Tag Archives: Prof. Enrique Soriano

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

Advertisements

What If You Died Tonight? Part 2

march 6

I am challenging the family members to heed my call on the importance of preparing for a future event like death or disability.

Procrastination as they say is a thief of time and has no place in any organization.

Let me be straightforward. Are the issues below happening? If left unresolved, any one issue can trigger an avalanche of conflict among family members that can spillover to the next generation.

Family members have limited communication skills and are unable to handle a future conflict especially when you are gone

  • There is a brewing conflict
  • There is an urgent need to establish harmony within the family
  • The goals and values of the family are unclear
  • There is no clarity on Roles and Responsibilities
  • There is no accountability
  • There is no Formal Succession Plan
  • There is a huge gap between generations in terms of work attitude, mindset, and values
  • Senior generation control is triggering tension
  • Next Generation sense of entitlement is triggering more tension

Planning the family’s business future is a process and there are several stages that must be initiated.

Firstly, the patriarch or matriarch must address critical issues related to family involvement in the business.

Family members wear many hats all at the same time. How does a business leader distinguish between his or her role as president of the enterprise and his or her role as mother or father?

How can a parent distinguish between his/her unconditional love over his/her children and a parent/business leader exacting performance over them?

The same question goes for the younger generation. Do they expect special treatment because they wear son or daughter hats?

To address the dilemma, the family must develop a family constitution or a charter that highlights shared values and vision as the cornerstone of the family agreement.

A constitution can only be effective based on two areas: it should have specific policies governing family-business relationships and it is activated immediately right after signing lest it becomes a useless piece of document. Sadly, every month without fail, my firm in Asia, the Wong + Bernstein Family Business Unit has been approached by family members complaining why their family constitution prepared by other consultants remain ineffective.

Thirdly, a constitution reinforced by a shareholder’s agreement should be prepared. The latter is a legally and enforceable document that regulates shareholder behavior and act as a deterrent for erring family members/shareholders. Without a Shareholder’s agreement, the constitution is empty!

And lastly, the senior leaders must prepare a 5 to 10-year succession plan that can prepare the next generation members to assume leadership based on a future event.

Why are these interventions non-negotiable? Even the best family businesses that I have coached must work hard at governance and relationship building. It does not end with the signing of the agreement.

In many instances, next generation members appear confused and cannot reconcile why I would always advocate a shift in owner mentality to a professional manager mentality when for many years the parents have ingrained ruinous statements such as “someday this business that I built from scratch will be yours”.

An understanding of what the company’s mission is, what its short and long term goals are, and solid job descriptions can be a good starting point for businesses that are going through some form of “natural tension”.

When done right, the transition from parents to young children entering the business phase can be a wonderful opportunity to embed governance and define the boundaries of family and business. Good, open communications fostered by the parents can help build good relationships throughout the different phases.

esoriano@wongadvisory.com

What If You Died Tonight?

Inline image 1

When you’re dead, you’re dead. 

What happens to your business, however is another story… if you planned the leadership and ownership transition, I congratulate you! In your memorial service, you will be remembered fondly!

Wait a minute!  No plan? That can be chaotic for your family, children, employees, partners and the business itself — a completely avoidable mess. Don’t expect to be remembered fondly!

It is not only scary but too daunting to think of a likely scenario where the founder or patriarch dies without planning the future of the enterprise. In my recent family business coaching engagement in the US and Canada last month, the death of a patriarch was just too much to bear for family members who were caught unprepared.

During our first session, I was peppered with so many questions coming from practically all family members and creditors!

  • What would happen to the business?
  • What would happen to the ongoing projects?
  • Who will take care of the family members?
  • How would this affect our respective families?
  • Will there be conflicting priorities and future plans for the business between other shareholders and the deceased’s family?
  • How do we make decisions amongst us siblings?
  • What will happen to Mom with Dad gone?
  • How much is the total value of our business?
  • Do we need to sell some properties to pay for Dad’s estate taxes?
  • As heirs, how do we go about getting our inheritance?
  • How much and how do we settle our total liabilities?
  • Where will we get the money to pay creditors? Are our loans secured?
  • Where are the list of assets? Who is in charge of safe keeping the Titles?
  • Who will assume the leadership role?
  • Will suppliers and creditors extend the same credit and terms of business they always have or will they begin to pull back?
  • Will customers maintain their confidence in our products and services?
  • Will key personnel suddenly begin to leave?

It is difficult to imagine, especially after working so hard and then all of these questions are raised because you never planned your death or disability. In unfortunate events like this, businesses are liable to fall apart if the proper planning and agreements are not in place.

Sadly, you are not alone though. In a Wong + Bernstein Advisory internal research, fewer than 30% of business owners have a succession plan in Asia!

You can prevent losing all that you worked so hard with a good and enforceable plan.

The key is preparation! Founders, second generation leaders, patriarchs or matriarchs always think of themselves as superheroes and take the inevitability of death lightly until one day he or she discovers something that will forever change his or her perspective about life and living.

And then in a blink of an eye, the mortal faces death and reflects on the family and the family business and the “what ifs” and the ” what should have been done”.

But in all likelihood, it will be too late.

Thus, it is no surprise that the Chinese saying, “Wealth Shall Not Last Three Generations” will continue to consume and haunt families in the event that death suddenly occurs in the family.

Any death can disrupt a functioning family and can mercilessly cause the family business to jolt and veer off course. At worse, the lack of preparation and the entitlement of the family members can cause the family business to fall apart and disintegrate.

How then should family businesses deal with such a powerful emotional event?

esoriano@wongadvisory.com

Without Respect, There is No Love

Inline image 1

“Without respect, there is no love. Without trust, there’s no reason to continue.”

This is a powerful quote from Paul Chucks that must resonate to all family members torn by strife and conflict. It is also a timely reminder as we celebrate the month of hearts!

For the past six years after its founder Richard’s passing, the “A” family typically gathers for their mid-year family and business council meeting every third Sunday of the sixth month. The family calls it Code 36 representing the third Sunday of the sixth month. It is an event combining family and business performance review with a segment on ownership alignment. I normally add flavor by injecting governance, strategy and growth during the session.

This activity is separate from their regular family and business council meetings. In the Family Constitution that my advisory firm, Wong Advisory drafted six years ago, the members of the Family Council must meet for a total of 20 hours a year spread over five to six meetings while the Business Council members are required to meet every month.

My firm added Code 36 together with the other governance councils before the founder passed away primarily because the family and the business almost fell apart due to major conflicts on many areas (entitlement, in law participation, decision making, power struggle, conflict of interest). The infighting was so intense that it grounded the business to a halt for several years and caused so much heartbreak for the founder. 

In this year’s forthcoming gathering, a total number of 23 members of the second and third generation are expected to attend. Their age ranges from 61 to 15 coming from the founder’s five children and their families. Those below 15 years old can join but are not obligated to be in the function room.

Relevant topics are sorted months before but the objectives are four fold:

  • Evaluate the state of family and the business
  • Review mid-year performances of the operating units
  • Develop long-term goals for the business
  • Evaluate policies to govern family- business relationships

The overarching core messages remain the same and revolve on five powerful values handpicked by the founder himself: Communication + Respect + Trust +Unity = Growth

Just like the last gathering in December, the meeting usually starts with the clan’s Gen 2 anointed leader reiterating the family’s shared vision and values and a story about the growth of the business since its humble beginnings in the 1960’s.

The objective is to remind the younger generation and the extended family members how their grandfather Richard and his wife jointly founded the business through hard work and honest dealings with customers and suppliers. Then a short seven-minute video of the family history will be played. The emotional video instantaneously reconnects the deceased founder to all the members of the two generations and reminds everyone that through regular and open lines of communication, the family enterprise can overcome temporary setbacks.

After the talk, a Gen 3 member usually in charge of finance will report how the business performed over the last quarters and the outlook for the succeeding quarters.

Then the legal counsel, a non-family professional will then provide a quick review of the ownership structure by way of educating newly inducted family members on the importance of stewardship as well as shareholder qualifications and responsibilities. Recently employed family members are those who were invited, signed the constitution and are now full-fledged family assembly members.

To be continued…

esoriano@wongadvisory.com

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!

Taming the Black Sheep

When parents are not united in their words and actions, display conflicting messages and continue to tolerate the black sheep family member’s damaging actions, Prof. Eddelston correctly painted two scenarios:

  • The black sheep or “Fredo” will either withdraw from the family business and/or;
  • Lash out with selfish behaviors in an effort to gain compensation for their circumstances

Another aggravating scenario that will further add strain to the family is the tendency of the children to pit parents against each other.

On one hand, a parent, usually the mother, has the natural tendency to coddle underperforming family members by way of covertly supporting the children (financial and advice) often against the wishes of the father who in most cases is the disciplinarian.

Unknowingly, the actions of the coddling parent (rewarding/reinforcing bad behavior) will eventually lead to more problems effectively undermining an already strained relationship among family members.

On the other hand, the children who have communication issues with the stricter parent will gravitate to the coddling parent resulting in real conflict and constant clashes between parents and the children.

To mitigate the tension, the family will “sweep the issues under the rug”, ignore the tension and for most family members, would rather just “suffer in silence.”

This unstable “ceasefire” will allow a semblance of numbing peace but it will only be temporary. When a sensitive topic is raised and a raw nerve is touched, expect an avalanche of problems to come out in the open and a new round of discord is activated.

With the “elephant in the room” becoming so big but deliberately ignored, stress levels will continue to surge and one trigger, just one, can discharge another round of infighting. This event, if left unresolved, becomes a vicious cycle that consumes and zaps the energy of every family member.

At this juncture, the family is in a state of helplessness and on the brink of finally “throwing in the towel.” When left unresolved, this negative energy spills over to the business.

Unfortunately, when the parents are already old or are gone, you can expect the children (and in-laws) to slug it out, employing higher levels of relationship conflict. With their newly inherited ownership rights, the problems are compounded and another bruising conflict awaits the siblings. This highly charged situation becomes a precursor for family members to sell out and marks the beginning of the end of the family business.

Do you want to have a united and harmonious family? Do you want family members to become responsible owners and stewards? Eddelston offers some advice in dealing with black sheep and underperforming family members.

First, confront the child, either one-on-one or through an experienced advisor. Sometimes children do not realize the harm they bring to the family and the business so articulating the family’s clear position is important. Show that the bad behavior has major consequences and expulsion, suspension or demotion are options available.

Second, give the child another job – one that better suits his/her interests and experience. Sometimes an otherwise “good” family member can seem like a black sheep because the person is ill-suited to the industry and business.

Third, consider firing or buying out the child’s shares. Unfortunately, in reality, there are also situations when firing him/her is not practical since the person does not have career options and needs to provide for a family.

You are not alone. Having a black sheep family member is universal. Initiating these actions are unpleasant but in the end you just have to do what is best for the family and the business.

The Destructive Effect of Poor Succession Planning

sept 11

Yu Pang-lin

A property mogul has decided to donate his entire £1.2 billion pound fortune to charity, leaving his wife and kids with nothing.

He had a special interest in helping those with cataracts in their eyes. Since 2003, his foundation has helped restore the sight of more than 300,000 people from more than 20 provinces and autonomous regions across China, including some poverty-stricken areas in Qinghai, Gansu, Yunnan and Guizhou provinces.

Yu attributed his desire to help others with his experiences as a young man. In the 1940s, Yu had worked as a journalist and an editor for a newspaper, learning about the hardships of people in poverty. He moved to Hong Kong in 1958, and made a living in the early years with many jobs, including as a cleaner, handyman and construction worker. He later founded his own real estate company, then expanded to other areas, including tourism, hotels and healthcare.

In the 1980s, Yu started donating money to build schools, emergency centres, public bus routes, tunnels, fountains and other infrastructure projects. In 2007, he was on the list of world’s top philanthropists selected by Time magazine.

===

“If my children are more capable than me, it’s not necessary to leave a lot of money to them. If they are incompetent, a lot of money will only be harmful to them,”

Hong Kong Real Estate Billionaire Yu Pang-lin

Yu is the founder of the Yu Pang-lin Foundation dedicated to healthcare, education and disaster relief. He was believed to be China’s first billionaire to donate an entire fortune to charity.

Alarming Number of Family Business Failures

In my work as Family Business coach doing the rounds in Asia the past five years, I have witnessed a rapid increase of family business disputes bitterly adjudicated in courtrooms because of poor governance and harmful wealth and ownership distribution.

In a Family Enterprise Trend report by my consulting firm, W+B Family Advisory, it researched on the average age of business owners who are going through “rush” transitions.

The study showed more than half were 70 years old or more. The firm also identified the top five major sources of dispute:

1. Money as a result of ownership misalignment and wealth distribution

2. Control and Power struggle among siblings and or cousins

3. Poor succession programs that bred conflict

4. Wrong policies related compensation, dividend policies and incentive programs

5. Employment for everyone. Despite their lack of experience and competence, family members are thrust into leadership positions because of their surnames

Summarizing the report and analyzing why conflict and tension happens among these enterprises, it highlighted the following findings:

“Business owners in general procrastinated and did not see the urgency of initiating governance in the early stages of the business cycle. They were just too busy growing the business.

In the latter stages when health issues surface often and disagreements were becoming frequent, owners would suddenly realize that the children were not prepared to assume full control of the business when they (parents) are no longer around. In short, there was a very high probability that these family enterprises were headed to separation due to internal squabbles.”

Litigation Can Scar Family Relationshipsfor Life

My role as governance coach is to prevent and deter senseless and unnecessary family tension from escalating into a full blown and irreversible family feud. That if left to feed on its own, will spill over and convert the courtroom into the next family battleground.

With the exception of lawyers from both sides, nobody wins in a messy litigation process. They are just plain expensive, personal and can scar relationships for life.

Inevitably, whatever comes out of any court case can produce a debilitating effect not just on warring family members but also on the financial state of the enterprise.

Why is conflict pervasive?

As the business leader or visionary gets old, he or she has to naturally pass on the business to the heirs. Unfortunately, many of these owner managers follow certain traditions to a fault.

a. They do not want to see their own business empire falling apart as a result of division of wealth

b. They want their children to stay together in harmony so they can continue the business

c. They have very strong preference towards their male offspring to carry the mandate in the next generational cycle

d. But they are not open to Non family professionals joining the business

e. There are no entry and exit rules for family members and in-laws

To be continued…

(esoriano@wongadvisory.com)