Tag Archives: Family Business Coach

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  

 

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.

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.

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…

Family Businesses at their Best

In my last article, I warned about the dangers of ignoring and abetting the red flags in family owned businesses and the natural confusion the dual role family members play both in the family and business ecosystem.

In today’s article, I will cite family businesses at their best and how they continue to remain resilient after overcoming generational challenges and family conflict.

The strengths of a family business are plentiful. In terms of organizational metrics, family owned businesses outperform non-family owned companies in sales, profit, and other growth measures by a mile. Some of the inherent characteristics unique to family members are their high commitment as business owners, their willingness to work long hours and their natural instinct to reinvest profits into the business that will enable long term growth.

Indeed, family businesses provide a good opportunity for wealth creation and the secret lies in a well-structured governance system that promotes harmony, improves communication and promotes accountability.

The reality is this, as the family and business become more complex, effective governance structures increases. Unfortunately, as the business leader continues to generate wealth for the business, governance and succession takes a back seat.

So when a major event or risk happens (Illness/death of key family figure, major fight among siblings, among generations) the business goes into a free fall. For some businesses that I have helped, it can be a daunting task to reverse the tide. For a handful, it has become irreversible.

To quote the 8th generation successor of the Philippine’s oldest conglomerate, Jaime Zobel de Ayala, when asked how they have managed to survived two world wars and still came out stronger, he said:

“Ensuring the continuity of a multi-generational business is not easy. It is a challenge in itself to run a business successfully, while family dynamics and relations can often be very complex. Each generation introduces new challenges. No family leader can plan beyond one or two generations, but if each one values continuity and the legacy that has been passed on, they will always look for ways to strengthen the foundations for the next generation.”

Without any question, the Ayala model of governance is something every family enterprise must strive to emulate. They have stayed the course and relentlessly pursued governance through the years.

Today, Ayala is a preferred brand by investors promoting “shared value”. As Jaime succinctly puts it, “Promoting shared value means aligning company success with social progress.”

Another Asian model for governance is the 130 year Hong Kong based Lee Kum Kee Group (established 1888), the world leader in sauces and condiments. Misunderstanding on the way the business was run, unclear succession plans, greed and power almost took the life out of the LKK family business in the 3rd and 4th Generation.

After two successive buyouts, the next generation leader finally decided to exact governance and raised compliance and accountability standards by introducing unorthodox rules like prohibiting members from sitting in the board if they married late, engaged in extra marital affairs, etc.

With more rules introduced, the group extended their longevity streak. Undoubtedly, one very important value that is at the core of LKK is their concept of “Si Li Ji Ren” or “Put others First Before Yourself”. The traditional and overseas Chinese also refer to this powerful value as “Xian Ren Hou Ji”.

These rules, safely embedded in their family charter and reinforced by a Family Council continues to educate, regulate and inspire the 5th and 6th generation family members to be stewards rather than owners of the LKK Group.

esoriano@wongadvisory.com