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.”

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Scared of hiring non-family executives?

Try inexperienced and under-performing family members that you cannot suspend or terminate by reason of birthright.

As a father, you probably hired or even cajoled a reluctant family member to join the business by virtue of his last name and nothing else. Credentials and work experience were never part of any yardstick. Employed family members skipped any formal hiring process. In short, the next gen employment is typically outside the scope of the HR department.

Entrepreneurial parents, usually the father, would routinely blurt a line to the children:  “Work hard and help me run the family business so that when I retire in a few years, you and your siblings will eventually take over.”

That’s it. No rules, just a simple crossover from the family to the business system. So when conflict happens, the dispassionate children, predictably manifesting entitlement will end up being rewarded with the 4 P’s –– higher Pay, Promotion, more Perks and Potential windfall (ownership). The consequences of rewarding bad behavior can cause irreparable damage.

One thing is certain though, the end result will undermine the years of adversity and hardships parents spent growing their wealth.

Without very clear and enforceable rules related to business and ownership governance, the business will naturally tilt towards failure. When an internal event like the sudden death and illness of the senior leader happens or an external circumstance like a crisis occurs, the business will end up in jeopardy.

To quote Jaime Augusto Zobel De Ayala, the 8th generation successor of the 184-year old Ayala Group from the Philippines,

“I often remember my uncle Joe’s comment that it was statistically impossible to produce enough highly qualified family members to run the businesses generation after generation. We only have two family members (out of 7 siblings) in the business at this time. My brother and I serve as chairman and president at the holding company and we provide leadership on the boards of the companies within the group. We are involved in the selection of CEO’s and CFO’s, succession, strategic partners and board members. We also participate in major strategic and resource allocation decisions and provide defined leadership through the governance structures of the boards,”

Akin to the spectacular growth of the Ayala Group the past 30 years, the success and growth of an enterprise depends on its ability to attract, motivate, develop and retain outstanding executives who are not kin.  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).

In my nine years of governance work in Asia, I have come across senior generation leaders making critical decisions related to succession planning. Steadily gaining traction is the preference of business owners to fully hand over management responsibility to qualified, non-family executives. The rationale, objectives and advantages are many fold:

  1. They are hired based on talent, industry experience and the value that they can contribute to the organization
  2. They are metric driven and their KPI’s (Key Performance Indicators) are measureable
  3. Their compensation is commensurate to their skills
  4. They are geared to perform on a Quarter to Quarter basis
  5. They look forward to pre agreed incentives and profit sharing arrangements
  6. They are also prepared to resign and assume accountability should they perform below expectations
  7. The engagement is on a professional level and they are driven primarily based on business profitability
  8. They have an employment contract that is contingent on performance
  9. Owners look at their employment as an investment rather than a cost driver
  10. Emotion is irrelevant

Are Your Children Really Committed?

Or are they just working to please you?

When every family member is fully committed, it sends a strong message to everyone to put the interests of the family business first before their own. For founders/owners, family member commitment gives them a certain level of self-assurance that the business will be in good hands when the day the formal handover happens (an event like death or illness of the senior leader).

But how do we galvanize family member commitment? That is a tough question that continues to bother business owners especially those whose age ranges 60’s onwards. Here is a couple of disturbing statements coming from the next generation family members (31 and 40-year old) that my firm, W+B Family Business Advisory, researched and polled in 2017.

Next Generation 1

“My parents offered me future ownership even while I was in college. It felt good being an owner but years later I realized that having zero outside work experience became more of a liability. The only consolation I got was because I never went through the difficulty of applying for a job.  There was also less pressure in terms of going to work. But how I wish I had real work experience outside my comfort zone. It’s been a difficult 15 years managing the business with frequent disagreements with papa. It is a wake-up call and this made me realized that at 39, it’s time for me to make a full assessment of whether I am worthy to succeed my father. I am playing catch up by hiring professionals and doing advance courses on areas I am weak at.”

Next Generation 2

“I have the best of both worlds and couldn’t ask for a better job. Of course friends teased me as a COO (Child of Owner) but at 31 years old and managing 450 plus employees, it’s not bad. I also get to enjoy the benefits of a nice salary, an SUV and unlimited travel benefits. My classmates who are employed are still languishing with low salaries. I couldn’t ask for more!”

When they were asked about the following: future growth plans, managing complexities and balancing growth, how to confront the uncertainties of sustaining the business… their reactions showed serious reservations and self-doubt. Collectively, these were generally the responses of more than 100 next generation successors surveyed:

a. If they really have the skills set like their hardworking visionary parents

b. Their continuing struggle in the areas of decision making and people policies

c. Their concerns related to the pressures of expanding the business

d. Balancing the old and the new ways of managing the enterprise

e. Issue of business longevity, co-ownership with siblings, debt issues

f. Potential conflict among siblings that will predictably surface when their visionary father is no longer around

These are natural reactions that I encounter every day. Therefore, the real challenge for business owners is to confront these questions:

How will we know if those who are actively working in the business have the passion and sincere intention to grow the business? How will we know if they are just after the four P’s –– Pay, Position, Perks and the Potential windfall (ownership) the parents generously and wrongly offered them when they started joining the business.

If these questions remain unanswered or if there are no singular focus in creating powerful commitment initiatives now, these will result to many sleepless nights by the business leader. Expectedly, the road ahead will be less paved and difficult to navigate. Hence, governance should now be the way forward.

Family Commitment is Non Negotiable

Family values and business values are usually not aligned.

While a business exists to create customers and achieve financial success, families have an entirely different motivation. They typically bring a less profit-centered focus alternating financial gains with trust, relationship and a lifetime engagement. These non-financial goals represent the bedrock of the family business ecosystem.

For one, family-owned enterprises are more community driven. They go out of their way to help their trade area on various social advocacies. Internally, the employees see the enterprise as an extension of their family and vice versa.

One good example was when a Philippine based businessman (net worth US$3B) went out of his way to do a headcount of all his employees affected by Super typhoon Yolanda (Haiyan). He then secretly met and surprised each one of them with financial support under a “pay when able” scheme and encouraged them to go back to their hometowns so they can be with their loved ones while rebuilding their homes. As a PWC report stated in one of their studies, it “is the injection of this very human element into the mix that makes family businesses unique.”

I want to share another success story of how family and business governance can work for as long as the family remains committed.

Family Business A is a trading company I have been coaching for the past five years. It was founded in the 1970’s and now distributes its products across the Asia Pacific region. By industry volume alone, the business is ranked 8th in Asia Pacific.

The business is currently being run by second generation members composed of five siblings. Due to the lack of systems and internal structures, confusion and petty misunderstandings among siblings became more frequent. Even non-family members were always caught in the crossfire, unclear on whose instructions to follow.

Recognizing the need to overcome the generational curse, the family agreed that the eldest son would take the lead and address governance in the areas of family, business and ownership (shareholding) structures.

“We used to have heated, nasty disagreements, but because we have set some rules in place now, we can resolve problems in a more professional manner minus the emotion” said Johnson.

Jenny the other sibling also remarked, “The advantage of having a family council and being constantly reminded by a family governance coach is that our disputes have become less personal. We were made to realize that we were brought up under the same roof and our father always reminded us that when conflicts do happen, we should always hold on to our values like respect, honesty and unity.“

As in most of my engagements, my intervention with this family was never a walk in the park. In my first year, it was clear that my initiatives would solely focus on family governance. It is extremely important to galvanize family commitment first as a squabbling family will never progress to embracing business governance.  Forcing a disunited family to transition to business governance is a double edge sword.

In the course of a little more than a year, we finally signed the family agreement. Immediately after, I made them formulate business governance policies to include hiring of non-family key personnel, performance metrics including entry and exit rules.

With professionals in place, meetings became less emotional and family members saw it as a challenge to raise their performance standards.

When every family member is fully committed, it sends a strong message to everyone to put the interests of the family business first before their own.

esoriano@wongadvisory.com

 

Have Governance, Expect Real Family Unity

I received a deluge of frantic emails related to my previous articles (“What If You Died Tonight” and “Nothing Is Uncertain except Death”).  More than half of the messages came from next generation members desperately fearful of the dire consequences of suddenly losing a business leader. Additionally, most of them also felt a feeling of inadequacy and helplessness because of the patriarchal shadow enveloping their decisions.

On the other hand, the other half of the messages came from worried senior generation leaders expressing unhappiness with the way the children have managed the business. One patriarch in his 70’s even remarked that he felt great sadness because the children (and in laws) acted as if they owned the business even though they never experienced hardships.

Summarizing my email exchanges clearly points to the twin evils of family owned businesses:

1. The senior generation’s way of control or “patriarchal shadow”; and

2. The Next generation’s work attitude and sense of entitlement

Every family I coach all over the world is in agreement that good family and business governance go hand in hand with sustained benefits that can last for generations. The question is how committed are family members especially the business leader in initiating real change?

In my recent engagement in Istanbul, Turkey, a business owner shared a question: “Professor, we all know the importance of governance and succession and there is no question all of us in this room aspire to be 100-year old companies someday. However, with all the issues considered urgent, how can I worry about governance, succession and ownership transfer when I have a business to run, creditors to manage and bills to pay?

My answer is clear… always start the process with simple steps but make sure you position family governance and succession at the top of your priority list. There is a Chinese saying, “the journey to a thousand leagues begins with one step” and it holds true in creating legacy building measures. I need to reiterate that even the best family businesses work hard at relationship building.

To jumpstart governance, family members must understand what the company’s mission is, what its short-term goals are and how it relates to their individual job descriptions. They must also know their boundaries. To determine the latter, a system that encourages open communications must be fostered by the business leader.

Trust me, communication helps build good relationships enterprise-wide.

I must warn you, though – encouraging open communication has its temporary setbacks. You will expect siblings or cousins to raise memories of past hurts related to how they were treated differently and unfairly. That said, will you just sweep the issues under the rug? How would you confront these “elephants in the room”? Will you just suffer in silence and prefer temporary peace knowing that at some point, these forbidden issues can surface and create tension amongst family members? What if you are no longer around when tension erupts?

And if you choose to ignore these issues now, what is the likely scenario that these problems will escalate? The risk is just too high to set aside these problems!

So if you believe these issues can compromise family harmony and impede the operations of the business, they must be dealt with now, not later. I know these are not easy issues to deal with, so it is in the best interest of families to rely on family-business experts to help family members navigate through these difficult “terrain”. Let me close with this message, “Action may not always bring happiness, but there is no happiness without action”.

 

esoriano@wongadvisory.com

Nothing is Certain Except Death

It is a Volatile, Uncertain, Complex, Ambiguous (VUCA) world out there! I am constrained to add that on top of the uncertainty of business, the demise of a family business leader can cripple the enterprise overnight.

The sudden death of a colleague in 2015 was a stark reminder that life is fleeting.

A year earlier, we were exchanging notes and quite excited about our planned collaboration to “gain a beach head” by setting up businesses in emerging ASEAN member economies. Then suddenly, I received news that he became terminally ill and given a few months to live… six months to be exact. In a blink of an eye, his health deteriorated and went downhill. He was gone at 64. Death came so swiftly like a thief in the night. He left behind a wife, three children and a 2,700 plus workforce.

My friend passed away without preparing any leadership transition and as the family grieved, the children struggled to consolidate his estate comprising assets, liabilities including the three core businesses. And as if on cue, worried creditors swooped down like vultures, naturally demanding for answers on how loans will be repaid.

For the three children (all in their 30’s), they were obviously unprepared, untrained and used to the good life generously provided for by their visionary father. With the death of the patriarch, they were now fearful of an uncertain future and the “what’s next”. I realized that the family needed help so I volunteered any assistance but my offer was politely turned down.

When the youngest child was diagnosed with a certain form of mental disorder and had to be hospitalized, the other siblings continued to manage the business but their apparent lack of training and limited skills worsened the situation. Sensing a bleak future, employees started to leave the company.

The business suffered its biggest setback when their credit lines were discontinued. Clearly, everyone where at a loss due to the sudden void left by the demise of their leader.

Four months after, the children pleaded for help and requested my intervention.

The six months that followed was probably one of the most challenging times the family members experienced under my brand of governance… and a test of patience for me and my team as well. I almost gave up on a number of occasions. The family members were stubborn, indecisive, arrogant and distrustful of our turnaround initiatives. Worse, they were incredulous and hardly contributed to the efforts.

I felt helpless when they could not decide on critical issues and in my quiet moments I would lay the blame on their deceased father for overprotecting and raising entitled children. Their actions were extremely frustrating and a disservice to the values of hard work and tenacity that the father displayed when he was alive.

At the onset, the only way to appease troublesome creditors was to install a management committee primarily tasked to manage a tight cash flow.  We also brought in specialists to “hold the fort” until the situation normalized. My title was “caretaker CEO” but in reality I played a conductor role by making sure alignment of plans continued without disruption.

After 2 years of playing catch up, the firefighting became less frequent and the business showed signs of recovery.  When we finally saw steady growth, we knew a turnaround was in sight. We also saw creditors renewing their commitments after cash flow and new investments were already showing favorable results.

It was a close call and for year three (2018) to five, the enterprise is now geared for growth and expansion.

Nothing is certain in Life and in Business

Geoffrey Gaberino, the 1984 Olympic Gold Medalist once remarked, “The real contest is always between what you’ve done and what you’re capable of doing.  You measure yourself against yourself and nobody else.”

If family businesses around the world strive for future prosperity and family survival in an increasingly volatile, uncertain, complex and ambiguous (VUCA) world, how did the next generation business leaders of dominant conglomerates like the 184-year old Ayala and 130-year old LKK managed to keep pace with an ever-changing VUCA world?

Even with a great idea, leadership and many hours of hard work, one rule still applies:  Nothing is certain in life and in business.  No one can unfailingly know if an enterprise will fail or reach a century or whether a startup will survive past the one-year mark.  So, how can one increase the odds?

To dream and aspire in becoming a 100-year old enterprise, the business must be relentless in staying relevant. But how?

Firstly, the business leader must create a clear vision of where he or she wants to take the business in 10 to 20 years. Next is future proofing a succession plan. It is important that this shared vision must be well-defined, replete with measurable objectives and supported with very clear lines of communication and accountability, especially with the natural entry of next generation siblings and cousins.

I was in Boston last week for strategic coaching work and in between engagements, pursued collaborative studies at Harvard on how to create a resilient and dynamic organization of the future. Expectedly, VUCA is here to stay and family businesses must evolve to overcome these dramatic changes!

So beyond the perks, entitlement and glamour of being an SOB (Sons and daughters of Business owner), successors must fully embrace the commitment, the hard work, the long hours and the pursuit of a strategic “big idea” that goes with the succession plan. This is what strategic planning is all about.

Jane Hilbert-Davis, a Boston based consultant, defined strategic planning as “simply creating a plan of action. Originally from the Greek roots, ‘STER’ which means to spread out, usually in a military sense, and AG to drive or to lead, the word ‘strategy’ conjures up images of preparing for battle, or competition.  It’s different from ‘vision’ which is a future imagined, a hope of how things can be in the ‘farther into the future’ horizon, 10-20 years from now. “

A strategic plan describes how you can get there. It’s about making decisions in the present for the future and usually involves a 3-5-year time frame. It is both written and lived. It cannot be pieces of paper stuck in a drawer and forgotten, but must be thought through carefully.  It should reflect a flexibility and readiness to whatever the future may bring.

So I pose this challenge to business owners: What is your vision, your shared values—and your mission? What strategies should you follow to reach your goals before passing the baton? What structures and people do you need for the business to succeed? What is your succession plan? What are your contingency plans in handling a business crisis? How about a death in the family? Sibling rivalry? Questions related to ownership, management of shares, who are qualified to own, inheritance, entry of in-laws, extended family members?

Many business owners recognize the importance of ownership and management transition, but few know where and how to start in developing collaborative leaders that will take the business to the future.

To be continued…