Monthly Archives: August 2018

Conflict-of-Interest Policy

This is one coaching work I am particularly proud of. After a series of sessions and weeks of intense exchanges among Gen 1, Gen 2 and Gen 3 family members, I am almost finished with the family covenant on conflict of interest and self-dealing policies.

This 5,000 strong family led enterprise with diverse interests in property and manufacturing started in the 70’s, moved their headquarters in Singapore in the 90’s and their growth has been nothing less than spectacular.

With their relative success, one may wonder what could have triggered the group from engaging my firm, W+B Family Business Advisory to revisit their vision, values and mission? And why was there a clamor from family members to review the family charter (constitution)?

With a semi-retired patriarch in his 80’s and five (5) children in their 40’s and 50’s actively managing the day to day affairs of the business plus over a dozen Gen 3 cousins joining the pool of management trainees, the time has come for them to regroup and assess the relevance of their agreement I personally initiated 7 years earlier.

One of the primary objectives of this recent policy initiative was to preserve the family business reputation for honesty and integrity, two values that have been the cornerstone of the group since its inception. The family members wanted to articulate in the strongest possible terms their integrity DNA to the succeeding generations and the only way to inject this powerful value is to adopt and enforce stronger guidelines for family members to avoid any conflicts-of-interest, real or perceived.

Let me share 8 of the many COI rules the family enacted with the hope that business owners can follow their lead and mandate members to do what is right so they can continue to enjoy a reputation of honesty amongst employees, customers, competitors, suppliers and community.

Rule Number 1: The enterprise shall not engage in business with any family member and/or spouse who has his or her own enterprise or who is employed in another company. It is the intent of the enterprise to use suppliers and service providers who are unrelated to the founding family in any way.

Rule Number 2: Family members, their spouses, and their children, whether or not they work inside the business, will not be permitted to avail themselves of the services or the resources of the enterprise for personal use.

Rule Number 3: Family members, their spouses, and their children shall attempt at all times to avoid any perception of impropriety in business matters. They may not directly or indirectly derive any personal profit or advantage by reason of their birthright.

Rule Number 4: The personal interest of family members should never prevail over the interest of the company. Their single minded loyalty to the company is non-negotiable.

Rule Number 5: Family members will not invest in companies that are suppliers of the enterprise nor seek to benefit financially from information and opportunities gained as a result of their association with the enterprise

Rule Number 6: When an actual or potential conflict of interest should arise on the part of family members, it should be fully disclosed and the concerned family member should not participate in the decision making.

Rule Number 7: When a family member has a continuing conflict of interest and it is discovered, he or she should resign or if the Family Council deems appropriate, be expelled and be meted the most stringent penalty

Rule Number 8: Copies of the Enterprise Conflict-of-Interest Policy will be distributed to all family members, company employees, and suppliers

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Conflict of Interest

Case 1
The board has authorized its CEO (Second Generation family member, director and shareholder) to source for a contractor to construct plants in different locations. With this information, the CEO immediately commissioned his wife’s family (who are in the contracting business) as General contractor. His argument is that he trusts his in-laws more than third party contractors. Does this constitute Conflict of Interest (COI)?

Comments from other Siblings/Shareholders
“Prof, this is a very uncomfortable situation for family members and shareholders like us. Our brother has no sense of “delicadeza” at all. He will just end up approving his wife’s proposal. Obviously he is beholden to his in-laws and our gut tells us he will be getting commissions out of this transaction!

We also cannot imagine a scenario where this in law contractor will perform poorly or cannot deliver on time.

The operations team tasked to monitor the performance of the contractor will end up being subservient and useless!

In all these, we are lost! Should we just suffer in silence? What should we do?

Comments from the CEO
“Prof. I don’t understand my siblings! Who do they think can do a better job? I care for this business that is why I prefer to deal with a contractor that I trust.”

Case 2
A board composed of siblings as directors has approved the setting up of a new business engaged in food production. Would it constitute COI if a director (and family member) supply raw materials to the new business?

Comments from Siblings/Shareholders
Prof. it is obviously COI! Why can’t he just supply outside? Being a director and a supplier will just make life miserable to professionals assigned to check on his products!

Comments from the Director/Supplier
Why can’t the other family members understand that I am out there to prove myself. Are they not happy that I have finally decided to be financially independent? After all, I am also a shareholder.

COI issues can be so complex and there are no sweeping solutions to a plethora of situations. Instinctively, family members are programmed to help fellow family members whether its support for the business or personal issues. More so for Asian family owning businesses, where setting up a business is generally encouraged.

In both cases, it is obvious that COI was present. The issue of heavily favoring an in-law business by virtue of the CEO’s position and in case 2, the issue of personal gain.

According to Prof John Ward, there are several legitimate issues that the family owners need to be aware of:

  • What if it doesn’t work out?
  • How does it affect the perceptions and professionalism of the non-family managers and employees?
  • How does it affect the family business’ future options?
  • What precedent does it establish for other family members to do business with the family business?

My SID-SMU Governance notes presented two scenarios. Firstly, a director and or shareholder must not place himself in a position where his duty to his company and his personal interests conflict. And second, a director, being in a fiduciary position, is accountable to the company for any secret profit made by reason of that position.

In many instances, directors in family owned businesses are torn between having to decide in favor of the interests of shareholders, employees, creditors and or related companies. And it becomes all the more confusing when the director himself is also a shareholder. Why? There will always be a human element of subjectivity where family members have the tendency to cloud his decisions in his favor based on his personal needs.

esoriano@wongadvisory.com

Single-Minded Loyalty to the Company

What do the likes of Philippine conglomerates SM Group, Ayala Corp. and Alliance Global have in common with their Indonesian (Salim Group), Singaporean (Singapore Telecoms) and Thai counterparts (CP Group)?
 
They have extremely talented professionals and board members singularly focused in pursuing growth in their respective industries and still keen observers of their director’s fiduciary duty completely.
 
The title of this article perfectly defines what a fiduciary duty means from a Board of Directors (BOD) level perspective. The word was drawn from the Latin term fiduciarius or fiducia meaning confidence and trust. In the pecking order of things, the fiduciary duties of a director rank highest in any governance initiated event regardless whether the enterprise is a closed or a publicly listed corporation.
 
What then is the role and responsibilities of a director? This is a serious and important question directed to warring family members who are wondering why the business is in a state of suspended animation due to infighting, distrust and betrayal amongst siblings (and cousins).
 
My answer is straightforward, as a family member-director, understanding your responsibilities should always be your first task. And your primary role is to “ensure the company’s prosperity, steer the organization’s future by adopting sound, ethical, legal governance and financial management policies with the objective of enhancing long term stockholder value.”
 
The cause of all these senseless disagreement is due to the “culture of control and secrecy where the family tries to do it all.” totally ignoring corporate rules related to governance. In many instances where the dysfunctional family continues to cast an overarching shadow over the business, directors will never be effective and the BOD will end up being relegated as a “paper board.”
 
What are the qualities that a director must possess for him or her to be appointed or elected to the board?
  • Competence
  • Professional Experience
  • Network
  • Integrity
But over and above these qualities, the director must also embrace a decision-making mindset focused on his or her single minded loyalty to the company. These decision-making parameters should never be confused with the director’s relationship with other shareholders and fellow directors. Not even if the director and shareholder is one and the same.
 
Directors must understand that a company is a different entity. Some of its powers may be exercised by the BOD, while certain other powers may be reserved for the shareholders like the Annual Stockholders Meeting (ASM). In general, if the policy and directional making powers of management are vested on the directors, then they and they alone can exercise these powers.
 
What then comprises the fiduciary duties of a director? Culling from my SID SMU directorship notes (Singapore Institute of Directorships-Singapore Management University), these are the:
  • Duty to act honestly
  • Duty to act in good faith
  • Duty to exercise reasonable diligence
  • Duty to exercise care, skill & diligence and
  • No Conflict of interest and
  • No Personal gain
In my years of family business coaching and resolving conflicts, the most common problem affecting companies is always about conflict of interest (COI). The fundamental question that needs to be resolved is: Can family members (and in laws) do business with the business? Let us start with common COI cases:
 
You are the CEO, director and shareholder of a company and the board has authorized you to source for a contractor to construct plants in different locations. With this information, you immediately commissioned your wife’s family, who are in the contracting business, as general contractor. Your argument is that in laws can be trusted. Does this constitute COI?
 
To be continued…