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.”
 
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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”.

esoriano@wongadvisory.com 

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

Entitlement is a Dangerous Disease

Jeff Faulkner once warned business owners, “Entitlement issues are rampant in family owned businesses. It is a stealthy and dangerous disease that can have a widespread and prolific impact on our business culture, as well as at home. How do we keep it from becoming an epidemic in our business and family lives?”

Bequeathing a business on the other hand is a once-in-a-lifetime event and any poor, hasty judgment on succession can take out a business in one fell swoop. When you are planning on retiring soon, then having someone ready to take over the business is undoubtedly very important. But it is not an easy task to just turnover the business to someone.

The family business ecosystem is so complex and naturally confusing. It is further aggravated when family members are actively working in the business.  An enterprise with several family members has twice as many opportunities for conflict, misunderstanding and resentments. Therefore, teamwork is essential and effective communication is critical in aligning the entire organization to the succession objectives initiated primarily by the visionary, advisor and the family members.

Consultant Rick Johnson correctly stated that “an attitude of entitlement that is displayed openly can create major challenges for even the most successful family business. This attitude is often displayed by the family member’s work ethic expecting every employee to “live to work” and give of themselves unconditionally while Junior takes off every Friday afternoon or goes on extended vacations.”

Johnson further expounds that “these children often manage with an autocratic style with little empathy for employees and leaving the impression that they can do whatever they want because they will run the company someday.”

Having entitled and confused successors in the family business is fraught with danger. When they are made (forced) to join the family business straight from college and without rules that define their participation, you can expect them to act like spoiled brats and bully their way by demanding power without accountability.

Entitlement and the next generation “owner mentality” is one of two evils (Patriarchal control is the other evil) that every parent/ business owner has an obligation to resolve. This apparent role confusion is a real danger and must be nipped in the bud before it goes out of hand.  It is pervasive as the entitlement feeds into the child’s last name and becomes a birthright then suddenly degenerates into a mindset of an owner mentality.

So how can you turn the business over to your children sans entitlement? Why do other family businesses transition successfully and some woefully tragic? This is probably the toughest question any business owner will ever face. And it can be thorny.

Firstly, it all depends on how well the owner has prepared himself or herself and the children for this transition. Second, what really touched off the succession? Was it due to a triggering event like death, an illness or a medical scare? Was it a bruising conflict among senior business owners (siblings and cousins) or plainly the owner’s advance age. Or a realization that death is near and that he or she has to “pass the baton” now.

I am highlighting four very important and non-negotiable criteria in laying the foundation for a successful succession to happen:

  1. The candidate must have the right leadership qualities, acceptable to all and a proven track record
  2. Appoint highly qualified directors with proven integrity and competence
  3. Institutionalize a culture of accountability reinforced with corporate governance
  4. Every decision must be guided on “what is best for the company and not self”

esoriano@wongadvisory.com 

The 70/30 Succession Curse

The month of May has been quite challenging. An ugly feud erupted for control of a family-owned business in country A and I have been requested to intervene.

The sons of the founder are attempting to wrest control of the company from their father. Several thousand miles away in country B, another scenario has befallen another company, this time pitting siblings against siblings after the sudden demise of the matriarch. In both cases, my intervention posthaste was due to recommendations from associates that felt there was still a glimmer of hope for mediation.

The caveat is that should my initiatives fail in the next 12 months; a litigious process pitting lawyers from both sides will ensue. I can almost anticipate a very public mud-throwing spectacle between the warring parties much like the Lotte Group conflict in South Korea and the Philippine’s Ilusorio and Romero family disputes.

In my initial research, the problems started manifesting when the children were forced to join the business without any clarity related to their roles and responsibilities. After the ownership structure was distributed to the children, the plot to unseat their father intensified. I cannot pass judgment nor speculate on the motivation of the four siblings why they rebelled against their father. One thing is clear –– the issues are deep-seated and have created so much strain on the family. The children are now in their early 40’s.

Theoretically, I refer to the first case as rebellious. It is one of the three patterns of ineffective succession where the next generation launches a clean slate approach to the organization as an overreaction to the founder’s control of the firm. As a result, traditions, legacies and even the business model are rejected and discarded.

This case is just one of a handful of unwarranted family squabbles where the children would attempt to dislodge their parents from controlling the companies that the older generation founded. Predictably, these conflicts implode when governance, succession and ownership processes are set aside. And these same type of issues can happen to any family owning business, big and small.

As a family business advisor, I have never been remiss in constantly reminding leaders to initiate the process of succession immediately. Unfortunately, procrastination, an air of invincibility (superman mentality) and an inflated ego can oftentimes obfuscate the founder’s rational mindset.

The facts are clear, seventy percent of wealth and ownership transitions are not successful and seventy percent of family wealth ends with the 3rd generation.

So I am posing a direct challenge to family business owners: Be among the thirty percent who have successfully transitioned their wealth and ownership to the next generation.

One of the worst mistakes entrepreneurs can make is to postpone naming a successor until just before they are ready to step down or when death comes knocking.

Sometimes founders avoid naming successors because they don’t want to hurt family members who are not chosen to succeed them.  Yet, both the business and the family will be better off if, after evaluating the candidates as they work in the business, the founder picks the successor based on that person’s skills and abilities, early enough.

So my advice to business owners in their 60’s and 70’s is to have an open mind on the topic of succession planning. It can be both exciting and daunting at the same time. Daunting as the “letting go” phase for someone else to take over can be initially tough on founders. However, for visionaries dreaming of perpetuating their businesses, they must recognize that this leadership transition is both critical and indispensable.

esoriano@wongadvisory.com  

 

The Dire Consequences of having Family No. 2

Enforcing Governance and crafting a Succession plan for our clients in Asia are two of the most critical challenges that we encounter in our regular work at W+B Family Business Advisory.

Providing a tailor fitted approach for every family owning business and combining it with Asian values has been our core competence since the firm broadened its reach to cover Asia Pacific and South Asia.

But there are two other major risks (ownership and succession risks) that are often neglected and yet take center stage when immediate family, extended and in-law members battle for power and ownership. Succession coupled with ownership issues gets mired in controversy when many marriages end in divorce, legal separation and annulment.

In Singapore alone, where I engaged most of my regional clients, the country’s divorce rate spiked a few years ago, catapulting the Republic as one of Asia’s top six economies with very high incidence of failed marriages. The latter was exceeded only by South Korea, Japan, Hong Kong, China and Taiwan. But it is worth mentioning that all these countries are among the most affluent in Asia that share a common Chinese cultural heritage background.

When we look at the total picture, the marriage rate in Asia has gone down in recent years while the divorce rate continued its upward trajectory. From a family business perspective, what does a failed marriage got to do with Succession and ownership issues? What are the implications when couples terminate their marital vows by saying “I don’t” or “I won’t any more” instead of continuously professing their “I do’s”? The implications and the consequences are too important to ignore!

For starters, most couples who go into business together never dream their relationship will end. But when things unravel and the divorce or separation is set in motion, the emotional turmoil is further complicated by the question of what happens to the business and the children produced by the union.

Problems emerge when a significant number of these parents will remarry, adding new children to the marriage and further complicating the already complex family business eco system.

The consequences can be quiet daunting as the creation of a not-so-merry mix of family members we refer to as a blended family can include half-siblings, step-siblings and children from the current marriage. Expectedly, all of them will jockey for attention and as they become adults, will expect employment, power, participation in decision-making and future ownership.

Naturally, we can anticipate deep schism and undercurrents within the blended family and if ignored, can cause real tension. Neglecting the latter can devour the best-laid plans of business succession!

But the biggest risk of them all is the inherent risk that will impact the family business system especially when Illness, incapacity and death of a key family shareholder happens. When the enterprise is caught unprepared, we can almost always expect the entire family, business, ownership system to turn chaotic overnight as practically all ownership related issues relating to shareholder’s composition, leadership and unity will end up in disarray.

It is therefore important to note that sensitive issues like anticipating failed marriages, remarriage, adopting children and having children out of wedlock are brought into the open so governance and ownership policies can be formulated. In doing so, there is less likelihood that family dissent will cripple the business during the critical next generation transition period.

 

esoriano@wongadvisory.com

Two Enemies That Threaten Family Businesses

In an interview with Family Business Advisor Harry Martin, he was emphatic in stressing that “the two main enemies that threaten the very survival of family businesses are the controlling patriarch/matriarch and the next generation sense of entitlement!”

Those two factors are working against a family business that is why it is estimated that close to 70% will not survive into the second generation and 90% will never make it to the third generation. The average lifespan of a family owning business can be as short as 24 years. That number also coincides with the average time that the founder is associated with the business.

Martin went on to advise owners to “treat family members joining the business like you would treat non-family employees. Be sure they would have to live to the same standards of work and performance.” 

Clearly, Martin’s statement hit home especially in the context of the Asian culture where family relationships are deeply interwoven in the business. The overlapping of Family, Business and Ownership breed natural tension and when left unmanaged, can lead to real, emotionally charged conflict.

The challenge is to confront this predictable danger and reverse the current situation. Unfortunately, a good number of owners do not know how to start the change process.

Therefore, I am sharing a list of initiatives to guide business leaders to do what is best for the family and the business:

a. Business owners must primarily focus on being good parents that espouses values such as love, God fearing, respect, integrity, hard work and being fair to everyone

b. Never handover and never promise your children ownership on a silver platter. To be future and qualified shareholders, they must deserve to be one and must exhibit full commitment and a work attitude that exemplifies hard work.

c. My advice to a parent/business owner is to stop behaving like a father or mother on business related matters involving the children. Never ever reward bad behavior.

d. Compensation must be commensurate to credentials and must be based on what the child can contribute to the business. Equal pay among employed family members breed resentment and is an unacceptable business practice.

e. Continue to ingrain in your children the importance of separating the concept of being an owner and an employee. Children would always fall into the trap of choosing an owner rather than an employee mindset.

f. If your children are still in college and have shown interest in joining the business, make sure that (as parents and business owners) you impose strict conditions on their employment before they are accepted. Pre-employment requirements include an Employment Contract stating their Job descriptions and Performance metrics. Employment means qualifications, commitment, performance, meritocracy and accountability

g. Discard the “Eldest Child Syndrome”. Family business owners who don’t appoint the most competent leaders available—be they family or non-family members—are also taking a great risk

h. Business owners must enforce the rules of employment (entry and exit polices) of any family member interested to join the business

i. In anticipation of any future conflict, a Family Constitution, Shareholder’s Agreement and the activation of the family council are necessary governance tools to manage and mitigate any future tension

To effect a seamless handover in the future, it is necessary for parents to spend more time in molding their children so they will learn the value of hard work and fair play.

Undeniably, the objective is to embed the right values so they can become solid, decent, responsible people before they assume the mantle of succession and leadership.

esoriano@wongadvisory.com