Tag Archives: Family Business Advisor

Are You Really Committed to Succession?

June 26Prof. Josep Tàpies of IESE Business School in Spain is absolutely right when he remarked, “No one assumes that the son of a great violinist will also be a virtuoso on that instrument,”

So when do we consider a succession successful? First, it is when the company’s founder hands over the business seamlessly to the children, along with their spouses without any fanfare nor disturbances in any of the three critical pillars: Family, business and ownership systems.

Second, it includes the transfer of power to the most qualified and deserving next generation leader, who will navigate the enterprise together with his or her siblings. The transition to a chosen successor is a critical decision made unanimously by all the siblings, the BOD and the senior executive team.

The third element in the succession journey is that every strategic move is guided by a family agreement or a charter where governance issues are raised to the family council for approval using pre-agreed barometers. It is also essential for every member of the family council to be involved in a consensual decision-making process under a culture of transparency and respect.

In my family governance work at W+B Advisory, it can take up to 10 to 12 sessions or close to a year to create a family agreement. Why that long? There is no short cut to creating a real and authentic governance process. Just to initiate a transition from an informal set of rules to documenting formal agreements can be daunting for family members who are not used to corporate best practices.

During sessions, family members are made aware of their inherent responsibilities. They are guided on every item covering a slew of code of conduct policies where they simulate a formal meeting and collectively negotiate an acceptable governance solution to predictable problems that will likely happen in the future.

The fourth element is the creation of a Family Business Training Institute meant to inculcate good parenting programs, values formation training, business skills enhancement, shareholders education, a rigid successor program, Board level governance and institutionalizing a culture of stewardship to all family members.

And finally the last element in the succession journey is the creation of a Single Family office (SFO) that seeks to manage and preserve the family’s wealth. An SFO is a private company that manages investments and trusts for a single family. Other services include family governance, financial and investment education, philanthropy, estate planning and tax mitigating services. For ultra-high net worth (UHNW) families ably assisted by my firm, we assist family businesses in pursuing diversification strategies using private equity and liquidity investments.

Tàpies concludes, “All companies are subject to risks committed by governments and managers, but family companies, because of their very nature, can more easily succumb to a series of mistakes. The succession process is a key issue that the family company must confront. It is a long process that requires planning and collaboration with outside advisors. A well-prepared succession requires the intensive training of one or several different successors. It also requires you to establish conditions that will regulate relationships between shareholders, managers and corporate personnel in the future.”

In closing, succession is a new beginning, a process, an ever evolving phenomenon. Most of all, it is a journey. Hence, adequate preparation is key and this includes:

  • An agreement or willingness of the successors to go on the trip
  • A common destination with shared values
  • Milestones for monitoring progress
  • Fuel to sustain the journey
  • Fundamental skills for dealing with road obstacles
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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

 

What If You Died Tonight?

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When you’re dead, you’re dead. 

What happens to your business, however is another story… if you planned the leadership and ownership transition, I congratulate you! In your memorial service, you will be remembered fondly!

Wait a minute!  No plan? That can be chaotic for your family, children, employees, partners and the business itself — a completely avoidable mess. Don’t expect to be remembered fondly!

It is not only scary but too daunting to think of a likely scenario where the founder or patriarch dies without planning the future of the enterprise. In my recent family business coaching engagement in the US and Canada last month, the death of a patriarch was just too much to bear for family members who were caught unprepared.

During our first session, I was peppered with so many questions coming from practically all family members and creditors!

  • What would happen to the business?
  • What would happen to the ongoing projects?
  • Who will take care of the family members?
  • How would this affect our respective families?
  • Will there be conflicting priorities and future plans for the business between other shareholders and the deceased’s family?
  • How do we make decisions amongst us siblings?
  • What will happen to Mom with Dad gone?
  • How much is the total value of our business?
  • Do we need to sell some properties to pay for Dad’s estate taxes?
  • As heirs, how do we go about getting our inheritance?
  • How much and how do we settle our total liabilities?
  • Where will we get the money to pay creditors? Are our loans secured?
  • Where are the list of assets? Who is in charge of safe keeping the Titles?
  • Who will assume the leadership role?
  • Will suppliers and creditors extend the same credit and terms of business they always have or will they begin to pull back?
  • Will customers maintain their confidence in our products and services?
  • Will key personnel suddenly begin to leave?

It is difficult to imagine, especially after working so hard and then all of these questions are raised because you never planned your death or disability. In unfortunate events like this, businesses are liable to fall apart if the proper planning and agreements are not in place.

Sadly, you are not alone though. In a Wong + Bernstein Advisory internal research, fewer than 30% of business owners have a succession plan in Asia!

You can prevent losing all that you worked so hard with a good and enforceable plan.

The key is preparation! Founders, second generation leaders, patriarchs or matriarchs always think of themselves as superheroes and take the inevitability of death lightly until one day he or she discovers something that will forever change his or her perspective about life and living.

And then in a blink of an eye, the mortal faces death and reflects on the family and the family business and the “what ifs” and the ” what should have been done”.

But in all likelihood, it will be too late.

Thus, it is no surprise that the Chinese saying, “Wealth Shall Not Last Three Generations” will continue to consume and haunt families in the event that death suddenly occurs in the family.

Any death can disrupt a functioning family and can mercilessly cause the family business to jolt and veer off course. At worse, the lack of preparation and the entitlement of the family members can cause the family business to fall apart and disintegrate.

How then should family businesses deal with such a powerful emotional event?

esoriano@wongadvisory.com

Without Communication, There is No Relationship (Part 2)

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“Without respect, there is no love. Without trust, there’s no reason to continue.” This was the overarching message in my last column.

Today’s article will highlight the importance of communication.

In a growing multi-generational family similar to the “A” family featured last week, communication is no longer a benefit, it is mandatory!

This coming June, a timely and very important topic where family members are eagerly looking forward to is the topic related to M&A’s (mergers and acquisitions) and IPO or Public listing. I personally handpicked the topic to create awareness on the need for the family business to understand the concept of enterprise value and also to raise the bar on performance and accountability.

The topic last December was also relevant as the subject focused on the Tax Reform Law and its effects on the enterprise.

And as a fitting finale, being the family’s business coach and growth advisor, I intend to conduct a 30-minute session that focuses on three important areas related to governance.

Three C’s (Communication, Compliance, Commitment), three R’s (Roles, Rules and Responsibilities) and three G’s (Governance, Goals, Growth). 

It is also a wonderful venue in addressing possible questions many families wonder about. How do we educate our family members so that they can be effective owners and contributors to the family legacy? How can family members’ voices be heard if they have issues within the business? Who can work in the family business?

Sometimes, the family decides on a certain philanthropy, foundation or service (community project) to support as well as acknowledge accomplishments and milestones of family members. The last part is spent sharing wonderful stories together.

The meeting usually wraps up in less than four hours. When there are no more issues or topics raised, the whole clan is treated to a sumptuous buffet lunch, the much awaited raffle of travel certificates and their honorarium or per diem for attending.

What the family is employing is a process that prepares and plans the family business’ future. It is called communication. Communication also brings to the table openness and transparency. When these meetings are properly managed, it breeds goodwill, trust and respect both for those active and non-active in the family business.

After helping reverse an emotionally charged conflict among Richard’s children that lasted four years, I felt that creating a communication platform with regular Family and Business council meetings plus a middle of the year gathering was the best “fire wall” approach to deter and eliminate any possibility of renewed conflict.

Additionally, the discipline to meet on a regular basis and the opportunity to embrace “take home values” or new knowledge has positively reinforced their commitment to protect the business.

With a stewardship mindset slowly being embedded among family members, the culture of long term thinking has effectively discouraged personal interests to take root.

Expectedly, while the family continues to experience “rough patches” in terms of their relationships, the fact that they can address the issues in a safe and open manner has given them a certain level of maturity and closeness that was not evident before the meetings were initiated.

For the “A” family, open and honest communication during meetings was the foundation for a better future.

As a final message, do not underestimate the importance of good communication — among members of management, among family members, and particularly between the generations. It is an investment in the future!

esoriano@wongadvisory.com

Stop Behaving Like a Father

I want to start 2018 by upsetting the family and business systems in a positive way.

Knowledge is power and ignorance breeds conflict so allow me to share a powerful quote from Prof Kim Eddelston related to a “Fredo” child or better known as a black sheep family member,

“As Fredo demonstrates, these bad apples can disrupt both family relationships and the firm. Continuing to reward Fredos while ignoring their damaging behavior leads to more problems: the child’s sense of entitlement increases, higher levels of relationship conflict in the family firm result, and more problems with productivity and teamwork emerge.”

Unmasking Fredo

A “Fredo” behavior rears its ugly head when the business leader, usually the patriarch, behaves more like a father than a business owner and his actions are manifested in many ways:

  • Bias in choosing family over the business
  • Is motivated in hiring family members regardless of their qualifications and competence
  • Failure to enforce discipline against the erring or underperforming family members

With the next generation family members getting “kid glove” treatment, a “Fredo” will naturally surface and is emboldened to flaunt his or her entitled behavior.

Paradoxically, as the parents continue to ignore the telltale signs of misbehavior, they remain hopeful that their “Fredo” will change and become motivated. Despite the “Fredo” child’s inadequacies, they reward him or her with promotions and bigger compensation.

Creating this environment will naturally make the child demonstrate poor business decisions, commit abuses, initiate tension against his or her siblings and inevitably create conflict after conflict with whoever crosses his or her path. This phase is characterized with constant clashes during meetings, poor performance, high employee attrition rate and professional managers leaving their jobs as a result of the heightened conflict.

When the “Fredo” child is left to do things on his or her own, the disruptive behavior will worsen over time and the acrimony spilling over to the rest of the siblings. When the parents are no longer around, the conflict escalates to an ownership tussle among heirs.

In “The Godfather” novels, Vito Corleone realizes his son Fredo’s shortcomings, but he insists that Fredo, like his siblings must also be given the same opportunity in the family business.

Parental Action Spells Danger

I have witnessed many family businesses led by patriarchs, where the dysfunctional behavior of their “Fredos” are generously rewarded by way of higher pay and new positions in the hopes that the change will motivate them to perform better.

The actions are dangerous, unwise and counterproductive. In the absence of any deliberate effort to contain an aberrant family member, any form of appeasement that parents do to win their “Fredo” to their side will likely fail. And to rub salt into the wound, business owners may unknowingly foment a conflict if they are currently doing the following:

  • Rewarding an underperforming family member
  • Tolerating the family member’s bad and disruptive behavior in the workplace
  • Continually providing financial support to non-working family members
  • Appointing unqualified family members in managerial positions and worse, elevating them to the Board of Directors
  • Giving equal compensation to active family members
  • Giving higher compensation to family members over professionals
  • Not subjecting active family members to performance and Accountability Rules
  • Flip flops on the issue of wanting to retire but refuses to relinquish control
  • Letting the next generation family members decide for themselves on the issue of succession and direction of the business but retains the patriarchal shadow