Monthly Archives: September 2016

Shocking succession decline in Asia (part 2)

THE      subject of family-owned business is important globally, and more particularly in Asia where it is further exacerbated by the fact that many of these enterprises are first or second generation family-owned companies.

In my coaching work all over Southeast Asia, topics like succession planning are still pretty new and, in most cases, have not yet received significant attention. They are aware of the importance that a seamless succession planning can do to the organization but see no urgent need to initiate the process. It doesn’t help that the first generation are highly entrepreneurial and often tend to “forget” about succession planning until the last moment. This makes the task even harder.

Professor Joseph P.H. Fan emphasized in his book “Critical Generations – Out of the Succession Dilemma of Chinese Family Businesses” that the cause of the shocking succession decline in Asia is based on two compelling reasons. First, intangible assets such as values, skills and networks, although commonly found among the first generation entrepreneurs, are difficult to pass on to the next generation. Second, Chinese families also face various family, industrial, and institutional obstacles such as family brain drain, regulatory changes, and political uncertainty, which can devastate the families and their businesses.

To overcome these challenges, Fan has identified three critical tasks that every family enterprise must embrace. These are family governance, ownership design, and corporate governance. These effective tools should be consistent with Chinese cultural values. For the benefit of my regular readers, I have written more than a dozen articles related to these three tools. Perhaps it is important to urgently reflect on these governance tools, especially that succession is inevitable.

Procrastinating is fatal and can lead to devastating consequences.

Western influence may compromise the family business

Direct transplant of Western solutions are usually not applicable. In addition, Chinese business founders often prefer to “lock-up” the wealth and ownership of the business in some way. Family members however, expect to get a “fair” share of their inheritance and after the founding generation passes away, family fights and court action inevitably follow.

Again, my articles about the local Cosmos family and HK’s iconic Yung Kee Restaurant are two cases of a failed succession. For the Yung Kee group, the acrimonious parting happened right after the death of the patriarch, erupting in bitterness, litigation and the eventual liquidation of the business. On the other hand, for the Wong Family of the Cosmos Beverage fame, the business ended up being sold to the RFM group triggered by the demise of its patriarch, Henry Wong.

Younger members will never replicate the work ethic of the older generation

Another important observation according to Prof. Fan is that successors of family business, even if they share values and passion of their parent founders, may not be seasoned business professionals. It is therefore important to build a strong management team and put into place an effective model of corporate governance which can effectively monitor leadership and results. They must also implement more transparent accounting practices and greater checks and balances.

Chinese family founders are using a range of different methods to solve their succession problems and often these are ad hoc resulting in varying degrees of success. Ad hoc can mean employing crude means like informal delegation, allowing a bit of empowerment, rotating function, etc. But because of the higher incidence of family conflict, many Chinese business founders are now becoming more proactive on this matter and are joining classes and seeking knowledge to resolve the succession issue.

Fading traditional values

Another culprit in internal family disputes is the fading of traditional Chinese culture and values within family businesses. “The Chinese practice of bequeathing all the family wealth to the eldest son is diminishing. This tradition, although perceived by some as ‘unfair,” has helped preserve family wealth and preempt conflict. However, the new generation of Chinese family members who have been influenced by Western culture and education are adopting different family values such as equality and democracy. Succession planning says Prof. Fan is therefore, “less straightforward and more complex with greater potential for family disputes.”

The only solution to these pervasive problem is for families (and not just confined to the Chinese) to install and enforce a system of governance, internalizing shared values, consolidating family interests and putting in place a mechanism to manage conflict. Succession planning in the Asian context is really a precarious event.

Chinese values shunned by next generation leaders?

I AM back in the US for talks and family coaching sessions after only a month in Asia. Counting the many exchanges with colleagues at the University of San Francisco (USF), I finally delivered a lecture last Thursday related to Asian business strategy and growth as well as the impact of trading blocs like ASEAN and APEC.

Many thanks to those who attended my lecture most notably the department chairs, faculty members and the multi-racial business students comprising several classes belonging to USF’s School of Management.

Ateneo and USF are Jesuit Catholic universities.

USF is a top tier Jesuit Catholic university and the school’s main campus is located on a 22-hectare setting between the Golden Gate Bridge and Golden Gate Park. The hilly campus has a breathtaking view of downtown San Francisco. Belonging to the same order like Ateneo de Manila University, it’s Jesuit Catholic identity is rooted in the vision and work of St. Ignatius of Loyola, the founder of the Jesuit order.

Prof. Danny, a colleague at the Ateneo Graduate School of Business and a senior family business advisor for Chinese families at W+B Strategic Advisory Group is an MBA alumnus of USF.

Asian family business

I immensely enjoyed the interaction with students and I counted more than half of the participants of Asian origin. Most of the questions were trained at their desire to know more about the dramatic changes in Asia and validates their beliefs that there is indeed a plethora of business opportunities worth growing outside the US.

My lecture was an obvious eye opener and talks are under way to organize an even bigger event. If this major activity materializes, it will be a collaboration with the Chinese Business Studies Initiative of the University. That is another article in itself but briefly, the USF China Business Studies Initiative provides a platform for collaboration with the influential Chinese business community and bridges Chinese business leaders, public policy makers and academics. It will be an honor to be part of that initiative in the near future.

Why? I get to understand in a much deeper perspective why the present crop of Chinese leaders are deliberately asserting and re-introducing history and confucian values to overseas based Chinese. That concerted effort supported with funds from prominent Chinese businesses has gained considerable influence in practically all areas…business, academe and the political spectrum of a given community. Depending on how you look at it, my firsthand knowledge mentoring family businesses is a good starting point…I have noticed next generation Chinese family members’ waning interest in embracing Chinese values and practices.

Chinese influence has waned in family enterprises

For thousands of years Chinese rulers have wanted to build dynasties. And in Asia, family businesses remain a tradition. But something new is happening in Chinese family firms.

As the younger generation of Chinese business owners have been increasingly exposed to Western values, the gap between them and the older generation has become a source of conflict in the succession planning of family businesses.

Incidents of family court business disputes are increasing at an alarming rate, with poor succession planning as a root cause of the problem. The impact of poorly managed succession and family infighting can be significant, both for the family business and investors.

Some think the best path to future success is to ditch leadership by family members – and instead bring in the professionals.

But is this the right way forward? What lessons can we learn from the family approach to business?

Professor Joseph P.H. Fan, researcher and educator of family business governance at The Chinese University of Hong Kong wrote in his book “Critical Generations – Out of the Succession Dilemma of Chinese Family Businesses” that the market value of 250 listed family firms in Hong Kong, Taiwan and Singapore declined by almost 60 percent on average starting from five years before to the year the family patriarch handed over the business to his successor.

In other words, if an investor bought shares valued at $100 five years before the succession, the value of their shares would be reduced to an average of $40 three years after the succession. Hong Kong companies dropped the most, losing some 80 percent on average, with Taiwan and Singapore family-owned companies falling about 40 percent and 20 percent, respectively. Hence, if greater China entrepreneurs take Professor Fan’s advice, there should be a lot more public companies. He wrote that a stock market listing is a good way to distribute ownership to family members.

Chinese values are difficult to pass on

According to Prof. Fan, the reason behind the shocking succession decline is two-fold. First, intangible assets such as values, skills and networks, although commonly found among the first generation entrepreneurs, are difficult to be passed on to the next generation. Second, Chinese families also face various family, industrial, and institutional obstacles such as family brain drain, regulatory changes, and political uncertainty, which can destroy or ruin the families and their businesses.

To be continued.

A tool to manage family conflict

MY talk in Singapore last week is one for the books.

Seven out of 10 questions that were asked by family members during the forum focused on why conflict persisted even after they drafted and signed a family charter (constitution). In the hundreds of talks where I am invited to speak every year, I have never experienced being bombarded with almost similar questions.

Why are relationships among family members still fragile or uncertain even after a family constitution has been signed?

To finally put to rest this dilemma, I ended up writing an article on my flight back to Manila. The gist of the article addresses the core reason why conflicts persist.

Family business is always about emotions

A family business is a business of relationships and relationships are at the heart of the family business. The potential for conflict is typically due to a clash between business and emotional concerns. How conflict is managed is a determinant of the degree to which a family and its business remains healthy and strong. Failure to manage conflict leads to the splintering of family business firms.

However, conflict can be seen as a challenge — or even as a positive driver for change. For example, a disagreement between family members on the strategic direction of the business may result in a much-needed rethinking of the business plan and a new agreed vision for the business.

Post-constitution goal: Activating the family council

One of the most effective tools in managing family conflicts is the organization of a family council. Its primary purpose is to facilitate free and open communication between family members in a formal and organized manner to minimize internal or interfamily conflict and hostility. It can also be a forum for discussing issues of continuity and succession. The key to the success of the family council are actual family business meetings, which falls under its main activity. A family meeting serves to resolve family business issues and help maintain social relationships among its members.

Families may encounter initial difficulty in engaging in open and candid discussion on sensitive subjects. Address relatively non-controversial subjects first to pave the way for talks on more difficult issues. It may be advisable to tap the services of a professional as facilitator.

The family council and the constitution

If a family council is activated, it is also mandatory to prepare a written and comprehensive family constitution, which is a critical requirement for it to succeed. Basically, the family constitution defines the family’s vision of the future and its core values and beliefs. It likewise spells out the purpose and responsibilities of the family council, the family assembly and the board of directors.

The family assembly and the family council can co-exist. Since only a select group of family members get to participate in the council to discuss more relevant business-related issues, it might be necessary to establish the assembly to provide a venue for other family members not included in the council, to thresh out conflicts and air their opinions.

There are various components of a family constitution such as a code of behavior and policies governing family members working in the company. Some components worth mentioning here are dismissal and retirement policies. There can be a rule such as “All family members should automatically retire at age 60 and can serve on the board of directors only until the age of 70.”

Changing of the guard must be a gradual and graceful exit

In my experience coaching family enterprises in Asia, in order for me to motivate the family member, especially the founder who still clings to his position even past retirement age, I would normally specify certain incentives and benefits for the retiring members. For the founder, he can continue to have an honorary title such as chairman of the board or something that would make him feel he is useful to the business, knowing that his expertise and experience are duly acknowledged and respected by all concerned.

I also request next generation leaders to prepare and present a business or strategic plan on how to attain positive income projections in the next five years to make him feel secured in the thought that the company’s profitability continues even after his retirement. In short, make the transition gradual and done with grace and style. The candidate for succession should be endorsed by the family council based on meeting certain meritocracy criteria and strong leadership.

Suspending or firing a family member

Dismissals are sensitive matters that should be addressed directly. One policy may state “The authority to fire a family member rests solely with his or her direct superior. Prior to dismissal, the general manager should inform the family council, so that the ramifications of the dismissal can be anticipated and properly managed.”

Establish a fair process to build safety and predictability. Put stock redemption policies, job descriptions, performance appraisal systems, non-competition agreements, etc. The constitution should spell out the specific process by which the successor is to be chosen.

Perhaps, putting up the above organizational tools will prove difficult for most Filipino and Chinese family businesses given Asians’ non-confrontational attitude. But if they are to achieve economic takeoff and maintain stability, the effort must be undertaken, otherwise the family constitution is just a piece of paper.

With a clear strategy, growth is assured

SINGAPORE-I am back in Singapore to continue facilitating a strategic planning session for a family-owned enterprise with 7,000 employees. It is managed by second generation family members and engaged in several businesses (agriculture, real estate, investments and food). Just like any startup business with limited capital, the business that was started 40 years ago initially ventured into the trading of commodities like rice, sugar and corn.

Throughout its 40 years of existence, the patriarch has expressed his desire to retire. When he engaged my services as family business coach, he intimated two things as a pre-condition before he steps down–he wants to know where the business is heading (vision) and whether his children are capable of assuming a bigger role in managing the business (governance). I am on my third year as board advisor and this year’s thrust is to expand to Vietnam.

Before I was tapped by W+B to advise the enterprise, the patriarch admitted that these two questions keep him awake on some nights. Now he looks forward to a gameplan covering an expansion mode in ASEAN that he never thought was possible. After three years, his function is purely under an oversight mode now minus the day to day involvement.

Family constitution is a game changer

After helping the family craft a family charter (Constitution) which took a little more than a year to complete, the family and business relationships have been harmonized. Of course, there are occasional bumps on the compliance side but the governance process put in place plus the defined roles of the family members has dramatically eased the tension experienced prior to the constitution.

What has made the family members more focused now is due to the activation of the constitution into several councils (family and business councils), where I periodically attend and observe how the next generation family members behave during meetings and how they adhere to the governance policies enshrined in the agreement.

For now everybody’s gearing up to take the business to the next stage: ASEAN growth.

Your growth strategy must be competitive and relevant

A personal favorite that I use in most of my family strategic sessions is Harvard Prof. Michael Porter’s three “generic competitive strategies”. These are cost leadership, differentiation and focus.

Cost leadership strategy-a strategy of achieving leadership in an industry or line of business by offering products or services at a lower cost than your competitors.

Porter’s Cost leadership strategy requires a focus on efficiency, tight cost and overhead internal controls, and relentless cost minimization programs.

Differentiation strategy-a strategy of achieving leadership by creating a product/service that is perceived throughout the industry as unique. A differentiation strategy may take the form of design, brand image, technology, features, service, or other dimensions. Ideally, the company will differentiate itself along multiple dimensions. A focus on quality could be a key differentiator.

Focus strategy-a strategy of achieving leadership within a particular target market by serving that market more effectively or efficiently than competitors. This may enable the focused strategy firm to have cost leadership or differentiation within a tightly focused target market, or both.

What is your competitive and compelling strategy?

Your business growth requires a clear strategy. Your strategy could be based on cost leadership, differentiation or focus. So in my strategic growth sessions (which lasts two to three days) with family members and executives, I usually challenge them to get some pre work done and create a strategy go-to team to formulate and come up with a clear competitive strategy with a vision and an action plan that will cover the whole of 2017.

Family business leaders and professionals must not delay the strategic planning exercise. As what I highlighted in my previous article, everything you do now is meant for the future of your family business.