Tag Archives: Family Council

Family Commitment is Non Negotiable

Family values and business values are usually not aligned.

While a business exists to create customers and achieve financial success, families have an entirely different motivation. They typically bring a less profit-centered focus alternating financial gains with trust, relationship and a lifetime engagement. These non-financial goals represent the bedrock of the family business ecosystem.

For one, family-owned enterprises are more community driven. They go out of their way to help their trade area on various social advocacies. Internally, the employees see the enterprise as an extension of their family and vice versa.

One good example was when a Philippine based businessman (net worth US$3B) went out of his way to do a headcount of all his employees affected by Super typhoon Yolanda (Haiyan). He then secretly met and surprised each one of them with financial support under a “pay when able” scheme and encouraged them to go back to their hometowns so they can be with their loved ones while rebuilding their homes. As a PWC report stated in one of their studies, it “is the injection of this very human element into the mix that makes family businesses unique.”

I want to share another success story of how family and business governance can work for as long as the family remains committed.

Family Business A is a trading company I have been coaching for the past five years. It was founded in the 1970’s and now distributes its products across the Asia Pacific region. By industry volume alone, the business is ranked 8th in Asia Pacific.

The business is currently being run by second generation members composed of five siblings. Due to the lack of systems and internal structures, confusion and petty misunderstandings among siblings became more frequent. Even non-family members were always caught in the crossfire, unclear on whose instructions to follow.

Recognizing the need to overcome the generational curse, the family agreed that the eldest son would take the lead and address governance in the areas of family, business and ownership (shareholding) structures.

“We used to have heated, nasty disagreements, but because we have set some rules in place now, we can resolve problems in a more professional manner minus the emotion” said Johnson.

Jenny the other sibling also remarked, “The advantage of having a family council and being constantly reminded by a family governance coach is that our disputes have become less personal. We were made to realize that we were brought up under the same roof and our father always reminded us that when conflicts do happen, we should always hold on to our values like respect, honesty and unity.“

As in most of my engagements, my intervention with this family was never a walk in the park. In my first year, it was clear that my initiatives would solely focus on family governance. It is extremely important to galvanize family commitment first as a squabbling family will never progress to embracing business governance.  Forcing a disunited family to transition to business governance is a double edge sword.

In the course of a little more than a year, we finally signed the family agreement. Immediately after, I made them formulate business governance policies to include hiring of non-family key personnel, performance metrics including entry and exit rules.

With professionals in place, meetings became less emotional and family members saw it as a challenge to raise their performance standards.

When every family member is fully committed, it sends a strong message to everyone to put the interests of the family business first before their own.

esoriano@wongadvisory.com

 

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Without Communication, There is No Relationship (Part 2)

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

Today’s article will highlight the importance of communication.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

esoriano@wongadvisory.com

Without Respect, There is No Love

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“Without respect, there is no love. Without trust, there’s no reason to continue.”

This is a powerful quote from Paul Chucks that must resonate to all family members torn by strife and conflict. It is also a timely reminder as we celebrate the month of hearts!

For the past six years after its founder Richard’s passing, the “A” family typically gathers for their mid-year family and business council meeting every third Sunday of the sixth month. The family calls it Code 36 representing the third Sunday of the sixth month. It is an event combining family and business performance review with a segment on ownership alignment. I normally add flavor by injecting governance, strategy and growth during the session.

This activity is separate from their regular family and business council meetings. In the Family Constitution that my advisory firm, Wong Advisory drafted six years ago, the members of the Family Council must meet for a total of 20 hours a year spread over five to six meetings while the Business Council members are required to meet every month.

My firm added Code 36 together with the other governance councils before the founder passed away primarily because the family and the business almost fell apart due to major conflicts on many areas (entitlement, in law participation, decision making, power struggle, conflict of interest). The infighting was so intense that it grounded the business to a halt for several years and caused so much heartbreak for the founder. 

In this year’s forthcoming gathering, a total number of 23 members of the second and third generation are expected to attend. Their age ranges from 61 to 15 coming from the founder’s five children and their families. Those below 15 years old can join but are not obligated to be in the function room.

Relevant topics are sorted months before but the objectives are four fold:

  • Evaluate the state of family and the business
  • Review mid-year performances of the operating units
  • Develop long-term goals for the business
  • Evaluate policies to govern family- business relationships

The overarching core messages remain the same and revolve on five powerful values handpicked by the founder himself: Communication + Respect + Trust +Unity = Growth

Just like the last gathering in December, the meeting usually starts with the clan’s Gen 2 anointed leader reiterating the family’s shared vision and values and a story about the growth of the business since its humble beginnings in the 1960’s.

The objective is to remind the younger generation and the extended family members how their grandfather Richard and his wife jointly founded the business through hard work and honest dealings with customers and suppliers. Then a short seven-minute video of the family history will be played. The emotional video instantaneously reconnects the deceased founder to all the members of the two generations and reminds everyone that through regular and open lines of communication, the family enterprise can overcome temporary setbacks.

After the talk, a Gen 3 member usually in charge of finance will report how the business performed over the last quarters and the outlook for the succeeding quarters.

Then the legal counsel, a non-family professional will then provide a quick review of the ownership structure by way of educating newly inducted family members on the importance of stewardship as well as shareholder qualifications and responsibilities. Recently employed family members are those who were invited, signed the constitution and are now full-fledged family assembly members.

To be continued…

esoriano@wongadvisory.com

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)

*****

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

 

Padre Noble, Hijo Rico, Nieto Pobre

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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)

*****

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.