Ensuring 100 Years of Unity and Growth Part 1

What comprises natural conflict?

I’ll start with the most pressing issues that are regularly amplified in my governance engagements in Asia.

Generational transition and the ensuing conflict between generations can cause irreversible damage to relationships. All too often the senior-generation leaders believe they have done a great deal in generating wealth for the next generation only to falter in the end game because the “passing of the torch” was never planned well. There is no success without succession!

Family members between generations have different values and varying degrees of personal and business goals.When these goals are not articulated in a proper forum or is not aligned with the overarching values of the family, this can transform into unnecessary stress and open the flood gates for more conflict situations.

Personalities are totally different. When ignored, set aside or worse, a bad behavior is rewarded by the business leader; this can naturally lead to intense rivalries. The result can cause severe harm not just to the business but in relationships all the way to the succeeding generations.

Family member expectations related to employment, entitlement, perks, promotions, ownership vary. These expectations must be addressed immediately. If the business leader continues to set this aside, it will negatively impact family and business harmony and challenge the long-term survival of the business.

No employment entry and exit rules. Expect regular fireworks when any family member crosses over from the family to the business without clarity. Who gets to work? Who gets what position? Promotion? Titles? Perks? In-law employment? Treatment of family member, as an employee or as an owner? When the business leader ignores these issues and does not initiate a formal employment process, your natural tendency to employ family members by virtue of bloodline can turn into a nightmare.

These are natural conflicts in family owning businesses. Every family business comprises a mixture of individuals who are more likely to hold different opinions on a particular matter. For some families, disagreements can either be strategic or tactical which is acceptable in the ordinary course of preparing your plans for the future.

But in really difficult cases, some of the conflicts I have resolved come from deep-seated resentment and anger dating back from years of indifference and neglect.

When these issues continue to be ignored or not managed, expect tension to build up causing many business failures and untold misery.

On the bright side, I have identified Asia’s oldest family-owned businesses that have breached 100 years. What are the “secrets” to their longevity? What made them overcome crisis after crisis? What made them accomplished so much?

In the Philippines, I can only count a handful of family owned businesses that are still operating today.  The most enduring of them all is the family behind the 184 year old Ayala Group of Companies. The group was founded in 1834 and is presently under the care of the 8th generation stewards, Jaime and Fernando Zobel de Ayala.

Out of a family of seven, they were both handpicked to co-lead the conglomerate. With a target EBITDA of more than US$1B this year, they must be doing something worth emulating.

Presently, three 9th generation family members are occupying positions in different industries to prepare them for future leadership. But just like ordinary employees, these young descendants have to go through the rigors of occupying entry level positions to gain the experience and think like professionals with accountability so they can earn the respect of their non-family co-employees.

To be continued…

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富不过三代 (Wealth Does Not Last Beyond Three Generations)

Research confirms the truth of this old saying.

A significant 90% of family-owning businesses lose their wealth by the end of the third generation. The real tragedy is “If wealth disappears, so does the family.” When family members are pitted against each other, expect familial ties severed for good. It’s a sad commentary on the reality that faces family business.

The reasons are naturally predictable: generational conflict (father and children), power struggles (between siblings, among cousins), pride, emotion, personality differences, In-law issues, unfairness, petty but unresolved past family issues, entitlement, no rules when joining and exiting the business.

The fight for money is just the finale and likely to be the last and often climactic event to end the years and decades of acrimony and infighting. Sadly, there is no end. What is unfortunate is there are no real winners, only vicious lawsuits and broken hearts. This is a story repeated all over again, a lesson many families will never learn.

It is increasingly recognized that family issues more than business issues determine the outcome of generational change in family businesses. My experience in dealing with dozens of families across Asia provides an important perspective in managing this change—educating members related to family and business governance and creating legacy building measures that will ensure a seamless handover to the next generation.

A significant milestone in the life of a family business is the adoption of a family constitution. Happily, more companies are now drawing up family constitutions to help them manage growth and navigate the perilous journey of transitioning to the next generation.

As Bernard Rennell, head of family governance at HSBC Private Banking highlighted, “Where the goal of the family is to continue to manage the family business or the family wealth collectively across the generations, a constitution can be very helpful.” I will further enlighten participants on this topic when I fly to the Philippines to do a 3-city public seminar engagement covering Bacolod City on May 15, Cebu City on May 18 and Manila on May 19. The Manila leg is almost sold out.

There are business owners who would tend to ask if they really need a family constitution? Many family businesses appear quite able to get by without concerning themselves with any form of agreement. Of course, for as long as the business leader is alive! But what if he or she suddenly goes? Therefore, it’s always better to be prepared.

To business leaders who are likely to be in their 50’s to 80’s, my message is loud and clear… stop procrastinating. You are neither supermen nor superwomen. You know very well that your years are numbered. Your gut tells you there is something brewing amongst family members and you can sense that if you lose your grip by reason of death or being incapacitated, the business you nurtured with your spouse will end up being the single biggest source of conflict.

Clearly, the advantage of a family constitution is that it ensures clarity, professionalism and every signatory knows what to do when conflicts arise. From my experience working with family businesses across Asia, there are generally common issues that are addressed in family constitutions:

  • Balancing family and business issues
  • Family member Entry and Exit rules
  • Role of In-Laws
  • Role of Active and Non Active Members
  • Compensation, Dividend Policies
  • Maintaining ownership control
  • Mentoring a successor
  • Enforcing compliance and accountability

Inevitably, family enterprises without a Family Constitution will likely head to a crisis…it is just a matter of time.

Don’t Be Afraid to Hire Professionals

In my last column, I repeatedly mentioned that the success, growth and well-being of a family business depend on its ability to attract, motivate, develop and retain outstanding executives who are not kin.

I also hasten to add that any business with the intention to continue and grow needs executives with a profile matching the business culture, organization, and strategy (Gallo, 1991; Welch, 2005).

The intermingling of the family, business and ownership ecosystem spawns a different organizational business culture unique only among family owned businesses. To be effective, non-family executives must be able to merge their set of values with that of the new culture. When there is alignment, a cultural fit creates synergies between non-family executives and the family business.

In one of my overseas talks last March, I recall one participant in his late 60’s candidly sharing his thoughts and reservations on the need to hire non family executives. He expressed his concerns and even went further by questioning my views related to the hiring of senior non-family executives. The business owner’s exact words:

1. Professionals cannot be trusted

2. They are only after their personal and selfish interests

3. They are very expensive

4. They are not as passionate and committed as family members

5. They jump from one company to another

6. They will never be loyal to the organization

My response was swift. Firstly, I emphasized that hiring non-family executives is not just about showcasing their impressive credentials. Using the latter as a singular yardstick can present challenges to the family business.

Secondly, there are four hiring pillars that owners must embrace. These are the technical skills, human relations skills, track record and the “cultural” fit of the candidate.  Neglecting one pillar in the hiring process will likely lead to possible failure. The latter may be able to deliver based on measureable expectations but if he or she fails to manage the impulsive nature of the owners, the tenure will likely be short lived.

Thirdly, it is extremely important for the organization to create an environment where business is defined by a set of rules, roles and responsibilities. This will minimize the confusion when non-family executives join the organization.

I ended my talk by sharing an inspiring story about Liem Sioe Liong (LSL), the Salim Group founder and patriarch of one of the largest conglomerates in Indonesia. LSL once remarked when asked why he took a major leap of faith in hiring non-family members during his start up years he said…

“I have a strong management team and they see the opportunities but choosing the right people and believing in professionalism is my underlying approach. You see I believe in teamwork and not dictatorship.”

Through time, the steady collaboration between family members and professionals of the group, reinforced by the shared vision of the founder and the next generation successor, youngest son, Anthony Salim (US$7B), created an empire with 300-plus corporations. The group has extended its reach to several continents namely Asia, North America, Europe and Australia.

The Philippines and Hong Kong operations is run by a professional executive in the person of Manny Pangilinan under the First Pacific Group Holdings. This professional empowerment has produced unprecedented growth outside Salim’s sphere of interest, making the Pangilinan model a gold standard for family owned enterprises to emulate.

To quote Steve Jobs, “It doesn’t make sense to hire smart people and then tell them what to do; we hire smart people so they can tell us what to do.”

Scared of hiring non-family executives?

Try inexperienced and under-performing family members that you cannot suspend or terminate by reason of birthright.

As a father, you probably hired or even cajoled a reluctant family member to join the business by virtue of his last name and nothing else. Credentials and work experience were never part of any yardstick. Employed family members skipped any formal hiring process. In short, the next gen employment is typically outside the scope of the HR department.

Entrepreneurial parents, usually the father, would routinely blurt a line to the children:  “Work hard and help me run the family business so that when I retire in a few years, you and your siblings will eventually take over.”

That’s it. No rules, just a simple crossover from the family to the business system. So when conflict happens, the dispassionate children, predictably manifesting entitlement will end up being rewarded with the 4 P’s –– higher Pay, Promotion, more Perks and Potential windfall (ownership). The consequences of rewarding bad behavior can cause irreparable damage.

One thing is certain though, the end result will undermine the years of adversity and hardships parents spent growing their wealth.

Without very clear and enforceable rules related to business and ownership governance, the business will naturally tilt towards failure. When an internal event like the sudden death and illness of the senior leader happens or an external circumstance like a crisis occurs, the business will end up in jeopardy.

To quote Jaime Augusto Zobel De Ayala, the 8th generation successor of the 184-year old Ayala Group from the Philippines,

“I often remember my uncle Joe’s comment that it was statistically impossible to produce enough highly qualified family members to run the businesses generation after generation. We only have two family members (out of 7 siblings) in the business at this time. My brother and I serve as chairman and president at the holding company and we provide leadership on the boards of the companies within the group. We are involved in the selection of CEO’s and CFO’s, succession, strategic partners and board members. We also participate in major strategic and resource allocation decisions and provide defined leadership through the governance structures of the boards,”

Akin to the spectacular growth of the Ayala Group the past 30 years, the success and growth of an enterprise depends on its ability to attract, motivate, develop and retain outstanding executives who are not kin.  Any business with the intention to continue and grow needs executives with a profile matching the business culture, organization, and strategy (Gallo, 1991; Welch, 2005).

In my nine years of governance work in Asia, I have come across senior generation leaders making critical decisions related to succession planning. Steadily gaining traction is the preference of business owners to fully hand over management responsibility to qualified, non-family executives. The rationale, objectives and advantages are many fold:

  1. They are hired based on talent, industry experience and the value that they can contribute to the organization
  2. They are metric driven and their KPI’s (Key Performance Indicators) are measureable
  3. Their compensation is commensurate to their skills
  4. They are geared to perform on a Quarter to Quarter basis
  5. They look forward to pre agreed incentives and profit sharing arrangements
  6. They are also prepared to resign and assume accountability should they perform below expectations
  7. The engagement is on a professional level and they are driven primarily based on business profitability
  8. They have an employment contract that is contingent on performance
  9. Owners look at their employment as an investment rather than a cost driver
  10. Emotion is irrelevant

Are Your Children Really Committed?

Or are they just working to please you?

When every family member is fully committed, it sends a strong message to everyone to put the interests of the family business first before their own. For founders/owners, family member commitment gives them a certain level of self-assurance that the business will be in good hands when the day the formal handover happens (an event like death or illness of the senior leader).

But how do we galvanize family member commitment? That is a tough question that continues to bother business owners especially those whose age ranges 60’s onwards. Here is a couple of disturbing statements coming from the next generation family members (31 and 40-year old) that my firm, W+B Family Business Advisory, researched and polled in 2017.

Next Generation 1

“My parents offered me future ownership even while I was in college. It felt good being an owner but years later I realized that having zero outside work experience became more of a liability. The only consolation I got was because I never went through the difficulty of applying for a job.  There was also less pressure in terms of going to work. But how I wish I had real work experience outside my comfort zone. It’s been a difficult 15 years managing the business with frequent disagreements with papa. It is a wake-up call and this made me realized that at 39, it’s time for me to make a full assessment of whether I am worthy to succeed my father. I am playing catch up by hiring professionals and doing advance courses on areas I am weak at.”

Next Generation 2

“I have the best of both worlds and couldn’t ask for a better job. Of course friends teased me as a COO (Child of Owner) but at 31 years old and managing 450 plus employees, it’s not bad. I also get to enjoy the benefits of a nice salary, an SUV and unlimited travel benefits. My classmates who are employed are still languishing with low salaries. I couldn’t ask for more!”

When they were asked about the following: future growth plans, managing complexities and balancing growth, how to confront the uncertainties of sustaining the business… their reactions showed serious reservations and self-doubt. Collectively, these were generally the responses of more than 100 next generation successors surveyed:

a. If they really have the skills set like their hardworking visionary parents

b. Their continuing struggle in the areas of decision making and people policies

c. Their concerns related to the pressures of expanding the business

d. Balancing the old and the new ways of managing the enterprise

e. Issue of business longevity, co-ownership with siblings, debt issues

f. Potential conflict among siblings that will predictably surface when their visionary father is no longer around

These are natural reactions that I encounter every day. Therefore, the real challenge for business owners is to confront these questions:

How will we know if those who are actively working in the business have the passion and sincere intention to grow the business? How will we know if they are just after the four P’s –– Pay, Position, Perks and the Potential windfall (ownership) the parents generously and wrongly offered them when they started joining the business.

If these questions remain unanswered or if there are no singular focus in creating powerful commitment initiatives now, these will result to many sleepless nights by the business leader. Expectedly, the road ahead will be less paved and difficult to navigate. Hence, governance should now be the way forward.

Family Commitment is Non Negotiable

Family values and business values are usually not aligned.

While a business exists to create customers and achieve financial success, families have an entirely different motivation. They typically bring a less profit-centered focus alternating financial gains with trust, relationship and a lifetime engagement. These non-financial goals represent the bedrock of the family business ecosystem.

For one, family-owned enterprises are more community driven. They go out of their way to help their trade area on various social advocacies. Internally, the employees see the enterprise as an extension of their family and vice versa.

One good example was when a Philippine based businessman (net worth US$3B) went out of his way to do a headcount of all his employees affected by Super typhoon Yolanda (Haiyan). He then secretly met and surprised each one of them with financial support under a “pay when able” scheme and encouraged them to go back to their hometowns so they can be with their loved ones while rebuilding their homes. As a PWC report stated in one of their studies, it “is the injection of this very human element into the mix that makes family businesses unique.”

I want to share another success story of how family and business governance can work for as long as the family remains committed.

Family Business A is a trading company I have been coaching for the past five years. It was founded in the 1970’s and now distributes its products across the Asia Pacific region. By industry volume alone, the business is ranked 8th in Asia Pacific.

The business is currently being run by second generation members composed of five siblings. Due to the lack of systems and internal structures, confusion and petty misunderstandings among siblings became more frequent. Even non-family members were always caught in the crossfire, unclear on whose instructions to follow.

Recognizing the need to overcome the generational curse, the family agreed that the eldest son would take the lead and address governance in the areas of family, business and ownership (shareholding) structures.

“We used to have heated, nasty disagreements, but because we have set some rules in place now, we can resolve problems in a more professional manner minus the emotion” said Johnson.

Jenny the other sibling also remarked, “The advantage of having a family council and being constantly reminded by a family governance coach is that our disputes have become less personal. We were made to realize that we were brought up under the same roof and our father always reminded us that when conflicts do happen, we should always hold on to our values like respect, honesty and unity.“

As in most of my engagements, my intervention with this family was never a walk in the park. In my first year, it was clear that my initiatives would solely focus on family governance. It is extremely important to galvanize family commitment first as a squabbling family will never progress to embracing business governance.  Forcing a disunited family to transition to business governance is a double edge sword.

In the course of a little more than a year, we finally signed the family agreement. Immediately after, I made them formulate business governance policies to include hiring of non-family key personnel, performance metrics including entry and exit rules.

With professionals in place, meetings became less emotional and family members saw it as a challenge to raise their performance standards.

When every family member is fully committed, it sends a strong message to everyone to put the interests of the family business first before their own.

esoriano@wongadvisory.com

 

Have Governance, Expect Real Family Unity

I received a deluge of frantic emails related to my previous articles (“What If You Died Tonight” and “Nothing Is Uncertain except Death”).  More than half of the messages came from next generation members desperately fearful of the dire consequences of suddenly losing a business leader. Additionally, most of them also felt a feeling of inadequacy and helplessness because of the patriarchal shadow enveloping their decisions.

On the other hand, the other half of the messages came from worried senior generation leaders expressing unhappiness with the way the children have managed the business. One patriarch in his 70’s even remarked that he felt great sadness because the children (and in laws) acted as if they owned the business even though they never experienced hardships.

Summarizing my email exchanges clearly points to the twin evils of family owned businesses:

1. The senior generation’s way of control or “patriarchal shadow”; and

2. The Next generation’s work attitude and sense of entitlement

Every family I coach all over the world is in agreement that good family and business governance go hand in hand with sustained benefits that can last for generations. The question is how committed are family members especially the business leader in initiating real change?

In my recent engagement in Istanbul, Turkey, a business owner shared a question: “Professor, we all know the importance of governance and succession and there is no question all of us in this room aspire to be 100-year old companies someday. However, with all the issues considered urgent, how can I worry about governance, succession and ownership transfer when I have a business to run, creditors to manage and bills to pay?

My answer is clear… always start the process with simple steps but make sure you position family governance and succession at the top of your priority list. There is a Chinese saying, “the journey to a thousand leagues begins with one step” and it holds true in creating legacy building measures. I need to reiterate that even the best family businesses work hard at relationship building.

To jumpstart governance, family members must understand what the company’s mission is, what its short-term goals are and how it relates to their individual job descriptions. They must also know their boundaries. To determine the latter, a system that encourages open communications must be fostered by the business leader.

Trust me, communication helps build good relationships enterprise-wide.

I must warn you, though – encouraging open communication has its temporary setbacks. You will expect siblings or cousins to raise memories of past hurts related to how they were treated differently and unfairly. That said, will you just sweep the issues under the rug? How would you confront these “elephants in the room”? Will you just suffer in silence and prefer temporary peace knowing that at some point, these forbidden issues can surface and create tension amongst family members? What if you are no longer around when tension erupts?

And if you choose to ignore these issues now, what is the likely scenario that these problems will escalate? The risk is just too high to set aside these problems!

So if you believe these issues can compromise family harmony and impede the operations of the business, they must be dealt with now, not later. I know these are not easy issues to deal with, so it is in the best interest of families to rely on family-business experts to help family members navigate through these difficult “terrain”. Let me close with this message, “Action may not always bring happiness, but there is no happiness without action”.

 

esoriano@wongadvisory.com