Tag Archives: Family Governance

Family Businesses at their Best

In my last article, I warned about the dangers of ignoring and abetting the red flags in family owned businesses and the natural confusion the dual role family members play both in the family and business ecosystem.

In today’s article, I will cite family businesses at their best and how they continue to remain resilient after overcoming generational challenges and family conflict.

The strengths of a family business are plentiful. In terms of organizational metrics, family owned businesses outperform non-family owned companies in sales, profit, and other growth measures by a mile. Some of the inherent characteristics unique to family members are their high commitment as business owners, their willingness to work long hours and their natural instinct to reinvest profits into the business that will enable long term growth.

Indeed, family businesses provide a good opportunity for wealth creation and the secret lies in a well-structured governance system that promotes harmony, improves communication and promotes accountability.

The reality is this, as the family and business become more complex, effective governance structures increases. Unfortunately, as the business leader continues to generate wealth for the business, governance and succession takes a back seat.

So when a major event or risk happens (Illness/death of key family figure, major fight among siblings, among generations) the business goes into a free fall. For some businesses that I have helped, it can be a daunting task to reverse the tide. For a handful, it has become irreversible.

To quote the 8th generation successor of the Philippine’s oldest conglomerate, Jaime Zobel de Ayala, when asked how they have managed to survived two world wars and still came out stronger, he said:

“Ensuring the continuity of a multi-generational business is not easy. It is a challenge in itself to run a business successfully, while family dynamics and relations can often be very complex. Each generation introduces new challenges. No family leader can plan beyond one or two generations, but if each one values continuity and the legacy that has been passed on, they will always look for ways to strengthen the foundations for the next generation.”

Without any question, the Ayala model of governance is something every family enterprise must strive to emulate. They have stayed the course and relentlessly pursued governance through the years.

Today, Ayala is a preferred brand by investors promoting “shared value”. As Jaime succinctly puts it, “Promoting shared value means aligning company success with social progress.”

Another Asian model for governance is the 130 year Hong Kong based Lee Kum Kee Group (established 1888), the world leader in sauces and condiments. Misunderstanding on the way the business was run, unclear succession plans, greed and power almost took the life out of the LKK family business in the 3rd and 4th Generation.

After two successive buyouts, the next generation leader finally decided to exact governance and raised compliance and accountability standards by introducing unorthodox rules like prohibiting members from sitting in the board if they married late, engaged in extra marital affairs, etc.

With more rules introduced, the group extended their longevity streak. Undoubtedly, one very important value that is at the core of LKK is their concept of “Si Li Ji Ren” or “Put others First Before Yourself”. The traditional and overseas Chinese also refer to this powerful value as “Xian Ren Hou Ji”.

These rules, safely embedded in their family charter and reinforced by a Family Council continues to educate, regulate and inspire the 5th and 6th generation family members to be stewards rather than owners of the LKK Group.

esoriano@wongadvisory.com

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When parents reward bad behavior (Part 3)

The “Fredo” behavior manifests as early as when a child confronts a major dilemma: the crossing over from a healthy family where unconditional love, inspiration, encouragement, equality and full support are ingrained during the child’s growth years.

Instinctively, parents tend to further extend care and nourishment on the more fragile child expending and nurturing him or her until the child bounces back and intermingles with the other siblings. While the parents demonstrate the handholding process, the family is also expected to care for one another especially on someone who needs it the most.

Full of Inconsistencies

The danger is unmasked when this “culture of love and equality” is carried over to the business. Here lies the inconsistency! Let me articulate why?

Business represents a huge contrast to the norms and culture embedded in the family. While family nurtures love, feelings and equality regardless of behavior, business singularly focus on key metrics like meritocracy, profits, results and accountability.

On one hand, family encourages the family to compensate for the weaknesses and failings of family members and to forgive indiscretions but on the other hand, business in its truest form can be unforgiving on matters related to under performance and mediocrity. Aggravating this paradox is the natural tension between two or three generations working together. You don’t just have a sandwich generation but the gaps between a baby boomer and the millennial generation is far and wide.

Allow me to list down a number of contradictions and divergent values that have created a confused mindset among family members as they cross over to the two other circles (as managers and or owners).

The weakest family member will inevitably end as a likely “Fredo” candidate.

If the family breeds feelings emotion, entitlement and equality plus a slew of varying C’s like confidentiality, culture, career, control and conflict, the business on its own pursues a totally different approach bereft of any emotion. As the family member moves on to the more difficult and measurable metric like profits, policies and plans, you can almost conclude the makings of a full blown conflict.

In an article penned by Kimberly Eddleston, she highlights a critical part in the transition of the child.

“When a child joins a family business expecting the same treatment he or she experiences in the family, where resources are allocated based on equality and need, trouble can result. Patriarchs that treat family employees as children encourage immaturity and dependence, and lead family employees to see them as responsible for their well-being. Moreover, well-meaning family patriarchs often feel they must reward their children equally in the business realm, without regard to their contributions. Their altruism ends up hurting them and costing the business.”

In a very recent family governance engagement assigned to me by our family business advisory firm, Wong+Berstein, a son (sibling A) actively working in the family business was given a house by his parents right after he got married. On hearing the news, his only sibling (B) known to be lazy and underperforming, demanded a house of his own with the same number of bedrooms! Sibling B felt it was not ‘fair’ that sibling A received a house and he did not.

Situations like this as Eddelston opined “are very common in family businesses and demonstrate how family members often expect resources and rewards to be allocated based on the family norm of equality rather than the business norm of merit.”

DIY Governance Can be a Disaster (Part 2)

Family Governance

A fundamental aim of family governance is to mitigate conflict and harmonize interests to ensure business sustainability.  Successful family businesses in the region often establish a governance model and do the following:

  • Establish and formalize family rules and policies through a family constitution
  • Have a clear succession plan in terms of family ownership and leadership
  • Establish the right structures and bodies to enable proper family governance e.g. family assemblies, councils, etc.

Professionalization of the Firm 

  • Corporate Governance: Having an effective Board of Directors with the right structure, composition, roles, decision making rights, etc.
  • Planning and Performance: Having a planning function for both holding and subsidiary levels supported by a performance management system
  • Controls: Effective management controls are in place to ensure proper functioning of business processes
  • Processes, Policies, and Procedures: Effective processes and policies for core business functions, job descriptions, authority matrices, etc.
  • Technology: Implementing technological systems which increase efficiencies in processes and promote more effective decision making

Portfolio Direction and Management

  • Core competencies of the group need to be clearly defined and an investment strategy outlined to match those competencies and opportunities in the market.

—- Continue with Prof Soriano’s Article —-

Governance is all about communicating and winning the trust of family members/branches as well as instilling the overarching message that institutionalizing rules and setting a realistic code of conduct for the “greater good” can effectively mitigate conflict and raise the bar of productivity.

For some that have sought my help, they have admitted that in the past, the next available “resource” and natural “go to counselor” were their favorite spiritual advisers. These can be the community parish priest, a pastor and to some extent seeking out guidance and wisdom from the most senior and influential member of the business community.

Sadly, for those who are already on the edge and showing clear signs of desperation, they have resorted to calling out as many saints including their deceased founders and influential family members imploring their divine intervention so they can finally put an end to the “curse” we generally refer to as family conflict.

DIY Governance Can Be Extremely Frustrating

The downside in any DIY initiative is it can be physically draining for the family member proponent. Governance is not just about articulating the list of benefits or asserting the importance of legacy creation or getting everyone to comply based on the rules and policies set.

The key is communicating the urgency and significance of going through this all-important event!

It is a Once in a Lifetime Event

Now that I have emphasized the enormity of work and the likely disastrous consequence of initiating a Governance DIY approach, I am sharing a timely PWC research related to the importance of initiating Governance in family owned businesses:

a. Safety in structure. Many family businesses have learned that a little structure can be extremely helpful when the time comes to discuss sensitive issues, such as:

  • Ownership shares
  • Rights and responsibilities
  • The competence of family-member managers, and
  • Agreeing on a strategy that is best for both the business and the family

b. It starts with a clear vision—and clear lines of communication

  • Like any business, a family enterprise must be built on a foundation of mutual agreement on certain fundamental questions:
    • What is our vision—and our mission—for this business?
    • What strategy should we follow to reach our goals?
    • What structures and people do we need to succeed?
    • How do we handle shares, inheritance, in-laws?

The Importance of Education and Shared Values

When next generation members fully understand and embrace their roles as stewards rather than owners, the entitlement mindset is tempered. And having a non-family member as advisor to provide oversight can significantly improve and restrain aberrant behavior.

Clearly, when the process of governance becomes unbiased, consistently applied to all, and initiated without fear or favor and with the guidance and facilitation of an experience family advisor, the family can expect better communication within its members plus the added benefit of a scientific and stable approach to the natural overlapping interests of the family, business and the ownership ecosystem.

In closing, Governance is a sensitive and serious matter and is simply too important to be left in the care of a family member unfamiliar and ill equipped to manage emotions and personal interests of different family members.

Harmonizing relationships and institutionalizing control across generations under an environment of shared vision can tremendously accelerate the growth curve of the enterprise.

If done correctly from the onset, governance can become the source of more strength and longevity for the family.

Stop Suffering in Silence!

How can I tell my son that he has to be at the office early and be a good example to our employees?

I have been giving equal compensation to my children and I know it is not fair to my other son who works very hard. What is the right compensation for my children?

I am extremely worried why my children gave shares to their spouses? What if they passed away and their spouses remarry?

How can my son work in our family business and manage his personal business at the same time?

Shouldn’t the business buy supplies from me?  After all, I am part of the family?

What happens if my brother thinks my nephew (his son) should be promoted and his salary increased, but I disagree?

How do we terminate a family member for incompetence or dishonesty?

How do we prevent a sibling from selling his shares? What if it is our competitor?

How do we deal with shareholders who are based overseas and yet have the temerity to always question the way the business is run?

Volatile Brew

These are just some of the nagging questions that I regularly hear from family business owners. And if left unresolved can be real nightmares!

Without any means to address these issues, it will be a bruising struggle for power that will result into more disagreements, further antagonizing family members and weakening the very foundation of the family business.

Tolerating these serious concerns and sweeping them under the rug and “do nothing” will result to entropy. The consequences of inaction are irreversible.

Policies help avoid problems and conflicts

The best and only option is for family members agreeing on solutions and subsequently formulating family agreements. To avoid making the issues less personal and ensure greater objectivity, it is imperative for the family to engage the services of a third party family business facilitator who will propose initiatives leading to some form of family and business governance.

Problems are predictable and initiating policies before they happen can eliminate or reduce future tension and will de-escalate a major conflict when the founder or patriarch is no longer around.

Family Protocols

Family protocols or agreements, if done right, can minimize or avoid a potentially damaging conflict and prevent unnecessary misunderstandings.

The objective is to mitigate the conflict by establishing very clear guidelines and promote the goals of the family and the company towards a joint and collective interest to grow the enterprise. Additionally, it will also strengthen the communication process amongst family members.

When a family protocol is unanimously accepted by the whole family, it tends to be strictly applied and, in most cases, helps to ease tensions that may arise between family members.

A Fair Warning

According to a study published by IESE’s Josep Tàpies and Lucía Ceja, if the protocol is not broadly accepted by family members and its stipulations seldom applied or if the code of conduct is not explicitly made clear and put in writing, the process of trying to implement it will further cause confusion and ultimately render it useless.

The key therefore is a fair process of formulating rules where family members are engaged  and compliance without fear or favor.  

(esoriano@wongadvisory.com)

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Prof Soriano is slated to deliver a talk to family business owners in Cebu on March 20, 2017. The talk this month is part of W+B Cebu’s advocacy campaign related to Family and Business Governance. Seats are limited. Those interested to reserve a slot may call Octopus Events at 09159108686 and look for Ms. Cherryl.

Creating a world-class SME

THE title of the article is at the very heart of my advocacy talk in Cebu this coming Saturday, Feb. 18, at Parklane International Hotel.

After a little more than a week of exchanging notes and doing collaborative work with eminent family business advisors based in the US and Canada, I feel I have much to share to my colleagues and clients in Asia.

Creating a best-in-breed family enterprise is definitely not a walk in the park. In a family wealth article penned by James Hughes, he highlights this very important conclusion:

“As families grow, the development of a family governance system becomes a critical component of the family’s plan for managing its wealth for the succeeding generations. Without effective family governance, many families are unable to preserve their wealth beyond the third generation. This unraveling of a family legacy tends to follow a familiar path: the first generation creates the wealth; the second generation preserves the wealth; and the third generation spends the wealth.”

Families grow faster than businesses

In most cases, the founders of the business keep everything to themselves and rarely share succession and ownership plans to the children until it’s a little too late in the game.

Over time, as the children join the business, get married and have families of their own, they will have varying and increasing personal and lifestyle needs. With more siblings having ownership stakes, the number of shareholders naturally increases.

At this juncture, share ownership becomes fragmented, which makes it harder for the family to make business decisions. At this time, the patriarch may have become semi-detached from the day-to-day functions of the enterprise.

Some family members may opt to suffer in silence on matters related to the “forbidden agenda” like ownership, succession, sibling rivalry or conflict of interest while others will openly show feelings of discontent.

In the end, the majority of family businesses in the region fail as a result of internal issues, rather than external or macro environmental factors.

I am sharing a list of questions that I use when I facilitate family governance sessions. Clearly, this will serve as any family leader’s wonderful guide posts for businesses transitioning to becoming a world-class SME.

Corporate and business goals: Wealth generation

1. What is the family business’ five-year goal? Do we have a compelling vision for the company?

2. What will it take to make the business reach an EBITDA of X amount from the current X amount?

3. What is our annual growth rate? What is the industry growth rate?

4. What kind of professionals/specialists do we need in driving the business forward?

5. Is the family business ready to embark on an IPO in five years?

Family and governance goals: Wealth preservation

1. How will we preserve our family wealth?

2. How will we address ownership issues in the second (or third generation)? Is there a vehicle to transfer ownership to the next generation?

3. Who are qualified to own shares in the family business? Who are not qualified?

4. If there is conflict, who will be objective enough to make the final decisions?

5. Who are qualified to join the business? What are the rules for entry?

If you have no answers to the questions raised and you are at least in your 50s, then it is time to gather family members and let everyone commit to pursuing governance. Becoming a world class SME requires painstaking, collective work. The good news is there is still time.

(esoriano@wongadvisory.com)

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Prof. Soriano is 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 slated to deliver a talk to family business owners in Cebu on Feb. 18. The series of talks are part of W+B Cebu’s advocacy campaign related to family and business governance for SME’s. Those interested to reserve a slot should call the W+B Group 09228603186 and look for Ms. Jen. Registration is a requirement.