Monthly Archives: December 2014

Why building family unity is key

“THE secret sauce for the survival of a family business from generation to generation has three main ingredients: growth, talent and unity. It should be your mantra if you want multigenerational success.”

Family unity has been documented as an important characteristic of successful and enduring family businesses. Family pride, personal sacrifice, loyalty and reputation are valuable factors which influence business operations, especially their continuity during periods of hardship (Donnelly, 1964).

Is the family keeping the business together or, is it the business that is keeping the family together?

Family feuds that result in ownership splits weaken a family and greatly reduce its assets and returns. You need a program to bring together the family behind the business, to strengthen trusting bonds and build family commitment to your company. A good shareholder agreement is very useful. Fundamental disagreements must be managed in a respectful and careful way, ultimately with a commitment to preserve family unity and assets.

Successful families are those who remain reasonably united, keeping supportive members loyal to one another and to the family’s mission. Over generations, as families become more diverse, it is likely that only a few relatives per generation will directly work in the business. Outside-the-business members might still support family philanthropic efforts or social activities, and sometimes that level of involvement is enough to maintain family unity. But investing in family entrepreneurs can also keep talented members contributing to the broader family’s wealth and mission. In the course of my coaching engagement in the Asean region, the Philippines included, I have noticed that the new millennial generation—ages 15 to 30—seems especially interested in being entrepreneurs.

What is a long term family wealth plan?

This plan involves making a conscious decision to unite as a larger family to plan for the benefit of the larger family through the fourth generation into the future. It involves identifying the larger family’s goals, understanding risks to accomplishing those goals, planning for the time when the family members grow in numbers, more spread out and less cohesive and it involves working outside of the immediate family unit.

There are always challenges when a company is on the door step of transferring from one generation to another. Many companies often start with the legal side of the transfer but from experience, the first place to start is by gaining agreement across all generations on the business plan for the organization under the leadership of the
incoming generation.

It’s natural that each family member in any generation will have their own perspective on how the business should run moving forward. It’s the companies that talk through those perspectives to gain agreement on one plan that will set their family up for prosperity for many generations to come. Developing a plan will lead to increased profitability which provides more options for the family and the company to work through any leadership or ownership transfer issues.

You might say that the real secret to a family fortune is permanence. Permanence begins at home. And family wealth fails because families fail.

The oldest businesses in the world are family businesses that have been successful mainly due to the resilience and united stand of the family members even in the face of seemingly insurmountable obstacles brought about by modernization and globalization. The Antinori business in Florence and the Barovier & Toso glass-making business in Murano have produced some 20 succeeding generations of owner-managers from the same family. Cargill, a family business founded in the United States in 1865 now has revenues exceeding $50 billion and employs nearly 100,000 employees around the world. For the most part, the descendants of the founder now in their fourth or fifth generation have run the family business throughout its life.

Imagine if your wealth suddenly disappeared. Would your family members rally by your side to help rebuild the family fortune? The Rothschild family was able to survive and grow its family wealth for 250 years. Over the years, various branches of the banking business failed. But there was always a Rothschild family member somewhere who helped the family business survive and thrive.

Do your family members have what it takes to get back the family fortune? If the answer is no, what lessons should they learn? Perhaps, if they’re lucky they don’t have to be wealth creators. But if they lack even the potential to be wealth creators, they are unlikely to preserve the family wealth for long. And when family fortunes are lost, it’s usually the family that falls apart. The problems are almost always family-centered, not money-centered. And that’s why the solutions can’t come from outside the family. They need to come from the inside. Outside professionals can help temporarily but sometimes, when the family does turn to outside help, it is often too late.

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Family businesses must prepare for major shift in next 20 years

“SUCCESS is the temporary suspension of failure”

WHAT will family businesses look like 20 years from now? One thing’s for sure: the sector won’t look the same. For a start, family businesses will be in different sectors, moving away from traditional areas like manufacturing to things like software development and social media. And their management and ownership teams will be different.

As Tracy Perman explains in her Business Week article entitled “Taking the pulse of family business,” two broad trends are visible in the realm of family business as we get comfortable in the 21st Century. First, the aging of the baby boom generation signals a coming ownership change for many family businesses within the next ten years. Second, more and more of these businesses will be taken over by women, continuing a trend that has been visible since the turn of the century.

Recent studies have shown, Perman explains, that “women-owned businesses were more likely to focus on succession planning, have a 40 percent lower rate of family-member attrition, tend to be more fiscally conservative, and carry less debt than male-owned businesses.”

According to a recent MGI study, the percentage of family businesses in manufacturing, the traditional heartland of family business, has halved from 40 percent in 2003 to 20 percent in 2013.

Some family-owned businesses are finding that it is no longer assumed that children will wish to take over a family business. Thus, if the founders of a firm wish to keep it in the family’s hands, they should be sure to take proactive measures to attract future generations to the business.

In addition, the majority of family business owners aren’t laying the groundwork for the next generation to continue running their companies. Only 45 percent of respondents in the family business survey say their children are involved in the business.

Even among those who have children involved in the business, there seems to be a lack of confidence. More than 40 percent of family business owners say non-family employees are more qualified to keep running the business than their family members are.

The concept of stages of growth (and decline) and the projection of a life cycle is common in biology, economics and business and has been translated into the Three Generation Effect. It is a well-established framework in the analysis of the histories of family firms. Globally and in the Philippines, it probably occurs often enough to be credible as a forecast and a cautionary rule-of-thumb. On the other hand, especially among Japanese artisan enterprises, there are family firms running into the centuries—surviving if not growing.

As the business environment changes over time, the trading and licensing opportunities and the rent-seeking manufacturing monopolies that characterized the founders’ businesses will give way to the information technology age with higher-technology and service (people-oriented) opportunities that the younger MBA generation with family connections and entrepreneurial ambitions could take full advantage of. The AIM Family Corporation Group’s overseas research indicated a predilection for the members of the third, and occasionally even of the second generation of overseas Chinese family firms educated in the United States to form their own start-up enterprises.

The motivations included escaping from the family hierarchy, the innovative entrepreneurial culture in American universities and high-technology enclaves from Silicon Valley to Boston’s I-128, the reward in new ventures for capability rather than seniority, and the bonding during business school among nonfamily peers.

But according to specialists, the big change is in the way family businesses are now being inherited by siblings. It’s come a long way from the tradition of primogeniture or the right of the eldest child, especially the eldest son, to inherit the entire estate of one or both parents.

This is likely to transform the sector. It could become more unstable, but much more creative and dynamic, and place family businesses in different markets.

Lucio Dana, a family business analyst, says parents are now in a completely different position from where they were years ago. “They are much more concerned about fairness and equality,” Dana says. “Also, the kids are more vocal and there have been cases where they would take the parents to court.”

But family business consultant Jon Kenfield says the trend could create new markets for family businesses in the future.

“The ones that succeed will be the ones that harness the creative juices of what will be a better educated group of people, who have a much broader range of skills than their parents and they’ll be looking for new products. He says this will create a big shift for family businesses. In 20 years’ time, the sibling teams could take them to a completely different space. It might be software development, it might be social media services, it might be hospitality that they will need to do at a higher level.”

Soriano: Common issues that can tear family business apart (part 2)

“While the journey can be difficult, those that succeed enjoy many benefits. Be deliberate; be courageous. Work the issue with sincerity and expect the best from each other. The rewards are many” Managing Nepotism: Absolutely No Entitlement Family members, whether organic or extended (in-laws, step siblings) should be required to earn their stripes and show they are qualified for a stated task or job.

This can be quite a challenge if family members have joined the business with their last names as their birthright. But if you really want growth in the organization, there is still time to address this concern. For starters, get everyone to comply with the same set of HR rules defined by the HR Department. If the HR department is weak, invest on an experienced and qualified HR practitioner to manage the department.

Nepotism can be safeguarded against with several precautions. These include pre-stated requirements for family members such as education and outside work experience in order to qualify them for a position. These “rules” can be part of a family agreement.

3. Letting emotions run the business

If you let emotions interfere with your business, it can make you appear weak to your employees and customers, and severely affect your ability to make sound business decisions. On the other hand, if you are insensitive, you may appear cold and unapproachable. Lack of sensitivity with family employees can also cause problems at home if you are not careful. You will need to determine the right balance of emotion needed based on the dynamics of your business environment.

4. Losing non-family employees

Every business needs a good mix of people to help it grow. Non-family employees add balance to the organization because they have an ability to view the business from an unemotional position — they can offer valuable input on how to make the company better. Without opportunity to advance or take on a leadership role, many talented and ambitious employees will move on.

5. No succession plan

There is going to come a time when someone retires, leaves, or perhaps passes away. If you do not have a plan, you are setting your business up for failure.

A succession plan is absolutely necessary to ensure the business lives on from generation to generation.

Formulating governance policies means a family that works together.

One of the key factors for ensuring a successful family business is the understanding by everyone involved that, at work, the success of the business must be paramount.

Verbal communications must become more impersonal and attitudes more objective. Family members who work in the business must accept the employer/employee relationship— just as they would in another business. All job descriptions must be clear, in writing and adhered to. Any personal problems that originate at home should be left there when the workday begins and workplace issues should not be allowed to “invade” family life.

When all family members accept and abide by this distinction between “home” and “work,” not only will it help avoid strained personal relationships, but it will also communicate to other employees that, at work, the needs of the business come first.

There are three components necessary for building or re-building a strong and effective foundation for a successful family business:

  1. Clear and effective communication between all family members;
  2. A well defined reporting structure—a chain of command;
  3. A documented strategic plan for business growth and orderly succession.

Collectively, researchers and authors suggest the following tips to manage threats to your family business:

  • Make the family members realize how the business will be run…” Is it business first or family first”?
  • Clearly define the goals of the company and make sure everyone is on the same page.
  • Outline each family employee’s role and responsibilities and hold them accountable.
  • Keep an open line of communication at all times.
  • Address all concerns quickly and in a non-emotional manner.
  • Create a fair promotion and salary system that is based on individual merit and ability.
  • Take a management course to learn how to separate your emotions from the management process.
  • Provide opportunities for advancement in your business for non-family employees.
  • Be prepared and create a succession plan to ensure your business lives on after you
    are gone.
  • Test pre-agreed business protocols and process flow.
  • Seek outside advice so decisions related to family matters are unbiased and objective.
  • Family members must collectively agree to craft a family charter or constitution.
  • Establish a legally-binding shareholders agreement.

Common issues that can tear the family business apart

“WHEN family members are fighting, it is nearly impossible to set aside personal agenda or to overcome excessive emotionality.”

Every business owner must deal with issues and problems in the course of building and running a successful operation. In many ways though, the challenges—and advantages—in a family business are unique. With the Asean Integration barely a few days away, it pays to reflect on the real causes of an organization’s downfall. More often than not, the failure is caused by internal conflict.

I have listed some of the most common threats that family businesses are facing:

1. Family quarrels

There are many causes of family feuds — anger, envy, money, sibling rivalry, priorities, or even differing lifestyles. Whatever the reason, getting at the root of the matter and bringing back together the family bond, is always a matter of proper communication.

First, if the argument is recent, allow yourself and the other player(s) the time to calm down and be willing to converse with you. Moving too quickly could cause even more animosity and bring the separation to an even greater level.

Someone has to step up and initiate the healing or mending process. Although it may be the toughest thing to do – especially if you feel that you did nothing wrong — you may have to swallow your pride and allow yourself to move forward and forgive. Reach out and take responsibility for your actions. Explain why this feud is not as important as your relationship; reaffirm your love for the other person.

The power of objectivity

As the saying goes: “Nothing personal… it’s just business.” In a family-owned business, emotional responses are to be expected, especially in cases where one family member is charged with supervising or directing another. The key is to be sensitive to complex family dynamics, ensuring that these emotions are carefully managed and not allowed to influence or affect the overall operations of the business.

One of my clients, a family-owned business, came into our program with a strong business and great potential. But as we got further into our monthly coaching meetings, it became apparent that their stated positions in the organization were sorely at odds with the way things really worked. This is not unusual in a family business; often a family member is given a title, but not the true responsibilities of the position.

In this particular situation, the eldest son held the title of general manager of the company; the father was officially retired but still discharged and function as the head of Sales. However, it was understood by everyone (including me) that the father still called the shots and all decisions were made by him. Over time it became equally clear that communication between the family members was not as open and frank as it needed to be.

When we stepped back and looked at the business holistically, when we really investigated how the lack of integrity in these roles was actually hurting the business, the solution became less about fixing personal issues, and more about improving efficiency for the business. So we tackled these issues together, openly and honestly, and agreed on the necessity for functioning within their assigned roles and reporting structure.

When you frame it in the context of creating the best business possible (which is what everyone wants) this re-alignment was logical and dissipated some resentment and confusion that was truly getting in the way of success. Clear structures and protocols, the formation of a council, especially when validated by a third party such as a coach, help. They bring a sense of security that assists the underlying family relationship to proceed.

2. Nepotism

Part of the reason a family business exists is to benefit the family. It’s something all employees should understand. However, non-family employees who perceive a sense of preference and family-only promotions are understandably unmotivated to go above and beyond for a business in which there’s no hope of advancement. Similarly, family members who feel entitled to special privileges and positions become complacent and don’t strive to improve performance. The word nepotism is derived from the Latin word “nepos,” which means nephew or grandchild.

The term originated in the Middle Ages with papal nepotism. Many Catholic popes were unable to have children due to their vows of chastity so their nephews were often appointed to important positions such as cardinals. Pope Alexander V, Pope Callixtus III, and Pope Paul III all appointed several nephews. To curb this practice Pope Innocent XII issued a bull, “Romanum decet Pontificem,” in 1692: only one relative could be made a cardinal. There are also numerous high-profile examples. The most famous accusation of nepotism could be John F. Kennedy’s appointment of his brother Robert Kennedy as attorney general.

(To be continued)