Category Archives: Articles

Weekly published articles that can also be found in http://www.sunstar.com.ph/cebu/business

Entitlement is a Dangerous Disease

Jeff Faulkner once warned business owners, “Entitlement issues are rampant in family owned businesses. It is a stealthy and dangerous disease that can have a widespread and prolific impact on our business culture, as well as at home. How do we keep it from becoming an epidemic in our business and family lives?”

Bequeathing a business on the other hand is a once-in-a-lifetime event and any poor, hasty judgment on succession can take out a business in one fell swoop. When you are planning on retiring soon, then having someone ready to take over the business is undoubtedly very important. But it is not an easy task to just turnover the business to someone.

The family business ecosystem is so complex and naturally confusing. It is further aggravated when family members are actively working in the business.  An enterprise with several family members has twice as many opportunities for conflict, misunderstanding and resentments. Therefore, teamwork is essential and effective communication is critical in aligning the entire organization to the succession objectives initiated primarily by the visionary, advisor and the family members.

Consultant Rick Johnson correctly stated that “an attitude of entitlement that is displayed openly can create major challenges for even the most successful family business. This attitude is often displayed by the family member’s work ethic expecting every employee to “live to work” and give of themselves unconditionally while Junior takes off every Friday afternoon or goes on extended vacations.”

Johnson further expounds that “these children often manage with an autocratic style with little empathy for employees and leaving the impression that they can do whatever they want because they will run the company someday.”

Having entitled and confused successors in the family business is fraught with danger. When they are made (forced) to join the family business straight from college and without rules that define their participation, you can expect them to act like spoiled brats and bully their way by demanding power without accountability.

Entitlement and the next generation “owner mentality” is one of two evils (Patriarchal control is the other evil) that every parent/ business owner has an obligation to resolve. This apparent role confusion is a real danger and must be nipped in the bud before it goes out of hand.  It is pervasive as the entitlement feeds into the child’s last name and becomes a birthright then suddenly degenerates into a mindset of an owner mentality.

So how can you turn the business over to your children sans entitlement? Why do other family businesses transition successfully and some woefully tragic? This is probably the toughest question any business owner will ever face. And it can be thorny.

Firstly, it all depends on how well the owner has prepared himself or herself and the children for this transition. Second, what really touched off the succession? Was it due to a triggering event like death, an illness or a medical scare? Was it a bruising conflict among senior business owners (siblings and cousins) or plainly the owner’s advance age. Or a realization that death is near and that he or she has to “pass the baton” now.

I am highlighting four very important and non-negotiable criteria in laying the foundation for a successful succession to happen:

  1. The candidate must have the right leadership qualities, acceptable to all and a proven track record
  2. Appoint highly qualified directors with proven integrity and competence
  3. Institutionalize a culture of accountability reinforced with corporate governance
  4. Every decision must be guided on “what is best for the company and not self”

esoriano@wongadvisory.com 

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The 70/30 Succession Curse

The month of May has been quite challenging. An ugly feud erupted for control of a family-owned business in country A and I have been requested to intervene.

The sons of the founder are attempting to wrest control of the company from their father. Several thousand miles away in country B, another scenario has befallen another company, this time pitting siblings against siblings after the sudden demise of the matriarch. In both cases, my intervention posthaste was due to recommendations from associates that felt there was still a glimmer of hope for mediation.

The caveat is that should my initiatives fail in the next 12 months; a litigious process pitting lawyers from both sides will ensue. I can almost anticipate a very public mud-throwing spectacle between the warring parties much like the Lotte Group conflict in South Korea and the Philippine’s Ilusorio and Romero family disputes.

In my initial research, the problems started manifesting when the children were forced to join the business without any clarity related to their roles and responsibilities. After the ownership structure was distributed to the children, the plot to unseat their father intensified. I cannot pass judgment nor speculate on the motivation of the four siblings why they rebelled against their father. One thing is clear –– the issues are deep-seated and have created so much strain on the family. The children are now in their early 40’s.

Theoretically, I refer to the first case as rebellious. It is one of the three patterns of ineffective succession where the next generation launches a clean slate approach to the organization as an overreaction to the founder’s control of the firm. As a result, traditions, legacies and even the business model are rejected and discarded.

This case is just one of a handful of unwarranted family squabbles where the children would attempt to dislodge their parents from controlling the companies that the older generation founded. Predictably, these conflicts implode when governance, succession and ownership processes are set aside. And these same type of issues can happen to any family owning business, big and small.

As a family business advisor, I have never been remiss in constantly reminding leaders to initiate the process of succession immediately. Unfortunately, procrastination, an air of invincibility (superman mentality) and an inflated ego can oftentimes obfuscate the founder’s rational mindset.

The facts are clear, seventy percent of wealth and ownership transitions are not successful and seventy percent of family wealth ends with the 3rd generation.

So I am posing a direct challenge to family business owners: Be among the thirty percent who have successfully transitioned their wealth and ownership to the next generation.

One of the worst mistakes entrepreneurs can make is to postpone naming a successor until just before they are ready to step down or when death comes knocking.

Sometimes founders avoid naming successors because they don’t want to hurt family members who are not chosen to succeed them.  Yet, both the business and the family will be better off if, after evaluating the candidates as they work in the business, the founder picks the successor based on that person’s skills and abilities, early enough.

So my advice to business owners in their 60’s and 70’s is to have an open mind on the topic of succession planning. It can be both exciting and daunting at the same time. Daunting as the “letting go” phase for someone else to take over can be initially tough on founders. However, for visionaries dreaming of perpetuating their businesses, they must recognize that this leadership transition is both critical and indispensable.

esoriano@wongadvisory.com  

 

The Dire Consequences of having Family No. 2

Enforcing Governance and crafting a Succession plan for our clients in Asia are two of the most critical challenges that we encounter in our regular work at W+B Family Business Advisory.

Providing a tailor fitted approach for every family owning business and combining it with Asian values has been our core competence since the firm broadened its reach to cover Asia Pacific and South Asia.

But there are two other major risks (ownership and succession risks) that are often neglected and yet take center stage when immediate family, extended and in-law members battle for power and ownership. Succession coupled with ownership issues gets mired in controversy when many marriages end in divorce, legal separation and annulment.

In Singapore alone, where I engaged most of my regional clients, the country’s divorce rate spiked a few years ago, catapulting the Republic as one of Asia’s top six economies with very high incidence of failed marriages. The latter was exceeded only by South Korea, Japan, Hong Kong, China and Taiwan. But it is worth mentioning that all these countries are among the most affluent in Asia that share a common Chinese cultural heritage background.

When we look at the total picture, the marriage rate in Asia has gone down in recent years while the divorce rate continued its upward trajectory. From a family business perspective, what does a failed marriage got to do with Succession and ownership issues? What are the implications when couples terminate their marital vows by saying “I don’t” or “I won’t any more” instead of continuously professing their “I do’s”? The implications and the consequences are too important to ignore!

For starters, most couples who go into business together never dream their relationship will end. But when things unravel and the divorce or separation is set in motion, the emotional turmoil is further complicated by the question of what happens to the business and the children produced by the union.

Problems emerge when a significant number of these parents will remarry, adding new children to the marriage and further complicating the already complex family business eco system.

The consequences can be quiet daunting as the creation of a not-so-merry mix of family members we refer to as a blended family can include half-siblings, step-siblings and children from the current marriage. Expectedly, all of them will jockey for attention and as they become adults, will expect employment, power, participation in decision-making and future ownership.

Naturally, we can anticipate deep schism and undercurrents within the blended family and if ignored, can cause real tension. Neglecting the latter can devour the best-laid plans of business succession!

But the biggest risk of them all is the inherent risk that will impact the family business system especially when Illness, incapacity and death of a key family shareholder happens. When the enterprise is caught unprepared, we can almost always expect the entire family, business, ownership system to turn chaotic overnight as practically all ownership related issues relating to shareholder’s composition, leadership and unity will end up in disarray.

It is therefore important to note that sensitive issues like anticipating failed marriages, remarriage, adopting children and having children out of wedlock are brought into the open so governance and ownership policies can be formulated. In doing so, there is less likelihood that family dissent will cripple the business during the critical next generation transition period.

 

esoriano@wongadvisory.com

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

 

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.