Tag Archives: Family Council

Why Banks Love Governance

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Corporate Governance

Outstanding Performance, Higher Profits, Expanded Market Reach and the like FAILS to protect a company which has put good governance & ethics at the back burner.

Only the culture of strict adherence to good compliance can keep a company ahead on sustainable basis, bring in larger profits.

Corporates should act like honey bee which suck the nectar of the flower without effecting its fragrance and produce honey for the well –being of society.

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SAN FRANCISCO, CA. Governance is everywhere. I am slated to deliver a talk related to Ownership and Succession today to the students, faculty members and business owners at the Community College of San Francisco Ocean Campus (CCSF).

This will be another interesting exchange of ideas with business owners and the academia similar to the one I did exactly a year ago when the University of San Francisco College of Business (USF) core faculty invited me to lecture on a topic as diverse as the ASEAN Integration and Its impact on the US Economy.

Next month, I will resume my family business initiatives in Africa organized by the World Bank/IFC Group and then proceed to Southwest Asia to run another governance campaign in collaboration with the country’s stock exchange.

If I get “unlucky”, I will end up doing another North American engagement before or after the year ends. It will be winter so advisory work can get really challenging.

Just as I thought my business coaching engagements will taper off as the year is almost at the tail end, in comes invitations to actively promote governance and succession in emerging economies like Kenya, Ethiopia, Rwanda in Africa and India, Sri Lanka and Bangladesh in South Asia.

Governance is a Top Lending Metric

There is no doubt that creditors, lenders, VC’s and financial institutions are clearly biased towards businesses that are devoted to best practices or whose business and operating model revolve around corporate governance.

The Asian and Global financial crisis in 1997 and 2008 revealed severe shortcomings in corporate governance. Quoting an OECD report, “when most needed, existing standards failed to provide the checks and balances that companies need in order to cultivate sound business practices.”

Right after the 2008 debacle, the OECD and several global institutions launched an ambitious action plan to develop a set of recommendations for improvements in priority areas such as remuneration, risk management, board practices and the exercise of shareholder rights.

The changes happening now is a result of the global wave of governance standards put in place especially in the most vulnerable sector, the start-up businesses and family-owned enterprises.

Hopefully, the collaborative and active intervention efforts will encourage founders of businesses to step up to the plate not just in their profit strategies but in establishing a structure where sound business practices can become the norm.

It is a fact that one of the major hurdles for business owners is the issue of transitioning from an owner mindset (where there is weak governance structures and systems) to the new model of stewardship management (where governance is written and there is compliance of best practices).

Why Creditors/Banks Prefer Businesses that Espouse Governance?

The answers point to a very important ingredient in lending money… the ability to use the fund for the right purpose and the responsibility to pay the creditor-bank on time.

Corporate governance structure builds a strong family foundation and banks are naturally receptive in lending capital to a stable enterprise especially if they see a family constitution in place that captures the following:

  • Vision-driven and values-based that prepares the family and the business for the future
  • Aligning the family’s relationship with the business by way of meritocracy
  • Defining the family member’s rights and responsibilities
  • Ownership alignment covering the next gen leaders are well-documented
  • Effective plan for ownership including key family leadership role and succession
  • A Communication platform to minimize conflict and misunderstanding for active and non-active owners
  • The creation of Family Council to manage Family and personal issues

(esoriano@wongadvisory.com)

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https://www.slideshare.net/pkvijay/corporate-governance-39555679

 

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Padre Noble, Hijo Rico, Nieto Pobre

Sept 25

Governance

As the family and business grow and become more complex, the need for effective governance structures increases. A well structured governance system promotes harmony within the family and business, improves communication and promotes accountability.

Governance defines a process and structure for decision making within each of the systems involved in a family business – family, business, ownership.

Essentially, governance encourages the right people to have the right conversations at the right time.

Effective governance is critical to the long-term success of any organization. This is especially true for family run businesses where the complex dynamics that accompany overlapping family, business and ownership interests can often create conflict where none need exist.

 

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“Father Founder of the company, Son Rich, and Grandson Poor” is Mexico’s powerful equivalent to Asia’s popular saying about family-owned businesses, “Wealth Shall Not Last Three Generations”!

Citing an article penned by Lee Iwan, a leading Business Strategist in Mexico, he avers that the “founder works and builds a business, the son takes over and is poorly prepared to manage and make it grow but enjoys the wealth, and the grandson inherits a dead business and pronto an empty bank account.”

Family Governance Is Non Negotiable

I always reiterate that the first step towards governance is for family members to be cognizant of the major causes of the tension. Second, after identifying the source, the family with the assistance of a family business advisor, proactively work to ensure that adequate measures are adopted so that those conflicts do not spillover to the other circles (John Davis et. al. Three Circle Model). Lastly, if there are differences, they must not be avoided. This will only postpone the issue and create bigger problems in the future.

I strongly encourage the patriarch/matriarch not to waste time in pursuing the governance process. Your action now can help your grandchildren avert not just going back to being part of the “poorhouse” but the ignominy of causing the demise of the family business during their watch.

But to be truthful and fair about the wealth dissipation issue as to which generation caused the demise of the business? The blame lies on the failure or inaction of the first and second generation to initiate governance and succession early.

Tension is Normal in a Transition

When governance is initiated, natural tensions occur as they cannot be avoided. In fact, if there is no tension, it can mean that family members are passive, incompetent, either not thinking or trying to improve or have no power to assert. All of which are equally red flags that a family business will not last.

With any multi-generational transition, you can anticipate tension. With more family members, you can expect more complex family issues emerging that will further exacerbate and breed more tension.

It is important that Family Business governance be set in motion, where rules and expectations are articulated and compliance integrated in the family ecosystem.

It is equally important to note that “every single-owner enterprise passed through various stages of transition and the process improvement is dispersed over time”. But when issues that cause strain and conflict remain unsolved during the governance initiatives, you can expect many of these challenges to manifest and re-appear when the second and subsequent generations enter the business.

The 3 Components of Family Governance

In a Harvard Business Review article with the same title penned by noted Family Business Professor, Dr. John Davies, he adeptly highlights 3 components of Family Governance:

a. Periodic assemblies of the family

b. Family council meetings for those families that benefit from a representative group of their members doing planning, creating policies, and strengthening business-family communication and bond.

c. A family constitution—the family’s policies and guiding vision and values that regulate members’ relationship with the business.

He further points out that for governance to be effective, there should be a working family assembly and family council that focuses on the roles and responsibilities of family members. He outlines the critical areas:

  • These are clarity on family member roles and rights.
  • Actions of Family members, family employees, and family owners to act responsibly toward the business and the family.
  • Regulate appropriate family and owner inclusion in business discussions.

 

(esoriano@wongadvisory.com)

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http://www.mcgowangroupinc.com/services/governance/

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)

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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.

Will the business end when the cousins take over? (Part 3)

THIS is the third article in a four-part series related to the cousin consortium stage. The SME Toolkit and the Business Families Foundation defines the cousin consortium as a stage where at least two cousins or more share ownership of a joint enterprise, generally those belonging to the third generation members of a family in business.

Unlike other stages, this particular phase carries with it more challenges due to the presence of many nuclear families (branches) and numerous family owners, some of which are majority shareholders, others minority owners, some actively involved, and others inactive or passive shareholders.

As the number of family members multiply, there is a pressing need to formalize agreements in all fronts, including the alignment of the family and business visions.

Instituting changes should be a top priority by the senior and next generation leaders

Passing the responsibility to the cousins solely to address governance issues is never a good option. Senior generation members must provide the inspiration and must be present in all governance-initiated programs. These policies do not just guide decisions inside the business, but guide decisions about the relationship between the family and the business.

Below is a list of my recommendations for family members to immediately put in place:

a. Engage qualified professional/non-family members (refer to my last article).

b. Create a communication and conflict resolution mechanism (refer to my last article). Policy development on how best to communicate and manage conflict cannot be put off forever. Family members must formalize and set down on paper the structure and guidelines under which the family will own and operate their business.

My best advice is for the family members to meet and set up a sound governance structure early starting with the formation of the family council and the business council.

c. Set up a family council. Among the many functions of the family council is the setting up of an adequate grievance committee that intervenes against an erring family member. This council must be proactive and unbiased and must be able to manage and temper misunderstandings and irrational behavior among cousins before it escalates into a major disagreement where all parties become emotional. Examples of some questions that will be tackled by the family council are:

  1. How do we go about fixing a petty argument amongst siblings or cousins who are also shareholders?
  2. When will our parents empower us to make decisions? We have been in the business for more than 10 years!
  3. Who has the final say in accommodating cousins interested to work in the business?
  4. What is the protocol in filing a complaint against a disrespectful cousin or senior generation member?

d. Set up a business council. This governance structure, when done with the family member’s/shareholders interest in mind, will be the company’s best bet against unnecessary confusion in the way the company is managed by the cousin consortium. Addressing business related issues like conflict of interest and allowing only qualified family members to join the business will make it easier to maintain peace and harmony as well as cohesion amongst owners. Common questions that the business council usually take up and resolve:

  1. Can we seek your help in pushing for our company vision and values? There is disagreement as to what and where the direction of the business is.
  2. There are many bosses in the company. We do not know whom to follow. Succession is unclear.
  3. Can we review the current compensation policy? The next generation family members have growing needs and we do not know if the senior generation members are aware.
  4. Is there a mechanism to gauge the performance of siblings/cousins? I sometimes feel it is unfair. I work more than my other siblings/cousins and yet we receive the same pay.
  5. Can we regulate the entry of in-laws and relatives?
  6. If and when I decide to pursue my MBA, will the family business pay for my tuition? Will it be the entire amount?
  7. I am a non-active shareholder but would want my son to join the business, is that possible?
  8. There has been no dividend policy for a long time and it has affected my family’s cash flow. I am based overseas. What and how can I air my complaint without being tagged as a greedy cousin?

e. Have the discipline and commitment to abide by the rules. To spur growth in the family business under the cousin consortium stage, a major factor would be to strongly push for the approval of the governance rules and the subsequent implementation by the different governance councils. The key is to impose discipline against family members found violating the agreement. Having agreed policies in place and abiding by them reduces the chances that family conflicts will haunt and destroy the family enterprise.

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.