Monthly Archives: November 2017

Founder Inaction Can Cause the Business to Fail (Last Part)

Phase 2: Restoring Communication Channels

The team focused its efforts in salvaging whatever lines of communication channels available and in doing so gradually, introduced the buy-in of the warring siblings through the different phases:

  • Founder History (How he started)
  • Founder Shared values (hard work, humility, honesty)
  • Founder Aspirations (family harmony, legacy, stewardship)
  • Founder Transition to Next Generation leaders (direction of the business)
  • Family and Business Structure (What structures must be instituted to maintain family harmony)
  • Family Transition (How will the family Prepare for the Future)

With these values resonating, we then proceeded to a plan of action geared towards a unifying and shared vision and mission statement.The direction of the business was a major strain and through the formulation of a strategic plan, we effectively diffused the tension.

Even with my years of family business coaching, this process was arguably tougher than expected as the growing pains were quite palpable.

For Gen 1 and 2 family members, the big switch from the first generation “entrepreneurial” style to a professional and consensus based model had to happen so it was necessary to institutionalize the rules without fear or favor.

Phase 3: Governance is Mandatory to Survive

After a series of sessions coupled with one on one assessments, we finally made them agree to sign family agreements outlining family member roles and responsibilities (active and non-active) in the family and business.  We then created a detailed code of conduct covering conflict of interest, entry and exit rules, and family member KPI’s.

For shareholders, we made it very clear that those elected to the board must have the competence, interest and commitment and that the conduct of the shareholders must be aligned with what the founder desired.

Phase 4: Ownership Alignments

After a series of exhaustive ownership sessions, we preempted what could have been a scandalously damaging effect to the family and the business. We finally made all shareholders sign ownership agreements.

These difficult intervention was worth it! It not just averted a long and litigious court proceeding and, as their HR head puts it, “our office saved the jobs of close to five thousand employees, 1,200 project based workers and a few thousand indirect recipients from suppliers to the families that rely on their breadwinners.”

We felt we won the lottery when warring siblings started to communicate and some members reaching out and trying to play catch up on the many years lost due to the conflict.

As I write this article, it is still a work in progress, as the next challenge is to continue the momentum by forming a Family Council and doing oversight work. Beyond governance, the business can now move toward growth mode.

There are many founders in the mold of Mr. C. I would often hear Gen 2 members explaining to me their inability to talk to their fathers about succession issues. It is still an extremely sensitive topic. It is a cultural factor.

Finally, founders (particularly the traditional Chinese) are reluctant to disclose their wealth and the history of the conflict to a local advisor so when Mr. C met me, he only asked three questions:

  • My nationality
  • My experience; and
  • My motivation in helping mediate and mentor

I told him that my grandfather from my mother’s side used to own many businesses. And for many years, was recognized as the second largest taxpayer in his city. But in one fell swoop, the business collapsed because of sibling rivalry.

Mr. C understood completely.

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Founder Inaction Can Cause The Business To Fail (Part 3)

My World Bank/IFC Governance work in Africa did not push through over the weekend due to the current post election tension unfolding in Kenya.

The deferment was a blessing as it allowed me to revisit peculiar and common issues affecting family owned businesses in Asia. The case of Mr. C is no exception.

After a thorough evaluation of his family business, the Family Advisory unit of my firm, W+B, identified several major causes of conflict that led to the dramatic decline of the business exacerbated by a virulent tug of war among siblings.

  • Employment by virtue of their last names with zero accountability
  • Family members were thrust into leadership positions, despite their lack of experience and competence
  • Money issue as a result of ownership misalignment
  • Compensation and incentive programs were wrong
  • Unclear succession programs that bred conflict

After summarizing the report and analyzing why the conflict happened, I have listed a handful of related issues:

  • The patriarch did not see the urgency of initiating governance in the early stages. As the problems became more evident, Mr. C chose to procrastinate
  • He exhibited a typical patriarch mindset that siblings will be able to fix the issues amongst themselves
  • He was also too busy growing the business and ignored the red flags
  • Control and Power struggle among siblings was bound to happen
  • The conflict escalated when Mr. C suddenly stepped down

When the patriarch’s health deteriorated and disagreements among the children were becoming frequent, he suddenly realized that the children lacked the maturity to lead their departments and were not prepared to assume full control of the business.

Out of desperation, the patriarch finally sought assistance from his friends and luckily his colleagues endorsed me and the firm to initiate intervention.

Our Intervention was Intense

We were racing against time using three critical areas:  Resolve a “ticking time bomb”, initiate full governance across all areas and prepare a lengthy succession process.

Phase 1 Intervention Governance Protocol

Our precondition in helping Mr. C was to take out the litigation lawyers representing the children. With the mother’s appeal, the children finally relented to let the lawyers step back.

Our initiatives focused solely on addressing the causes of conflict by installing and aligning governance systems covering the naturally overlapping areas (family, business and ownership). What was peculiar about this intervention was the need to put another circle covering long-staying employees loyal to the father.

The issue may look miniscule from the outside, but it is not. These handful of employees who started as factory hands 40 years ago became equally entitled as the children.

The W+B findings revealed “their association with Mr. C for many decades was “power in itself” as they held the title of “gatekeeper”. In short, they were perceived to be so influential that they can make or break a candidate aspiring for a managerial position.”

On a positive note, their contribution to the company’s growth years under the leadership of Mr. C can never be discounted. However, with the imminent break up, we also discovered that this group was also “fighting for survival.” They strongly felt that with Mr. C slowly losing his grip on power, their influence was also dissipating and they were not prepared to leave the company.

To be continued…

Founder Inaction Can Cause Business to Fail Part 2

With tension escalating and family members demanding for more entitlements, Mr. C, the founder, no longer had the passion to grow the business he started in 1973.

Unless there was real intervention, it was obvious that the family business was on a downward trajectory.

In the course of our assessment, there were instances we hit a brick wall.  We discovered that the gap was so wide and the acrimony between siblings so deep.

There was a time in my advisory work that every meeting I attended would always end with a virtual confrontation punctuated with a shouting match that can be heard by employees and visitors in the executive floor. And as if on cue, assistants would immediately disallow visitors from entering the floor. Mr. C would then just quietly leave the boardroom, disheartened and embarrassed by his children’s actions.

At one point and out of desperation, Mr. C became emotional and told me “how he wished his business never grew so big so he will never have to contend with his entitled, squabbling and disrespectful children”.

He also lamented about the issue of money and power plaguing his adult children… “why are they fighting for the small pot? If they can just work as a real, united family, there is a much bigger pot to create!

Mr. C was used to the hard life, at a young age of 12, desperate and hungry, he decided to join the exodus of Chinese laborers leaving China with only one thing in mind…hope for a better life.

As he was about to tear up again, I comforted him that all was not lost. In tense situations where the Patriarch or Matriarch is being pressured by family members to make decisions, there is a very strong likelihood that they will end up suffering in silence and feeling helpless. Such is the case of Mr. C. He chose not to decide, opted to procrastinate and remained neutral in the course of our intervention.

This pattern of indecision is not only wrong but destructive. Unfortunately, the “Do Nothing” option is by far the most popular option. Therefore, it makes sense to consider a third party intervention as time is critical.

An experienced family business advisor, bereft of any emotion, will guide the family members the appropriate governance mechanism to make critical decisions based on what is best for the family and the enterprise.

After the children swapped accusations of wrongdoing, it was apparent that if my firm, W+B Family Advisory cannot help them, their only recourse was to seek the legal route. It didn’t help that both parties were being goaded by their lawyers to seek court intervention.

In a KPMG report, this case is what they refer to as a classic Rags to Riches and likely back to Rags family.

The report highlights that starting a family business is easy, relatively speaking; sustaining it beyond 2 or 3 generations is the hardest part. Indeed, it’s often said that the rags fall on the third generation. It’s a sad commentary on the reality that faces family business.

Every family member must recognize that family issues, not business nor external events, will define the very survival of the next generational change in family businesses.

After a series of assessments, one on one sessions with the family members and a slew of governance interventions replete with drama, a breakthrough happened that averted what would have been the biggest mistake the warring family members would have committed… go to court and scar the family for life.

Founder Inaction Can Cause Business to Fail

Allow me to share the story of a Family Business run by Mr. C. Like most entrepreneurs Mr. C migrated from Southern China, started a trading business and through the years expanded to several businesses like manufacturing, food and retail. The business was founded 44 years ago and at its peak, had a total employee count of more than 15,000.

Early this year, I conducted an organizational audit and found out that the employee headcount sharply dropped to just below 5000. The decline started right after the founder took a back seat due to a life threatening condition.

Family C’s case is unique. It is a live case full of twists and turns and ever unfolding. Live case also means that it is a “work in progress” (WIP) project. This is also one of the reasons why I spend more time in Asia than in the Philippines.

Our sessions have been quiet challenging and gratifying at the same time. My core team was able to diffuse a family “ticking time bomb” that started more than a decade ago involving two warring sides of the family…three younger siblings pitted against two older siblings.

The problem started with the employment of the first 2 children, who were untrained and ill equipped to handle the rigors of managing an enterprise belonging to different industries.

Straight from college and without any formal entry policy, they were asked by their father to help out in the business. Confident that the children were ready to assume bigger roles and the companies’ consistently better performance year after year, the father decided to slowly detach from the day to day chores.

Through time, they married, produced children and the family grew faster than the business. With their new found power, the older children started to apportion for themselves the departments and business units that they were already managing.

This was also the time the three younger siblings joined the business. With 5 children in the business, each vying for control, the departments were like a separate kingdom without any semblance of a collective plan moving in one direction.

With the children at the helm, heated discussions among them became more frequent and their incompetence manifesting by way of lapses in major decisions. It was obvious that apart from the breakdown of governance, the lack of vision, poor judgment, conflict of interest, high attrition rate for employees, no planning and a certain level of entitlement contributed to the decline.

Primary Causes of the Sharp Decline:

  • With the same surname as the founder, any family member can freely join the business
  • Some were plain lazy, while some did not have to work as hard and still got the same pay as those who were fully engaged
  • Distrust and self-dealing among family members were becoming apparent
  • Relatives or friends can be a supplier without the necessary accreditation.
  • In-laws got infected with the “entitlement bug”
  • No rules of entry and exit including accountability for family members.
  • Employees started to take sides out of survival
  • Frequent clashes due to personality differences
  • Constant friction as to where the business should be heading
  • No expansion as family members spent much of their energy fighting one another over money and power
  • Family members never exerted effort nor time to cooperate.

To be continued…

 

https://www.towerswatson.com/en/Insights/IC-Types/Reprints/2014/10/Succession-Planning-The-Answer-to-Leadership-Crisis

DIY Governance Can be a Disaster (Part 2)

Family Governance

A fundamental aim of family governance is to mitigate conflict and harmonize interests to ensure business sustainability.  Successful family businesses in the region often establish a governance model and do the following:

  • Establish and formalize family rules and policies through a family constitution
  • Have a clear succession plan in terms of family ownership and leadership
  • Establish the right structures and bodies to enable proper family governance e.g. family assemblies, councils, etc.

Professionalization of the Firm 

  • Corporate Governance: Having an effective Board of Directors with the right structure, composition, roles, decision making rights, etc.
  • Planning and Performance: Having a planning function for both holding and subsidiary levels supported by a performance management system
  • Controls: Effective management controls are in place to ensure proper functioning of business processes
  • Processes, Policies, and Procedures: Effective processes and policies for core business functions, job descriptions, authority matrices, etc.
  • Technology: Implementing technological systems which increase efficiencies in processes and promote more effective decision making

Portfolio Direction and Management

  • Core competencies of the group need to be clearly defined and an investment strategy outlined to match those competencies and opportunities in the market.

—- Continue with Prof Soriano’s Article —-

Governance is all about communicating and winning the trust of family members/branches as well as instilling the overarching message that institutionalizing rules and setting a realistic code of conduct for the “greater good” can effectively mitigate conflict and raise the bar of productivity.

For some that have sought my help, they have admitted that in the past, the next available “resource” and natural “go to counselor” were their favorite spiritual advisers. These can be the community parish priest, a pastor and to some extent seeking out guidance and wisdom from the most senior and influential member of the business community.

Sadly, for those who are already on the edge and showing clear signs of desperation, they have resorted to calling out as many saints including their deceased founders and influential family members imploring their divine intervention so they can finally put an end to the “curse” we generally refer to as family conflict.

DIY Governance Can Be Extremely Frustrating

The downside in any DIY initiative is it can be physically draining for the family member proponent. Governance is not just about articulating the list of benefits or asserting the importance of legacy creation or getting everyone to comply based on the rules and policies set.

The key is communicating the urgency and significance of going through this all-important event!

It is a Once in a Lifetime Event

Now that I have emphasized the enormity of work and the likely disastrous consequence of initiating a Governance DIY approach, I am sharing a timely PWC research related to the importance of initiating Governance in family owned businesses:

a. Safety in structure. Many family businesses have learned that a little structure can be extremely helpful when the time comes to discuss sensitive issues, such as:

  • Ownership shares
  • Rights and responsibilities
  • The competence of family-member managers, and
  • Agreeing on a strategy that is best for both the business and the family

b. It starts with a clear vision—and clear lines of communication

  • Like any business, a family enterprise must be built on a foundation of mutual agreement on certain fundamental questions:
    • What is our vision—and our mission—for this business?
    • What strategy should we follow to reach our goals?
    • What structures and people do we need to succeed?
    • How do we handle shares, inheritance, in-laws?

The Importance of Education and Shared Values

When next generation members fully understand and embrace their roles as stewards rather than owners, the entitlement mindset is tempered. And having a non-family member as advisor to provide oversight can significantly improve and restrain aberrant behavior.

Clearly, when the process of governance becomes unbiased, consistently applied to all, and initiated without fear or favor and with the guidance and facilitation of an experience family advisor, the family can expect better communication within its members plus the added benefit of a scientific and stable approach to the natural overlapping interests of the family, business and the ownership ecosystem.

In closing, Governance is a sensitive and serious matter and is simply too important to be left in the care of a family member unfamiliar and ill equipped to manage emotions and personal interests of different family members.

Harmonizing relationships and institutionalizing control across generations under an environment of shared vision can tremendously accelerate the growth curve of the enterprise.

If done correctly from the onset, governance can become the source of more strength and longevity for the family.