Tag Archives: governance

Scared of hiring non-family executives?

Try inexperienced and under-performing family members that you cannot suspend or terminate by reason of birthright.

As a father, you probably hired or even cajoled a reluctant family member to join the business by virtue of his last name and nothing else. Credentials and work experience were never part of any yardstick. Employed family members skipped any formal hiring process. In short, the next gen employment is typically outside the scope of the HR department.

Entrepreneurial parents, usually the father, would routinely blurt a line to the children:  “Work hard and help me run the family business so that when I retire in a few years, you and your siblings will eventually take over.”

That’s it. No rules, just a simple crossover from the family to the business system. So when conflict happens, the dispassionate children, predictably manifesting entitlement will end up being rewarded with the 4 P’s –– higher Pay, Promotion, more Perks and Potential windfall (ownership). The consequences of rewarding bad behavior can cause irreparable damage.

One thing is certain though, the end result will undermine the years of adversity and hardships parents spent growing their wealth.

Without very clear and enforceable rules related to business and ownership governance, the business will naturally tilt towards failure. When an internal event like the sudden death and illness of the senior leader happens or an external circumstance like a crisis occurs, the business will end up in jeopardy.

To quote Jaime Augusto Zobel De Ayala, the 8th generation successor of the 184-year old Ayala Group from the Philippines,

“I often remember my uncle Joe’s comment that it was statistically impossible to produce enough highly qualified family members to run the businesses generation after generation. We only have two family members (out of 7 siblings) in the business at this time. My brother and I serve as chairman and president at the holding company and we provide leadership on the boards of the companies within the group. We are involved in the selection of CEO’s and CFO’s, succession, strategic partners and board members. We also participate in major strategic and resource allocation decisions and provide defined leadership through the governance structures of the boards,”

Akin to the spectacular growth of the Ayala Group the past 30 years, the success and growth of an enterprise depends on its ability to attract, motivate, develop and retain outstanding executives who are not kin.  Any business with the intention to continue and grow needs executives with a profile matching the business culture, organization, and strategy (Gallo, 1991; Welch, 2005).

In my nine years of governance work in Asia, I have come across senior generation leaders making critical decisions related to succession planning. Steadily gaining traction is the preference of business owners to fully hand over management responsibility to qualified, non-family executives. The rationale, objectives and advantages are many fold:

  1. They are hired based on talent, industry experience and the value that they can contribute to the organization
  2. They are metric driven and their KPI’s (Key Performance Indicators) are measureable
  3. Their compensation is commensurate to their skills
  4. They are geared to perform on a Quarter to Quarter basis
  5. They look forward to pre agreed incentives and profit sharing arrangements
  6. They are also prepared to resign and assume accountability should they perform below expectations
  7. The engagement is on a professional level and they are driven primarily based on business profitability
  8. They have an employment contract that is contingent on performance
  9. Owners look at their employment as an investment rather than a cost driver
  10. Emotion is irrelevant
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Unlocking Your Full Potential

In one of my coaching engagements for a mid-sized family business last year, I recall censuring a next generation business leader in a QBR (quarterly business review) for failing to deliver on his performance targets.

The results were dismal and instead of owning up to the debacle, he ended up pointing fingers at his subordinates. While he was trying to absolve himself of any responsibility, I stood up and showed him two slides.

Slide 1 came from Tom Landry

“A Coach is someone who tells you what you don’t want to hear, who makes you see what you do not want to see, so that you can be who you have always known you can be.”

Slide 2 came from lightboxleadership.com

“Accept Responsibility for your actions. Be Accountable for your results and Take Ownership of your mistakes.”

The role of a Business Coach is to challenge business owners by way of visioning, accountability and encouragements. It also helps organizations enhance their operations, sales, marketing, management and so much more. Most importantly, just like a sporting coach, a Business Coach will make you focus on the game.

Business coaching is extremely effective in creating successful actions designed to move the business owner in a positive direction.  It is the partnering of client and coach in an extraordinary relationship aligned towards achieving big goals set in milestones. In my years of experience coaching organizations all over the world, a good example of a focused plan is to align organizations and its executives toward a possible listing in the stock exchange in the immediate future.

So, what exactly is business coaching?

Business coaching is for clients who are READY to make changes and improvements in their business. It gives the entrepreneur a business partner who doesn’t necessarily share in the business profits.  Anyone who’s ever had a business partner knows that partnerships are rarely equal. With a Business Coach, you’ll receive unbiased strategic advice for a retained monthly fee usually covering a number of hours, not 50% of your profits.

Business coaching is about SPEED, ACTION and ACCOUNTABILITY. Think about all the workshops and conferences you have attended where you learned a new technique or strategy that was never implemented. Your Business Coach will help you get it done and hold you accountable, but you must be ready to take action. The client does the work, not the coach.

Business coaching CHALLENGES the status quo and exact GOVERNANCE. Your Business Coach asks, “What are your challenges?  What are you NOT doing?  When are you going to do that?”

Business coaching promotes CLARITY OF ROLES between the owner and the professionals consistent with corporate as well as personal values.  When your values are aligned with your business, greater success is possible.

Business coaching helps the business owner create a SHARED VISION AND MISSION for the organization.  A business owner with a Vision is much more likely to succeed than one that doesn’t know where he’s going.

Business coaching helps the business owner identify OPPORTUNITIES.  A Business Coach can help you to see an opportunity you may have passed up.

Business coaching helps the business owner see his business through a DIFFERENT PAIR OF EYES.  A Business Coach can see what you don’t see.

Business coaching brings out the BEST in the entrepreneur.  Have you ever had someone truly interested in your success? Business coaching will push you out of your comfort zone, take you to your limits and in the end you will embrace it!

My Yearend Letter to Family Business Owners

HAMBURG, GERMANY. After 82 domestic and 51 overseas flights, I am officially signing off and temporarily setting aside Family Business Governance for a much deserved rest and recreation!

Welcome to the holiday season my dear readers- that whirlwind of gift-giving, marketing blitzes, parties galore that begins right after Halloween and continues to gain momentum through the end of the year.  While this season is meant to bring feelings of love and cheer, it’s also the harbinger of holiday stress for many.

The faltering economy has made the task of balancing family and business more difficult than ever. Family members work longer hours and are aiming for a final push in the last month of the year to increase sales.

I can only imagine the past 4 weeks was probably horrendous, with business owners spending hours cracking their heads on how to meet  production demands especially when their employees start filing their Christmas leaves and claiming 13th month pay and annual bonuses.

Being competitive requires intense focus too especially when year on year sales have registered a paltry increase.  People can begin to lose the balance that is essential for success, both as a family and in business. Your first line of defense from stress is to think about what it is about the season that has felt so stressful in the past. Ill name a few here with excerpts coming from an articled, The Business of Family Business, penned by Lee Mccaffrey:

Are you happy? There’s no use being in a situation where you’re not happy. It breeds resentment and anger, and nothing good can come from that. If you’re not happy, it’s a good time now to sit down with everyone to figure out why, and then take steps to fix it.

Address issues as they come up. Let’s say something small happened in March if you’re still holding onto it by the time November rolls around it’ll likely be starting to take on a life of its own. Issues and problems need to be addressed, worked on together and squared away, as they arise.

Doing Too Much All at the Same Time.   The problem with the holiday season is that we often experience too much of a good thing. While stress itself is necessary for our survival and zest for life, too much stress has a negative impact on our health, both mental and physical. Too many activities, even if they are fun activities can leave us feeling exhausted, rather than fulfilled.

There is no balance between Work and Family. For family members working together, balance is important because the business is part of the family and the family is part of the business. The ramifications of losing balance can have long-lasting and unpleasant effects.

Families should take advantage of the holiday season to re-energize or mend broken relationships and enhance the value of their time together, so that getting through these tough times is much easier.

a. Set communication ground rules. Family discussions during family time (holiday or not) must not include any talk about the business. Usually, the founder or the business leader is prone to violate this rule. The best way is to create a fun program that rewards those people who refrain from “talking shop” during family time and provides a friendly penalty program for those who do. For those who have set up a family council right after signing the family agreement, this activity is one of them.

b. Share one quantifiable goal with each family member. Ask each family member to identify one goal that the rest of the family can help that person achieve in the coming year.

Tough times do not have to upset the balance between family and business. To quote Richard Eu, the great grandson of the Founder of the Eu Yan Sang Group, Asia’s largest TCM (Traditional Chinese Medicine) Retailer:

“Good governance in a family business starts by putting the company and the family first – each in its own time. “

So in the spirit of the holiday season, I encourage family members to set aside business and enjoy family time!

From my family to yours, I sincerely wish you had a great Christmas and definitely a prosperous New Year in 2018!

(esoriano@wongadvisory.com)

Founder Inaction Can Cause Business to Fail Part 2

With tension escalating and family members demanding for more entitlements, Mr. C, the founder, no longer had the passion to grow the business he started in 1973.

Unless there was real intervention, it was obvious that the family business was on a downward trajectory.

In the course of our assessment, there were instances we hit a brick wall.  We discovered that the gap was so wide and the acrimony between siblings so deep.

There was a time in my advisory work that every meeting I attended would always end with a virtual confrontation punctuated with a shouting match that can be heard by employees and visitors in the executive floor. And as if on cue, assistants would immediately disallow visitors from entering the floor. Mr. C would then just quietly leave the boardroom, disheartened and embarrassed by his children’s actions.

At one point and out of desperation, Mr. C became emotional and told me “how he wished his business never grew so big so he will never have to contend with his entitled, squabbling and disrespectful children”.

He also lamented about the issue of money and power plaguing his adult children… “why are they fighting for the small pot? If they can just work as a real, united family, there is a much bigger pot to create!

Mr. C was used to the hard life, at a young age of 12, desperate and hungry, he decided to join the exodus of Chinese laborers leaving China with only one thing in mind…hope for a better life.

As he was about to tear up again, I comforted him that all was not lost. In tense situations where the Patriarch or Matriarch is being pressured by family members to make decisions, there is a very strong likelihood that they will end up suffering in silence and feeling helpless. Such is the case of Mr. C. He chose not to decide, opted to procrastinate and remained neutral in the course of our intervention.

This pattern of indecision is not only wrong but destructive. Unfortunately, the “Do Nothing” option is by far the most popular option. Therefore, it makes sense to consider a third party intervention as time is critical.

An experienced family business advisor, bereft of any emotion, will guide the family members the appropriate governance mechanism to make critical decisions based on what is best for the family and the enterprise.

After the children swapped accusations of wrongdoing, it was apparent that if my firm, W+B Family Advisory cannot help them, their only recourse was to seek the legal route. It didn’t help that both parties were being goaded by their lawyers to seek court intervention.

In a KPMG report, this case is what they refer to as a classic Rags to Riches and likely back to Rags family.

The report highlights that starting a family business is easy, relatively speaking; sustaining it beyond 2 or 3 generations is the hardest part. Indeed, it’s often said that the rags fall on the third generation. It’s a sad commentary on the reality that faces family business.

Every family member must recognize that family issues, not business nor external events, will define the very survival of the next generational change in family businesses.

After a series of assessments, one on one sessions with the family members and a slew of governance interventions replete with drama, a breakthrough happened that averted what would have been the biggest mistake the warring family members would have committed… go to court and scar the family for life.

Why Am I Passionately Espousing Family Governance?

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Samsung

Samsung Electronics, the crown jewel of the Samsung group, has reported record profits despite Lee’s arrest in February and a damaging recall for Galaxy Note 7 phones that were prone to battery fires. The financial success was largely thanks to events set in motion by Lee’s father in the 1990s. The elder Lee made the decision to break into the memory chip industry and followed up with massive and risky investments that rivals could not match every year.

Those investments are paying off. Samsung, the world’s largest maker of memory chips for servers, mobile devices and computers, was the biggest beneficiary of supply constraints and explosive demand for mobile devices that pushed up prices.

Longer term, however, some analysts see risks for Samsung and its flagship Samsung Electronics.

“South Korea’s chaebol system is similar to monarchy,” said Park, the Seoul National University professor. “In the monarchy system, you need a king.”

There is also potential for a destabilizing family feud over inheritance when the elder Lee dies.

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Over the past seven years, our firm, W+B Family Business advisory has been spearheading family and business governance in Asia.

Most of our alliance partners in the business sector and the academe in North America, Indonesia and Singapore have referred to our vigorous campaign as “relentless”.

In our head office, we modestly refer to our work as the “W+B Method”.  International clients have acknowledged our method as best in class and we solely look at it as our compelling value proposition.

Why is W+B vigorously campaigning to promote Governance?

It is a race against time. We have witnessed first-hand, emotionally charged families being torn apart because of rivalry, greed, envy, vengeance and sometimes senseless loss of human lives.

There have been quite a number of cases where family members would “kidnap” a parent allegedly suffering from dementia in order to prevent an asset sale or overthrow a sibling in power or seeing siblings conspire in forging documents so they can surreptitiously sell assets.

I have experienced several cases where I had to enforced disciplinary action and initiate expulsion of family members engaged in self-dealing, conflict of interest transactions and in rare cases absconding with large amounts of money.

These are unfortunate but live cases of family conflict! When the battle lines are drawn, you can expect discord among family members, sometimes violent confrontations, parents inconsolable and confused, and the business on the brink of a major setback or at worse, imploding.

Without any doubt, as Family business advisors, we have the herculean responsibility to intervene and affect the governance process because it is the way forward and the right thing to do.

To quote a Bloomberg report related to the never-ending family drama unfolding at Samsung:

“Sabotage, espionage, succession battles, and sibling rivalries — it sounds like a season of “Game of Thrones.” But it’s the real-life drama of the Lee family, the Korean dynasty that founded Samsung with wealth equal to 17% of the country’s GDP.

It’s a fragile situation. If successor Lee Jae doesn’t navigate this right, there are family members waiting to take his spot.“

Currently, Lee Jae is in jail and family members and non-family shareholders are allegedly plotting separately to let him stay in jail for good.

Governance Intervention Must Be Holistic

Our coaching interventions are straightforward. As a Senior Advisor, my role is to articulate very important and purposive set of ideas and beliefs before any actual engagement. The key is to educate and prepare members for the journey toward corporate governance.

Educating family members is critical. The willingness and readiness of every family member to go through the process is equally vital.

Finally, the advisor’s role is to underscore the importance of embracing pre-work rules before starting the process of change. These are the following:

a. Governance and Succession is non-negotiable.

b.Size of the business is immaterial.

c.The bigger the number of family members, the more complex it can become.

d.Intervention should be on the 3 circles (Family, Business and Ownership). Each circle has its own unique characteristics so a tailor-fitted approach must be in place.

e.Procrastination is like a thief of time. Delaying governance further can increase the volatility of the family and the business.

f.Age is a factor. As the founder and the business leader ages, succession and related issues in a multi generational family can offer more challenges.

g.Compliance of the rules and activation of the Governance Councils as enshrined in the constitution is non-negotiable.

(esoriano@wongadvisory.com)

*****

http://www.chicagotribune.com/business/ct-samsung-prison-qa-20170825-story.html

 

Padre Noble, Hijo Rico, Nieto Pobre

Sept 25

Governance

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

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

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

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

 

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

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

Family Governance Is Non Negotiable

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

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

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

Tension is Normal in a Transition

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

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

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

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

The 3 Components of Family Governance

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

a. Periodic assemblies of the family

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

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

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

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

 

(esoriano@wongadvisory.com)

*****

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

The destructive effect of poor succession planning (Part 2)

sEPT 18

Ensuring the solvency of a family business

Note that succession planning is not about just sending the second and third generation to the top schools. It’s about careful career planning and skill development, and more importantly, it is about making sure that the core processes in the company, including governance, communications and decision making, are such that they support succession planning. Key areas that often are in the center of this are intra-company communication routines, decision-making processes, documentation, and sharing of information.

Corporate governance, growing pains, and your family business 

Instilling corporate governance into the business model is more of a mandatory thing, rather than just a benefit. Without proper governance, a company (be it family-owned or not), can simply not survive.

The growing pains are that usually switching from the first generation “entrepreneurial” style to proper professional grade succession planning requires a major change in mindset.  Sometimes this is only possible in conjunction with the actual generation shift. However, it is much better if succession planning and governance are already addressed within the time of the first generation. This way the process is smoother and has a better likelihood of success, success including also preserving good relationships across the family members throughout the process.

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While some initiatives in my previous article including the list below are instinctively noble, Family Business author Dr. Fan refers to these leader aspirations as “wishful thinking”.

a. Family gene pool is limited but Patriarch is not keen on hiring Non Family professionals

b. Typical of founders, they would express their desire to retire but the patriarchal shadow continues to cloud the next generation members’ decision-making

c. They apportion their wealth equally resulting to a divisive and disunited next generation shareholder group where decisions are stalled

d. Patriarch will delay succession plans because of the fear of losing control

In most cases, family members who have been sheltered often want to sell the business and move on right after the death of the patriarch or matriarch.

Similarly, some leaders (especially the conservative owners) even pass away without making a will. This leads to bitter feuds and will be even more complicated and severe if the founder has several wives.

Flying Away from the Nest

Finally, with the patriarch gone, the untrained and entitled next generation members will end up clashing amongst themselves.

Limited decision making and the lack of any form of hardship experience while growing up under the shadows of their overprotective parents will take its toll on the business.

With their roles undefined for years, there is the likelihood that heirs will be confused amplified by an unproven management skills set.

Compounding the lack of preparation is when they discover that the business has liabilities (debt load) and a looming creditor intervention to exact pressure on the new leadership.

With all the problems besetting the enterprise, the natural option for heirs will be to opt out by selling their shares, effectively absolving them of any form of “hard work”. In the end, the preference to just “live the good life”becomes insatiable.

Can the bleak situation still be reversed?

This scenario is repeated many times, thus it is no secret that business owners go through many sleepless nights blaming themselves for creating entitled children.

I consider this pervasive problem one of the biggest dangers faced by family businesses in Asia where owners attempt to self-medicate by way of offering more perks to family members hoping to motivate them. The problem is in the manner the perks are equally distributed whether to the deserving, capable or inept. The other problem is whether the perks should be given in the first place.

This practice will certainly guarantee failure after failure as the incentive will translate to more entitlement for the next generation of untrained family members.

It now becomes a vicious cycle of generational tension and sibling rivalries. In the end, the business owner will end up struggling with governance, leadership transitions, ownership conflicts and even survival.

At this juncture when the patriarch or matriarch, by reason of age, rushes the process of turning over the business to the next generation and discovers their ineffective or feeble judgements, the parent will end up extending his reign until he succumbs to pressure, old age, stress and death.

There is Still Time to Exact Good Governance

It is absolutely impossible for family businesses to manage internal talent (both family and non-family) and or attract the best non-family professionals without setting up a governance best practices program.

The key is to separate the family and the business and ensure independent oversight from a professional board.

To be continued…

(esoriano@wongadvisory.com)

*****

LINK:

https://www.entrepreneur.com/article/254614