Monthly Archives: June 2015

Soriano: Crafting solid agreements: your most important step (part 2)

ACCORDING to the family business firm Lansberg and Gersick, governance is concerned with all of the ways that the interests of owners are reflected and implemented in the organizational system. It is inherently about institutionalizing control.

A business first model

Working family members must realize that in business, there are targets to be made, budgets to stick to, profits to raise, deadlines to be met, a network of people to deal with, and a lot more responsibilities that need to be taken according to corporate standards.

Unfortunately, these could not be delivered if the members of the family are not on the same page, not in agreement with what is expected of them, and unaware of how their expectations would have to be limited for the good of the family business. They could be just all over the place and doing whatever they want without considering the resources and proper procedure. This is why formalizing agreements becomes an indispensable tool to institutionalize governance.

Shareholders’ agreement

Apart from the family charter or constitution, I will start with one of the most important formal agreements family business owners must document and put in writing to avoid a future, irreparable and unnecessary conflict among family members.

This agreement is sometimes referred to as an owners’ agreement but in the Philippines, we use the term shareholders’ agreement. As the word implies, this agreement highlights the need to align ownership and board level governance, as it makes known to all who are concerned about ownership. It also includes the governing aspects of their relationship not covered in the articles of incorporation. It is also an agreement that crystallizes ownership rules to suit the particular requirements of the company and its shareholders.

Another important element of the shareholders agreement also defines the qualifications of being an owner and the description of particular events that could be reasons for transfer of ownership.

In short, some questions listed below can be resolved in the shareholders’ agreement:

What will trigger a transfer of ownership?

Who can own shares?

How should an ownership position be valued?

What are the terms of the purchase?

When can I sell my shares?

To whom can I sell my shares?

I can go on and on but what is crucial is for family members to start the process of formalizing ownership and board governance policies through a shareholders agreement before it’s too late!

Why do we need one?

A common question that I usually encounter among family business leaders is, “We have no major quarrel in the family, therefore, why do we need one?”

The answer is quite clear! For as long as the family head is in full control then ownership issues are “muted”. Family members do not openly talk or assert ownership concerns while the senior business leader is still on top. It is the family members’ way of avoiding a very sensitive topic while showing respect to the senior generation members.

But what if all of a sudden the senior family member or the head of the family falls ill, or is crippled or suffers a debilitating disease and dies? Almost instantaneously, the business itself may die or be permanently disabled on the same day, not because something wrong was done, but because nothing was done!
Compelling reasons to start now

There are many reasons why every family business must formalize ownership structures. I can highlight the top three:

To avoid future disputes by defining the relationships between and among shareholders;

Anticipating the issues which could cause disputes; and

Agreeing on acceptable ways of dealing with them.

As a guide to the readers, I have also listed below a number of issues commonly covered in the agreement:

Shareholders, classes of shares and shareholdings;

Governance in the board of directors and top management level;

Funding of the company and shareholder’s loans;

Transfer and restriction of shares; and

Valuation of shares.

A shareholders’ agreement is one form of governance agreement that is both normative and legally enforceable. Therefore, it would be best to look for a tax lawyer or a tax specialist with extensive experience in ownership transfers employing tax efficient methods. A corporate lawyer can also be a good reinforcement to make the agreement legally binding.

(sorianoasia@gmail.com)

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I will be in Cebu on July 25 (Saturday) to deliver a talk entitled “Creating Growth Opportunities for Family-Owned Enterprises”. The venue will be at the Choi City Seafood Restaurant in Banilad Town Centre. This timely one-day Franchise and Marketing Seminar is organized by the Octopus Strategic Branding Group. Those interested to attend, please call Mr. Danny Wong at 0917-8900063.

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Crafting solid family agreements: your most important step

IN MY previous columns, I wrote lengthily about the need to pursue governance in the family business. And without any doubt, crafting a family constitution or a charter is one major step to every founder’s dream and aspiration of ensuring that his blood, sweat and tears (legacy) is cemented for generations to come. The objective, therefore, in any governance undertaking is to create harmony, unite family members and prepare very good family and ownership agreements.

Today’s column will focus on family agreements and in what my industry colleagues Lansberg and Gersick refer to as “institutionalizing control.”

Formalize agreements

Formality is very important in family businesses. Assuming that one’s relatives would forever be supportive to the family business and consistently remain productive may not be a good way to set one’s frame of mind.

We should always accept the reality that there are different types of family members working in the family business. Some of them may exhibit exceptionally good performance, are committed and trustworthy. There are some that are plain indifferent, selfish and would always look at his last name and employment as his or her birthright. For some entitlement is all there is to it in a family business.

Behaviors change

According to a Business Week article, family business leaders must always recognize the family members’ individual differences (types of personalities, attitudes, and behaviors), varying opinions, values, demands, expectations, and capabilities and changing or evolving priorities in life.

What you know of your younger or older siblings’ behavior when you were in your teens may no longer be the same in midlife

With all these likely scenarios happening, family business leaders must anticipate and expect the difficulty in meeting the kind of certainty that is needed from its pool of family members to operate a business on a professional level and direct it towards specific objectives.

The core group of any family business would be the members of the family itself who could either be catalysts for positive outcomes or a major source of problems if they do not agree with certain guidelines.

Familiarity and entitlement

The issue with members of the family boils down to familiarity and entitlement and they will naturally have the tendency to be complacent and presumptuous since they are related by blood or marriage with the president or any family business leader with significant influence, they would not be made accountable for under-performance or weakness they might have.

In most cases, “free riders” in the family can also compromise the business. They think that being entitled will allow them the advantage to put little or no effort at all in the development of the business.

Without any performance metric and a semblance of accountability, they continue to draw their salary every payday and benefit from dividend sharing. And to add salt to the wound, they moonlight and put up separate businesses outside of the family business.

Another cause of major conflict is in dealing with different personalities in the family. Some could be very intellectual, capable and productive, but are greedy, overly controlling and manipulative for their own good. Some are usually quiet and have the penchant to question every policy laid out by a family member or sibling disrupting initiatives for growth.

Start by crafting good agreements and policies

There are different kinds of agreements that could be created and followed in the business to keep family relationships in harmony and espouse professionalism in the industry. Based on my experience coaching family businesses in the Asia Pacific region, the most important documents and policy to unite and harmonize family members are the following:

a. Family constitution or charter incorporating governance policies covering employment, compensation policy, a code of conduct, job description of working family members and a statement of vision and values

b. Shareholders’ agreement on the other hand covers agreements on ownership and board level accountabilities

Due to limited space, I will cover these agreements in the succeeding columns.

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(I will be in Cebu on June 25 to deliver a talk entitled “Creating Growth Opportunities for Family Owned Enterprises”. Choi City along Banilad will be the venue of this timely franchise and marketing seminar. It will be a one-day event organized by Octopus Strategic Branding. Those interested to attend, please call Mr. Danny Wong at 0917-8900063.)

Why family biz owners are reluctant to hire execs (Part 2)

IN MY previous article, I shared the opportunities and challenges of hiring non family members/executives in the family business. Today we will complete the elements in the hiring process.

As a family business advisor, one of my key responsibilities is “transitioning the family business from a family first business mindset, to a business first business model.” The latter is naturally preferred as the family business transitions from a founder centric model to a more complicated, sibling and cousin consortium phase. A major “business first model” attribute is growth with strong emphasis on business governance, process and accountability and bereft of emotions and entitlement.

My role during this challenging phase is to handhold family members as they adjust from the informal phase to a more formal process of coming together and agreeing to formulate family agreements (Constitution and alignment of ownership).

While the formal family agreements take shape, the change process entails the simultaneous integration of non-family members in the business organization. And this is where some of my biggest fears manifest…hiring the right candidate and ensuring she/he stays in the job for long. I have outlined below the continuation of what I highlighted in my column last week:

h. The candidate must adjust into the composition of the management team (where members are family members and long time employees).

i. The candidate must demonstrate a mature personality by displaying self-confidence, authority, and modesty.

j. The candidate must show loyalty, readiness to subordinate and compromise with the family.

k. And finally, trustworthiness, credibility, reliability and humaneness

The absence of any of these elements will certainly compromise the hiring process and the likelihood of an executive staying longer than one year in the family business is slim.

Senior executive preferences

Highly qualified non-family managers might favor non-family businesses instead of family businesses because they may present fewer emotional complications e.g., the absence of family quarrels or unqualified interference or disposal (Poza, 2004; Ibrahim & Ellis, 2004). However, there are still good reasons and prospects for qualified non-family executives to work in a family business. “Family-owned companies give you a level of collegiality and informality rarely found in corporate environments.” (Welch & Welch, 2006, p. 144). According to Aronoff and Ward (2000) non-family executives often expect a family business to be less bureaucratic with fewer hierarchies.

Why do we need to employ a non-family manager?

The necessity to employ a non-family executive can be caused by the state of the family or by the family business itself. An increasing number of family business owners are facing the problem of having no successor in general or no family member who is willing, qualified, or accepted (Chua et al., 2003; Ibrahim & Ellis, 2004; Schultzendorff, 1984).

The family business owner might also expect the outsider to be an interim solution e.g., to bridge two family generations together in order to perhaps prepare a member of the next generation as a potential future family manager or in order to help the business through a serious crisis. Finally, in some cases, non-family executives may be hired in order to avoid interpersonal conflicts and problems in the owning family.

They may serve as a neutral solution between conflicting family owners or family members and reduce unintentional family entrenchment (Astrachan et al., 2002).

The larger and more complex the family business, the more executives with a higher level of professionalism and external knowledge are required (Klein, 2000).

In an early approach, Schultzendorff (1984) defines a non-family executive as a person who is neither a blood relative nor related to the owning family by marriage or adoption. She/he should hold none or only a few shares. Another premise is the non-family executive’s seat on the management board. Here, the non-family executive is able to shape actions according to his/her individual intentions, motivation, skills and scope. Like family members or other stakeholders, she/he can influence the system and its subsystems.

In any case, the importance and the percentage of outsiders involved in family business management seem to be increasing. Current literature, although often not empirically proven, confirms this development (Becker et al., 2005; Chua et al., 2003; Aronoff, 1998; Dyer Jr., 1989; Hennerkes, 1998).

Key non-family executives carry on a variety of responsibilities beyond the title of CFO, president, or general manager. They tend to be the key “insider from the outside” who can mediate family generation concerns, hold family members accountable in their performance, and lead business units while balancing family dynamics that are played out at work.

It is indeed a challenge, creating an energy not found in other settings.

Why family business owners are reluctant to hire executives

“Prof, my children have been pressuring me to get senior executives but I have time and again refused to heed their advice. You know why I am scared of hiring professionals? Firstly, my children will not have anything to do anymore and they will become lazy. Secondly, senior executives are expensive plus they have no loyalty and they might even steal my money or they might just be spies sent by my competitors!”

Is this an act of definance by the founder/visionary in his mid-sixties? Is it unfounded? I don’t think so.

Is it a confession of the uncertainties when you bring in senior non-family members in the business? Yes and possibly other real fears!

This caselet is related to what I wrote in my previous column (When Generations Collide April 28, 2015). We cannot blame the baby boomer generation, a generation born from 1946 to 64. We must instead learn to respect understand and empathize with them. It will do well for the next generation leaders to reflect on the history of the business and how the founders struggled to keep the business afloat through sheer hard work.

Two years later

That exchange took place more than two years ago, after a colleague endorsed me to coach the family with their governance and succession plan. After several sessions with the family members where we balanced the concerns of the senior generation members and the need of the next generation leaders to pursue changes to keep the business relevant, the patriarch finally relented and heeded my advise to try out one HR senior executive.

Fast forward two years later…the business has senior executives in key departments covering sales, marketing, operations, logistics, accounting and business development with one of his children appointed as COO and with full oversight control over these departments. The patriarch retained senior family members to manage the finance, purchasing and audit departments and his growth has been remarkable, registering double digits.

The first HR executive was unsuccessful and stayed briefly (he was right on the loyalty part) but the succeeding hires proved to be the turning point. He has never been happier with his decision and has expressed his intention to aggressively pursue expansion in other countries.

Business first equals growth

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.

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). This holds especially true for family businesses, since they tend to have a specific and distinct business culture (Denison et al., 2004).

In many cases the managing responsibility is partly or even fully handed over to non-family executives. The process of bringing a non-family executive into a family business requires much forethought and planning. Because of this, family business owners think a lot about how to determine the “fit” of a prospective non-family executive in a values-driven family company.

Executive hiring that went sour

When I was consulting for an Asean-based company a few years ago, I was introduced to the newly hired chief finance officer (CFO) whose previous engagement was as finance director of a multinational corporation (MNC). The CFO had the credentials, having worked with the MNC for more than 12 years. He even confessed that his new engagement will likely be his last, as he was already seven years away from retirement age.

Four months into the job, he shared his dissapointment that the financial statements were deliberately not being shared to him by the patriarch. Only the sales figures were being disclosed. The following month he tendered his resignation. When the patriarch asked me what went wrong, I took that opportunity to gather the family members for a full session articulating the importance of critical areas that must be included when hiring professionals.

According to Becker (2005), professional skills such as practical and leadership experience, industry knowledge, a sure sense of money and risk, entrepreneurial engagement, correctness and transparency are important, but for family enterprises determined to engage and retain professionals, the answer lies in the eight overarching attributes highlighted below:

  1. The hiring process must not only involved the HR department but ideally the family advisor and a select group of senior generation leaders including the patriarch.
  2. Roles and expectations of the candidate and the business owner must be defined and put in writing.
  3. Define the relationship between the senior executive and the working and non-working family members.
  4. The fit between the candidate’s social skills and the family’s cultural and value system.
  5. The candidate’s sensibility to deal with family issues and his understanding and sharing of the family’s interests.

To be continued…