Monthly Archives: October 2015

Avoiding family wars

CONFLICTS are part of a normal experience for many small startups and family-owned businesses. However, conflicts (especially the kind where every day seems like a battlefield), can actually inhibit the growth and profitability of the business—a kind of glass ceiling that keeps the family business from reaching its true potential. It causes not only disruption in the business, but hard feelings within the family. The best way to deal with potential conflict is to anticipate and avoid it rather than having to work on resolving problems after they arise.

What to do with conflict?

According to Don Schwerzler, a family business expert in Lawrenceville, Georgia, conflicts in family businesses are more difficult to resolve because there are three levels of interests at play—family issues, business issues, and ownership issues. “A dispute that occurs in one area can quickly cascade into the other areas.” And since the family is an emotional system as well, old hurts and loyalty challenges can last a long time.

On the other hand, a family business has strong points, like children learning about their company at the breakfast table and by the time they are old enough, they already know the business by heart. However, every family business is unique and complex in its own way, so boiler plate solutions don’t always work.

Here are important rules to follow to help you stave off some family business blunders.

Rule No. 1

Hiring family to work at your small business has its pros and cons. Cheap labor, unconditional loyalty and built-in familiarity are a few. Don’t put family members on the payroll if they’re not working in the company or can’t make a real contribution to the business. In a startup or family business, everybody does everything. This is where a lot of conflicts occur. Make sure that everyone has a role and responsibilities that are spelled out and are very clear, says Jane Hilburt-Davis, president of Cambridge-based Key Resources and co-author of Consulting to Family Businesses.

Establish each person’s title, job function, and compensation. And make sure that you have performance reviews for family and non-family employees alike. Don’t award a contract to a supplier who is a relative.

If you don’t have an employee handbook, this is the perfect time to get one. If not, you are asking for trouble. And there ain’t no trouble like family trouble. Policies for things like overtime, paid holidays and disciplinary guidelines must be comprehensive and you should have them in writing. Some family members might entertain feelings of entitlement – which translates into unreasonable expectations in terms of advancement, rewards and compensation.

The content of family employment policies differs from one family business to another. In developing its family employment policy, the family should focus on the rules, conditions, and processes that allow it to attract and motivate the best competence available. Once developed and agreed upon by the family, the written employment policy should be made available to all family members. This will help set the right expectations about family employment among all family members.

Rule No. 2

Special favors given to family members and friends demotivate employees and set a bad example. Don’t create two classes of employees—family vs. non-family. Be careful not to show family members special treatment, without any justifiable reason/s. Sometimes, great employees resign because they feel they can’t go up in the corporate ladder thinking that family business is open only to bloodline members.

Perhaps, your relative is a very good performer. If you reward him or her, perceived nepotism may arise. There will be people, without question, who believe the sole reason for your cousin’s success is because he or she is your family member–unfortunately, they’ll just never get past it.

Nearly anything could be construed as favoritism. Can you handle it? Is he worth it? Like any other decision in business, you need to give the prospect of bringing aboard a family member a lot of thought, and it’s imperative that you have a “back door” strategy just in case things don’t work out.

Rule No. 3

Be careful not to abuse family relationships. Meaning, don’t either reward or punish someone because they are a relative with whom you have personal history, says business and tax consultant Augustus McMillan. “If others are disciplined for bad behavior, your family member must be disciplined also.”

Of course, emotions are always involved. Think about it: How is your cousin going to feel when you, as his boss, scolds him for some mistakes committed. He’s going to take it personally because you have a personal relationship. Harboring ill feelings is not good for business.

At the same time, you need to reward and praise exceptional work. “Treat any employee, including family members or friends, special if they deserve it,” says McMillan.

To be continued.

Does a dividend policy buy peace in the family?

THE Philippines is predominantly a family business market and most businesses were set up by the baby boomer generation (born after World War II). Expectedly, a significant chunk of family enterprises are going through a generational change in the next five to 10 years.

What is alarming is that most businesses remain unstructured with no formal holding company.

Being unstructured translates to a very informal organization with the senior founder, likely to be aged between 55 and 75 years old still calling the shots purely based on gut, employing traditional methods, and likely to be very discretionary.

Additionally, you add another equation where the next generation members in their 30s and 40s, likely to have a family of their own and with family needs increasing, the issue of dividends sharing becomes a nagging concern.

According to F. Visscher, for many family firms, the lack of a dividend policy is a serious omission at best, and a recipe for a shareholder-relations disaster—or a family feud—at worst.

He opines that a dividend policy formulated without consideration of other liquidity options, and outside the context of the company’s overall capital needs, is also a serious mistake.

Family goals and business goals are different

Visscher again articlulates that the lack of liquidity is one of the most common sources of discontent voiced by the shareholders of family firms. As the family and the business grow, the disparity in the financial and economic goals of shareholders increases. The shareholders active in management want the business to grow and the stock to appreciate.

They prefer to see “excess” cash reinvested in the business, rather than frittered away on dividends.

But the inactive shareholders tend to see their equity as an investment on which they are entitled to a return comparable with other investments. Oftentimes, they view the business as more of a cash cow than a long-term family enterprise, especially if they do not have other sources of income.

For starters, dividend policies should always form part of the shareholders’ agreement.

What is a good formula for crafting a dividend policy?

Just like my colleagues coaching family businesses in the ASEAN region, I am always confronted with the same question.

Many family businesses always assume that there is a “rule of thumb” for setting dividends. For all practical purposes, crafting a dividend policy is not easy. I have had coaching work in ASEAN where family leaders have a policy of not paying dividends. For some, they distribute all available cash.

So what then is a good formula? Fundamentally, the focus should be on what’s right for your family business and what can the business afford? How much do we need to reinvest back into the business?

A most common example is to budget a set percentage of profit after tax. The usual practice is a progression of increases starting with five percent, seven percent then 10 percent, but again the rate will depend on the financial health of the company.

I normally recommend that dividends usually start with a low rate. Just the same, I have listed the following “best practices” guidelines in setting up a dividend policy:

  • A clearly articulated dividend policy is needed to establish expectations among shareholders/family members.
  • Shareholders must be made aware as to when and under what circumstances the company will pay dividends.
  • Shareholders must be made aware as to how much they can receive. I coached one family where dividend amounts have been pre-agreed in the beginning of the year and released in December.
  • While a dividend policy might represent a compromise of interests, it is important that the policy is evaluated every year.

Who sets company dividend policy?

When should dividends be paid? To whom? How frequently?

How large should the dividend be?

How flexible should the policy be?

Crafting dividend policies early can avoid conflict

ONE of the most important aspects of any business continuity planning is to have pre-agreed rules on to how to deal with predictable issues, particularly control and ownership of the business, before they come up. In many family firms, the lack of a dividend policy is a serious omission at best, and a recipe for shareholder relations disaster.

Conflict in a family business stems from how best to recognize and reward family members for their efforts. By the second or third generation, not every family member will work in the family business. Some have higher financial needs than others. For some, their personal lives are too dependent on some form of family business rewards.

In a Business Spectator article written by Dominic Pelligana, he resonates, “All too often families seek to aggregate remuneration and keep it equal, particularly in the second generation. The next generation wants certainty of amount and level of financial independence. The senior generation does not want to create expectations or create incentives to the next generation’s ‘entitled lifestyle’.”

A suggested solution is to have a form of pre-determined compensation model. Others refer to the model as a pre-agreed dividend policy.

Paying dividends will discourage family members from trying to join the family business for the wrong reasons. Policies should define criteria for dividend distributions, such as linking them to profitability levels, to keep potential competition among family factions from harming the business.

Rather than being a source of conflict, a reasonable dividend policy can reinforce a family’s values and goals for the business.

Pelligana further opines, “The reality is that individuals are equal as family members but may not be equal in terms of position in the company. So in order to promote transparency and fair process, best practice suggests that we separate these roles, as well as the remuneration.”

All too often, senior generation leaders mix and match payouts and, in the process, confuse family members.

The article further cites clear examples on classifying the different forms of remuneration. Below is a handy reference guide for family business leaders:

Managers – market value remuneration and, where appropriate, bonuses for exceeding goals

Directors – a set amount per meeting and effort

Shareholders – an annual dividend based on ownership interests

By doing it this way, family members are clear on what they are being remunerated for.

So what is a dividend policy?

At its simplest, a dividend reflects the portion of earnings that is not reinvested in a business in a given year, but paid out to owners in the form of current returns. It is the decision to pay out earnings versus retaining and reinvesting them. It includes the following elements:

1. Form of Payout? High or low?

2. Stable or irregular dividends?

3. How frequent?

4. Do we announce the policy?

Setting dividend policy in the family business

Family business practices for dividends or distributions range broadly. In my coaching work in the ASEAN region, I have encountered many family businesses that simply do not have policies for dividend payments. Others distribute all available cash. And for some, they have a pre-determined value at the onset making releases predictable so family members can forecast their family cash flow for the year. There is really no “rule of thumb” to speak of. Ultimately, it all boils down to the financial health of the business.

So what’s a desirable dividend sharing?

What’s right for your family business depends on many factors.

Securing cash and extracting it out of the business in a tax-efficient manner is a function of your accountant and finance people managing the cash flow affairs of the business. But first, cash must be available for distribution. To set a dividend policy, there must be a relatively consistent, level of cash flow.

Once the availability of cash is determined, the question of what to do with that cash arises. Should the money be reinvested in the business? Should it be allocated to make family members/shareholders happy. Is it the CEO/family members’ carrot to shareholders so he/she can stay in the job as head of the family business?

So what is really the formula for dividend payout? During family business conferences where I am invited to share my insights about dividend policies, I am always incessantly bombarded with questions after questions asking me or pleading for a “perfect” dividend model.

Part 2 will cover the best practices in creating a dividend policy.

The enduring Esther Vibal: the country’s publishing queen

ESTHER Asuncion Vibal is a writer, publisher, businesswoman, socio-civic worker, and philanthropist. Founder and chairperson of the Vibal Group of Companies, she is known internationally as the first Asian and Filipino president of International Inner Wheel, a socio-civic organization formed by wives and daughters of Rotary Club International members.

She is also the first ever Go Negosyo-Philippine Center “Inspiring Women of the Year” awardee in recognition of her excellence in her field, and for embodying admirable traits, such as concern for women’s causes, care for the community, and integrity. The Vibal name is a leader in the book publishing industry in the country.

Vibal Publishing House Inc. began with very little capital but with great determination, foresight and hard work. Esther was a writer for the women’s section at the newly-organized “Manila Times”, where her husband, the late Hilarion P. Vibal, was business editor. In 1953, Hilarion decided to set up his own company, which published specialized trade journals. But like many other entrepreneurs, Mrs. Vibal and the company faced countless challenges and trials which tested their entrepreneurial characteristics. One of the first few challenges they faced was the need for financing, which several start-up companies usually experience.

Managerial competence and uncompromising quality

When Hilarion passed away, Esther headed the company with an aggressive and results-oriented management style. She hired highly trained education specialists and writers, propelling Vibal Publishing House, Inc., into a leading developer and publisher of textbooks and instructional materials for elementary and high school students.

The company soon grew into a multi-million peso corporation with sales offices in various regions of the country. Today, with some 400 employees and state-of-the-art printing facilities, Vibal Publishing continues to serve the needs of thousands of private schools.

According to an Inquirer interview a couple of years ago, in the unforgiving world of business, where enterprises consider themselves lucky to last beyond two years, Vibal Publishing Inc. was able to outlast the competition and become one of the country’s largest publishers of textbooks and educational materials by never compromising on quality. According to Esther, quality is the single biggest determinant of success in the publishing sector, since the company’s products are used in the shaping of students’ minds. Her keen adherence to quality and passion for excellence, have led the Vibal Group to become an institution in the education and publishing fields.

The importance of innovation

She says that she and her husband entered the publishing sector, specializing in textbooks, as they believed that the demand for educational materials would never wane.

“You have to be daring in business and innovative. An entrepreneur cannot afford to stay where he or she is. Failure to adopt means failure in the business, especially in the publishing field, where there is always something new to be learned”, explains Vibal.

Recently, Vibal Foundation, in partnership with De La Salle University, published the first set of e-books in the Philippines. Launched in September 2006, Filipiniana.net is the largest, most advanced digital library and online research portal, offering free, 24/7 access to rare, unpublished and out-of-print books, documents, and other materials on the Philippines categorized under history, culture, geography, government, society, economy, religion, and science.

Shift to digital and online

The emergence of digital technology was a change welcomed by the Vibal Group. Instead of drifting along the current, they embraced the challenge of going against it by becoming pioneers in introducing the first e-reader developed by Filipino software engineers to launching an e-commerce bookstore called Vibe Bookstore. Today, the Vibal Group has transitioned from a strictly publishing business into a complete end-to-end technology solutions provider for education, enterprise, and government.

Social responsibility

Cognizant of the complex needs of the Filipino in the areas of education as well as historical and cultural preservation, the company set forth to establish Vibal Foundation to undertake various programs and projects using new technologies to reach a bigger and more diverse audience.

Through the years, Esther has remained at the forefront of women’s issues through her involvement in the Philippine Center for Entrepreneurship and the Philippine Commission on Women. She was also the founder of the Philippine Women’s Studies Project and member of the board of trustees of UP Center for Women’s Studies Foundation, Inc.

Enterprise Asia – the world-class award-giving body honoring business leaders who have shown outstanding performance in developing successful businesses within the region – recognized Esther Vibal as one of the country’s Outstanding Entrepreneurs at the Asia Pacific Entrepreneurship Awards (APEA).

Her being an enduring model of tenacity, perseverance, and innovation in the educational print and publishing industry deemed her worthy of this global award.