Monthly Archives: February 2017

Avoiding Cain and Abel

SOMETIME in 1987, Mr. Uy (not his real name) invested in a small piece of property and constructed a five-storey apartment building.

With rental escalation picking up every year, he ended up focusing his efforts on properties with potential recurring income.

Mr. Uy saw the potential windfall in real estate and decided to concentrate full time. With China’s transformation as the factory of the world offering low cost products, he decided it was time to divest in the furniture business. Three years later, he sold all his shares to his partners.

With sufficient capital, he then used the money to acquire more properties and in 1995, ventured into his first real estate development: a 25-storey residential development in Manila.

With a string of successes save for the 1997 Asian financial crisis, where he unloaded some of his assets to pay off some debts, Mr. Uy navigated his way to many successful projects by prudently managing his cash flow.

For someone who started as a salesman, he was able to grow his wealth with a mixed portfolio of condominiums, office buildings, and a string of neighborhood retail spaces. At age 72 (in 2012), his net worth was valued at almost P4 billion.

Then one day, he suffered a heart attack while inspecting of one of his high rise developments in Manila. That health scare triggered a lot of changes and made him realize that he had to do something to ensure the continuity of the family business.

With his deteriorating health condition, Mr. Uy, through the advice of his accountant, immediately placed all his real estate assets in a corporation and distributed the shares to his wife and four children. His aspiration is for his children to work together and maintain their future ownership in a single real estate enterprise.

Typical of a Filipino-Chinese mindset, he gave more shares to his two sons (now in their 40s), who were actively involved in the business but gave only minimal shares to his two other daughters (also in their mid and late 30s).

The traditional practice among Chinese families still holds–that daughters should have fewer shares than their male sibings, as they will be taken care of by their husbands.

The youngest of the children, Irene, single, has been with the family business for nearly four years. After working as an operations executive in a multinational corporation for five years, she was requested by her father to join the family business. This was after another sister Lucy got married and migrated to Australia.

After Mr. Uy passed away in 2014, she soon made changes in the way the business was run. Her skills and passion significantly contributed to the growth of the family enterprise. In just two years, the business process that Irene introduced generated substantial savings and goodwill for the business.

Over time, Irene’s leadership was starting to get noticed and recognized by her industry peers and even the partners of her late father were impressed with her acumen.

They also found her to be charming and a great negotiator.

On the other hand, the male siblings who had no outside work experience felt the pressure of having a skilled and savvy younger sister, thus the day-to-day management soon became a source of strained relations between the male siblings and Irene.

The usual conflict would always center on the strategic direction of the business. Irene, more frequently, would always question the wisdom of her older male siblings’ investment decisions. And in most cases, albeit after the fact, Irene would always be proven right but out-voted.

Next week: Lucy rejoins the family business.

(esoriano@wongadvisory.com)

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Prof. Soriano is an ASEAN family business advisor, book author and executive director of ASEAN-based consulting group, W+B Strategic Advisory. He is also an international business lecturer and professor at the Ateneo Graduate School of Business.

 

Lieben und arbiten

AUSTRIAN neurologist and psychoanalysis founder Sigmund Freud is famous for saying that the secret to a full life revolved in the three-word phrase “Lieben und arbiten (To love and to work).

For most people, the two most important things in their lives are their families and their work. It is easy to understand the compelling power of organizations that combine both.

This, in a nutshell, is the message of a book given to me by Andrew Hier, the CEO, senior adviser and partner at Cambridge Advisors during my visit to their Massachusetts headquarters last week to pursue collaboration between W+B and Cambridge Advisory. It was a wonderful opportunity to exchange notes related to family business dynamics in Asia.

Cambridge Advisors is the world’s foremost authority on family enterprise advisory. It was founded in 1989 by Harvard professor John Davis and has offices in Brazil, Beijing, London, Montreal and Zurich.

The book Generation to Generation: Life Cycles of the Family Business is a great source of information. Authored by colleagues from the academe John Davis, Marion Hampton, Ivan Lansberg and Keilin Gersick, it postulates that the form of family control varies across nations and cultures, but family firms hold dominant positions in all of the most developed economies.

Some common scenarios that the book highlighted reflects on the intrinsic and natural “closeness or specialness” within the family business.

From my personal experience coaching family businesses all over the world, I can enumerate more scenarios that make family businesses challenging and different from other organizations where the “closeness” can also work against the longevity of the family business.

Case of share ownership

Over time, the number of shareholders increases, share ownership becomes fragmented, which makes it harder for the family to make business decisions. As the share ownership becomes fragmented, the shareholders also start to lose emotional commitment to the family business.

Another case in point is when the ownership structure is equal or practically the same among working family members and non working shareholders.

Below are some examples or pain points where the “closeness” can work against the family business.

a. Your role as a finance or accounting manager trying to figure out a way on how to compensate siblings and cousins who rarely report for work.

b. Your role as the biggest shareholder in the firm but struggling to come to terms on how to discipline your son or daughter for spending money as if money grows on trees

c. The role of a president recommending a dividend policy that should be balanced with the need to reinvest funds for expansion. In short, making outside shareholders happy and on the other hand keeping the business afloat and out of harm’s way.

d. Your role as GM in deciding to accept or decline a sibling, cousin or a nephew who is unqualified for the position in the family business.

As the book correctly intimated, it has both positive and negative consequences.

To quote the authors, “Family businesses draw special strength due to the shared history, identity and common language of families. When key managers are relatives, their traditions, values and priorities spring from a common source. Most importantly, commitment, even to the point of self-sacrifice, can be asked for in the name of the general family welfare.”

But it is also fair to say that “closeness” is a double edged sword and can be the source of many internal conflicts.

(esoriano@wongadvisory.com)

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Prof. Soriano is an ASEAN family business advisor, book author and executive director of ASEAN-based consulting group, W+B Strategic Advisory. He is also an international business lecturer and professor at the Ateneo Graduate School of Business.

Creating a world-class SME

THE title of the article is at the very heart of my advocacy talk in Cebu this coming Saturday, Feb. 18, at Parklane International Hotel.

After a little more than a week of exchanging notes and doing collaborative work with eminent family business advisors based in the US and Canada, I feel I have much to share to my colleagues and clients in Asia.

Creating a best-in-breed family enterprise is definitely not a walk in the park. In a family wealth article penned by James Hughes, he highlights this very important conclusion:

“As families grow, the development of a family governance system becomes a critical component of the family’s plan for managing its wealth for the succeeding generations. Without effective family governance, many families are unable to preserve their wealth beyond the third generation. This unraveling of a family legacy tends to follow a familiar path: the first generation creates the wealth; the second generation preserves the wealth; and the third generation spends the wealth.”

Families grow faster than businesses

In most cases, the founders of the business keep everything to themselves and rarely share succession and ownership plans to the children until it’s a little too late in the game.

Over time, as the children join the business, get married and have families of their own, they will have varying and increasing personal and lifestyle needs. With more siblings having ownership stakes, the number of shareholders naturally increases.

At this juncture, share ownership becomes fragmented, which makes it harder for the family to make business decisions. At this time, the patriarch may have become semi-detached from the day-to-day functions of the enterprise.

Some family members may opt to suffer in silence on matters related to the “forbidden agenda” like ownership, succession, sibling rivalry or conflict of interest while others will openly show feelings of discontent.

In the end, the majority of family businesses in the region fail as a result of internal issues, rather than external or macro environmental factors.

I am sharing a list of questions that I use when I facilitate family governance sessions. Clearly, this will serve as any family leader’s wonderful guide posts for businesses transitioning to becoming a world-class SME.

Corporate and business goals: Wealth generation

1. What is the family business’ five-year goal? Do we have a compelling vision for the company?

2. What will it take to make the business reach an EBITDA of X amount from the current X amount?

3. What is our annual growth rate? What is the industry growth rate?

4. What kind of professionals/specialists do we need in driving the business forward?

5. Is the family business ready to embark on an IPO in five years?

Family and governance goals: Wealth preservation

1. How will we preserve our family wealth?

2. How will we address ownership issues in the second (or third generation)? Is there a vehicle to transfer ownership to the next generation?

3. Who are qualified to own shares in the family business? Who are not qualified?

4. If there is conflict, who will be objective enough to make the final decisions?

5. Who are qualified to join the business? What are the rules for entry?

If you have no answers to the questions raised and you are at least in your 50s, then it is time to gather family members and let everyone commit to pursuing governance. Becoming a world class SME requires painstaking, collective work. The good news is there is still time.

(esoriano@wongadvisory.com)

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Prof. Soriano is an ASEAN family business advisor, book author and executive director of ASEAN-based consulting group, W+B Strategic Advisory. He is also an international business lecturer and professor at the Ateneo Graduate School of Business.
He is slated to deliver a talk to family business owners in Cebu on Feb. 18. The series of talks are part of W+B Cebu’s advocacy campaign related to family and business governance for SME’s. Those interested to reserve a slot should call the W+B Group 09228603186 and look for Ms. Jen. Registration is a requirement.

Why do founders dislike retirement?

IN one of my meetings yesterday here in Vancouver, I heard this reaction from a founder and visionary after I posed a challenge on the urgency and need to initiate succession planning: “Professor, building a family business from practically nothing is all about hard work. My children never experienced any of the hardships I went through. And planning for the continuation of my business long after I am gone is actually many times harder and poses the greatest challenge for the next generation.”

“So put yourself in my shoes. There is no doubt that I deserve to enjoy life outside of the business. Who doesn’t want to spend time with one’s grandchildren? But under the circumstances, tell me, how can I let go?”

With that said, I am not surprised why founders refuse to give up power and control. For one, the process of handing the business over to the next generation is something that’s specific to each enterprise. And there are various elements that may work for one family business but not for another.

A family is strongest when united. Unfortunately, all too often a family can fall into infighting that can compromise family business succession.

Available estimates (Dun & Bradstreet, 1973) indicate that approximately 70 percent of all family firms are either sold or liquidated after the death or retirement of their founders (Beckhard and Dyer, 1983). The founder’s unexpected death can force a major upheaval in the pattern of authority and ownership distribution.

In this situation, conflict among the founder’s heirs often becomes so intense that they are unable to make the strategic decisions needed to ensure the future of the firm. Failure to plan for succession also threatens the family’s financial well-being by leaving many thorny estate issues unanswered; a distressed sale of the firm is often the result.

Max Weber, the great German sociologist, was among the first to identify the importance of having the founder of an organization turn over power to a successor who could solidify the administrative structures required for the continued development of the enterprise.

Weber (1946) referred to this process as the institutionalization of charisma and saw it as one of the greatest challenges of leadership.

Ambivalence: a major cause of a failed succession

The word “ambivalence,” according to Merriam Webster Dictionary, is a simultaneous and contradictory attitude or feeling toward an object, person or action.

Founders adopt different ways of coping with their ambivalence toward succession planning. One common response is to compromise opposing feelings by enacting a number of self-defeating behaviors. Let’s look at the case of a founder who chooses his oldest daughter to be his successor but undermines her authority by refusing to give her the coaching and training that she needs to perform competently in the top position (Rogolsky, 1988).

Anointing his daughter as the successor addresses the founder’s desire to “do something” about the continuity problem. Passively compromising the daughter’s development placates the founder’s need to remain in control. The two behaviors prevent any real progress toward a feasible succession plan.

(esoriano@wongadvisory.com)

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Prof. Soriano is an ASEAN family business advisor, book author and executive director of ASEAN-based consulting group, W+B Strategic Advisory. He is also an international business lecturer and professor at the Ateneo Graduate School of Business.
He is slated to deliver a talk to family business owners in Cebu on Feb. 18. The series of talks are part of W+B Cebu’s advocacy campaign related to family and business governance for SME’s. Those interested to reserve a slot should call the W+B Group 09228603186 and look for Ms. Jen. Registration is a requirement.