Tag Archives: family business problems

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…

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When succession can go wrong (part 2)

THE two main enemies in the survival of family businesses are patriarchal control for the senior generation leaders and a sense of entitlement for the next generation family members.

Here is a common case I am always confronted with in my coaching work: “Father consciously facilitates son’s entry but subconsciously needs to be stronger than his son. Son seeks increased responsibility and authority but finds that his father refuses to cede authority, or continues to call the shots from behind.”

In part 1 of the same title that came out in my column two weeks ago, I emphasized the importance of understanding the founder’s dilemma clouded by a three-dimensional process after a successor is designated.

READ: When succession can go wrong

In a Harvard Business Review article written by Ciampa and Watkins, the authors highlighted three distinct phases:

Phase 1: The founder feels pleased with having “done his duty” by installing a replacement. But in the same light, when the successor starts shaking things up and initiates changes in the organizational ecosystem and more often than not touches or encroaches on the culture that the father/founder painstakingly built, the founder goes to a second phase.

Phase 2: He feels a growing discomfort and gradual resistance. He is also confronted with the reality of handing over important decisions to someone who can certainly run the organization well enough but who has a different style and different priorities.

As the founder struggles to retain some control, he also discovers that having a successor requires him to share the limelight in his interactions with the board or senior executives, the employees, and the business community. Additionally, the founder begins to confront several questions and the following issues makes them awake on most nights:

What to do once they retire

Leaving a position of power is like dying a little

Personal loss of identity

Fear of losing significant work activity

Jealousy, rivalry towards, or lack of confidence in the successor

For people who have devoted all their lives to the job for many years—and who delight in their identity as owner visionaries—this can be a difficult consideration. Many founders of successful companies are anointed heroes by grateful employees and as demi-gods by their respective industries. As a result, they come to believe not only that they deserve such praise but also that they are indispensable to the ongoing success of the business.

As they contemplate leaving, their heroic self concept, as the HBR article refers to it, revolts. They cannot live without the company that defines them, and they believe that the company cannot live without them.

In this context, many founders start to ponder the meaning and extent of their legacy. They ask themselves what they will be remembered for—and many realize that it might be overshadowed, or perhaps even diminished, by what the new leader is trying to do.

As co-author Ciampa and Watkins demonstrate, “the CEO/founder feels his power in eclipse, the successor’s impulse is to push for more and deeper change. The two sides enter into more open conflict, and communication between them falls off precipitously. Indeed, it is at about this time that phase three—active resistance—begins to emerge.”

What often happens next is a turning point from which there is no easy return. The CEO/founder calls for support from his troops—mostly members of his senior team. Many are willing accomplices. They are feeling overwhelmed by the successor’s changes and have strong personal ties to the CEO. For the key executives, this brewing conflict can be an opportunity to reconnect with the CEO/Founder but with personal interest as most glaringly highlighted in the following issues:

Reluctance to let go of personal relationship with the CEO/founder; and

Resistance to change – fear of losing power or even employment.

As soon as the CEO/founder shows disagreement with the successor’s style or direction, even subtly, the senior team feels free to operate around or without the designated successor—for example, going directly to the CEO/founder with ideas or plans.

Right around the time the successor should be getting ready to move up, he is facing the fact that the CEO/founder wants him to leave.

Meeting the challenge

Leadership transitions are high-stakes situations, but the fact is, most people aren’t prepared to meet them. The first step toward becoming prepared is understanding the dynamic that under-girds a changing of the guard. But such understanding is not sufficient—action is. And that action, is the successor’s responsibility.

Avoiding family wars (Part 2)

FAMILY businesses are complex as these go through different generational phases. As a family business transitions from single ownership to a multi-generational ownership, expect plenty of opportunities for conflict, covering a plethora of issues and between a range of family stakeholders.

I want to continue my article with the last four rules:

Rule No. 4: Communicate honestly and openly. Open communication is a concept that almost all companies claim to value, but very few truly achieve.

It’s amazing that some well-educated, innovative executives can develop brilliant plans to improve shareholder value but struggle in communicating with the very people they need to help them implement their turnaround plans.

Don’t keep it a secret or hide the fact from your staff that you have relatives or friends working for you, says McMillan; otherwise when it eventually comes out, and it surely will, you’ll appear like you were being deceitful. To foster a better climate among employees and improve continuous two-way communications, consider holding company outings for fun and camaraderie. Attend training seminars or industry workshops with family members and employees to bond with them, establish genuine communications and build teamwork.

It is highly recommended that regular sessions become part of your weekly gathering. In any book about management, it is often referred to as an informal way of resonating your plans and gaining some form of buy-in.

You may call it any name you want such as “Morning Session with the GM” or “CEO Session”, but it is important that you invite key family executives and staff to gather regularly, hear briefly from management and ask questions.

Make employees and relatives realize that opinions are heard and respected. Set a regular schedule or when your “doors are open” for consultations and honor those commitments. Make it a point to find time amidst your busy schedule to address urgent needs.

What is needed to nurture an environment of open communication?

Trust is earned and not given. All high-performing teams, whether in the sports arena or in the business world, are built on a solid foundation of trust. Trust grows over time and is based on individual members of a team making and keeping commitments.

In short, good communications mean good business. It is absolutely important that staff from the most senior on down practice behaviors that facilitate information exchange and encourage honest input from every level.

Rule No. 5: Professionalize the family business. Don’t meet personal family needs using business resources.

Avoid letting family members borrow company vehicles or allowing them to ask the company’s IT person or repairs and maintenance personnel to do home-related repairs and installation. If you can’t avoid it, create an SOP (standard operating procedure) and consolidate them in a manual handbook for family members and senior executives to follow. It’s also a bad idea to pass off personal expenses such as family vacations as business expenditures.

Rule No. 6: Establish healthy boundaries/distance between family and business. This especially applies to husband-and-wife teams. Running a business together with your spouse is a balancing act. Agree and adhere to some kind of system. For instance, some couples refuse to talk about business matters at home, on weekends, or during family vacations.

Rule No. 7: Use family councils to address family matters

A family council is composed of members who may be owners but not necessarily company employees. They meet monthly, quarterly and/or annually for the strategic planning of the business over the next year to the next 10 years.

The council does not micromanage the business but addresses family issues or concerns relative to the business. If a family member is working in the business buts needs to borrow money, the council will decide if it wants to create a fund for the purpose of granting family loans.

In a nutshell, conflicts are often costly—financially, emotionally and relationally. It’s important to remember that there are many strategies we can use in conflict situations, but each of us tends to habitually use some strategies more often than others.

To most effectively resolve a conflict, we should use the strategy that is most appropriate for that particular conflict situation but in the end, setting in motion any form of intervention related to family, business and ownership governance will minimize unnecessary conflict.

Prevention is a whole lot better than the cure!

Avoiding family wars

CONFLICTS are part of a normal experience for many small startups and family-owned businesses. However, conflicts (especially the kind where every day seems like a battlefield), can actually inhibit the growth and profitability of the business—a kind of glass ceiling that keeps the family business from reaching its true potential. It causes not only disruption in the business, but hard feelings within the family. The best way to deal with potential conflict is to anticipate and avoid it rather than having to work on resolving problems after they arise.

What to do with conflict?

According to Don Schwerzler, a family business expert in Lawrenceville, Georgia, conflicts in family businesses are more difficult to resolve because there are three levels of interests at play—family issues, business issues, and ownership issues. “A dispute that occurs in one area can quickly cascade into the other areas.” And since the family is an emotional system as well, old hurts and loyalty challenges can last a long time.

On the other hand, a family business has strong points, like children learning about their company at the breakfast table and by the time they are old enough, they already know the business by heart. However, every family business is unique and complex in its own way, so boiler plate solutions don’t always work.

Here are important rules to follow to help you stave off some family business blunders.

Rule No. 1

Hiring family to work at your small business has its pros and cons. Cheap labor, unconditional loyalty and built-in familiarity are a few. Don’t put family members on the payroll if they’re not working in the company or can’t make a real contribution to the business. In a startup or family business, everybody does everything. This is where a lot of conflicts occur. Make sure that everyone has a role and responsibilities that are spelled out and are very clear, says Jane Hilburt-Davis, president of Cambridge-based Key Resources and co-author of Consulting to Family Businesses.

Establish each person’s title, job function, and compensation. And make sure that you have performance reviews for family and non-family employees alike. Don’t award a contract to a supplier who is a relative.

If you don’t have an employee handbook, this is the perfect time to get one. If not, you are asking for trouble. And there ain’t no trouble like family trouble. Policies for things like overtime, paid holidays and disciplinary guidelines must be comprehensive and you should have them in writing. Some family members might entertain feelings of entitlement – which translates into unreasonable expectations in terms of advancement, rewards and compensation.

The content of family employment policies differs from one family business to another. In developing its family employment policy, the family should focus on the rules, conditions, and processes that allow it to attract and motivate the best competence available. Once developed and agreed upon by the family, the written employment policy should be made available to all family members. This will help set the right expectations about family employment among all family members.

Rule No. 2

Special favors given to family members and friends demotivate employees and set a bad example. Don’t create two classes of employees—family vs. non-family. Be careful not to show family members special treatment, without any justifiable reason/s. Sometimes, great employees resign because they feel they can’t go up in the corporate ladder thinking that family business is open only to bloodline members.

Perhaps, your relative is a very good performer. If you reward him or her, perceived nepotism may arise. There will be people, without question, who believe the sole reason for your cousin’s success is because he or she is your family member–unfortunately, they’ll just never get past it.

Nearly anything could be construed as favoritism. Can you handle it? Is he worth it? Like any other decision in business, you need to give the prospect of bringing aboard a family member a lot of thought, and it’s imperative that you have a “back door” strategy just in case things don’t work out.

Rule No. 3

Be careful not to abuse family relationships. Meaning, don’t either reward or punish someone because they are a relative with whom you have personal history, says business and tax consultant Augustus McMillan. “If others are disciplined for bad behavior, your family member must be disciplined also.”

Of course, emotions are always involved. Think about it: How is your cousin going to feel when you, as his boss, scolds him for some mistakes committed. He’s going to take it personally because you have a personal relationship. Harboring ill feelings is not good for business.

At the same time, you need to reward and praise exceptional work. “Treat any employee, including family members or friends, special if they deserve it,” says McMillan.

To be continued.