Monthly Archives: October 2016

Will the business end when the cousins take over? (Part 2)

FAMILY business comprises three overlapping circles. One circle is family, another circle is business and the last circle is ownership.

Depending on where you stand on those circles, the issues can be predicted. According to family business expert Ivan Lansberg, the challenge is learning to manage the diversity of people, as more and more of the territories (in the different circles) become populated with family members, cousins, in-laws, etc.

Entrepreneurs and founders in general are fundamentally skilled in running and growing the business but as Lansberg highlighted, “very few people stop to think that families are every bit as important and complicated.”

Founder/Controlling Owner: Unilateral decisions, authoritarian, quick and simple

In the startup days or the stage known as the founder/owner stage, understanding the circle where the owner is easy. One owner, or the spouses, stand in the area where all three circles overlap: they are the family, the business owner, and the management team rolled into one. The founder calls the shots and is revered by everyone in the organization. But clearly, that setup is not sustainable.

Sibling rivalry stage: Consensus decision, diversity, volatile, higher risk of conflict

As the sibling partnership joins the business, the need to create rules on practically all decisions requires consensus among siblings. This can take its toll on the founder. Working in a structure that checks and balances the founder’s authority does not come naturally to entrepreneurs. There will be many cases of conflict related to decision making and overlapping. And as the business gets passed down to another generation, the field becomes more complex.

Cousins stage: Democratic decision, dispersed ownership, rules, fairness, others lose interest

By the third generation, most businesses have evolved into “cousin consortiums” and fragmented ownership and as what Lansberg describes the third stage members.

“They’ll be into the world of coalitions, politics, branches—complex structures that allow the cousins to collaborate.”

In a cousin consortium, the depth of involvement of each of the cousins varies. There are those who would be active in the business and there are those who would be passive. The scope of ownership could also be different. Some of the cousins could be majority stockholders and some could be minority stockholders. In this case, the control over the business would not actually be equally balanced. Therefore, my most basic intervention is for active family members to formulate rules and protocols and align ownerships. Otherwise, expect cousins to draw swords on the most petty issues.

Initiate a governance structure while the parents are still around

As part of instituting changes, it can be expected that certain entitlements of cousins/shareholders, both active and non-working, will need to be clipped as part of putting in place an enforceable governance system. Depending on the degree of civility or acrimony among cousins, I have outlined below several solutions that family members can immediately put in place with or without the need for a family advisor:

a. Engage qualified non-family members. When necessary, invite non-family members/professionals/former senior executives who can serve as advisors or independent members of the board of directors. These professionals would ensure that the objectives of the enterprise would be prioritized minus the emotion and drama that would naturally come from family members. Last year, I endorsed almost a dozen W+B consultants and colleagues from the academe to act as board level advisors or formally nominated independent directors. For family business owners averse or not being use to having non-family members becoming a regular fixture in the board, I or my colleagues would usually assume the role of a family board advisor to provide advise and guidance during meetings where the items in the agenda may be sensitive.

Common examples would be compensation, disciplining a non-family member for non-performance, direction of where the company is headed, etc.

b. Communication and conflict resolution mechanism. It is very healthy to develop open lines of communication among cousins; after all they are one huge family.

However, since they would not be coming from one and the same nuclear family, it would not necessarily follow that they would have the same ideas, background, culture, practices, beliefs, education, skills, levels of understanding and experience. These are all hindrances in achieving an open communication among the cousins but could be managed if they would specifically begin the consortium out of willingness to participate, commitment and respect to each other.

To be continued.

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Will the business end when the cousins take over?

“It’s a very different proposition to have four siblings, who grew up in the same house, with a five-year age spread, to get along than 30 cousins 30 years apart, who grew up in different houses.”

THAT is a perfect description by family expert Ivan Lansberg.

Over time, I am also asked why “wealth will disappear in the third generation” and I naturally offer the same response, but add with a stern warning that without any intervention on governance and ownership alignments, this stage has a 70 percent likelihood of self-destructing due to entropy.

The SME toolkit definition

“A cousin consortium where cousins share ownership of a joint enterprise; generally third generation members of a family in business but not necessarily—they could be second generation or even a first-generation start-up, although this is less common. A cousin consortium can be formed by two cousins or more.”

The siblings Gary and Jimmy’s simmering conflict that I wrote in my last column belong to the second stage also known as the sibling generation phase. The sibling rivalry is so common in my advisory work. In fact, it is so universal and pervasive.

The Mayfull Foods shooting on the other hand, although rare, stemmed from a case of poor or the absence of ownership governance. The animosity and provocation just became fatal.

What made the fourth son shoot and murder his two older brothers after a heated discussion related to inheritance issues was the unclear succession plan of their father.

Right after the death of the patriarch, the six male siblings naturally fought for what they believed was their share of the inheritance. The resulting fracas left three siblings dead in their head office conference room. These twin cases happened in the sibling partnership stage. Expectedly, there will be more complications ahead when the enterprise reaches the cousin consortium stage.

Cousin stage: A world of coalitions, politics, and complex structures called family branches

After having the ownership placed under sibling partnership from the founding stage, the next generation comprised of the cousins would then acquire the family business’ stakes as owners and managers. These are referred to as the cousins consortium stage.

At this point, there would be several families involved (unlike the previous stages when there was only one family) which could pose a challenge in arriving at a common vision, more so in deciding on growth and strategy.

Cousin downside: Change can be disruptive

Again, Lansberg clearly explains why this stage is disruptive. He says a “discontinuous change” shifts not only the players, but the rules.

Dipping into sports analogies, he narrates, “You’re going from solo tennis to basketball, and then to the cousin generation, to a soccer club. During transition, you have a tennis superstar coaching a basketball team, and you have trouble. There’s very little in that individual’s success to influence success in the next stage.

Cousin upside: Institutionalizing governance is key

One positive factor that puts the cousin consortium at an advantage is that the cousins would have better outlook on familial and business disputes. In the past, they have witnessed how their parents and/or grandparents fought over differing ideas and have felt the unsettling negative impact of unwise decisions. There could be a growing hope among the cousins to learn from the mistakes made during the founding and sibling partnership stages of the family business and make better choices.

Fortunately, family businesses that are able to stand for many long years — from one generation to another — experience difficulties in many areas. However, these family businesses have found that institutionalized governance is the key to success despite conflicting interests.

Torn between branch interest and the complexity of so many cousins

On the other hand, even if cousins already possess a better understanding of situations, it would still be hard to always share the same vision. Since, there would be a number of families concerned, attaining unity could not be secured at all times. There is a tendency for the cousins to treat situations from the point of view of their own immediate families. If this situation is unchecked and progresses to some form of personal gain for the branch, it will manifest into a conflict of interest situation.

Part 2 next week.

Can fairness be equated to equal inheritance?

I WROTE in my column last week that the likely cause of the Mayfull Foods shooting incident, where the fourth son Huang Ming-Te murdered his two older siblings, was due to the pressure felt by the killer son that he was being sidelined by his four other brothers and that his family weren’t honoring the tradition of equal inheritance.

This senseless rivalry happened after the death of their father last year leaving a $3-billion empire with no clear succession planning except the patriarch’s devotion to the Chinese culture of equal inheritance.

To quote the online magazine Family Capital, “the concept of equal inheritance in Asia most notably amongst the Chinese appears to be fraught with problems and a cause of many disagreements. It underscored “that tradition dictates that inheritance is split equally among siblings, or at least male siblings, thus equal inheritance can often lead to disputes, particularly when families don’t adhere to it.”

Fairness in a family business setting

Legal and tax advisors have observed that children tend to look at inheritances as a measure of their parents’ love for them. To put it strongly, I look at wills as the child’s final performance rating card. But leaving an equal inheritance especially shares in the family business to all children is not always the best solution — and sometimes it might not even be fair.

As founders or senior generation leaders bring their children into the family enterprise, they always have a natural formula in mind in compensating and turning over ownership shares to the next generation. By default, eight out of 10 families I have coached in Asia would always pursue the “fair and equal” model regardless of the number of children in the family.

That kind of mindset is understandable—but sadly a big mistake. In a book entitled “Managing Conflict in the Family Business” written by Kent Rhodes and David Lansky, the authors assert that “children employed by the company should be compensated according to the level of jobs they have, and how qualified they are, not simply because they are family members.”

The book also highlights another common mistake: automatically giving each child an equal stake as ownership passes to the next generation. The authors cited the iconic brand U-Haul where the founder LS Shoen, with disastrous results, equally divided the company among 12 children he had by three different wives.

In Asia, I have experienced coaching many family enterprises with siblings awarded equal shares right after the death of the patriarch. Let me cite one particular example that proved to be a challenging client. We will refer to the brothers Gary, the older sibling and Jimmy, five years younger (not their real names).

Gary as CEO and Jimmy as vice president for operations own equal shares in a company engaged in construction. Following Chinese tradition, the three other sisters own fewer shares. Both siblings sit in the executive committee and the board. In these meetings, they deliberate on growth and strategy from equally strong positions.

However, when they return to their roles as managers in which one is subordinate to the other, Jimmy as the younger brother, finds it extremely difficult to think of himself in a subservient role.

Jimmy is in a bind and is usually in a dilemma on how to manage this relationship. There is a tendency for Jimmy to be less confident than his older brother and considers himself to be at an unending disadvantage. With Jimmy’s insecurity and shaky disposition increasing by the day, Gary creates an impression that Jimmy is not competent and less capable of running the business.

Through time, Gary becomes involved in self-fulfilling prophecies. He now believes that he is the only sibling capable enough of running the business. He also thinks of his children ending up as his successors.

As he continues to doubt Jimmy’s ability, he is now casting a wide net over his younger brother effectively controlling him, clipping his powers and denying his brother any opportunity to excel and grow in the family business.

Jimmy senses that he is unreasonably being pushed in the wall and in one of their regular meetings, a petty disagreement escalates into a full blown conflict.

Jimmy, tired of being bullied musters enough guts and challenges and provokes Gary. At this juncture, the bets are off and the rivalry becomes intense. Emotions run high and decisions from all sides are no longer rational. Entropy develops, non-family managers takes sides, chaos prevails…all because the father out of his love for his two sons bequeath them with equal inheritance/shares in the organization.

Was there fairness?

 

Three brothers dead in an inheritance dispute

WHEN succession goes very wrong, it can be fatal.

The case of Mayfull Foods Corp. is a lesson to founders and family business leaders in Asia not to take succession for granted. Questions of succession should never be a side dish nor an afterthought at the moment they begin to consider retirement. The planning starts when the enterprise is established.

Mayfull Foods Corp.: Ticking time bomb detonated after patriarch’s death

Mayfull is a $3-billion business and one of Taiwan’s biggest food importers of meat products. Established in 1963 as a professional food supplier, it is heavily involved in wholesale, food service, retail, logistics and hotels and the family is behind the famed Miramar Group.

Shortly after the death of Mayfull’s founder Huang Jung-tu last year, a meeting took place between his six sons to discuss how to split an inheritance left by their father.

According to the China Post, after a heated argument and provocation, the fourth son, Huang Ming-Te, 54, allegedly shot his older brother, the second oldest son, in the head. Another older brother who was then chairman of Mayfull Foods, after rushing forward in a bid to stop Ming-Te, ended up being shot on the spot.

In the conference room, two men lay dead or dying, after being shot at close range in the head. When the police arrived, Ming-Te ended it all by putting a bullet to his head and fell from the seventh floor of building’s rooftop.

The bloody scene that happened exactly a little more than a year ago was the culmination of a bitter family dispute and a succession gone horribly wrong.

This particular conflict may be a rare occurrence, but I have written many local cases (Ilusorio, Romero, Cosmos’ Wong families among others) of families in dire straits where the acrimony started with some petty misunderstandings, unresolved issues but escalated into a full blown conflict involving sabotage, legal suits, physical injury, fight for money, succession battles and sibling rivalries — sounding more like an entire season of “Game of Thrones” but in real life.

Why is there conflict? Founders tend to choose the “do nothing” option

It all boils down to poor succession planning or plainly, the founders or senior generation leaders completely ignoring it. Again I wrote about the single biggest mistake of leaving the “elephant in the room”, thinking that the children, through time, will end up fixing the ownership issue. Basically, reiterating that the single biggest mistake was choosing the “do nothing” option.

I can almost guarantee that in the coming years, we will see a common occurrence of unnecessary and senseless conflict and rivalry among Asian-based family-owned businesses. I should know, succession conflicts are getting to be pervasive in countries where I coach families owning businesses.

Why is conflict inevitable? Equal inheritance and the baby boomer generation

In a governance article sourced from online magazine Family Capital, the concept of equal inheritance in Asia most notably amongst the Chinese appears to be fraught with problems and a real source of unnecessary flash point.

The magazine article underscores that in the Asian context, “tradition dictates that inheritance is split equally among siblings, or at least male siblings thus equal inheritance can often lead to disputes, particularly when families don’t adhere to it.”

It highlighted a somber assessment…”the dispute over Mayfull Foods might have had something to do with this finding…that the killer son, Huang Ming-te, felt the pressure of increasingly being sidelined by his other brothers. He may have felt that his family weren’t honoring the tradition of equal inheritance.

Sibling disputes over the control of companies among Chinese-businesses are relatively common. But again, with the appropriate intervention tools like governance and a set of ownership rules, the long-term growth prospects of the enterprise is preserved.

Expect an avalanche of succession issues

The number of big successions is slated to happen within the next five to 15 years in the region. That’s because many of Asia’s business dynasties were set up after World War II. According to Family Capital, the founders who are now reaching the end of their line, if caught unprepared, will have no other option but to confront these imminent succession problems.

As I have repeatedly said, start your succession early, as early as when you were starting your business and stop procrastinating. It is the thief of time.