Tag Archives: family enterprise

Role Confusion Can Lead to Disastrous Results

I am now sharing the last half of Benny’s email (the 37 year old grandson and eldest 3rd Generation family member), that he sent to me together with his Easter Sunday greeting:

“Prof, despite our imperfections and the family members’ stubborn nature (it is in our DNA), we are grateful that you never gave up on us. Collectively as a family, we are more than determined not to let this governance opportunity pass and we are absolutely committed to pursue our role as stewards aiming for 100 years or more!

So, in behalf of the family, our second-generation leaders and my third-generation cousins, we sincerely thank you for believing in us. 

We look forward to the next Family Council meeting next month!”

Positive feedback like this one I received on Easter Sunday lifts my spirit and emboldens me to continue my advocacy of helping family businesses in Asia.

The Goal of 100 years is Unfolding

Now the C Family is united in its vision of becoming a family-inspired enterprise. The family is now on its way towards fulfilling the founder’s dream in building a legacy that promotes harmony, growth through strategy, professionalism, free from petty conflicts, supported with mutual covenants and a powerful set of values reinforced with legally enforceable shareholder’s agreements!

Governance work is about compliance and it is challenging. There is no guarantee that the ride will be smooth.  As a matter of fact, it will have its twists and turns but their journey to becoming a world class family enterprise will no longer be elusive.

The C Family Crisis mirrors 90 % of the World’s Family Enterprises

Without any form of proper mentoring related to governance and role definition, these next generation family members will end up managing non-family employees with disastrous results.

Additionally, family member entitlement is oftentimes a result of a confused role when these children crosses over from a purely family member role to a family member employee or shareholder role.

By observing how the patriarch (matriarch) or other senior generation family members gives out orders and discipline subordinates, the new family member employee will naturally imitate these behaviors and the senior leader’s management style. Good thing some of the family members realized that an intervention was needed so a looming crisis was averted. It would have been the beginning of the end for the C Family Business.

Solutions Must Be Long-Term

A non-executive Shareholder or family member who is active in the business but with an “owner mentality” mindset is naturally unreasonable and may demand the use of company resources or to impose his or her will on employees in how to behave.

Such role confusion can often be clarified by conducting a series of educational forums initiated by a Family Business facilitator in which the boundaries of appropriate and inappropriate shareholder behavior are clearly explained. Depending on the planning area where intervention is urgent and immediate, I am suggesting critical planning areas to choose from:

1. Family Governance and Succession Planning as a prelude to the Crafting of the Family Constitution where the topics covered will be the natural transition to the next generation members and the predictable problems that goes with the transition

2. Business and Growth Planning entails the formulation of a Strategic Plan that will serve as the family business’ 3 to 5-year vision and growth plan. The option to do an IPO, if the family members are receptive, can be discussed in this forum.

3. Ownership Plan addresses key topics that clarifies the roles of owners, management and the board level family members

(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.
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My personal advice to business owners (Last part)

SURABAYA – As this article sees print, I will be in Indonesia’s second biggest and most populated city with a population of three million and an extended metropolitan area with more than nine million inhabitants covering several cities.

Surabaya is a port city and was once the largest city in the Dutch East Indies and virtually the center of trading in Southeast Asia, competing with the likes of Singapore and Hong Kong. It is pretty much like Cebu and Iloilo as the local economy has a thriving Chinatown district.

Together with neighboring Singapore, which is a short two-hour flight, Surabaya and Jakarta form part of my regular coaching itinerary due to my numerous engagements with some of the country’s biggest family owned conglomerates.

Compliance after implementation

Allow me to complete the last part of the time tested formula that I strongly encourage every family member to embrace:

8. Compliance on business governance. It is essential that family members define and set boundaries, including drawing clear management lines in running the business. Mixing business, family and ownership issues every day can strain relationships, transforming the same into unnecessary conflict and disagreements.

Discretion follows conflict, so the best way to understand each other is to put in writing rules for participation in the business, qualifications, duties and accountabilities of each family member.

For senior generation leaders, there is no other time than now to initiate and document protocols and define roles and responsibilities to avoid hard feelings or miscommunication.

9. Require outside work experience. Children of owners desirous to join the family business should be required to get at least three to five years’ business experience elsewhere first, preferably in a related industry.

This will give them valuable perspectives on how the business world works outside of a family setting. Here, the child appreciates the value of discipline, competition and control. It is also in the outside world where he is humbled and challenged to perform by his peers and superiors.

10. Seek outside advice. The decision-making process for growing a family business can sometimes be too closed. Fresh ideas and creative thinking can get lost in the tangled web of family relationships. By having a non-family advisor, objective solutions minus the emotions are effectively laid out. The advisor’s entry can also be a good way to give the business a reality check.

11. Develop a succession plan. A family business without a formal succession plan is asking for trouble. The plan should spell out the details of how and when the torch will be passed to the younger generation. It needs to be a financially sound plan for the business, as well as a way for retiring family members to enjoy the quality years ahead. The phrase, “There is only one boss” is so appropriate when a successor is in place. Having a single leader does tend to be less complicated from the point of view of corporate decision-making.

The country’s biggest and most diversified family owned businesses like JG Summit Group and the Filinvest Group have already anointed next generation leaders to lead their billion-dollar conglomerates. With their succession plan firmly in place, mandates are established and the next generation leaders identified early so they can continue their stewardship role to the next generational phase.

12. Empower the next generation family members. Allowing the next generation of leaders to make contributions and introduce change is a major step in the right direction. Establish guidelines for competency, leadership and accountabilities for the next in line family business leaders.

The time to start the process is now

Applying these success formulas in the course of growing the business plan is like experiencing the seamless, graceful exchange of a stick between runners in a relay race. The new runner is fresh and has maximum energy; the concluding runner is decelerating as he has already spent his energy by running at maximum speed early on. The athletes never come to a stop to exchange the baton; instead, the handoff takes place on the move, almost effortlessly.

Good succession planning does not merely involve designating a family member and training him or her for the takeover. In fact, grooming the successor is the founder’s greatest teaching and development responsibility because it involves a long-term, continuing effort to balance competing interests and pressures that are integral in a family business.

My advice to business owners (Part 3)

TO continue with the time-tested prescriptions that I stated in my earlier column, I will cite several important techniques below:

5. Educate family members that family and business goals are fundamentally different. It is a unique system fraught with emotions that has fundamentally different and often incompatible goals. I will highlight a few examples of conflicting goals that usually take up centre stage in any family conflict.

The dilemma of having a dividend policy can be a cause of conflict. Non-active family members may need high dividends to secure their personal interests but for active family members, the expectation and bias to have ready capital for reinvestment would always be on top of the priority list.

In the area of employment where parents want their children to lead the business but the business needs to operate based on meritocracy. This now presents a dilemma of sorts—employing or continuing to employ less than stellar performing family members to run the business and in return compromising the viability of the enterprise.

In the absence of any governance policy, how then can you reconcile family needs and business goals? Whether they are shareholders or not, the key is to educate family members early on in their careers.

6. Change Matters. Family businesses must realize the importance of pushing for change. We are seeing the internationalization of businesses where sourcing, selling and buying are all happening in a borderless economy.

For family businesses to succeed, family members must be encouraged to embrace change as a core value while protecting the family legacy. Investing on the education, competence and the skill set of family members (preferably before they join the enterprise) must be an absolute requirement. Technology must be part of any business plan and drawing a business continuity program to determine where the business is heading will allay any fears of the senior generation when they gradually start the succession process.

7. Align ownership agreements. Conflicts arise when there is no solid and documented agreement. I understand the practice of the founders verbalizing shared ownership based on a simple formula that family members absolutely trust each other. But for as long as issues, concerns, and polices are only verbal in nature, it would not have much power and impact and naturally could easily be forgotten, neglected or ignored.

My advice is to avoid relying on verbal promises. It is not actually only about trust. It is about keeping the family business running successfully and getting everyone on the same direction.

So to avoid a future conflict, the senior member must take the lead to formalize matters in writing. A word of caution though: do not procrastinate any longer! So much energy and senseless accusation have been hurled amongst family members already.

The time to initiate ownership agreements should be made immediately so that everything is clear and formal.

To be continued.

A successful governance seminar in Cebu

It was a truly wonderful feeling to be warmly accepted by first, second and third generation family members who participated in my governance talk last Saturday at the Cebu Parklane International Hotel!

The audience was an eclectic mix of business owners and senior executives from Visayas and Mindanao. There was also a sprinkling of consultants belonging to the legal, tax and finance profession.

Overall, my talk with fellow colleague Prof. Dickie Gonzalez, the corporate governance specialist at W+B Advisory who took the morning slot, was not just a success but a personal boost to further my advocacy in educating family members in pursuing authentic governance in the family enterprise.

Notwithstanding the long and delayed 20-hour flight from JFK New York on a Black Friday, arriving 1 a.m. the following day and making it to Cebu by a hairline just in time for my afternoon slot, I can say it was well worth it!

Thank you to the organizer, Octopus Events & Branding, to the Sun.Star Cebu team for supporting and promoting the event and to all the sponsors who contributed their time and resources in making this seminar possible.

My last seminar in Makati

For those who missed my Cebu talk, you can still attend my last seminar in Makati on Dec. 2, a Friday. Octopus Events will organize this one to be held at Makati Sports Club in Salcedo Village.

The week after, I will be delivering a series of governance and succession engagements in Indonesia and Singapore to complete my ASEAN lecture series for the year.

The short life of family enterprises

FAMILY-OWNED enterprises (FOE) constitute the world’s oldest and most dominant form of business organizations.

According to Prof. John Ward, in many countries, family businesses represent more than 80 percent of the overall businesses.

It is also a fact that most family businesses have a very short life span beyond their founder’s stage and that some 95 percent of the family businesses do not survive the third generation of ownership. This is often the consequence of a lack of preparation of the subsequent generations to handle the demands of a growing business and a much larger family.

Strengths of family businesses

Several studies have shown that family-owned companies outperform their non-family counterparts in terms of sales, profits, and other growth measures. This high performance is the result of the inherent strengths that family businesses have compared to their counterparts. Some of these strengths include:

Commitment. The family as the business owner shows the highest dedication in seeing its business grow, prosper, and get passed on to the next generations. As a result, many family members identify with the company and are usually willing to work harder and reinvest part of their profits into the business to allow it to grow in the long-term.

Knowledge continuity. Families in business make it a priority to pass their accumulated knowledge, experience and skills to the next generations. Many family members get immersed in their family businesses at a very young age. This increases their level of commitment and provides them with the necessary tools to run their family business.

Reliability and pride. Because family businesses have their name and reputation associated with their products and/or services, they strive to increase the quality of their output and to maintain a good relationship with their partners — customers, suppliers, employees, community, etc.

Why do family businesses still fail?

Indeed, about two-thirds to three-quarters of family businesses either collapse or are sold by the founders during their own tenure.

Only five to 15 percent continue into the third generation in the hands of the descendants of the founders.

This high rate of failure among family businesses is attributed to a multitude of reasons. Some of these reasons can be due to the state of the industry or some external event like the regulatory environment or the economy. But clearly, the real danger points to the three major issues below:

Complexity. Family businesses are usually more complex in terms of governance than their counterparts due to the addition of a new variable: the family. Adding the family emotions and issues to the business increases the complexity of issues that these businesses have to deal with. Unlike in other types of businesses, family members play different roles within their business, which can sometimes lead to a non-alignment of incentives among all family members.

Informality. The family tries to do it all and there is usually very little interest in setting clearly articulated business practices and procedures. As the family and its business grow larger, this situation can lead to many inefficiencies and internal conflicts that could threaten the continuity of the business.

Lack of discipline. Many family business owners especially the next generation members who have never experienced struggling to survive have this sense of entitlement and often times do not pay sufficient attention to key strategic areas.

While many businesses that are owned and managed by families recognize the importance of ownership and management transition, “few know where and how to start in developing a governance and succession plan.”

For advisors out there, the key is to challenge FOEs to pursue governance and succession. Doing so will improve their odds of survival.

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.

When succession can go wrong

THE final test of greatness in a CEO is how well he chooses a successor and whether he can step aside and let his successor run the company…a powerful quote coming from management guru Prof. Peter Drucker.

There have been issues about successors fighting and bringing to court their own parents. Society has despised these successors as ungrateful persons – biting the hands of the person/s who have fed and raised them up to where they are now. While there may be some truth to this, let’s try to understand the succession dilemma.

The succession dilemma is a seemingly intractable set of circumstances that has entangled leaders for as long as there have been organizations. For the would-be leader, succession is a time of great excitement and promise, the culmination of a long and arduous climb to the top. For the incumbent leader, succession is a time to confront the passage of time, the end of a career, and even mortality itself. It is no wonder that relationships between successors and those they hope to replace are so fraught with emotion.

In a Harvard Business Review article written by Ciampa and Watkins, “the dynamics of the successor’s dilemma can begin long before he sets foot in the new office or right after he assumes office. The chief executive whom he is supposed to succeed and the board make it clear that great things are expected of the designated successor—and fast.

And so the new successor plunges in to learn about products, markets, and internal processes. In the midst of this intense learning period, the successor must try to build a relationship with the person he hopes to replace, a process that is riddled with pitfalls. Initially, he may have to avoid challenging the CEO even when he disagrees with him. That reticence is understandable, but it can plant the seeds of trouble.

Saving a successor son

Take the case of a son in his mid 30’s I was engaged to mentor and designated as successor in a large manufacturing company with an annual turnover of $200 million. He was expected to take over in five years when his father, the chairman, retires. The chairman who started the company 38 years ago, had helped shape the industry and founded the industry association. He wasn’t an arrogant person, but the chairman’s reputation for hard work plus his sartorial taste made him an intimidating figure.

The company was in good shape, but it needed to improve the efficiency of its business operations to keep costs down. The new successor quickly spotted ways to do so, but he didn’t know how to tell his father, the chairman, without sounding disrespectful. In fact, he kept his opinions to himself and publicly supported the chairman’s status quo approach to the business. Fortunately, during the course of our regular interactions I discovered the bind the successor son was in and gradually helped him resolve it. Without my monthly fly-in to listen and coach the successor son, a conflict would have escalated leading to the business being compromised or the son breaking down. Much more often, the successor’s silence can lead him to frustration and anger.

The founder’s dilemma

If the successor son is facing new and daunting challenges, so too is the founder, who typically passes through three distinct phases after a successor is designated. In the first phase, he 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 painstakingly built, the founder enters the second phase—growing discomfort and gradual resistance. While he may be happy to have found a successor to whom he can entrust the company, he is 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. The founder must face up to the fact that his successor will run the company differently—and that just feels wrong. Part 2 will follow.

Does a dividend policy buy peace in the family?

THE Philippines is predominantly a family business market and most businesses were set up by the baby boomer generation (born after World War II). Expectedly, a significant chunk of family enterprises are going through a generational change in the next five to 10 years.

What is alarming is that most businesses remain unstructured with no formal holding company.

Being unstructured translates to a very informal organization with the senior founder, likely to be aged between 55 and 75 years old still calling the shots purely based on gut, employing traditional methods, and likely to be very discretionary.

Additionally, you add another equation where the next generation members in their 30s and 40s, likely to have a family of their own and with family needs increasing, the issue of dividends sharing becomes a nagging concern.

According to F. Visscher, for many family firms, the lack of a dividend policy is a serious omission at best, and a recipe for a shareholder-relations disaster—or a family feud—at worst.

He opines that a dividend policy formulated without consideration of other liquidity options, and outside the context of the company’s overall capital needs, is also a serious mistake.

Family goals and business goals are different

Visscher again articlulates that the lack of liquidity is one of the most common sources of discontent voiced by the shareholders of family firms. As the family and the business grow, the disparity in the financial and economic goals of shareholders increases. The shareholders active in management want the business to grow and the stock to appreciate.

They prefer to see “excess” cash reinvested in the business, rather than frittered away on dividends.

But the inactive shareholders tend to see their equity as an investment on which they are entitled to a return comparable with other investments. Oftentimes, they view the business as more of a cash cow than a long-term family enterprise, especially if they do not have other sources of income.

For starters, dividend policies should always form part of the shareholders’ agreement.

What is a good formula for crafting a dividend policy?

Just like my colleagues coaching family businesses in the ASEAN region, I am always confronted with the same question.

Many family businesses always assume that there is a “rule of thumb” for setting dividends. For all practical purposes, crafting a dividend policy is not easy. I have had coaching work in ASEAN where family leaders have a policy of not paying dividends. For some, they distribute all available cash.

So what then is a good formula? Fundamentally, the focus should be on what’s right for your family business and what can the business afford? How much do we need to reinvest back into the business?

A most common example is to budget a set percentage of profit after tax. The usual practice is a progression of increases starting with five percent, seven percent then 10 percent, but again the rate will depend on the financial health of the company.

I normally recommend that dividends usually start with a low rate. Just the same, I have listed the following “best practices” guidelines in setting up a dividend policy:

  • A clearly articulated dividend policy is needed to establish expectations among shareholders/family members.
  • Shareholders must be made aware as to when and under what circumstances the company will pay dividends.
  • Shareholders must be made aware as to how much they can receive. I coached one family where dividend amounts have been pre-agreed in the beginning of the year and released in December.
  • While a dividend policy might represent a compromise of interests, it is important that the policy is evaluated every year.

Who sets company dividend policy?

When should dividends be paid? To whom? How frequently?

How large should the dividend be?

How flexible should the policy be?