Tag Archives: Ownership

Are Your Children Really Committed?

Or are they just working to please you?

When every family member is fully committed, it sends a strong message to everyone to put the interests of the family business first before their own. For founders/owners, family member commitment gives them a certain level of self-assurance that the business will be in good hands when the day the formal handover happens (an event like death or illness of the senior leader).

But how do we galvanize family member commitment? That is a tough question that continues to bother business owners especially those whose age ranges 60’s onwards. Here is a couple of disturbing statements coming from the next generation family members (31 and 40-year old) that my firm, W+B Family Business Advisory, researched and polled in 2017.

Next Generation 1

“My parents offered me future ownership even while I was in college. It felt good being an owner but years later I realized that having zero outside work experience became more of a liability. The only consolation I got was because I never went through the difficulty of applying for a job.  There was also less pressure in terms of going to work. But how I wish I had real work experience outside my comfort zone. It’s been a difficult 15 years managing the business with frequent disagreements with papa. It is a wake-up call and this made me realized that at 39, it’s time for me to make a full assessment of whether I am worthy to succeed my father. I am playing catch up by hiring professionals and doing advance courses on areas I am weak at.”

Next Generation 2

“I have the best of both worlds and couldn’t ask for a better job. Of course friends teased me as a COO (Child of Owner) but at 31 years old and managing 450 plus employees, it’s not bad. I also get to enjoy the benefits of a nice salary, an SUV and unlimited travel benefits. My classmates who are employed are still languishing with low salaries. I couldn’t ask for more!”

When they were asked about the following: future growth plans, managing complexities and balancing growth, how to confront the uncertainties of sustaining the business… their reactions showed serious reservations and self-doubt. Collectively, these were generally the responses of more than 100 next generation successors surveyed:

a. If they really have the skills set like their hardworking visionary parents

b. Their continuing struggle in the areas of decision making and people policies

c. Their concerns related to the pressures of expanding the business

d. Balancing the old and the new ways of managing the enterprise

e. Issue of business longevity, co-ownership with siblings, debt issues

f. Potential conflict among siblings that will predictably surface when their visionary father is no longer around

These are natural reactions that I encounter every day. Therefore, the real challenge for business owners is to confront these questions:

How will we know if those who are actively working in the business have the passion and sincere intention to grow the business? How will we know if they are just after the four P’s –– Pay, Position, Perks and the Potential windfall (ownership) the parents generously and wrongly offered them when they started joining the business.

If these questions remain unanswered or if there are no singular focus in creating powerful commitment initiatives now, these will result to many sleepless nights by the business leader. Expectedly, the road ahead will be less paved and difficult to navigate. Hence, governance should now be the way forward.

Advertisements

Avoiding Cain and Abel

SOMETIME in 1987, Mr. Uy (not his real name) invested in a small piece of property and constructed a five-storey apartment building.

With rental escalation picking up every year, he ended up focusing his efforts on properties with potential recurring income.

Mr. Uy saw the potential windfall in real estate and decided to concentrate full time. With China’s transformation as the factory of the world offering low cost products, he decided it was time to divest in the furniture business. Three years later, he sold all his shares to his partners.

With sufficient capital, he then used the money to acquire more properties and in 1995, ventured into his first real estate development: a 25-storey residential development in Manila.

With a string of successes save for the 1997 Asian financial crisis, where he unloaded some of his assets to pay off some debts, Mr. Uy navigated his way to many successful projects by prudently managing his cash flow.

For someone who started as a salesman, he was able to grow his wealth with a mixed portfolio of condominiums, office buildings, and a string of neighborhood retail spaces. At age 72 (in 2012), his net worth was valued at almost P4 billion.

Then one day, he suffered a heart attack while inspecting of one of his high rise developments in Manila. That health scare triggered a lot of changes and made him realize that he had to do something to ensure the continuity of the family business.

With his deteriorating health condition, Mr. Uy, through the advice of his accountant, immediately placed all his real estate assets in a corporation and distributed the shares to his wife and four children. His aspiration is for his children to work together and maintain their future ownership in a single real estate enterprise.

Typical of a Filipino-Chinese mindset, he gave more shares to his two sons (now in their 40s), who were actively involved in the business but gave only minimal shares to his two other daughters (also in their mid and late 30s).

The traditional practice among Chinese families still holds–that daughters should have fewer shares than their male sibings, as they will be taken care of by their husbands.

The youngest of the children, Irene, single, has been with the family business for nearly four years. After working as an operations executive in a multinational corporation for five years, she was requested by her father to join the family business. This was after another sister Lucy got married and migrated to Australia.

After Mr. Uy passed away in 2014, she soon made changes in the way the business was run. Her skills and passion significantly contributed to the growth of the family enterprise. In just two years, the business process that Irene introduced generated substantial savings and goodwill for the business.

Over time, Irene’s leadership was starting to get noticed and recognized by her industry peers and even the partners of her late father were impressed with her acumen.

They also found her to be charming and a great negotiator.

On the other hand, the male siblings who had no outside work experience felt the pressure of having a skilled and savvy younger sister, thus the day-to-day management soon became a source of strained relations between the male siblings and Irene.

The usual conflict would always center on the strategic direction of the business. Irene, more frequently, would always question the wisdom of her older male siblings’ investment decisions. And in most cases, albeit after the fact, Irene would always be proven right but out-voted.

Next week: Lucy rejoins the family business.

(esoriano@wongadvisory.com)

***********

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.

 

Lieben und arbiten

AUSTRIAN neurologist and psychoanalysis founder Sigmund Freud is famous for saying that the secret to a full life revolved in the three-word phrase “Lieben und arbiten (To love and to work).

For most people, the two most important things in their lives are their families and their work. It is easy to understand the compelling power of organizations that combine both.

This, in a nutshell, is the message of a book given to me by Andrew Hier, the CEO, senior adviser and partner at Cambridge Advisors during my visit to their Massachusetts headquarters last week to pursue collaboration between W+B and Cambridge Advisory. It was a wonderful opportunity to exchange notes related to family business dynamics in Asia.

Cambridge Advisors is the world’s foremost authority on family enterprise advisory. It was founded in 1989 by Harvard professor John Davis and has offices in Brazil, Beijing, London, Montreal and Zurich.

The book Generation to Generation: Life Cycles of the Family Business is a great source of information. Authored by colleagues from the academe John Davis, Marion Hampton, Ivan Lansberg and Keilin Gersick, it postulates that the form of family control varies across nations and cultures, but family firms hold dominant positions in all of the most developed economies.

Some common scenarios that the book highlighted reflects on the intrinsic and natural “closeness or specialness” within the family business.

From my personal experience coaching family businesses all over the world, I can enumerate more scenarios that make family businesses challenging and different from other organizations where the “closeness” can also work against the longevity of the family business.

Case of share ownership

Over time, the number of shareholders increases, share ownership becomes fragmented, which makes it harder for the family to make business decisions. As the share ownership becomes fragmented, the shareholders also start to lose emotional commitment to the family business.

Another case in point is when the ownership structure is equal or practically the same among working family members and non working shareholders.

Below are some examples or pain points where the “closeness” can work against the family business.

a. Your role as a finance or accounting manager trying to figure out a way on how to compensate siblings and cousins who rarely report for work.

b. Your role as the biggest shareholder in the firm but struggling to come to terms on how to discipline your son or daughter for spending money as if money grows on trees

c. The role of a president recommending a dividend policy that should be balanced with the need to reinvest funds for expansion. In short, making outside shareholders happy and on the other hand keeping the business afloat and out of harm’s way.

d. Your role as GM in deciding to accept or decline a sibling, cousin or a nephew who is unqualified for the position in the family business.

As the book correctly intimated, it has both positive and negative consequences.

To quote the authors, “Family businesses draw special strength due to the shared history, identity and common language of families. When key managers are relatives, their traditions, values and priorities spring from a common source. Most importantly, commitment, even to the point of self-sacrifice, can be asked for in the name of the general family welfare.”

But it is also fair to say that “closeness” is a double edged sword and can be the source of many internal conflicts.

(esoriano@wongadvisory.com)

***********

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.

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)

***********

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.

Will the business end when the cousins take over? (Part 3)

THIS is the third article in a four-part series related to the cousin consortium stage. The SME Toolkit and the Business Families Foundation defines the cousin consortium as a stage where at least two cousins or more share ownership of a joint enterprise, generally those belonging to the third generation members of a family in business.

Unlike other stages, this particular phase carries with it more challenges due to the presence of many nuclear families (branches) and numerous family owners, some of which are majority shareholders, others minority owners, some actively involved, and others inactive or passive shareholders.

As the number of family members multiply, there is a pressing need to formalize agreements in all fronts, including the alignment of the family and business visions.

Instituting changes should be a top priority by the senior and next generation leaders

Passing the responsibility to the cousins solely to address governance issues is never a good option. Senior generation members must provide the inspiration and must be present in all governance-initiated programs. These policies do not just guide decisions inside the business, but guide decisions about the relationship between the family and the business.

Below is a list of my recommendations for family members to immediately put in place:

a. Engage qualified professional/non-family members (refer to my last article).

b. Create a communication and conflict resolution mechanism (refer to my last article). Policy development on how best to communicate and manage conflict cannot be put off forever. Family members must formalize and set down on paper the structure and guidelines under which the family will own and operate their business.

My best advice is for the family members to meet and set up a sound governance structure early starting with the formation of the family council and the business council.

c. Set up a family council. Among the many functions of the family council is the setting up of an adequate grievance committee that intervenes against an erring family member. This council must be proactive and unbiased and must be able to manage and temper misunderstandings and irrational behavior among cousins before it escalates into a major disagreement where all parties become emotional. Examples of some questions that will be tackled by the family council are:

  1. How do we go about fixing a petty argument amongst siblings or cousins who are also shareholders?
  2. When will our parents empower us to make decisions? We have been in the business for more than 10 years!
  3. Who has the final say in accommodating cousins interested to work in the business?
  4. What is the protocol in filing a complaint against a disrespectful cousin or senior generation member?

d. Set up a business council. This governance structure, when done with the family member’s/shareholders interest in mind, will be the company’s best bet against unnecessary confusion in the way the company is managed by the cousin consortium. Addressing business related issues like conflict of interest and allowing only qualified family members to join the business will make it easier to maintain peace and harmony as well as cohesion amongst owners. Common questions that the business council usually take up and resolve:

  1. Can we seek your help in pushing for our company vision and values? There is disagreement as to what and where the direction of the business is.
  2. There are many bosses in the company. We do not know whom to follow. Succession is unclear.
  3. Can we review the current compensation policy? The next generation family members have growing needs and we do not know if the senior generation members are aware.
  4. Is there a mechanism to gauge the performance of siblings/cousins? I sometimes feel it is unfair. I work more than my other siblings/cousins and yet we receive the same pay.
  5. Can we regulate the entry of in-laws and relatives?
  6. If and when I decide to pursue my MBA, will the family business pay for my tuition? Will it be the entire amount?
  7. I am a non-active shareholder but would want my son to join the business, is that possible?
  8. There has been no dividend policy for a long time and it has affected my family’s cash flow. I am based overseas. What and how can I air my complaint without being tagged as a greedy cousin?

e. Have the discipline and commitment to abide by the rules. To spur growth in the family business under the cousin consortium stage, a major factor would be to strongly push for the approval of the governance rules and the subsequent implementation by the different governance councils. The key is to impose discipline against family members found violating the agreement. Having agreed policies in place and abiding by them reduces the chances that family conflicts will haunt and destroy the family enterprise.

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.