Tag Archives: founder

Founder Inaction Can Cause Business to Fail

Allow me to share the story of a Family Business run by Mr. C. Like most entrepreneurs Mr. C migrated from Southern China, started a trading business and through the years expanded to several businesses like manufacturing, food and retail. The business was founded 44 years ago and at its peak, had a total employee count of more than 15,000.

Early this year, I conducted an organizational audit and found out that the employee headcount sharply dropped to just below 5000. The decline started right after the founder took a back seat due to a life threatening condition.

Family C’s case is unique. It is a live case full of twists and turns and ever unfolding. Live case also means that it is a “work in progress” (WIP) project. This is also one of the reasons why I spend more time in Asia than in the Philippines.

Our sessions have been quiet challenging and gratifying at the same time. My core team was able to diffuse a family “ticking time bomb” that started more than a decade ago involving two warring sides of the family…three younger siblings pitted against two older siblings.

The problem started with the employment of the first 2 children, who were untrained and ill equipped to handle the rigors of managing an enterprise belonging to different industries.

Straight from college and without any formal entry policy, they were asked by their father to help out in the business. Confident that the children were ready to assume bigger roles and the companies’ consistently better performance year after year, the father decided to slowly detach from the day to day chores.

Through time, they married, produced children and the family grew faster than the business. With their new found power, the older children started to apportion for themselves the departments and business units that they were already managing.

This was also the time the three younger siblings joined the business. With 5 children in the business, each vying for control, the departments were like a separate kingdom without any semblance of a collective plan moving in one direction.

With the children at the helm, heated discussions among them became more frequent and their incompetence manifesting by way of lapses in major decisions. It was obvious that apart from the breakdown of governance, the lack of vision, poor judgment, conflict of interest, high attrition rate for employees, no planning and a certain level of entitlement contributed to the decline.

Primary Causes of the Sharp Decline:

  • With the same surname as the founder, any family member can freely join the business
  • Some were plain lazy, while some did not have to work as hard and still got the same pay as those who were fully engaged
  • Distrust and self-dealing among family members were becoming apparent
  • Relatives or friends can be a supplier without the necessary accreditation.
  • In-laws got infected with the “entitlement bug”
  • No rules of entry and exit including accountability for family members.
  • Employees started to take sides out of survival
  • Frequent clashes due to personality differences
  • Constant friction as to where the business should be heading
  • No expansion as family members spent much of their energy fighting one another over money and power
  • Family members never exerted effort nor time to cooperate.

To be continued…

 

https://www.towerswatson.com/en/Insights/IC-Types/Reprints/2014/10/Succession-Planning-The-Answer-to-Leadership-Crisis
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Trust fund babies

THEY are referred to as children of wealthy parents who have lots of money set aside for them and often feel entitled. Everything they spend is paid for by their trust fund.

When you think of trust fund babies, you immediately think of socialite Paris Hilton, the celebrity great granddaughter of Conrad Hilton, the founder of Hilton Hotels.

In a Wikipedia article, critics and admirers have said that Hilton is “famous for being famous,” a celebrity not because of talent or work, but through inherited wealth and lifestyle.

I was in Singapore last week for my regular family governance work and was introduced to a business owner who narrated how his unprepared, ill-equipped eldest child mismanaged and almost caused the downfall of their 40-year-old business.

As the old man was talking to me and a colleague, he was shaking, groping for words and trying to make some sense out of the irreversible damage inflicted by the son’s entitlement. It was heartbreaking to learn that the assets were dissipated because of the son’s faulty judgments and his self-fulfilling prophecy that he should not be made accountable for his actions.

I finally got to meet the western-educated son over lunch, and as expected, he was cocky, abrasive and showed no traces of remorse for his failed actions. No doubt, he was, pun intended, an SOB (son of the business owner).

To conclude our lunch, I told him that he will no longer report to his father but to a functioning board comprising three members (his father included) and two independent directors. And that in my next session, a full audit report must be submitted to the board for review. Lastly, the son will also transmit all his initiatives and henceforth will strictly follow corporate governance policies.

To regain investor and creditor confidence, the son will also be required to sign an employment agreement that will monitor his performance based on financial metrics and qualitative variables.

Non-compliance of these rules and targets will result in his replacement by a non-family CEO within 12 months. He was still stunned with disbelief when I excused myself to catch a flight back to Manila.

The term trust fund baby is more of a stereotype for entitled kids who love to party but don’t even know the value of hard work. Having entitled and confused children in the family business is fraught with danger. When they are made to join the family business and there are no rules defining their participation, entry and exit, you would typically expect these children to act like spoiled brats and bully their way by demanding power without accountability.

Consultant Rick Johnson correctly stated that “an attitude of entitlement that is displayed openly can create major challenges for even the most successful family business.” This attitude is often displayed by the family member’s work ethic expecting every employee to “live to work” and give of themselves unconditionally while Junior takes off every Friday afternoon or goes on extended vacations.

Johnson further expounds that these children often manage with an autocratic style with little empathy for employees and leaving the impression that they can do whatever they want because they will run the company someday.

What Johnson highlighted is a very common sight among family members working in successful family businesses in Asia and the next generation “owner mentality” is causing a lot of sleepless nights for parents, founders and business owners.

The fear and paranoia are real as the sense of entitlement feeds into the child’s last name as a birthright then degenerates into a mindset of an owner mentality.

To be continued.

*****

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.

Real Causes of Family Conflict (Part 2)

FAMILY business in Asia is indeed a family affair, and the appropriate description will always depict a family tree with the next generation members and their spouses as branches connected all the way up to the founder or the generation that started the business.

A family affair carries with it a precarious decision-making process, where the criteria in most cases is heavily tilted towards equality, less on fairness and heavily fraught with emotion. Linking this scenario, I would like to continue the story of Rey below, as he narrates his disappointment upon hearing of the equal ownership scheme from his mother.

“All five siblings were not equal in ability and work attitude”

Modesty aside, I have always been the one initiating new businesses and maintaining relationships with our customers. Together with Raymond, Papa developed the habit of calling on me to implement the plans and not on Ralph, Rowen, Rochelle.

He would always remark that he failed as a parent in instilling the value of hard work on his three children.

Having worked with the three, it was obvious that they demonstrated a lack of maturity, leadership skills and poor work ethic. They report for work anytime of the day.

I often catch them on their computers doing something unrelated to their jobs. When I request for monthly meetings, they would either come in very late or not appear at all.

They have become so entitled that one time, Ralph told my mom that he will be out for a few days to do personal errands but came back 20 days later. He never bothered to inform us of his whereabouts. I only found out on Facebook that he went on a cruise with his wife’s family.

Recently, I discovered that the three siblings established their own businesses. This was a clear violation of what Papa told us when we joined the family business: that all members joining the business must work full time.

They obviously put up their businesses after Papa died.

I am turning 41 next month and my siblings are in their early to late thirties. To be burdened with so much work, plus the pronouncement of our mother regarding the equal ownership structure, I have reached a point where I have to decide if I am really cut out to be working for the family business or not. I feel I have been treated so unfairly!

The other thing that worries me is that once my mother is gone, the business might suffer.

After hearing my story, do you think I have every right to feel bitter and resentful against my ageing mother for not appreciating the work and commitment I put in the family business?

Should I just strike out on my own? Is stepping down the right thing to do?

By leaving, I also want to teach my unfocused siblings a lesson. And if I go, I am sure my youngest brother will follow. He has also expressed his disappointment to the equal ownership scheme.

                                                          ***********

Prof. Soriano is a National Agora Awardee for Marketing Excellence, an ASEAN Family Business Advisor, Book Author, 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.
Prof Soriano is slated to deliver a talk to family business owners in Cebu in February. 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 attend should call the W+B Group 09228603186 and look for Ms. Jen. Registration is a requirement.

Will the business end when the cousins take over? (Part 2)

FAMILY business comprises three overlapping circles. One circle is family, another circle is business and the last circle is ownership.

Depending on where you stand on those circles, the issues can be predicted. According to family business expert Ivan Lansberg, the challenge is learning to manage the diversity of people, as more and more of the territories (in the different circles) become populated with family members, cousins, in-laws, etc.

Entrepreneurs and founders in general are fundamentally skilled in running and growing the business but as Lansberg highlighted, “very few people stop to think that families are every bit as important and complicated.”

Founder/Controlling Owner: Unilateral decisions, authoritarian, quick and simple

In the startup days or the stage known as the founder/owner stage, understanding the circle where the owner is easy. One owner, or the spouses, stand in the area where all three circles overlap: they are the family, the business owner, and the management team rolled into one. The founder calls the shots and is revered by everyone in the organization. But clearly, that setup is not sustainable.

Sibling rivalry stage: Consensus decision, diversity, volatile, higher risk of conflict

As the sibling partnership joins the business, the need to create rules on practically all decisions requires consensus among siblings. This can take its toll on the founder. Working in a structure that checks and balances the founder’s authority does not come naturally to entrepreneurs. There will be many cases of conflict related to decision making and overlapping. And as the business gets passed down to another generation, the field becomes more complex.

Cousins stage: Democratic decision, dispersed ownership, rules, fairness, others lose interest

By the third generation, most businesses have evolved into “cousin consortiums” and fragmented ownership and as what Lansberg describes the third stage members.

“They’ll be into the world of coalitions, politics, branches—complex structures that allow the cousins to collaborate.”

In a cousin consortium, the depth of involvement of each of the cousins varies. There are those who would be active in the business and there are those who would be passive. The scope of ownership could also be different. Some of the cousins could be majority stockholders and some could be minority stockholders. In this case, the control over the business would not actually be equally balanced. Therefore, my most basic intervention is for active family members to formulate rules and protocols and align ownerships. Otherwise, expect cousins to draw swords on the most petty issues.

Initiate a governance structure while the parents are still around

As part of instituting changes, it can be expected that certain entitlements of cousins/shareholders, both active and non-working, will need to be clipped as part of putting in place an enforceable governance system. Depending on the degree of civility or acrimony among cousins, I have outlined below several solutions that family members can immediately put in place with or without the need for a family advisor:

a. Engage qualified non-family members. When necessary, invite non-family members/professionals/former senior executives who can serve as advisors or independent members of the board of directors. These professionals would ensure that the objectives of the enterprise would be prioritized minus the emotion and drama that would naturally come from family members. Last year, I endorsed almost a dozen W+B consultants and colleagues from the academe to act as board level advisors or formally nominated independent directors. For family business owners averse or not being use to having non-family members becoming a regular fixture in the board, I or my colleagues would usually assume the role of a family board advisor to provide advise and guidance during meetings where the items in the agenda may be sensitive.

Common examples would be compensation, disciplining a non-family member for non-performance, direction of where the company is headed, etc.

b. Communication and conflict resolution mechanism. It is very healthy to develop open lines of communication among cousins; after all they are one huge family.

However, since they would not be coming from one and the same nuclear family, it would not necessarily follow that they would have the same ideas, background, culture, practices, beliefs, education, skills, levels of understanding and experience. These are all hindrances in achieving an open communication among the cousins but could be managed if they would specifically begin the consortium out of willingness to participate, commitment and respect to each other.

To be continued.

Succession gone wrong: HK’s roast goose restaurant (Part 1)

A FAILURE in succession can shut down a family business almost overnight. Read on about the rise and fall of the famous Hong Kong Yung Kee Restaurant.

In Hong Kong, family business disputes in court rapidly increased in recent years because of poor succession planning by the founders. According to Prof. Joseph Fan of CUHK, nearly a third of the members of the Forbes Hong Kong Rich List are 70 years old or beyond, and the succession of new leaders has to be settled sooner than later.

As the Chinese founder gets old, he or she has to pass on the business to the heirs. And yet, many Chinese founders ended up following their family tradition as they do not want to see their own business empire falling apart as a result of partition. It is quite common that Chinese founders would want their offspring to stay together and lead the businesses they have founded.

However, this is often “wishful thinking as next generation family members often want to sell the business and move on” (Fan 2012a). Some Chinese founders in the olden days even passed away without making a will. Of course, this leads to court feuds among family members and the infighting will be even more complicated and severe if the founder has several wives or concubines, which was quite common in old Hong Kong.

One classic example that I had the opportunity to research is that of Yung Kee Restaurant, a Chinese restaurant located on Wellington St. in Central Island, Hong Kong, famous for its roast goose, not only among locals but foreign tourists as well, who take boxes of goose on their flights home to share with family and friends, giving rise to the nickname “Flying Roast Goose”. Founded in 1942 by former street food vendor Kam Shui Fai, the Yung Kee Restaurant is acknowledged as Hong Kong’s roast goose institution.

It is said that Yung Kee’s goose is much meatier and more succulent than a roast duck. The goose skin is crispy, almost crackling – oily, but not greasy. Thus, it was named by Fortune Magazine one of the world’s top 15 restaurants in 1968.

The Kam family feud is worth serious reflection for family businesses in Asia, especially those contemplating the transition from first to second generation. This case can be held up as an example that Asian family-owned businesses should invest time in addressing the family business succession planning with very story focus on family governance, ownership governance and corporate governance. All three are inextricably linked and short cutting the process can compromise succession planning.

Such is the case of the heirs of Hong Kong’s famous Yung Kee roast goose restaurant, which has finally been given permission to liquidate because of sibling rivalry.

Following founder Kam Shui Fai’s death in 2004, the restaurant was left in the hands of Kinsen and Ronald, his two sons. But Kinsen soon complained to the court that he was blocked from running the business despite holding 45 per cent of the shares, with Ronald holding 55 per cent. Days before the court ruling, however, he died, leading his family to accuse his younger brother Ronald of being behind his death. The incident has since caused the contentious dispute to erupt in bitterness.

At the Hong Kong’s Court of Final Appeal last December 16, Ronald Kam made a last ditch effort to Chief Justice Geoffrey Ma to rescind the winding up order for the restaurant. However, this was rejected by Chief Justice Ma, citing a lack of jurisdiction and the late stage of the case.

Reports say the late Kinsen’s family, who applied for the court liquidation order, demanded HK$1.3 billion or US$168 million for their 45 percent stake. But Ronald, who currently runs Yung Kee, was only willing to pay HK$1.1 billion in cash and almost HK$100 million worth of assets.

A liquidator will take over the holding company to find buyers for its assets, including the restaurant and the building it occupies in Hong Kong’s Central district.

Yet this does not mean that Yung Kee will shut its doors immediately. Lawyers say the liquidation process will likely take months if not years, and as a subsidiary of the holding company, the restaurant can keep running in the meantime.

However, if the restaurant and building are eventually sold off separately, the establishment might have to find a new home. One of Yung Kee’s most defining features, the only charcoal-fired oven on Hong Kong island, would finally end up closing shop. It is sad to note that the Yung Kee empire and an institution in Hong Kong will soon close it doors because of a sibling squabble in the next generation. How unfortunate, senseless and unnecessary!

In Part 2 of this column, I will lay down some strategies on how to prepare for a successful generational transition in the family business.