Monthly Archives: December 2016

What next after the Family Constitution? (Part 2)

“DEAR Professor Soriano,

Merry Christmas to you and your family!

I know you have a very hectic schedule and I hope you will find the time to read this email. For your reference, we signed a Family Constitution more than three years ago but sadly no one in the family took the initiative in implementing what was agreed upon.

The family consultant we engaged did not really place so much importance in the Family Council except to remind us that should there be some issues that need to be addressed, then the Family Council should be convened. We don’t even know how to convene.

At present, there is a brewing conflict among the Gen 2 siblings and I can sense that it will further escalate. We (Gen 3) are gravely concerned with this Gen 2 conflict and we want to fix this before it breaks us apart.

Unfortunately, we don’t know how to address this conflict and it is already affecting the family business. Even the employees are beginning to take sides. There were instances I wished we didn’t pursue the Family Constitution. It has become more of a liability. Do you think we can still follow the constitution? Is there still hope for our family?

Thank you and I look forward to any advice.”

Family councils

This email is just one of the many letters that I received right after I wrote about the activation of the councils. Allow me to share my thoughts and experience related to the implementation and activation of the Family Council. What are the objectives of the Family Council?

In an FBCG online article, Professor John Ward clearly articulates why the setting up of a Family Council is critical and important. He went on the further state some of the important objectives, to wit:

  • build and maintain effective personal and professional development programs for all family members in their chosen fields of endeavor and particularly for family members interested in participating in governance and management of family enterprises and family investments;
  • nominate qualified family members to be directors and hold other governance positions of the family council, the family business and family foundations; and
  • establish benchmarks and measures of accountability for performance of family businesses, investments and foundations.

Setting up the Family Council: it’s non-negotiable.

One of the most effective tools in managing family conflicts is the organization of a Family Council. I look at the setting up of a council as a very important tool to further the gains of the Family Constitution.

Its primary purpose is to facilitate free and open communication between family members in a formal manner to mitigate internal or interfamily conflict and hostility.

It can also be a forum for discussing issues of continuity and succession to include regulating their entry and disciplining family members in and outside of the business.

The key to the success of the Family Council is conducting actual family business meetings, which fall under its main activity. A family meeting serves to resolve family business issues and help maintain social relationships among its members.

Family members, especially those belonging to the second and third generations, may encounter initial difficulty in engaging in open and candid discussion on sensitive subjects. The key is to “break in” the family by initially addressing relatively non-controversial subjects first to pave the way for talks on more difficult issues. I strongly encourage the family to tap the services of a professional as facilitator.

Making the council operational

In my experience facilitating council meetings, I set the ground rules as a pre-condition to activating the Family Council. To get everyone organized, I would provide the leadership and guidance during the first few sessions so family members will get the traction they need.

After they have embraced the importance of the council meetings, the facilitator steps back to allow family members to appoint their chair who will eventually preside over the meetings. My role then shifts to pure oversight.

Perhaps, putting up the above organizational tools and the accompanying compliance will prove difficult for most Filipino and Chinese family businesses given the Asian’s non-confrontational attitude. But if they are to achieve economic growth and maintain stability, the effort must be undertaken. And it’s non-negotiable.

Advertisements

What next after the family constitution?

MUNICH, Germany — A Merry Christmas to Sun.Star Cebu readers! It is extremely freezing here and I wish I was in sun-baked Philippines. But work beckons and I am in Germany for meetings with fellow family business consultants to collaborate on complex European family enterprises.

After these series of engagements, I will finally shut down and enjoy my vacation with family and celebrate Christmas in Vienna, Austria.

Articulating this article’s title

If you are finally convinced that having a Constitution on the Top Shelf or COTS that I highlighted in my article last week is not in the best interest of the family and the business, then implementation is the only way to go.

It is either the family swims together in one direction or sinks together, carrying with it a dysfunctional enterprise and a legacy lost after being built through sheer hard work by the founding generation.

A family business is a business of relationships and relationships are at the heart of the family business. The potential for conflict in family businesses can be greater than for other businesses, typically due to a clash between business and emotional concerns.

Purpose of the family constitution

In a nutshell, a written, comprehensive and process-driven family constitution is a critical requirement for it to succeed. Doing it in haste is a recipe for failure even if family members signed it.

The agreements highlighted in the constitution seek to nurture and promote the company’s successful development and to prepare the family members for succession.

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 ownership council, the family assembly and the board of directors/business council.

More importantly, it also guarantees the enterprise a workable governance system as the family transitions from a single-owner phase to sibling ownership all the way to the cousin consortium, where the sheer number of owners and family members working in the business can be overwhelming and unwieldy.

Finally, on top of the business, it regulates family relationships by integrating what was agreed upon, and these are conflict resolution mechanisms, family business protocols, decision-making criteria, participation policy for those interested to join, corporate direction of the business and setting up rules of family members to own shares and to whom to sell shares. This legally enforceable document is also exhaustively covered in a binding shareholders’ agreement.

When all of these elements are harmonized and agreed upon in writing, the next step now becomes very crucial as the family coach seeks to provide an impartial and objective balancing act, reiterating to everyone what was agreed upon and asserting compliance in all aspects of the family agreement.

There is, however, a downside if implementation is done wrong.

All talk and no action

How conflict is managed determines the degree to which a family and its business remains healthy and strong and how it can address head-on the issues that might affect the relationships of the family members/branches.

Failure to manage conflict after the signing of the constitution leads to the splintering of the family business. One of the telltale signs is when family members talk endlessly about the issues yet fail to act on them. We call that procrastination.

Penny-wise and pound-foolish mindset

Here’s the Cambridge Dictionary definition of this phrase: to be extremely careful about small amounts of money and not careful enough about larger amounts of money. In our context, that refers to family members looks at the cost and never at the investment on family relationships, growth and legacy.

Facilitating governance is extremely challenging, especially when rules agreed upon are documented and are set in motion. Investing on an objective and experienced family business advisor to facilitate family meetings can unburden the family business and its members of the stress and senseless conflict that can escalate to irreparable damage to family relationships.

Managing the day-to-day business

Family members are so focused on wealth generation and set aside the constitution. Obviously, under stress and confronted with a heavy load every single day, which management activity loses out? Hands down, the clear priority will always be the business and never the governance part.

How unfortunate.

To be continued in Tuesday’s issue: Setting up the family council.

Constitution on top shelf

CONSTITUTION on top shelf or perhaps rephrasing it to Governance on top shelf is probably my biggest frustration in coaching family businesses!

That is the crux of this week’s article. Statistics of failed family businesses that went through a constitution building exercise and missed out on the implementation is alarmingly high.

Failure rate at 60 percent in ASEAN

Six out of ten family agreements (constitution) are most often than not relegated to the top shelf and continue to gather dust. In my last two seminars in the country on family business governance, I saw a significant number of attendees in a bind.

One family member even courageously went up to me and in a sad, booming but almost desperate tone lamented that the family members are still at odds despite formulating a family constitution (done by another consultant) five years ago.

He went on to relate that the family members were herded into a hotel, went through a two- day session with the third and final day devoted to the signing. Family members went home happy and optimistic that finally they can envision a harmonious relationship among family members with the enterprise finally moving forward sans family related hiccups.

My reply was direct. Without activation nor compliance, developing a family charter is just a paper exercise.

The emotional effort and energy that goes into the process of drafting the agreement is extraordinary…well at least if I benchmark our W+B working model. The latter goes through an eight to 12 rigorous session process before a final agreement is signed and document.

The process is equally important

After the signing of the agreement, an additional two to three sessions should be devoted to drawing a shareholders’ agreement. This is critical as this last piece of aligning ownership among family members is a legally enforceable document.

A family constitution without a shareholder’s agreement is empty!

For most families, the process represents their most significant investment of vulnerability and openness as well as discussions related to very sensitive and often times personal issues.

If nothing comes out of the family discussion, the family will be reluctant to try again.

Families can become very cynical toward future attempts to revisiting the failed family constitution.

A constitution is not a “cure all” document

A constitution is never a quick fix. It is a product of session after sessions of discovering new things and uncovering concerns that are affecting family and business relationships. It is also a living document that seeks to provide solutions to future problems. And it can only work unless the family members who signed the dotted lines proactively pursue the fourth and critical requirement–implementation!

Implementing the Family Constitution is non-negotiable. Non-compliance is a recipe for a bigger conflict especially if the head of the family is no longer around to provide the leadership and decision.

Alarming statistics

Statistics culled from the Economic Intelligent Unit showed that in the Philippines, the biggest stress (and this is very disturbing) comes from major disagreements among family members over corporate strategy. The EIU rated it at 48 percent for local family owned businesses and 52 percent for its Indonesian counterparts. This particular issue can only be resolved if the family constitution is done right and implemented correctly.

Now you know why I frequent Indonesia.

I have listed below several reasons why family agreements fail:

-Lack of senior management belief and commitment to implement and activate the governance councils

-Time/resource commitment isn’t there to plan, unrealistic expectations

-Day to day growth and pressures too dominant

-Lack of willingness of family members to be proactive and creative

-Tough choices avoided, failure to set priorities

-Reactive, low risk, rewards mentality, low reinforcement for governance thinking

-Past history and mistakes in previous planning attempts

-No desire in pursuing the implementation process itself

-Frequently changing priorities and focus; not persevering on one track; inconsistent decisions

-Low commitment to the implementation

-Governance on Top Shelf, no formal implementation

-Failure to provide the needed resources–financial and personnel

-Conflict, politics, lack of interpersonal skills amongst siblings, cousins when working together

My personal advice to business owners (Last part)

SURABAYA – As this article sees print, I will be in Indonesia’s second biggest and most populated city with a population of three million and an extended metropolitan area with more than nine million inhabitants covering several cities.

Surabaya is a port city and was once the largest city in the Dutch East Indies and virtually the center of trading in Southeast Asia, competing with the likes of Singapore and Hong Kong. It is pretty much like Cebu and Iloilo as the local economy has a thriving Chinatown district.

Together with neighboring Singapore, which is a short two-hour flight, Surabaya and Jakarta form part of my regular coaching itinerary due to my numerous engagements with some of the country’s biggest family owned conglomerates.

Compliance after implementation

Allow me to complete the last part of the time tested formula that I strongly encourage every family member to embrace:

8. Compliance on business governance. It is essential that family members define and set boundaries, including drawing clear management lines in running the business. Mixing business, family and ownership issues every day can strain relationships, transforming the same into unnecessary conflict and disagreements.

Discretion follows conflict, so the best way to understand each other is to put in writing rules for participation in the business, qualifications, duties and accountabilities of each family member.

For senior generation leaders, there is no other time than now to initiate and document protocols and define roles and responsibilities to avoid hard feelings or miscommunication.

9. Require outside work experience. Children of owners desirous to join the family business should be required to get at least three to five years’ business experience elsewhere first, preferably in a related industry.

This will give them valuable perspectives on how the business world works outside of a family setting. Here, the child appreciates the value of discipline, competition and control. It is also in the outside world where he is humbled and challenged to perform by his peers and superiors.

10. Seek outside advice. The decision-making process for growing a family business can sometimes be too closed. Fresh ideas and creative thinking can get lost in the tangled web of family relationships. By having a non-family advisor, objective solutions minus the emotions are effectively laid out. The advisor’s entry can also be a good way to give the business a reality check.

11. Develop a succession plan. A family business without a formal succession plan is asking for trouble. The plan should spell out the details of how and when the torch will be passed to the younger generation. It needs to be a financially sound plan for the business, as well as a way for retiring family members to enjoy the quality years ahead. The phrase, “There is only one boss” is so appropriate when a successor is in place. Having a single leader does tend to be less complicated from the point of view of corporate decision-making.

The country’s biggest and most diversified family owned businesses like JG Summit Group and the Filinvest Group have already anointed next generation leaders to lead their billion-dollar conglomerates. With their succession plan firmly in place, mandates are established and the next generation leaders identified early so they can continue their stewardship role to the next generational phase.

12. Empower the next generation family members. Allowing the next generation of leaders to make contributions and introduce change is a major step in the right direction. Establish guidelines for competency, leadership and accountabilities for the next in line family business leaders.

The time to start the process is now

Applying these success formulas in the course of growing the business plan is like experiencing the seamless, graceful exchange of a stick between runners in a relay race. The new runner is fresh and has maximum energy; the concluding runner is decelerating as he has already spent his energy by running at maximum speed early on. The athletes never come to a stop to exchange the baton; instead, the handoff takes place on the move, almost effortlessly.

Good succession planning does not merely involve designating a family member and training him or her for the takeover. In fact, grooming the successor is the founder’s greatest teaching and development responsibility because it involves a long-term, continuing effort to balance competing interests and pressures that are integral in a family business.