Monthly Archives: May 2018

Two Enemies That Threaten Family Businesses

In an interview with Family Business Advisor Harry Martin, he was emphatic in stressing that “the two main enemies that threaten the very survival of family businesses are the controlling patriarch/matriarch and the next generation sense of entitlement!”

Those two factors are working against a family business that is why it is estimated that close to 70% will not survive into the second generation and 90% will never make it to the third generation. The average lifespan of a family owning business can be as short as 24 years. That number also coincides with the average time that the founder is associated with the business.

Martin went on to advise owners to “treat family members joining the business like you would treat non-family employees. Be sure they would have to live to the same standards of work and performance.” 

Clearly, Martin’s statement hit home especially in the context of the Asian culture where family relationships are deeply interwoven in the business. The overlapping of Family, Business and Ownership breed natural tension and when left unmanaged, can lead to real, emotionally charged conflict.

The challenge is to confront this predictable danger and reverse the current situation. Unfortunately, a good number of owners do not know how to start the change process.

Therefore, I am sharing a list of initiatives to guide business leaders to do what is best for the family and the business:

a. Business owners must primarily focus on being good parents that espouses values such as love, God fearing, respect, integrity, hard work and being fair to everyone

b. Never handover and never promise your children ownership on a silver platter. To be future and qualified shareholders, they must deserve to be one and must exhibit full commitment and a work attitude that exemplifies hard work.

c. My advice to a parent/business owner is to stop behaving like a father or mother on business related matters involving the children. Never ever reward bad behavior.

d. Compensation must be commensurate to credentials and must be based on what the child can contribute to the business. Equal pay among employed family members breed resentment and is an unacceptable business practice.

e. Continue to ingrain in your children the importance of separating the concept of being an owner and an employee. Children would always fall into the trap of choosing an owner rather than an employee mindset.

f. If your children are still in college and have shown interest in joining the business, make sure that (as parents and business owners) you impose strict conditions on their employment before they are accepted. Pre-employment requirements include an Employment Contract stating their Job descriptions and Performance metrics. Employment means qualifications, commitment, performance, meritocracy and accountability

g. Discard the “Eldest Child Syndrome”. Family business owners who don’t appoint the most competent leaders available—be they family or non-family members—are also taking a great risk

h. Business owners must enforce the rules of employment (entry and exit polices) of any family member interested to join the business

i. In anticipation of any future conflict, a Family Constitution, Shareholder’s Agreement and the activation of the family council are necessary governance tools to manage and mitigate any future tension

To effect a seamless handover in the future, it is necessary for parents to spend more time in molding their children so they will learn the value of hard work and fair play.

Undeniably, the objective is to embed the right values so they can become solid, decent, responsible people before they assume the mantle of succession and leadership.

esoriano@wongadvisory.com

 

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Ensuring 100 Years of Unity and Growth Part 2

The secret sauce for the survival of a family business from generation to generation has three main ingredients: Growth, Talent and Unity and it should be every founder/business leaders’ mantra especially for those pursuing multigenerational success.

Family unity has been documented as an important characteristic of successful and enduring family businesses.  Family pride, personal sacrifice, loyalty and reputation are valuable factors which influence business operations, especially their continuity during periods of hardship (Donnelly, 1964).

As 8th Generation successor Jaime Augusto Zobel de Ayala (JAZA) of the formidable 184 year-old Ayala group when asked what he felt about family unity, remarked,

“Family unity is critical for business continuity. At the heart of this is careful and constant nurturing by inculcating the right values in the upbringing of children and maintaining bonds among siblings. We strengthen relationships between siblings and cousins by getting together on many different occasions. These gatherings build friendship and trust and also provide opportunities for educating the younger members about the family’s values and philosophy.”

Is the family keeping the business together or, is it the business that is keeping the family together? Family feuds that result in ownership splits weaken a family and greatly reduce its value. Therefore, you need a plan to bring together the family behind the business, to strengthen trusting bonds and build family commitment to the enterprise. Fundamental disagreements can be managed in a respectful and careful way, ultimately with a commitment to preserve family unity.

Successful families are those who remain steadfastly united, keeping supportive members loyal to one another and to the family’s mission. Over time, as families become more diverse, it is likely that only a few relatives per generation will directly work in the business.

Inactive members can still support family philanthropic efforts or social activities, and sometimes that level of involvement is enough to maintain family unity. But investing on the next generation of family enterprise leaders can also keep talented members contributing to the broader family’s wealth and mission. All these initiatives to promote family harmony and longevity constitute a family plan.

I was once asked what a long term family plan means. This plan involves making a conscious decision to unite as a larger family. It involves identifying the larger family’s goals, understanding risks to accomplishing those goals and planning for the time when the family members become complex as they increase in number.

There are always challenges when a company is on the door step of transitioning from one generation to another and it is natural that each family member in any generation will have their own perspective on how the business should run moving forward.  Developing a plan will lead to increased profitability which provides more options for the family and the company to work through any leadership or ownership transfer issues.

We can safely conclude that the real secret to a family fortune is permanence and permanence begins at home. The oldest businesses in the world are family businesses that have been successful mainly due to the resilience and united stand of the family members even in the face of seemingly insurmountable obstacles brought about by modernization and globalization.  Indeed unity and commitment are every family’s competitive advantage.

Ensuring 100 Years of Unity and Growth Part 1

What comprises natural conflict?

I’ll start with the most pressing issues that are regularly amplified in my governance engagements in Asia.

Generational transition and the ensuing conflict between generations can cause irreversible damage to relationships. All too often the senior-generation leaders believe they have done a great deal in generating wealth for the next generation only to falter in the end game because the “passing of the torch” was never planned well. There is no success without succession!

Family members between generations have different values and varying degrees of personal and business goals.When these goals are not articulated in a proper forum or is not aligned with the overarching values of the family, this can transform into unnecessary stress and open the flood gates for more conflict situations.

Personalities are totally different. When ignored, set aside or worse, a bad behavior is rewarded by the business leader; this can naturally lead to intense rivalries. The result can cause severe harm not just to the business but in relationships all the way to the succeeding generations.

Family member expectations related to employment, entitlement, perks, promotions, ownership vary. These expectations must be addressed immediately. If the business leader continues to set this aside, it will negatively impact family and business harmony and challenge the long-term survival of the business.

No employment entry and exit rules. Expect regular fireworks when any family member crosses over from the family to the business without clarity. Who gets to work? Who gets what position? Promotion? Titles? Perks? In-law employment? Treatment of family member, as an employee or as an owner? When the business leader ignores these issues and does not initiate a formal employment process, your natural tendency to employ family members by virtue of bloodline can turn into a nightmare.

These are natural conflicts in family owning businesses. Every family business comprises a mixture of individuals who are more likely to hold different opinions on a particular matter. For some families, disagreements can either be strategic or tactical which is acceptable in the ordinary course of preparing your plans for the future.

But in really difficult cases, some of the conflicts I have resolved come from deep-seated resentment and anger dating back from years of indifference and neglect.

When these issues continue to be ignored or not managed, expect tension to build up causing many business failures and untold misery.

On the bright side, I have identified Asia’s oldest family-owned businesses that have breached 100 years. What are the “secrets” to their longevity? What made them overcome crisis after crisis? What made them accomplished so much?

In the Philippines, I can only count a handful of family owned businesses that are still operating today.  The most enduring of them all is the family behind the 184 year old Ayala Group of Companies. The group was founded in 1834 and is presently under the care of the 8th generation stewards, Jaime and Fernando Zobel de Ayala.

Out of a family of seven, they were both handpicked to co-lead the conglomerate. With a target EBITDA of more than US$1B this year, they must be doing something worth emulating.

Presently, three 9th generation family members are occupying positions in different industries to prepare them for future leadership. But just like ordinary employees, these young descendants have to go through the rigors of occupying entry level positions to gain the experience and think like professionals with accountability so they can earn the respect of their non-family co-employees.

To be continued…

富不过三代 (Wealth Does Not Last Beyond Three Generations)

Research confirms the truth of this old saying.

A significant 90% of family-owning businesses lose their wealth by the end of the third generation. The real tragedy is “If wealth disappears, so does the family.” When family members are pitted against each other, expect familial ties severed for good. It’s a sad commentary on the reality that faces family business.

The reasons are naturally predictable: generational conflict (father and children), power struggles (between siblings, among cousins), pride, emotion, personality differences, In-law issues, unfairness, petty but unresolved past family issues, entitlement, no rules when joining and exiting the business.

The fight for money is just the finale and likely to be the last and often climactic event to end the years and decades of acrimony and infighting. Sadly, there is no end. What is unfortunate is there are no real winners, only vicious lawsuits and broken hearts. This is a story repeated all over again, a lesson many families will never learn.

It is increasingly recognized that family issues more than business issues determine the outcome of generational change in family businesses. My experience in dealing with dozens of families across Asia provides an important perspective in managing this change—educating members related to family and business governance and creating legacy building measures that will ensure a seamless handover to the next generation.

A significant milestone in the life of a family business is the adoption of a family constitution. Happily, more companies are now drawing up family constitutions to help them manage growth and navigate the perilous journey of transitioning to the next generation.

As Bernard Rennell, head of family governance at HSBC Private Banking highlighted, “Where the goal of the family is to continue to manage the family business or the family wealth collectively across the generations, a constitution can be very helpful.” I will further enlighten participants on this topic when I fly to the Philippines to do a 3-city public seminar engagement covering Bacolod City on May 15, Cebu City on May 18 and Manila on May 19. The Manila leg is almost sold out.

There are business owners who would tend to ask if they really need a family constitution? Many family businesses appear quite able to get by without concerning themselves with any form of agreement. Of course, for as long as the business leader is alive! But what if he or she suddenly goes? Therefore, it’s always better to be prepared.

To business leaders who are likely to be in their 50’s to 80’s, my message is loud and clear… stop procrastinating. You are neither supermen nor superwomen. You know very well that your years are numbered. Your gut tells you there is something brewing amongst family members and you can sense that if you lose your grip by reason of death or being incapacitated, the business you nurtured with your spouse will end up being the single biggest source of conflict.

Clearly, the advantage of a family constitution is that it ensures clarity, professionalism and every signatory knows what to do when conflicts arise. From my experience working with family businesses across Asia, there are generally common issues that are addressed in family constitutions:

  • Balancing family and business issues
  • Family member Entry and Exit rules
  • Role of In-Laws
  • Role of Active and Non Active Members
  • Compensation, Dividend Policies
  • Maintaining ownership control
  • Mentoring a successor
  • Enforcing compliance and accountability

Inevitably, family enterprises without a Family Constitution will likely head to a crisis…it is just a matter of time.

Don’t Be Afraid to Hire Professionals

In my last column, I repeatedly mentioned that the success, growth and well-being of a family business depend on its ability to attract, motivate, develop and retain outstanding executives who are not kin.

I also hasten to add that any business with the intention to continue and grow needs executives with a profile matching the business culture, organization, and strategy (Gallo, 1991; Welch, 2005).

The intermingling of the family, business and ownership ecosystem spawns a different organizational business culture unique only among family owned businesses. To be effective, non-family executives must be able to merge their set of values with that of the new culture. When there is alignment, a cultural fit creates synergies between non-family executives and the family business.

In one of my overseas talks last March, I recall one participant in his late 60’s candidly sharing his thoughts and reservations on the need to hire non family executives. He expressed his concerns and even went further by questioning my views related to the hiring of senior non-family executives. The business owner’s exact words:

1. Professionals cannot be trusted

2. They are only after their personal and selfish interests

3. They are very expensive

4. They are not as passionate and committed as family members

5. They jump from one company to another

6. They will never be loyal to the organization

My response was swift. Firstly, I emphasized that hiring non-family executives is not just about showcasing their impressive credentials. Using the latter as a singular yardstick can present challenges to the family business.

Secondly, there are four hiring pillars that owners must embrace. These are the technical skills, human relations skills, track record and the “cultural” fit of the candidate.  Neglecting one pillar in the hiring process will likely lead to possible failure. The latter may be able to deliver based on measureable expectations but if he or she fails to manage the impulsive nature of the owners, the tenure will likely be short lived.

Thirdly, it is extremely important for the organization to create an environment where business is defined by a set of rules, roles and responsibilities. This will minimize the confusion when non-family executives join the organization.

I ended my talk by sharing an inspiring story about Liem Sioe Liong (LSL), the Salim Group founder and patriarch of one of the largest conglomerates in Indonesia. LSL once remarked when asked why he took a major leap of faith in hiring non-family members during his start up years he said…

“I have a strong management team and they see the opportunities but choosing the right people and believing in professionalism is my underlying approach. You see I believe in teamwork and not dictatorship.”

Through time, the steady collaboration between family members and professionals of the group, reinforced by the shared vision of the founder and the next generation successor, youngest son, Anthony Salim (US$7B), created an empire with 300-plus corporations. The group has extended its reach to several continents namely Asia, North America, Europe and Australia.

The Philippines and Hong Kong operations is run by a professional executive in the person of Manny Pangilinan under the First Pacific Group Holdings. This professional empowerment has produced unprecedented growth outside Salim’s sphere of interest, making the Pangilinan model a gold standard for family owned enterprises to emulate.

To quote Steve Jobs, “It doesn’t make sense to hire smart people and then tell them what to do; we hire smart people so they can tell us what to do.”