Monthly Archives: May 2016

When succession can go wrong: Learning from failed family enterprises (part 2)

IN A family business succession article entitled “The Case of Yung Kee” written by Prof. Fu-Lai Tony Yu of HKSY University, one of the major causes of the Yung Kee family conflict happened in the fiscal year of 2009 when the restaurant earned HK$51.1 million in net profit.

Next generation’s sense of entitlement

The continuing schism among the two brothers about the management of the company reared its ugly head with the appointment of the younger Kam brother’s son Kam Lin-wang as a director, drawing a salary of HK$45,000 a month for only a few hours of work.

It was also stated that Kevin Kam Shung-hin, the first son of Kinsen, was pre-arranged to work in Yung Kee after finishing education in Canada in 1996. Despite being lazy and lacking in motivation to run Yung Kee, Kevin was promoted as assistant manager. Meanwhile, Ronald appointed his children, Carrel and Yvonne, as the director and alternate director (and chief financial officer), respectively.

They were also assigned “right at the top and took over” Yung Kee without any prior experience in the culinary industry.

Subsequently, Ronald was successful in taking majority control in the board of directors. He also paid “excessive” wages to his family members. It was reported that the two sons of Kinsen were paid only a monthly wage of HK$17,500 per month while the two children of Ronald received a salary of HK$45,000 per month.

These actions initiated by the next generation family members are very common and will inevitably result in enmity and conflict. We refer to this behavior as a form of entitlement that if ignored or tolerated will escalate into conflict that can threaten the stability of the enterprise.

Establish a family council

In my last column, I ended with the letter D, by way of setting up a family council as one of the governance units in the family business.

With the Yung Kee conflict, it is now clear that family business owners, especially the senior generation leaders, must be put to task in crafting very clear agreements that can be molded into a detailed family constitution.

In a constitution, the family articulates a collective vision for the business, define its core values and put into writing the policies and guidelines that will maintain a certain level of family discipline. In a Harvard Business Article entitled “Three Components of Family Governance”, it enumerated several governance policies including the setting up of a family council tasked to formulate the following guidelines:

a. Employment standards and compensation for the next generation
b. Career development policies for family employees
c. Succession process, including retirement ages
d. Ownership, including buy-sell agreements
e. Dividends

E. Have a family advisory board. It is a small group of people who meet periodically during the course of a year to offer advice to a company – some sort of an organized group of consultants who do not have any immediate or direct involvement in running the family business. Some of their functions are to provide assistance in assuring the continued success of company operations, to aid in the selection and development of the next generation of owners and leaders and to counsel regarding succession and retirement plans.

Each member of the board should be intimately familiar with the business and they are supposed to give advice within the context of the business plan. Minutes of the board meetings should be recorded and filed for future reference.

F. Have a family shareholders’ agreement. Most Asian family businesses do not have a family shareholders agreement or other form of “exit plan” in place. This might be one example of the impact of a culture where generation of wealth is more important than than the preservation itself. An Asian family that can talk about the need to put in place an exit plan today to provide for the future is going to be much better off than one without such a plan.

The late Kinsen’s family, who applied for the court liquidation order, demanded HK$1.3 billion or US$168 million, for their 45 percent stake. But Ronald, who currently runs Yung Kee, was only willing to pay HK$1.1 billion in cash and almost HK$100 million worth of assets. This problem could have been avoided had there been a shareholders agreement beforehand.

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When succession can go wrong: doing it right this time

LEADING a family business can be a complex affair. “Family” and “business” are intertwined into a mix of business challenges, family values and generational differences – meaning that the issues faced by a family business are often more diverse and complicated than those faced by other companies.

The hidden dragons that devour the best-laid plans of business succession are the relational issues (both past and present) that color individuals’ perceptions, feelings and decision-making.

In family-owned businesses, it is important to pay attention to the informal nature and complexities of family issues that are intertwined with the business. The founder, their spouse, their children, and grandchildren will continue to be relatives after the transfer of the business. Add the strong emotional experiences family members have shared (both positive and negative), with the usual presence of grandchildren, and it quickly becomes apparent that in most families the relational issues outweigh financial or business factors.

Succession can make or break a family business

Succession in family business is perhaps the most critical challenge among the many unique challenges of family businesses. Many marriages end in separation and divorce, and many divorced adults have children from their first marriage. Many of these parents will marry again, perhaps adding new children to the marriage, creating a blended family. A blended family can include half-siblings, step-siblings and children from the current marriage.

I will lay down some strategies on how to prepare for a successful generational transition in the family business.

In my first book, “Kite Runner Columns” (under “Why Most Family-Owned Businesses Fail and What To Do About It”, pages 39-42), I mentioned that family businesses have both strengths and weaknesses. Some of the weaknesses are: unwillingness to respond to change, conflict between growth and ownership, and failure to develop a succession plan.

On page 48 of said book, it says: “The next-generation family-business leadership rests with a team. Given the characteristic family desire for equal treatment of children, perhaps it is not surprising that team management receives a friendly reception in family business. What’s new is the notion that installing a successor team can be an appropriate approach rather than an expedient way of avoiding conflict.”

Strategies and steps to a successful handover

Below are some strategies on how to prepare for a successful generational transition:

Engage the family in discussions of the future. The first thing is for the family to clarify with its members the extent to which being actively involved with the business (as an owner or manager) is consistent with their personal dreams and goals. Establishing a collectively held vision for the future takes time, but helps ascertain the necessary alignment and motivation to move forward.

Establish an agreed set of family goals for the firm. There should be a clear statement of family policies regarding employment of family members, succession and ownership.

Set up clear ownership objectives. Examine the emotional factors behind ownership goals. The consequences of the dispersal of ownership should be fairly addressed and growth aspirations must be consistent with ownership objectives. Advice should be taken on the tax issues of passing ownership between generations. There should be a mechanism in place to reconcile potential differences in outlook between family shareholders who work in the business and those who do not.

Set up a family council or family assembly. Recognizing that family business is affected by family dynamics, create a platform – like a family assembly – where grievances can be aired and resolved. A family council or family assembly complements rather than replaces the board of directors. The family council sets policy for the family and recommends policy that concerns the family to the board, such as around family employment in the business. The board of directors sets policy for the business and may also make recommendations to the family council in matters that concern the business.

The family constitution articulates a family’s vision for itself and the business, its core values and the policies and guidelines that maintain family discipline.

Succession gone wrong: HK’s roast goose restaurant (Part 1)

A FAILURE in succession can shut down a family business almost overnight. Read on about the rise and fall of the famous Hong Kong Yung Kee Restaurant.

In Hong Kong, family business disputes in court rapidly increased in recent years because of poor succession planning by the founders. According to Prof. Joseph Fan of CUHK, nearly a third of the members of the Forbes Hong Kong Rich List are 70 years old or beyond, and the succession of new leaders has to be settled sooner than later.

As the Chinese founder gets old, he or she has to pass on the business to the heirs. And yet, many Chinese founders ended up following their family tradition as they do not want to see their own business empire falling apart as a result of partition. It is quite common that Chinese founders would want their offspring to stay together and lead the businesses they have founded.

However, this is often “wishful thinking as next generation family members often want to sell the business and move on” (Fan 2012a). Some Chinese founders in the olden days even passed away without making a will. Of course, this leads to court feuds among family members and the infighting will be even more complicated and severe if the founder has several wives or concubines, which was quite common in old Hong Kong.

One classic example that I had the opportunity to research is that of Yung Kee Restaurant, a Chinese restaurant located on Wellington St. in Central Island, Hong Kong, famous for its roast goose, not only among locals but foreign tourists as well, who take boxes of goose on their flights home to share with family and friends, giving rise to the nickname “Flying Roast Goose”. Founded in 1942 by former street food vendor Kam Shui Fai, the Yung Kee Restaurant is acknowledged as Hong Kong’s roast goose institution.

It is said that Yung Kee’s goose is much meatier and more succulent than a roast duck. The goose skin is crispy, almost crackling – oily, but not greasy. Thus, it was named by Fortune Magazine one of the world’s top 15 restaurants in 1968.

The Kam family feud is worth serious reflection for family businesses in Asia, especially those contemplating the transition from first to second generation. This case can be held up as an example that Asian family-owned businesses should invest time in addressing the family business succession planning with very story focus on family governance, ownership governance and corporate governance. All three are inextricably linked and short cutting the process can compromise succession planning.

Such is the case of the heirs of Hong Kong’s famous Yung Kee roast goose restaurant, which has finally been given permission to liquidate because of sibling rivalry.

Following founder Kam Shui Fai’s death in 2004, the restaurant was left in the hands of Kinsen and Ronald, his two sons. But Kinsen soon complained to the court that he was blocked from running the business despite holding 45 per cent of the shares, with Ronald holding 55 per cent. Days before the court ruling, however, he died, leading his family to accuse his younger brother Ronald of being behind his death. The incident has since caused the contentious dispute to erupt in bitterness.

At the Hong Kong’s Court of Final Appeal last December 16, Ronald Kam made a last ditch effort to Chief Justice Geoffrey Ma to rescind the winding up order for the restaurant. However, this was rejected by Chief Justice Ma, citing a lack of jurisdiction and the late stage of the case.

Reports say the late Kinsen’s family, who applied for the court liquidation order, demanded HK$1.3 billion or US$168 million for their 45 percent stake. But Ronald, who currently runs Yung Kee, was only willing to pay HK$1.1 billion in cash and almost HK$100 million worth of assets.

A liquidator will take over the holding company to find buyers for its assets, including the restaurant and the building it occupies in Hong Kong’s Central district.

Yet this does not mean that Yung Kee will shut its doors immediately. Lawyers say the liquidation process will likely take months if not years, and as a subsidiary of the holding company, the restaurant can keep running in the meantime.

However, if the restaurant and building are eventually sold off separately, the establishment might have to find a new home. One of Yung Kee’s most defining features, the only charcoal-fired oven on Hong Kong island, would finally end up closing shop. It is sad to note that the Yung Kee empire and an institution in Hong Kong will soon close it doors because of a sibling squabble in the next generation. How unfortunate, senseless and unnecessary!

In Part 2 of this column, I will lay down some strategies on how to prepare for a successful generational transition in the family business.

Family feuds and shattered families (part 2)

“It’s not the first ‘prominent/wealthy family’ inheritance battle waged, nor will it certainly be the last, but the on-going estate litigation of Potenciano ‘Nanoy’ Ilusorio’s heirs has emerged as one of the longest, nastiest, most public, no-holds-barred litigious family feuds in Philippine history or in the annals of jurisprudence.”

That is how the Ilusorio family conflict was described by the media and the Philippine courts after close to 300 civil and criminal cases were filed between two warring factions.

There are six Ilusorio children involved in the feud: sons Ramon (chair emeritus of Multinational Investment Bancorporation) and Maxie, and daughters Lin, Sylvia (president and vice president of Philcomsat, respectively), Honi and Shereen.

Ramon and Shereen were allied with mother Erlinda against the rest. Honi was allied with Ramon in the beginning, but has since shifted her allegiance to the other “team.”

Most of the rancor, however, now seems to be between Ramon on one side and three sisters—Lin, Sylvia and Honi—on the other. According to the source, Ramon and Shereen tried to keep the news of their mother’s passing from the three sisters in Manila. The sisters found out about it only four days later from a relative of Erlinda’s attending physician in New York.

It was tit for tat, says another source, also close to the family. It seems that when Potenciano died, some of the sisters also kept the news from Ramon. A memorial service for Erlinda was held at Sanctuario de San Antonio in Forbes Park, organized by the Manila faction.

Strangely enough, the funeral urn held Potenciano’s ashes, since Erlinda’s ashes were still in the keeping of Ramon and Shereen. A separate memorial, organized by Ramon, was held March 4 in Legazpi Village, Makati.

The three sisters were pointedly excluded from the service, according to the source. Security was even given detailed instructions to bar them from the premises.

This article is not meant to add fuel to the fire. We are simply restating the chronicle of events for a better understanding of those who are not familiar with the case and to drive home the point how important is the foresight to prepare for any such eventuality long before the heirs are confronted by the business founder’s mortality.

Agreements offer hope, clarity and sustainability

Pursuing doggedly a family agreement is critical, as it paves the way for family and business governance but it is empty if there is no owner’s agreement.

Documenting an owner’s agreement is key while the family members are still young. Often called the shareholder’s agreement, it is meant to protect the rights of owners.It specifies the legal and contractual understandings among shareholders on ownership of shares and governance issues. The agreement is important because it is the blueprint for the transfer of ownership. Without such an agreement in place, transfers can become mired in differences of opinion.

As wills and estates lawyers authors Les Kotzer, Barry Fish and Jordan Atin explain in their book, “The Family War”, how a will is worded can pit family members against each other, as well. “For many children, a parent’s will is interpreted as reflecting something deeper about their lifelong relationship. Those words in black and white are an expression of a parent’s confidence or distrust, pride or disappointment in the child. A large gift, or a smaller one, is seen as a reward or a reprimand.”

There is now a vogue among the famous, including Anita Roddick, Bill Gates and Nigella Lawson, to declare that they will not spoil their children with ludicrous fortunes but leave the money to charity. Hong Kong superstar Jacky Chan once said: “I’ve made my money myself — my son should make his own way in the world.”

Even the popular singer Sting, who recently staged a concert here, has time and again declared that he will not leave any inheritance to his six children. He was quoted as saying, “I have told my children not to expect to inherit my money (estimated to be worth more than $255 million or close to P12 billion), as I don’t believe in trust funds. I fear that my wealth will be albatrosses round there necks.”

In short, Sting was very clear–his children will have to fend for themselves and find their own way in the world as well.

Family feuds and shattered families

I HAD a wonderful time exchanging notes with the participants of my family business talk last Friday at the Holiday Inn in Makati. It was a sold out event with whole families coming in droves and occupying several tables armed with loads of questions related to governance.

To those who attended, many thanks! It is my sincere desire that the key learnings highlighted in the talk can translate into actual application and pocket wins leading to harmony and growth in your respective family businesses.

Family feuds in the Philippines, and elsewhere in the world, have always been about money. Lots of money. However, although estate fights are commonly perceived to be just about money, there is almost always more to a family war than just the money. Many estate disputes are sewn by the seeds of jealousy, greed, thirst for control, bitterness, hatred, and hurt feelings resulting from real or perceived preferential treatment by a parent.

The infighting becomes more intense if the patriarch or matriarch had another family on the side or children from previous marital relationships. A significant number of inheritance disputes also involve testators and beneficiaries who come from dysfunctional families, are mentally ill or addicted.

According to lawyer P. Mark Accettura, author of the book “Blood & Money: Why Families Fight Over Inheritance and What To Do About It,” the combatants can always trace their problems back several years, if not all the way back to childhood. It is clear that inheritance conflict doesn’t come out of nowhere; it is a continuation of long-term relationship problems that resurface upon the illness or death of a loved one. And they aren’t just about money or greed; they are about much more. But what is it that so often drives people to wage war against their own flesh and blood over a loved one’s estate?

There are five basic reasons families fight in matters of inheritance. Author Mark Accettura accurately points to the following:

First, humans are genetically predisposed to competition and conflict; our psychological sense of self is intertwined with the approval that an inheritance represents, especially when the decedent is a parent; we are genetically hardwired to be on the lookout for exclusion, sometimes finding it when it doesn’t exist; families fight because the death of a loved one activates the death anxieties of those left behind; and finally, in some cases, one or more members of a family has a partial or full-blown personality disorder that causes them to distort and escalate natural family rivalries into personal and legal battles.

Accettura cites that these sources of family conflict are not mutually exclusive; in most cases, some combination of the five elements present themselves in a combustible cocktail of family rivalry and conflict. Case in point: The bitter family squabble over the estate left by lawyer and businessman Potenciano “Nanoy” Ilusorio, which included shares in Philippine Communications Satellite Corp. (Philcomsat) and the Baguio Country Club, valued at between P1 and P2 billion pesos at the time of his death in 2001.

Pitting one set of siblings against another, the Ilusorio family feud has dragged on for more than 15 years now, clogged the court system with more than 300 legal suits and counter-suits, and entertained the idly curious, as it played out in the media over the years. To quote media covering the conflict, “It’s not the first ‘prominent/wealthy family’ inheritance battle waged nor will it certainly be the last, but the ongoing estate litigation of Potenciano ‘Nanoy’ Ilusorio’s heirs has emerged as one of the longest, nastiest, most public, no-holds-barred litigious family feuds in Philippine history or in the annals of jurisprudence.”

Far from easing tensions, the death last Feb. 17, 2016 of Potenciano’s widow, Erlinda “Nena” Kalaw-Ilusorio, in New York City, seems to have raised the simmering bad blood between the rival family factions back to boiling point.

In a newspaper article that came out two months ago, the rival factions are now said to be fighting over the ashes of the dearly departed, a weird echo of the tug-of-war they played over the custody of their aged and non compos mentis father just before his death in 2001, and quite possibly, a prelude to renewed fighting on the legal front over her estate, on top of the pending tussle over other Ilusorio assets.

To be continued…