Monthly Archives: July 2018

Why Do I Need a Board?

“I am the founder and have controlling interest in the business… why do I need a board to dictate to me how I should run my business?” or “I don’t need a board because I already know what’s right for my company!”

 
These are common condescending expressions by owners that I encounter almost daily when I start pressing them on the need to set up a real, authentic board.
 
Family enterprises form the backbone of any economy as it represents more than 75% of all businesses in any country. Unfortunately, the governance model is almost exclusively dependent on what the founder (or the next generation owners) wants. Where the owner goes, the rest follow and the old adage clearly says it all… if an owner tells his subordinate to “Jump”, the natural reaction of a beholden executive is to ask “How High?”
 
While today’s business culture isn’t as dictatorial as it has been in the past, there are still a lot of traditional thinking happening especially amongst the Silent and Baby boomer generation (born before 1945 then 1946 to 1964).
 
The mistaken notion of losing power and ownership as a result of having non family members in the board continue to stoke fear on owners, effectively subsuming growth in favor of control and confidentiality. This universal mindset is obviously untrue as safeguards are always available.
The bottom line is this: family businesses should have an active board with non- family members (or advisors) if they intend to stay and thrive in a complex environment. One wrong decision can change the course of business overnight.
 
For those unfamiliar with the 1997 Asian financial crisis, most of the companies that defaulted were family owned. A case in point is the Asia Pulp & Paper (APP) owned by the Widjaja family from Indonesia. The group defaulted on the back of a staggering US$14 billion debt in 2001.
 
Despite the family debacle, they have since recovered and investors are showing renewed faith in the group. The combined market value of 12 family-controlled companies listed on the Singapore and Jakarta exchanges has held steady and is estimated between US$15 B to US$16 B.
 
I am personally aware of this major turnaround as a colleague currently sits as an Independent Director in one of its listed companies. Their primary objective is to embed a Corporate Governance (CG) culture starting at the board level and highlighting the principles of transparency, accountability, integrity, fairness and independence.
 
In my W+B Family Advisory work, I always challenge business owners to nominate non-family members so they can provide value and strategic advice. These directors must also have the independence to challenge decisions when family and personal issues get mixed with the business.
 
The other role is also to impose discipline and check on entitled owners who may whimsically make poor judgments to the detriment of the business and the other shareholders/relatives.
 
Non-executive or Independent directors (NED/ID) can assist with some of the issues most family enterprises face since they can speak without fear of retaliation other than being removed from the board. This allows the ID to speak their mind and raise sensitive issues minus the emotional clutter that’s prevalent in many family enterprises.
Family expert Prof John Ward accurately pointed this out in one of his articles, “The realm of business is dynamic and unpredictable. Companies are constantly reacting to evolving markets and competition. Family businesses face the added challenge of balancing business and family issues in strategy. Business change inevitably creates stresses that impact both management and ownership interests. In this setting, the board of directors has the special role of assuring the strategic alignment of business and ownership interests.”
 
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The Toughest Decision You Will Ever Make

High profile billionaire, real estate mogul and one of the world’s top philanthropists, Yu Pang-Lin passed away at the age 92 in 2015 but in a gathering five years earlier, he announced that he would entrust his entire wealth valued at USD1.5 Billion to a bank and the money would then be donated to charity after his death.

Yu was believed to be China’s first billionaire to donate an entire fortune to charity. He gained prominence when he acquired Bruce Lee’s home in the early 70’s and rose from toilet cleaner to billionaire. He once said, “If my children are more capable than me, it’s not necessary to leave a lot of money to them. If they are incompetent, a lot of money will only be harmful to them.”

In the West, there appears to be a growing awareness on the dangers of children entitlement. Elton John whose net worth is around USD550 Million has the same mindset. He has no plans of leaving much of it to his sons, “Of course I want to leave my boys in a very sound financial state. But it’s terrible to give kids the silver spoon. It ruins their life! Listen, the boys live the most incredible lives, they are not normal kids. But you have to have some semblance of normality, some respect for money, some respect for work.”

The world’s most savvy investor, Warren Buffet whose fortune is estimated at USD65 Billion intimated that only a very small fortune of that money will go to his three children. According to Fortune magazine, Buffet pledged to give away 99% of his wealth over his lifetime. “My family won’t receive huge amounts of my net worth. I still believe in the philosophy…that a very rich person should leave his kids enough to do anything but not enough to do nothing.”

It looks like Jaycee Chan will have to make it on his own as well.  His celebrity father, Jackie Chan, has decided to donate his money to charity instead of his son. As reported in Hong Kong media, Jackie Chan, who has a fortune estimated at USD350 Million, recently announced that he will donate all his wealth to charity. The “Bleeding Steel” star, who originally intended to split his wealth between his family and charity, has decided to give it all to the needy. Chan was quoted as saying that his son Jaycee should be capable of earning his own money now that he has his own career.

Inheritance can be tricky so discussion is often avoided. However, as the founder reaches the age of 60 and up and the children are all grown up and likely to have been forced (lured) into the business with zero outside work experience, founders can expect the following worrisome scenarios:

  • Escalating  dispute between founder and children related to management style
  • Simmering sibling rivalry on family and business issues
  • Children jockeying for power aggravated by In Law influence
  • Worsening marital spats between the founder/spouse
  • A competitive and highly regulated marketplace
  • Growing tax pressure exacerbated by different sets of Internal books
  • Urgency to align a complicated ownership structure for estate and transition planning

When these combustible issues are mixed, the process of initiating an inheritance plan can be so overwhelmingly daunting that owners tend to naturally forego the process. Procrastination or the “Do Nothing Option” then ends up as the most convenient choice.

So when an event like death or illness strikes the founder, expect the phenomenon to reappear, “Rice bowl to rice bowl in three generations”.

esoriano@wongadvisory.com