues required formal decision making mechanisms

In a report by EFB, the umbrella federation of family businesses across Europe, family owned businesses provides some startling contribution to the European economy:

● They represent around 50% of Europe’s GDP

● More than 14 million business are classified as family owned businesses

● They contribute 60 million jobs

Similarly, in a researched material prepared by my firm, we also found out that just like Asian enterprises, many family-owned businesses belonging to EU countries were unsuccessful in managing inter​-​generational transmissions and vanished after the first generation.

Recalling my Family Business engagements in London more than a couple of years ago, I discovered that the continued drop in numbers of family businesses transitioning from the second to the third generation already showed worrisome figures.

Germany topped the list with 24% left in the second generation and down to single digit in the third generation. Not a single family business survived the fourth generation.

Still reeling from its exit from the European Union, the United Kingdom came in a close second with less than 30% left in the second generation and a mere 12% going into the third generation with zero left in the fourth generation.

The trend was similar for French family enterprises but they fared better posting an above average 8% somewhat overcoming the third generation curse. The single digit survival rate however is still bad news for family enterprises.

These numbers are alarming and are in no way different from family businesses in Asia.

If they remain unchecked, the percentage of failed businesses will continue to free fall and more jobs will be lost as a result of family businesses breaking apart.

(esoriano@wongadvisory.com)

http://johndavis.com/three-circle-model-family-business-system/

 

Businesses Must Aspire to Reach 100 years (Part 2)

image.png

Cosmos Bottling Corporation

One of the more popular alternative soda brands in the Philippines after the war was a product of the Manila Aerated Water Factory, located on Misericordia St., Manila. It was founded way back in 1918 by Wong Ning, a Guangdong native who migrated to the Philippines.

The eldest of his 7 children—Henry Gao-Hong Wong—rebuilt the business post-war and renamed it in 1945 as COSMOS Bottling Corporation. Cosmos is the first softdrink manufacturer in the country.

Among its branded products include Pop Cola, Sarsi, Cheers Lemon, Orange and Ruby, Jaz Cola and Sparkle. Sarsi and Sarsi Light are directed at the Class A and B markets while Pop, Jaz, Sparkle and Cheers brands are primarily marketed to the Class C and D segments.

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TORONTO, CANADA According to the Family Business Institute, only 30% of Family Business organizations last into the second generation, 12% remain viable into the third, and 3% operate into the fourth generation or beyond.

Family businesses face major challenges in working through ownership and management succession and family business leaders acknowledge the problem. However, few know where and how to develop a Governance and Succession plan. Let me continue part 2 of the article.

b. The Romero Group, a Philippine conglomerate with interests in construction and port services, got thrown into a turmoil when the son allegedly refused to cede control of the port business to his father. This led to a volley of court cases filed between them amid allegations of fraud, betrayal and financial improprieties. The son was a co-faculty at the ATENEO Graduate School of Business in the late 90’s and the father, a colleague in another business association. Common friends asked me to intervene but it was too late. The lawyers were already swapping accusations and the courts ended up taking over jurisdiction over the brewing conflict.

c. Another Philippine company is Manila Cosmos Aerated Factory, a beverage company started by Wong Ning in 1918 and successfully steered by the second generation only to fail in the third generation due to the sudden death of the patriarch and the lack of succession planning. This led to a power struggle between the uncles and the cousins ending with a sell-out to the RFM Group. Cosmos would have celebrated their 100th year next year. The third generation leader, Prof Danny is one of W+B’s Family Business advisor.

d. Family conflict is universal. In the US, the New England grocery chain Market Basket faced six weeks of mounting employee protests losing a hefty $583 million in sales as two cousins-both grandsons of the founder—publicly and bitterly fought for control of the company. The employees refuse to follow the directives of the newly installed CEO after removing his cousin Arthur T. Demoulas.  With pressure coming to a head, the feud ended with Arthur T, initiating a buyout and reclaiming his old post as CEO of Market Basket.

I have written in my column successful cases of family owned businesses overcoming hardship and triumphantly extending the founders legacy (Eu Yan Sang, Royal Selangor).

Visionaries need not go through the same periods of adversity.To preserve their wealth, theymust initiate governance and succession at the onset and not when they are old, sickly and dying.

Imagine the benefit, if the company mastered the art and science of governance, people management, leadership development, and succession practices?

Imagine the enormous rewards, if governance is reinforced with a shared vision supported with powerful values that the founder passed on to the next generation.

Imagine legacy-building benefits, if the founder put in motion the training of the next generation leaders so they can wholeheartedly embrace the value of fairness and meritocracy and the importance of making decisions based on “what is good for the company”.

The real challenge is to make every family member and future stakeholders understand early on the all-important concept of stewardship rather than ownership.

How? By learning from the best in their class… large family-owned businesses and their leaders that have defied the odds, went through rough patches in the second generation, summoned extraordinary strength to set things right, and deftly overcoming the third generation curse. They continue to prosper with some becoming certified century-old organizations.

Governance and Succession is non-negotiable. It is your wonderful gift to the next generation!

(esoriano@wongadvisory.com)

 

Family Businesses Must Aspire to Reach 100 years (Part 1)

ayala.png

Ayala Corporation

Ayala Corporation is the holding company of one of the oldest and largest business groups in the Philippines. Ayala has leadership positions in real estate, financial services, telecommunications, water infrastructure, electronics manufacturing, automotive distributorship and dealership, and business process outsourcing, and new investments in power generation, transport infrastructure, and education.

Year started: 1834

Number of Employees: 35,073

Annual Sales: $4,194.97M (2016)

Net Income: $547.74M (2016)

In a disclosure to the Philippine Stock Exchange (PSE) on Friday, August 11, AC reported a net income of P15.1 billion for January to June this year, compared to the P13.8 billion in the same period in 2016.

“A journey of a thousand li starts beneath one’s feet” is a common saying that originated from a famous Chinese proverb. The “starts beneath one’s feet” in family business parlance is governance. And governance is all about rules, policies, systems and accountability. In short governance is all about institutionalizing control and decision making.  As the 8th Generation successor, Jaime Augusto Zobel de Ayala, Chair of Ayala Corporation puts it…

“It is important to teach each new generation, early on, the difference between ownership and stewardship. Ownership is a right of possession. Stewardship is a fiduciary role. It is holding the institution in ‘trust for’ the next generation. We feel, as a family, that this institution has been passed on to us for our care and not for us to dissipate or do what we will with it for our personal gain.”

Ayala Corporation (AC) was founded in 1834 and is the oldest family business in the Philippines. That makes AC 183 years old.

Governance is uppermost in everybody’s mind today. But governance can be a difficult and extremely challenging act for family business owners.

According to a PWC report, “no matter what their size, the unique—and often volatile—mix of personal family dynamics, business strategy and ownership criteria can create an emotionally charged environment that makes decision-making, not to mention day-to-day management, challenging. And as the founding generation ages, succession and power issues across an expanding family can create cascading concerns.”

In my previous articles, I narrated a number of highly successful Family enterprises in Asia and researched on their history as well as their transformation as Asia’s gold standard in governance and succession. Without any doubt, these companies exhibited remarkable parallelism worth sharing over and over again.

What made these businesses tick? What were the qualities of the leaders that made them endure family tension, betrayal, adversity and conflict? Was it pure luck that they overcame a bitter feud? What was their secret to longevity?

It is a fact that all family businesses struggle with governance and succession with some even facing untold hardship and survival. Take the case of the Eu Yan Sang Family Business that was established in the late 1870’s.

Before the fourth-generation Eu family members engineered a buyout what was originally their family business, the family had to endure a tumultuous period starting with the murder of the wife of the successor by her in laws in the second-generation, an escalating conflict in the third generation with 13 uncles fighting for the spoils of the businesses and a volatile fourth generation involving 72 cousins.

If not for the daring move of the fourth-generation cousins led by investment banker Richard Eu, who engineered a buyout, Eu Yan Sang would have ended in their generation. With rules in place, Eu Yan Sang is now managed by a combination of fourth-generation descendants and professional managers and the growth has been phenomenal.

It is also noteworthy to consider some high-profile families in Asia that got embroiled in senseless and unnecessary conflict. For many, they ended in failure. For some, they were able to overcome the bitter rivalry and went on to strengthen their organizations.  I have compiled a handful of cases involving conflicts so owners, who are currently feeling the tension pervading within the family and the business, will realize the need to seek immediate intervention from family experts.

a. Mayfull Foods Corporation of Taiwan by far is the most violent and tragic family conflict recorded in Taiwan and probably in Asia. Gunshots rang out after a regular corporate meeting where the topic of inheritance was being discussed. Six brothers of the late tycoon Huang Jung-tu were present. The shooting resulted in the death of the two brothers. When the police arrived, the gunman ended up killing himself before falling from the 7th floor of their company’s headquarters. In one fell swoop, three brothers ended up dead in what police investigators called a pre meditated murder-suicide.

To be continued…

(esoriano@wongadvisory.com)

 

Rise, Fall and Rise of the EYS Family Business

Asian giant Eu Yan Sang (EYS) International is a traditional Chinese medicine (TCM) provider. The company was established in the late 1870s and has been in operation for 138 years. It is managed by a combination of fourth-generation descendants and professional managers.

This article highlights the complex nature of family businesses and the even more complex and often unwieldy interplay of preserving family values, managing sibling rivalries, personality differences, and reviving a century old business using modern management techniques.

Adding to the 100 year old drama that almost imperiled the business was the murder of Eu Tong Sen’s wife by his brothers, the sellout to an outside investor and the repurchase by the fourth generation members giving back control of the business to family.

Growing the Family Business

In an interview by NUS adjunct Prof Alison Eyring, she asked Richard Eu, the great grandson who led the buyout for his advice to leaders who want to grow a family business…

“Every generation, you’ve got to think what you want to do with the family business. Is your business the right business for the future? Is it more important to preserve the family or more important to preserve the business? That’s a discussion that you’ve got to have within the family and there’s many different parts to this. The family must have ongoing conversations about its future. This isn’t just about the patriarch or the founder – it’s got to include everybody.”

The entry of the fourth generation was a period of ups and downs but would end up as Eu San Sang’s defining moment.

Sell out due to 10 Uncles and 72 Cousins

In one newspaper account, Richard persuaded the board to make him general manager in 1989. But he ended up running  into a brick wall when the clan, comprising of mostly extended family members that included 10 uncles and aunts and 72 cousins, did not support him.

Instead, they sold their shares to the construction company Lum Chang. For the latter, it was a just an opportunistic investment in taking over the company.

Despite losing control, Richard navigated the company to steady growth, with the launch of a breakthrough product, American Ginseng Tea in 1991. The year after, the company listed in the Hong Kong Stock Exchange.

Four years later, Richard Eu and two of his cousins engineered a buy out of Lum Chang’s shares in EYS Holdings – making the firm a family business once again.

Back to Being a Family Business

Expansion went full-blast in Hong Kong, with its facility receiving ISO certification. In the coming years, the company achieved one milestone after another. The company would also end up becoming the majority stockholder of Australian health giant Healthzone.

With the company pursuing online automation for quality control, it aggressively expanded to more than 300 stores and clinics across four continents with $230 million in sales.

Growth and Expansion

Richard acknowledges that professionals are necessary in a huge enterprise, but he once told Asia Society that non-family managers tend to think short-term rather than long-term. For him, family is still paramount.

Since it was publicly listed in 2000, Eu Yan Sang has delivered double digit growth. In its core markets of Singapore, Malaysia and Hong Kong – the business enjoys the largest market share in its sector.

Many thanks to the participants of my Family Constitution seminar (Manila Series) last Saturday at the Tower Club in Makati as well as the participants who attended my talk in Jakarta the week before. These talks are extremely important for business owners in their quest to create a lasting legacy for their enterprises.

(esoriano@wongadvisory.com)