Monthly Archives: November 2015

When succession can go wrong (part 2)

THE two main enemies in the survival of family businesses are patriarchal control for the senior generation leaders and a sense of entitlement for the next generation family members.

Here is a common case I am always confronted with in my coaching work: “Father consciously facilitates son’s entry but subconsciously needs to be stronger than his son. Son seeks increased responsibility and authority but finds that his father refuses to cede authority, or continues to call the shots from behind.”

In part 1 of the same title that came out in my column two weeks ago, I emphasized the importance of understanding the founder’s dilemma clouded by a three-dimensional process after a successor is designated.

READ: When succession can go wrong

In a Harvard Business Review article written by Ciampa and Watkins, the authors highlighted three distinct phases:

Phase 1: The founder feels pleased with having “done his duty” by installing a replacement. But in the same light, when the successor starts shaking things up and initiates changes in the organizational ecosystem and more often than not touches or encroaches on the culture that the father/founder painstakingly built, the founder goes to a second phase.

Phase 2: He feels a growing discomfort and gradual resistance. He is also confronted with the reality of handing over important decisions to someone who can certainly run the organization well enough but who has a different style and different priorities.

As the founder struggles to retain some control, he also discovers that having a successor requires him to share the limelight in his interactions with the board or senior executives, the employees, and the business community. Additionally, the founder begins to confront several questions and the following issues makes them awake on most nights:

What to do once they retire

Leaving a position of power is like dying a little

Personal loss of identity

Fear of losing significant work activity

Jealousy, rivalry towards, or lack of confidence in the successor

For people who have devoted all their lives to the job for many years—and who delight in their identity as owner visionaries—this can be a difficult consideration. Many founders of successful companies are anointed heroes by grateful employees and as demi-gods by their respective industries. As a result, they come to believe not only that they deserve such praise but also that they are indispensable to the ongoing success of the business.

As they contemplate leaving, their heroic self concept, as the HBR article refers to it, revolts. They cannot live without the company that defines them, and they believe that the company cannot live without them.

In this context, many founders start to ponder the meaning and extent of their legacy. They ask themselves what they will be remembered for—and many realize that it might be overshadowed, or perhaps even diminished, by what the new leader is trying to do.

As co-author Ciampa and Watkins demonstrate, “the CEO/founder feels his power in eclipse, the successor’s impulse is to push for more and deeper change. The two sides enter into more open conflict, and communication between them falls off precipitously. Indeed, it is at about this time that phase three—active resistance—begins to emerge.”

What often happens next is a turning point from which there is no easy return. The CEO/founder calls for support from his troops—mostly members of his senior team. Many are willing accomplices. They are feeling overwhelmed by the successor’s changes and have strong personal ties to the CEO. For the key executives, this brewing conflict can be an opportunity to reconnect with the CEO/Founder but with personal interest as most glaringly highlighted in the following issues:

Reluctance to let go of personal relationship with the CEO/founder; and

Resistance to change – fear of losing power or even employment.

As soon as the CEO/founder shows disagreement with the successor’s style or direction, even subtly, the senior team feels free to operate around or without the designated successor—for example, going directly to the CEO/founder with ideas or plans.

Right around the time the successor should be getting ready to move up, he is facing the fact that the CEO/founder wants him to leave.

Meeting the challenge

Leadership transitions are high-stakes situations, but the fact is, most people aren’t prepared to meet them. The first step toward becoming prepared is understanding the dynamic that under-girds a changing of the guard. But such understanding is not sufficient—action is. And that action, is the successor’s responsibility.

Vietnam’s first billionaire

I AM in Ho Chi Minh (formerly Saigon) now for my usual advisory work. But this visit is unique in many ways…I get to combine three areas that are closest to my passion in helping emerging businesses grow and expand in the ASEAN region.

In a space of 3.5 days, I will squeeze these three engagements…family business and succession coaching for two families, inviting an entrepreneurial couple from Cebu to set up a manufacturing plant at the Vietnam Singapore Industrial Park and introducing my Ateneo MBA students to business groups covering different industries related to the food, retail, hotel and medical sector.

With my engagement here, I have decided to dedicate today’s article to Vietnam’s newly minted billionaire. He is no less than Pham Nhat Vuong, the owner of Vingroup and the country’s first billionaire.

Pham Nhat Vuong ranks 974th on the Forbes list, with his $1.5 billion assets based largely on the 53 percent stake he owns in Vingroup, a real estate development firm. Just like me, Pham is a certified Gen X.

Generation X is the generation born between 1964 and 1980, and connected to the pop culture of the 1980s and 1990s they grew up in. The term has been used in demography, the social sciences, and marketing.

Pham’s story has something to do with ramen noodles, a tremendously popular quick meal in many parts of the world.

Pham, whose name means “prosperity,” was born in Hanoi in 1968, the very same year of the Tet Offensive. His mother ran a sidewalk tea stand and his father worked in the North Vietnamese air defense force. Post-war Vietnam faced a very serious economic crisis. Pham’s family subsisted for a time on the meager earnings from his mother’s tea cart.

Pham studied economics at the University of Moscow in Russia. After graduating in 1993, he moved to Ukraine and founded the food company called LLC Technocom. Over time, Pham scraped together $10,000 from family and friends and opened a Vietnamese restaurant. Simultaneously, he began making and drying ramen noodles via a process he learned in Vietnam.

The Ukrainians went nuts for the noodles, as they were very poor and very hungry. Pham saw the opportunity and opted to take a risk. Instead of running a small noodle shop forever, he borrowed money at eight percent interest a month and expanded his noodle operations to include the dehydrated mixes used to season Vietnamese noodle soup. A Ramen King was born!

In 2010, Pham sold his noodle company LLC Technocom, which had revenues of $100 million, to Nestle for $150 million. While Pham was building his noodle empire in the Ukraine, he was funneling money back to projects in Vietnam, preparing to return to build an even bigger post-communist fortune. In 1999, Pham took a trip to the Vietnamese beach city of Nha Trang and developed it into the 225-room luxurious Vinpearl Resort. It became a resounding success.

The following year, he opened Vincom Center Ba Trieu, Hanoi’s first commercial tower complex. Three years later, Vinpearl got an upgrade, adding 260 additional rooms and a cable car connecting the island to the mainland.

Next, Pham developed high-end townships, including a luxury development with hundreds of villas called Vincom Village in Hanoi. Vincom went public in 2007, but Pham retained Vinpearl as a separate company for his luxury resort developments. In 2011, Pham merged the two into Vingroup.

If we were to identify certain factors that led to Phams’s business success, what are these?

  1. Market. Ukraine is the market where his ramen noodles were a hit. This country valued his instant noodle product. The young Pham knew his market well.
  2. Diversification. Pham’s products and services are varied and diversified in different countries – restaurant, noodles, real estate, resorts, hotels and malls.
  3. Professional team. His operations are based on scientific and cultural realities – a blend of western and oriental icons. He has at his disposal an elite group of disciplined technocrats.
  4. Strategy and story. He used man-made and natural resources as factors – right people and appropriate land use.
  5. Control and inspired leadership. Pham saw to it that he inspired and provided leadership.
  6. Values and culture. This Vietnamese made use of the culture of hard work and innovation as key factors to his success.
  7. Financial prudence. Wise management of finances and right marketing of corporate products could be surmised from the growth of his business over time.

In summary, Vingroup’s corporate culture of professionalism and trust is built on six core values: credibility, integrity, creativity, speed, quality and humanity.

When succession can go wrong

THE final test of greatness in a CEO is how well he chooses a successor and whether he can step aside and let his successor run the company…a powerful quote coming from management guru Prof. Peter Drucker.

There have been issues about successors fighting and bringing to court their own parents. Society has despised these successors as ungrateful persons – biting the hands of the person/s who have fed and raised them up to where they are now. While there may be some truth to this, let’s try to understand the succession dilemma.

The succession dilemma is a seemingly intractable set of circumstances that has entangled leaders for as long as there have been organizations. For the would-be leader, succession is a time of great excitement and promise, the culmination of a long and arduous climb to the top. For the incumbent leader, succession is a time to confront the passage of time, the end of a career, and even mortality itself. It is no wonder that relationships between successors and those they hope to replace are so fraught with emotion.

In a Harvard Business Review article written by Ciampa and Watkins, “the dynamics of the successor’s dilemma can begin long before he sets foot in the new office or right after he assumes office. The chief executive whom he is supposed to succeed and the board make it clear that great things are expected of the designated successor—and fast.

And so the new successor plunges in to learn about products, markets, and internal processes. In the midst of this intense learning period, the successor must try to build a relationship with the person he hopes to replace, a process that is riddled with pitfalls. Initially, he may have to avoid challenging the CEO even when he disagrees with him. That reticence is understandable, but it can plant the seeds of trouble.

Saving a successor son

Take the case of a son in his mid 30’s I was engaged to mentor and designated as successor in a large manufacturing company with an annual turnover of $200 million. He was expected to take over in five years when his father, the chairman, retires. The chairman who started the company 38 years ago, had helped shape the industry and founded the industry association. He wasn’t an arrogant person, but the chairman’s reputation for hard work plus his sartorial taste made him an intimidating figure.

The company was in good shape, but it needed to improve the efficiency of its business operations to keep costs down. The new successor quickly spotted ways to do so, but he didn’t know how to tell his father, the chairman, without sounding disrespectful. In fact, he kept his opinions to himself and publicly supported the chairman’s status quo approach to the business. Fortunately, during the course of our regular interactions I discovered the bind the successor son was in and gradually helped him resolve it. Without my monthly fly-in to listen and coach the successor son, a conflict would have escalated leading to the business being compromised or the son breaking down. Much more often, the successor’s silence can lead him to frustration and anger.

The founder’s dilemma

If the successor son is facing new and daunting challenges, so too is the founder, who typically passes through three distinct phases after a successor is designated. In the first phase, he feels pleased with having “done his duty” by installing a replacement.

But in the same light, when the successor starts shaking things up and initiates changes in the organizational ecosystem and, more often than not, touches or encroaches on the culture that the father painstakingly built, the founder enters the second phase—growing discomfort and gradual resistance. While he may be happy to have found a successor to whom he can entrust the company, he is confronted with the reality of handing over important decisions to someone who can certainly run the organization well enough but who has a different style and different priorities. The founder must face up to the fact that his successor will run the company differently—and that just feels wrong. Part 2 will follow.

Avoiding family wars (Part 2)

FAMILY businesses are complex as these go through different generational phases. As a family business transitions from single ownership to a multi-generational ownership, expect plenty of opportunities for conflict, covering a plethora of issues and between a range of family stakeholders.

I want to continue my article with the last four rules:

Rule No. 4: Communicate honestly and openly. Open communication is a concept that almost all companies claim to value, but very few truly achieve.

It’s amazing that some well-educated, innovative executives can develop brilliant plans to improve shareholder value but struggle in communicating with the very people they need to help them implement their turnaround plans.

Don’t keep it a secret or hide the fact from your staff that you have relatives or friends working for you, says McMillan; otherwise when it eventually comes out, and it surely will, you’ll appear like you were being deceitful. To foster a better climate among employees and improve continuous two-way communications, consider holding company outings for fun and camaraderie. Attend training seminars or industry workshops with family members and employees to bond with them, establish genuine communications and build teamwork.

It is highly recommended that regular sessions become part of your weekly gathering. In any book about management, it is often referred to as an informal way of resonating your plans and gaining some form of buy-in.

You may call it any name you want such as “Morning Session with the GM” or “CEO Session”, but it is important that you invite key family executives and staff to gather regularly, hear briefly from management and ask questions.

Make employees and relatives realize that opinions are heard and respected. Set a regular schedule or when your “doors are open” for consultations and honor those commitments. Make it a point to find time amidst your busy schedule to address urgent needs.

What is needed to nurture an environment of open communication?

Trust is earned and not given. All high-performing teams, whether in the sports arena or in the business world, are built on a solid foundation of trust. Trust grows over time and is based on individual members of a team making and keeping commitments.

In short, good communications mean good business. It is absolutely important that staff from the most senior on down practice behaviors that facilitate information exchange and encourage honest input from every level.

Rule No. 5: Professionalize the family business. Don’t meet personal family needs using business resources.

Avoid letting family members borrow company vehicles or allowing them to ask the company’s IT person or repairs and maintenance personnel to do home-related repairs and installation. If you can’t avoid it, create an SOP (standard operating procedure) and consolidate them in a manual handbook for family members and senior executives to follow. It’s also a bad idea to pass off personal expenses such as family vacations as business expenditures.

Rule No. 6: Establish healthy boundaries/distance between family and business. This especially applies to husband-and-wife teams. Running a business together with your spouse is a balancing act. Agree and adhere to some kind of system. For instance, some couples refuse to talk about business matters at home, on weekends, or during family vacations.

Rule No. 7: Use family councils to address family matters

A family council is composed of members who may be owners but not necessarily company employees. They meet monthly, quarterly and/or annually for the strategic planning of the business over the next year to the next 10 years.

The council does not micromanage the business but addresses family issues or concerns relative to the business. If a family member is working in the business buts needs to borrow money, the council will decide if it wants to create a fund for the purpose of granting family loans.

In a nutshell, conflicts are often costly—financially, emotionally and relationally. It’s important to remember that there are many strategies we can use in conflict situations, but each of us tends to habitually use some strategies more often than others.

To most effectively resolve a conflict, we should use the strategy that is most appropriate for that particular conflict situation but in the end, setting in motion any form of intervention related to family, business and ownership governance will minimize unnecessary conflict.

Prevention is a whole lot better than the cure!