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.)

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