My Yearend Letter to Family Business Owners

HAMBURG, GERMANY. After 82 domestic and 51 overseas flights, I am officially signing off and temporarily setting aside Family Business Governance for a much deserved rest and recreation!

Welcome to the holiday season my dear readers- that whirlwind of gift-giving, marketing blitzes, parties galore that begins right after Halloween and continues to gain momentum through the end of the year.  While this season is meant to bring feelings of love and cheer, it’s also the harbinger of holiday stress for many.

The faltering economy has made the task of balancing family and business more difficult than ever. Family members work longer hours and are aiming for a final push in the last month of the year to increase sales.

I can only imagine the past 4 weeks was probably horrendous, with business owners spending hours cracking their heads on how to meet  production demands especially when their employees start filing their Christmas leaves and claiming 13th month pay and annual bonuses.

Being competitive requires intense focus too especially when year on year sales have registered a paltry increase.  People can begin to lose the balance that is essential for success, both as a family and in business. Your first line of defense from stress is to think about what it is about the season that has felt so stressful in the past. Ill name a few here with excerpts coming from an articled, The Business of Family Business, penned by Lee Mccaffrey:

Are you happy? There’s no use being in a situation where you’re not happy. It breeds resentment and anger, and nothing good can come from that. If you’re not happy, it’s a good time now to sit down with everyone to figure out why, and then take steps to fix it.

Address issues as they come up. Let’s say something small happened in March if you’re still holding onto it by the time November rolls around it’ll likely be starting to take on a life of its own. Issues and problems need to be addressed, worked on together and squared away, as they arise.

Doing Too Much All at the Same Time.   The problem with the holiday season is that we often experience too much of a good thing. While stress itself is necessary for our survival and zest for life, too much stress has a negative impact on our health, both mental and physical. Too many activities, even if they are fun activities can leave us feeling exhausted, rather than fulfilled.

There is no balance between Work and Family. For family members working together, balance is important because the business is part of the family and the family is part of the business. The ramifications of losing balance can have long-lasting and unpleasant effects.

Families should take advantage of the holiday season to re-energize or mend broken relationships and enhance the value of their time together, so that getting through these tough times is much easier.

a. Set communication ground rules. Family discussions during family time (holiday or not) must not include any talk about the business. Usually, the founder or the business leader is prone to violate this rule. The best way is to create a fun program that rewards those people who refrain from “talking shop” during family time and provides a friendly penalty program for those who do. For those who have set up a family council right after signing the family agreement, this activity is one of them.

b. Share one quantifiable goal with each family member. Ask each family member to identify one goal that the rest of the family can help that person achieve in the coming year.

Tough times do not have to upset the balance between family and business. To quote Richard Eu, the great grandson of the Founder of the Eu Yan Sang Group, Asia’s largest TCM (Traditional Chinese Medicine) Retailer:

“Good governance in a family business starts by putting the company and the family first – each in its own time. “

So in the spirit of the holiday season, I encourage family members to set aside business and enjoy family time!

From my family to yours, I sincerely wish you had a great Christmas and definitely a prosperous New Year in 2018!

(esoriano@wongadvisory.com)

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When parents reward bad behavior (Part 3)

The “Fredo” behavior manifests as early as when a child confronts a major dilemma: the crossing over from a healthy family where unconditional love, inspiration, encouragement, equality and full support are ingrained during the child’s growth years.

Instinctively, parents tend to further extend care and nourishment on the more fragile child expending and nurturing him or her until the child bounces back and intermingles with the other siblings. While the parents demonstrate the handholding process, the family is also expected to care for one another especially on someone who needs it the most.

Full of Inconsistencies

The danger is unmasked when this “culture of love and equality” is carried over to the business. Here lies the inconsistency! Let me articulate why?

Business represents a huge contrast to the norms and culture embedded in the family. While family nurtures love, feelings and equality regardless of behavior, business singularly focus on key metrics like meritocracy, profits, results and accountability.

On one hand, family encourages the family to compensate for the weaknesses and failings of family members and to forgive indiscretions but on the other hand, business in its truest form can be unforgiving on matters related to under performance and mediocrity. Aggravating this paradox is the natural tension between two or three generations working together. You don’t just have a sandwich generation but the gaps between a baby boomer and the millennial generation is far and wide.

Allow me to list down a number of contradictions and divergent values that have created a confused mindset among family members as they cross over to the two other circles (as managers and or owners).

The weakest family member will inevitably end as a likely “Fredo” candidate.

If the family breeds feelings emotion, entitlement and equality plus a slew of varying C’s like confidentiality, culture, career, control and conflict, the business on its own pursues a totally different approach bereft of any emotion. As the family member moves on to the more difficult and measurable metric like profits, policies and plans, you can almost conclude the makings of a full blown conflict.

In an article penned by Kimberly Eddleston, she highlights a critical part in the transition of the child.

“When a child joins a family business expecting the same treatment he or she experiences in the family, where resources are allocated based on equality and need, trouble can result. Patriarchs that treat family employees as children encourage immaturity and dependence, and lead family employees to see them as responsible for their well-being. Moreover, well-meaning family patriarchs often feel they must reward their children equally in the business realm, without regard to their contributions. Their altruism ends up hurting them and costing the business.”

In a very recent family governance engagement assigned to me by our family business advisory firm, Wong+Berstein, a son (sibling A) actively working in the family business was given a house by his parents right after he got married. On hearing the news, his only sibling (B) known to be lazy and underperforming, demanded a house of his own with the same number of bedrooms! Sibling B felt it was not ‘fair’ that sibling A received a house and he did not.

Situations like this as Eddelston opined “are very common in family businesses and demonstrate how family members often expect resources and rewards to be allocated based on the family norm of equality rather than the business norm of merit.”

“Fredos” Are Certified Trouble Makers Part 2

According to Wikipedia, Frederico “Fredo” Corleone is a fictional character in Mario. There are real-life “Fredos” working in Family Businesses out there.

While the Corleone’s of the Godfather movies are fictitious, I have seen many examples of Fredos who are disruptive, dangerous and have wreak havoc on their family’s business.

Family Case 1

A restaurant chain, majority owned by the eldest brother Rey (not his real name) with contribution from his other siblings, repeatedly suffered at the hands of a Fredo named Rodney (not his real name). The latter was Rodney’s first born son. Barely straight out of college, Rey insisted that his son work for the family business.

However, Rodney was lazy, performed below expectations and showed poor human relations skills. His abrasive behavior drew complaints from colleagues and customers. He also had a penchant for sitting on major decisions, reports to the office as he pleases and displayed a very bad temper.

To hide Rodney’s incompetence, the father helped him with his work but over time, the son relied more and more on his father to do his work.

Things came to a head when a cousin discovered that Rodney was making a cut (commissions) on his preferred suppliers. Because of the overprice in the purchase of raw materials, the company struggled to compete in the industry they once dominated. While all the cousins wanted Rodney suspended, his father refused and continued to make excuses. When the animosity escalated into regular skirmishes amongst cousins, several key non family employees opted to resign instead of being caught in the crossfire. Soon after, the family business suffered a decline. The other founders then decided it was time to step in.

Family Case 2

This is the case of a leather retailer chain that had to deal with multiple Fredos who felt entitled to the products for their personal use. Two brothers would often shop at the stores, taking merchandise without paying or documenting what they took.

When an in law was hired as part of the accounting team, things got even worse since she had access to the cash registers. The brothers and the in-law started to take cash out of the registers to pay for their personal expenses. Eventually the business went bankrupt because the older generation looked the other way and never lifted a finger to put an end to the children and the in laws’ misbehavior.

Such dilemmas are so common in family firms that I have advised in Asia. Fredos are a different breed. They sincerely feel they are deserving of rewards and privileges even without earning it. They also have the temerity to demand an equal share of the business’s wealth, simply because they are part of the family and their last name is their birthright.

With the two cases presented, the message is clear…when you are contemplating in hiring a family member, watch for a Fredo behavior or better still before inviting a family member to join, make sure the family has already set in place the governance infrastructure.

Kimberly Eddelston in her research accurately observed the issue of a Fredo feeling entitled… “Research has shown that children with a strong sense of entitlement may be more likely to engage in theft because they see the business’s riches as compensation for their poor and neglected childhood during the firm’s early-year struggles.  No wonder that those who study family businesses have found that 85% of them go from “shirtsleeves to shirtsleeves” by the third generation.

Who Is “Fredo”? (Part I)

According to Wikipedia, Frederico “Fredo” Corleone is a fictional character in Mario Puzo’s novel The Godfather.

He is the second son of the mafia don Vito Corleone, younger brother of Sonny and elder brother to Michael (portrayed by Al Pacino) and sister, Connie. In the films, Fredo’s feelings of personal inadequacy and his inability to act effectively on his own behalf are character flaws leading to greater consequences.

With so much insecurity starting in childhood, Fredo exhibited poor coping mechanism and would always complain how he was ignored by his siblings and deprived of parental love during his adolescent years.

Eventually, his selfishness led to serious problems for the family, which ended when his own brother (Al Pacino) disowned him. In short, “Fredo” Corleone was known for his incompetence, bad business ideas, heavy drinking and betrayals. If you watch Godfather II, you will discover what happened to Fredo.

Do you have a “Fredo” in your family?

In a well written article by Kimberly Eddelston, Fredo is described as “the kind of sibling who just couldn’t get it right, no matter how hard he tried. But because he was family, Fredo was involved in some of the family’s business ventures.  Due to his weak personality and below average intelligence, he was constantly failing at even the simplest tasks he was given.”

In Asia, Fredo is often compared to a “black sheep” in the family. They display similar patterns of behavior and end up as a disgrace to the family. They are known as trouble makers, often left out, branded as outcasts because they choose to do other things than live up to their parent’s standards.

A Fredo in the family business is likely to be the least capable amongst siblings so when the family patriarch coddles him and looks the other way, he will do whatever possible means to take advantage of the family business for personal gain.

Like many family businesses with Fredos working, their presence in the business poses a serious hindrance to the enterprise. In a 2012 study by Kidwell, Kellermanns, Eddleston, they revealed that approximately one-third of family businesses admit to having a family employee who is an impediment to the business and only has a job because he or she is ‘family’.

What are the most common traits of a Fredo working in the family business? I have listed a handful of attributes below so family members are aware of the potential dangers that lie ahead.

Fredos can be any or all of the following:

  • They are irresponsible and consistently performs poorly in the family business
  • They disrupt the work of colleagues including business decisions initiated by family members
  • They strongly resent their parents especially with the way they were treated when they were young
  • They are naturally demanding and expect parents to support them especially when they experience setbacks or misfortunes
  • They misuse company resources and continue to commit conflict of interest
  • They are selfish, quick to blame others except themselves
  • They have no sense of responsibility nor accountability
  • To compensate for their failure, they usually engage in get rich quick schemes at the expense of the parent’s (and the business’) financial support.

In dozens of family businesses in Asia where I was tasked to intervene, I would always come across “Fredos”, either male or female, responsible for causing unnecessary pain and conflict in the family and the business.

In Mario Puzo’s The Godfather novel, Fredo nearly destroyed the first and second generations of the Corleone dynasty.

To be continued…

(esoriano@wongadvisory.com)

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.

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.