Tag Archives: family constitution

Rule No. 3 No Extra Marital Affairs

The rule definitely appears controversial and has raised many eyebrows every time I introduce the topic during Family Governance talks. Even my best friend who is a second-generation Chinese family member weighed in on the rule that it is very “un-Chinese”.  I leave the readers to interpret what my Chinese friend said.

Lee Kum Kee Policies

But for the 129-year-old Lee Kum Kee Group, the family edict related to extra marital affairs is one of the most powerful rules that the third generation and grandson of the founder, Lee Man-tat has required the next generation shareholders to obey especially those sitting on the board.

There are equally unique and governance rules that Lee Man-tat espoused as well and these are:

Rule No 1: No Late Marriage

Rule No 2: No Divorce

Rule No 3: No Extra Marital Affairs

Any family board member who contravenes Rules No. 2 and No. 3 are expected and required to leave the board automatically and will no longer have the right to speak and participate in the family council and business decision-making process.

Family Constitution and Family Council in 2002

For Lee Man Tat, these rules are important and crucial as the family members have grown in size, some have lost personal interest in the business, the market environment has become complicated, shareholder ownership are dispersed and owners have varying versions of where the future is headed.

After weathering through two major corporate battles, the Lees agreed to finally set up a family council and draft a family constitution in 2002.

In an article penned by Jeff Pao, he highlighted the different corporate governance systems set up by LKK and what came out of the initiatives, most notable was organizing the Family Council Board and the roles of the 29-member family assembly.

Pao further contends that the family council is in charge of the family business, family office, family investment firm, family charity fund and family training center.

I will share more initiatives that the Lee Kum Kee incorporated in their Family Constitution:

a. All family members have to work at least three to five years in other companies after graduating from college if they want to join the family business

b. Family members who violate rules do not just defy the values enshrined in their Family Charter but will also lose their moral and business ascendancy to implement, enforce and discipline erring or wayward family members.

c. Another powerful value worth repeating in this article is their strong adherence to “Si Li Ji Ren“, a Mandarin saying meaning “Put Other’s First, before yourself.”

d. If family members quit the board or company for personal reasons, they can sell their shares to the company and remain as family council members

e. The next generation are allowed to inherit shares even if they are not involved in the daily business operations.

These rules are the heart and soul of Lee Kum Kee’s flourishing existence and the foundation of their commitment to pursue business excellence and stewardship so the business can be handed to the next generation seamlessly.

Lee Kum is the name of the founder, and Kee is a Chinese word that means a new family business.

The enterprise will be celebrating 130 years in 2018 and there are no signs of the group slowing down. On top of their strict observance of protocols, the other critical and indispensable governance rule that the Lee family initiated was formalizing their succession plan.

The family believes that the plan is critical to sustaining a long-lasting family business.

(esoriano@wongadvisory.com)

Role confusion is dangerous

The C Family Business is a 52 year old manufacturing firm with operations in Southeast Asia and currently being managed by three branches belonging to the second generation.

There are a total of fifteen second and third generation family member employees-managers actively working in the business and their positions range from the President all the way down to the operating business unit managers.

My engagement was particularly challenging as the active third generation family members (cousins) were already on the brink of a major conflict. The only glue that held the family together then was the closeness of the second generation siblings.

In the course of my initial assessment, I felt that the way to move forward was to transition the enterprise from a family first to a business first mindset while addressing a slew of predictable problems related to entitlement, conflict of interest, envy and a sense of “owner mentality”. In-law participation was also slowly emerging as an added source of acrimony.

A Culture of Apathy and Indecisiveness

To avoid addressing these numerous conflicts head on, the three siblings chose to “sweep these problems under the rug” and looked the other way. This feeling of apathy made my intervention very difficult.

On the one hand, it was a tug of war of sorts between my role as family business coach and my singular resolve to put systems and accountability in place guided by the family’s dream of someday becoming a professionally-run, publicly listed and family inspired enterprise.

On the other hand, I was also confronted by every family members’ dilemma and reluctance to cut loose from the entitlements and perks they have gotten used to for many years! It took me all of two years to finally gain some headway.

Successful Intervention must be processed-driven

So what was the formula for success? Fundamentally it centered on eight crucial areas:

a. A collective decision to stop procrastinating and finally move forward to engaging a third party family business coach;

b. Established Rules and getting everyone to come to the table and agree on Governance;

c. Created a Shared Vision with the same set of values espoused by the founder

d. Initiated the implementation of the Agreed Principles immediately right after the signing of the Family Constitution;

e. Activated a working Board Level Governance;

f. Pursued Accountability where any breach by any family member will mean disciplinary consequences;

g. Educated everybody (Family and Non Family Employees) that ownership is different from management

h. A lot of patient capital from all stakeholders

To quote a portion of the email that Benny (the 37 year old grandson and eldest 3rd Generation family member) sent to me together with his Easter Sunday greetings a few days ago:

“Happy Easter Coach! We remain thankful for your continued guidance in making us realize that yes family is family, but business is business. At the onset, we disliked you for insisting that we all focus on governance and pressuring the family to comply but over time we eventually appreciated what you have done.

The realization happened when you insisted that we go through the process of several sessions in crafting the family agreements. The next change was when you asserted that the family council be activated right after we signed the family constitution as it squarely addressed family member roles and entry policies in joining the business. In short, everyone without exception understood that we needed to adhere to the same rules as anybody within the company.

To be continued…

Avoiding a Cain and Abel (Part 2)

LUCY rejoins the family business.

After separating from her husband, Lucy called Irene one night and decided it was time for her to come home and rejoin the family business. Whether it was planned or not, it was obvious that Lucy’s re-entry would reinforce and embolden Irene to raise the matter of governance, business direction and the unfair ownership distribution.

It was just a matter of time that the original distribution of shares among the children would end up becoming an urgent and sensitive issue. And with Lucy siding with Irene, the children are heading toward a collision course ready to draw swords with the slightest disagreement.

Clearly, the brothers understood that their sisters felt betrayed with the unfair ownership structure created by their deceased father but they chose to ignore it.

Over time, the business continued to grow and there were attempts by the sisters to discuss the ownership structure, including the major contribution of Irene. But in several occasions, the brothers deliberately avoided discussing the injustice related to ownership. Avoiding the “forbidden issues” ended up with heated discussions, resulting in intense and volatile relationships among siblings.

One day, Irene decided it was time to seek advice from a third-party family business advisor.

The first meeting was tense and the siblings felt awkward discussing a myriad of sensitive issues with me. My role was to listen, but there were times I had to interrupt them as the discussions ended with a lot of finger-pointing. After hearing all sides, I finally made my position very clear.

I went to task by addressing critical issues related to family involvement, ownership and the business. Below is the process as well as my intervention in creating a governance system for the family:

a. Helped resolve the ownership and business problems in a fair process

b. Assessed the state of family and the business

c. Facilitated a discussion in developing long term goals for the business

d. Helped the family craft policies that will govern family- business relationships

Established a family council to provide a discussion forum

e. Provided a forum for family members to participate in policy making

f. Prioritized the “sensitive agenda” like ownership, decision making, conflict resolution and define the ground rules

Developed a family constitution

g. Encouraged family members to identify their values and sense of purpose and why they have to work together

h. Documented all the rules and the agreed-on principles among the siblings

Developed a succession plan

i. Helped them lay out their role changes

j. Prepared documents that will make retirement timely and unequivocal

Without the appropriate governance tools, the transition of the family to a sibling partnership right after the death of the patriarch was a key risk factor that led to a breakdown in communication, ineffective decision-making and frustration and conflict.

When there was no intervention, the desire to dissolve the family enterprise became so intense that on the day I met Irene, she confessed that she already reached a tipping point and ready to confront her siblings with her plans meant to further shatter the business: to fight her siblings, to sell her shares or challenge them to sell the enterprise.

I told her to try family and business governance. She answered back, “What if it will not work Prof.?” I said, “The greatest failure is never to have tried at all.”

(esoriano@wongadvisory.com)

***********

Prof. Soriano is a National Agora Awardee for Marketing Excellence, an ASEAN Family Business Advisor, Book Author and Executive Director of ASEAN-based Consulting group, W+B Strategic Advisory. He is also an International Business Lecturer and Professor at the Ateneo Graduate School of Business.
He is the author of two bestselling books related to Family Business Governance and Succession. Those interested to order can call the W+B Group 09228603186 and look for Ms. Aira.

What next after the family constitution?

MUNICH, Germany — A Merry Christmas to Sun.Star Cebu readers! It is extremely freezing here and I wish I was in sun-baked Philippines. But work beckons and I am in Germany for meetings with fellow family business consultants to collaborate on complex European family enterprises.

After these series of engagements, I will finally shut down and enjoy my vacation with family and celebrate Christmas in Vienna, Austria.

Articulating this article’s title

If you are finally convinced that having a Constitution on the Top Shelf or COTS that I highlighted in my article last week is not in the best interest of the family and the business, then implementation is the only way to go.

It is either the family swims together in one direction or sinks together, carrying with it a dysfunctional enterprise and a legacy lost after being built through sheer hard work by the founding generation.

A family business is a business of relationships and relationships are at the heart of the family business. The potential for conflict in family businesses can be greater than for other businesses, typically due to a clash between business and emotional concerns.

Purpose of the family constitution

In a nutshell, a written, comprehensive and process-driven family constitution is a critical requirement for it to succeed. Doing it in haste is a recipe for failure even if family members signed it.

The agreements highlighted in the constitution seek to nurture and promote the company’s successful development and to prepare the family members for succession.

Basically, the family constitution defines the family’s vision of the future and its core values and beliefs. It likewise spells out the purpose and responsibilities of the family council, the ownership council, the family assembly and the board of directors/business council.

More importantly, it also guarantees the enterprise a workable governance system as the family transitions from a single-owner phase to sibling ownership all the way to the cousin consortium, where the sheer number of owners and family members working in the business can be overwhelming and unwieldy.

Finally, on top of the business, it regulates family relationships by integrating what was agreed upon, and these are conflict resolution mechanisms, family business protocols, decision-making criteria, participation policy for those interested to join, corporate direction of the business and setting up rules of family members to own shares and to whom to sell shares. This legally enforceable document is also exhaustively covered in a binding shareholders’ agreement.

When all of these elements are harmonized and agreed upon in writing, the next step now becomes very crucial as the family coach seeks to provide an impartial and objective balancing act, reiterating to everyone what was agreed upon and asserting compliance in all aspects of the family agreement.

There is, however, a downside if implementation is done wrong.

All talk and no action

How conflict is managed determines the degree to which a family and its business remains healthy and strong and how it can address head-on the issues that might affect the relationships of the family members/branches.

Failure to manage conflict after the signing of the constitution leads to the splintering of the family business. One of the telltale signs is when family members talk endlessly about the issues yet fail to act on them. We call that procrastination.

Penny-wise and pound-foolish mindset

Here’s the Cambridge Dictionary definition of this phrase: to be extremely careful about small amounts of money and not careful enough about larger amounts of money. In our context, that refers to family members looks at the cost and never at the investment on family relationships, growth and legacy.

Facilitating governance is extremely challenging, especially when rules agreed upon are documented and are set in motion. Investing on an objective and experienced family business advisor to facilitate family meetings can unburden the family business and its members of the stress and senseless conflict that can escalate to irreparable damage to family relationships.

Managing the day-to-day business

Family members are so focused on wealth generation and set aside the constitution. Obviously, under stress and confronted with a heavy load every single day, which management activity loses out? Hands down, the clear priority will always be the business and never the governance part.

How unfortunate.

To be continued in Tuesday’s issue: Setting up the family council.

Constitution on top shelf

CONSTITUTION on top shelf or perhaps rephrasing it to Governance on top shelf is probably my biggest frustration in coaching family businesses!

That is the crux of this week’s article. Statistics of failed family businesses that went through a constitution building exercise and missed out on the implementation is alarmingly high.

Failure rate at 60 percent in ASEAN

Six out of ten family agreements (constitution) are most often than not relegated to the top shelf and continue to gather dust. In my last two seminars in the country on family business governance, I saw a significant number of attendees in a bind.

One family member even courageously went up to me and in a sad, booming but almost desperate tone lamented that the family members are still at odds despite formulating a family constitution (done by another consultant) five years ago.

He went on to relate that the family members were herded into a hotel, went through a two- day session with the third and final day devoted to the signing. Family members went home happy and optimistic that finally they can envision a harmonious relationship among family members with the enterprise finally moving forward sans family related hiccups.

My reply was direct. Without activation nor compliance, developing a family charter is just a paper exercise.

The emotional effort and energy that goes into the process of drafting the agreement is extraordinary…well at least if I benchmark our W+B working model. The latter goes through an eight to 12 rigorous session process before a final agreement is signed and document.

The process is equally important

After the signing of the agreement, an additional two to three sessions should be devoted to drawing a shareholders’ agreement. This is critical as this last piece of aligning ownership among family members is a legally enforceable document.

A family constitution without a shareholder’s agreement is empty!

For most families, the process represents their most significant investment of vulnerability and openness as well as discussions related to very sensitive and often times personal issues.

If nothing comes out of the family discussion, the family will be reluctant to try again.

Families can become very cynical toward future attempts to revisiting the failed family constitution.

A constitution is not a “cure all” document

A constitution is never a quick fix. It is a product of session after sessions of discovering new things and uncovering concerns that are affecting family and business relationships. It is also a living document that seeks to provide solutions to future problems. And it can only work unless the family members who signed the dotted lines proactively pursue the fourth and critical requirement–implementation!

Implementing the Family Constitution is non-negotiable. Non-compliance is a recipe for a bigger conflict especially if the head of the family is no longer around to provide the leadership and decision.

Alarming statistics

Statistics culled from the Economic Intelligent Unit showed that in the Philippines, the biggest stress (and this is very disturbing) comes from major disagreements among family members over corporate strategy. The EIU rated it at 48 percent for local family owned businesses and 52 percent for its Indonesian counterparts. This particular issue can only be resolved if the family constitution is done right and implemented correctly.

Now you know why I frequent Indonesia.

I have listed below several reasons why family agreements fail:

-Lack of senior management belief and commitment to implement and activate the governance councils

-Time/resource commitment isn’t there to plan, unrealistic expectations

-Day to day growth and pressures too dominant

-Lack of willingness of family members to be proactive and creative

-Tough choices avoided, failure to set priorities

-Reactive, low risk, rewards mentality, low reinforcement for governance thinking

-Past history and mistakes in previous planning attempts

-No desire in pursuing the implementation process itself

-Frequently changing priorities and focus; not persevering on one track; inconsistent decisions

-Low commitment to the implementation

-Governance on Top Shelf, no formal implementation

-Failure to provide the needed resources–financial and personnel

-Conflict, politics, lack of interpersonal skills amongst siblings, cousins when working together

A tool to manage family conflict

MY talk in Singapore last week is one for the books.

Seven out of 10 questions that were asked by family members during the forum focused on why conflict persisted even after they drafted and signed a family charter (constitution). In the hundreds of talks where I am invited to speak every year, I have never experienced being bombarded with almost similar questions.

Why are relationships among family members still fragile or uncertain even after a family constitution has been signed?

To finally put to rest this dilemma, I ended up writing an article on my flight back to Manila. The gist of the article addresses the core reason why conflicts persist.

Family business is always about emotions

A family business is a business of relationships and relationships are at the heart of the family business. The potential for conflict is typically due to a clash between business and emotional concerns. How conflict is managed is a determinant of the degree to which a family and its business remains healthy and strong. Failure to manage conflict leads to the splintering of family business firms.

However, conflict can be seen as a challenge — or even as a positive driver for change. For example, a disagreement between family members on the strategic direction of the business may result in a much-needed rethinking of the business plan and a new agreed vision for the business.

Post-constitution goal: Activating the family council

One of the most effective tools in managing family conflicts is the organization of a family council. Its primary purpose is to facilitate free and open communication between family members in a formal and organized manner to minimize internal or interfamily conflict and hostility. It can also be a forum for discussing issues of continuity and succession. The key to the success of the family council are actual family business meetings, which falls under its main activity. A family meeting serves to resolve family business issues and help maintain social relationships among its members.

Families may encounter initial difficulty in engaging in open and candid discussion on sensitive subjects. Address relatively non-controversial subjects first to pave the way for talks on more difficult issues. It may be advisable to tap the services of a professional as facilitator.

The family council and the constitution

If a family council is activated, it is also mandatory to prepare a written and comprehensive family constitution, which is a critical requirement for it to succeed. Basically, the family constitution defines the family’s vision of the future and its core values and beliefs. It likewise spells out the purpose and responsibilities of the family council, the family assembly and the board of directors.

The family assembly and the family council can co-exist. Since only a select group of family members get to participate in the council to discuss more relevant business-related issues, it might be necessary to establish the assembly to provide a venue for other family members not included in the council, to thresh out conflicts and air their opinions.

There are various components of a family constitution such as a code of behavior and policies governing family members working in the company. Some components worth mentioning here are dismissal and retirement policies. There can be a rule such as “All family members should automatically retire at age 60 and can serve on the board of directors only until the age of 70.”

Changing of the guard must be a gradual and graceful exit

In my experience coaching family enterprises in Asia, in order for me to motivate the family member, especially the founder who still clings to his position even past retirement age, I would normally specify certain incentives and benefits for the retiring members. For the founder, he can continue to have an honorary title such as chairman of the board or something that would make him feel he is useful to the business, knowing that his expertise and experience are duly acknowledged and respected by all concerned.

I also request next generation leaders to prepare and present a business or strategic plan on how to attain positive income projections in the next five years to make him feel secured in the thought that the company’s profitability continues even after his retirement. In short, make the transition gradual and done with grace and style. The candidate for succession should be endorsed by the family council based on meeting certain meritocracy criteria and strong leadership.

Suspending or firing a family member

Dismissals are sensitive matters that should be addressed directly. One policy may state “The authority to fire a family member rests solely with his or her direct superior. Prior to dismissal, the general manager should inform the family council, so that the ramifications of the dismissal can be anticipated and properly managed.”

Establish a fair process to build safety and predictability. Put stock redemption policies, job descriptions, performance appraisal systems, non-competition agreements, etc. The constitution should spell out the specific process by which the successor is to be chosen.

Perhaps, putting up the above organizational tools will prove difficult for most Filipino and Chinese family businesses given Asians’ non-confrontational attitude. But if they are to achieve economic takeoff and maintain stability, the effort must be undertaken, otherwise the family constitution is just a piece of paper.

With a clear strategy, growth is assured

SINGAPORE-I am back in Singapore to continue facilitating a strategic planning session for a family-owned enterprise with 7,000 employees. It is managed by second generation family members and engaged in several businesses (agriculture, real estate, investments and food). Just like any startup business with limited capital, the business that was started 40 years ago initially ventured into the trading of commodities like rice, sugar and corn.

Throughout its 40 years of existence, the patriarch has expressed his desire to retire. When he engaged my services as family business coach, he intimated two things as a pre-condition before he steps down–he wants to know where the business is heading (vision) and whether his children are capable of assuming a bigger role in managing the business (governance). I am on my third year as board advisor and this year’s thrust is to expand to Vietnam.

Before I was tapped by W+B to advise the enterprise, the patriarch admitted that these two questions keep him awake on some nights. Now he looks forward to a gameplan covering an expansion mode in ASEAN that he never thought was possible. After three years, his function is purely under an oversight mode now minus the day to day involvement.

Family constitution is a game changer

After helping the family craft a family charter (Constitution) which took a little more than a year to complete, the family and business relationships have been harmonized. Of course, there are occasional bumps on the compliance side but the governance process put in place plus the defined roles of the family members has dramatically eased the tension experienced prior to the constitution.

What has made the family members more focused now is due to the activation of the constitution into several councils (family and business councils), where I periodically attend and observe how the next generation family members behave during meetings and how they adhere to the governance policies enshrined in the agreement.

For now everybody’s gearing up to take the business to the next stage: ASEAN growth.

Your growth strategy must be competitive and relevant

A personal favorite that I use in most of my family strategic sessions is Harvard Prof. Michael Porter’s three “generic competitive strategies”. These are cost leadership, differentiation and focus.

Cost leadership strategy-a strategy of achieving leadership in an industry or line of business by offering products or services at a lower cost than your competitors.

Porter’s Cost leadership strategy requires a focus on efficiency, tight cost and overhead internal controls, and relentless cost minimization programs.

Differentiation strategy-a strategy of achieving leadership by creating a product/service that is perceived throughout the industry as unique. A differentiation strategy may take the form of design, brand image, technology, features, service, or other dimensions. Ideally, the company will differentiate itself along multiple dimensions. A focus on quality could be a key differentiator.

Focus strategy-a strategy of achieving leadership within a particular target market by serving that market more effectively or efficiently than competitors. This may enable the focused strategy firm to have cost leadership or differentiation within a tightly focused target market, or both.

What is your competitive and compelling strategy?

Your business growth requires a clear strategy. Your strategy could be based on cost leadership, differentiation or focus. So in my strategic growth sessions (which lasts two to three days) with family members and executives, I usually challenge them to get some pre work done and create a strategy go-to team to formulate and come up with a clear competitive strategy with a vision and an action plan that will cover the whole of 2017.

Family business leaders and professionals must not delay the strategic planning exercise. As what I highlighted in my previous article, everything you do now is meant for the future of your family business.