Tag Archives: Shareholders Agreement

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

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What next after the family constitution?

MUNICH, Germany — A Merry Christmas to Sun.Star Cebu readers! It is extremely freezing here and I wish I was in sun-baked Philippines. But work beckons and I am in Germany for meetings with fellow family business consultants to collaborate on complex European family enterprises.

After these series of engagements, I will finally shut down and enjoy my vacation with family and celebrate Christmas in Vienna, Austria.

Articulating this article’s title

If you are finally convinced that having a Constitution on the Top Shelf or COTS that I highlighted in my article last week is not in the best interest of the family and the business, then implementation is the only way to go.

It is either the family swims together in one direction or sinks together, carrying with it a dysfunctional enterprise and a legacy lost after being built through sheer hard work by the founding generation.

A family business is a business of relationships and relationships are at the heart of the family business. The potential for conflict in family businesses can be greater than for other businesses, typically due to a clash between business and emotional concerns.

Purpose of the family constitution

In a nutshell, a written, comprehensive and process-driven family constitution is a critical requirement for it to succeed. Doing it in haste is a recipe for failure even if family members signed it.

The agreements highlighted in the constitution seek to nurture and promote the company’s successful development and to prepare the family members for succession.

Basically, the family constitution defines the family’s vision of the future and its core values and beliefs. It likewise spells out the purpose and responsibilities of the family council, the ownership council, the family assembly and the board of directors/business council.

More importantly, it also guarantees the enterprise a workable governance system as the family transitions from a single-owner phase to sibling ownership all the way to the cousin consortium, where the sheer number of owners and family members working in the business can be overwhelming and unwieldy.

Finally, on top of the business, it regulates family relationships by integrating what was agreed upon, and these are conflict resolution mechanisms, family business protocols, decision-making criteria, participation policy for those interested to join, corporate direction of the business and setting up rules of family members to own shares and to whom to sell shares. This legally enforceable document is also exhaustively covered in a binding shareholders’ agreement.

When all of these elements are harmonized and agreed upon in writing, the next step now becomes very crucial as the family coach seeks to provide an impartial and objective balancing act, reiterating to everyone what was agreed upon and asserting compliance in all aspects of the family agreement.

There is, however, a downside if implementation is done wrong.

All talk and no action

How conflict is managed determines the degree to which a family and its business remains healthy and strong and how it can address head-on the issues that might affect the relationships of the family members/branches.

Failure to manage conflict after the signing of the constitution leads to the splintering of the family business. One of the telltale signs is when family members talk endlessly about the issues yet fail to act on them. We call that procrastination.

Penny-wise and pound-foolish mindset

Here’s the Cambridge Dictionary definition of this phrase: to be extremely careful about small amounts of money and not careful enough about larger amounts of money. In our context, that refers to family members looks at the cost and never at the investment on family relationships, growth and legacy.

Facilitating governance is extremely challenging, especially when rules agreed upon are documented and are set in motion. Investing on an objective and experienced family business advisor to facilitate family meetings can unburden the family business and its members of the stress and senseless conflict that can escalate to irreparable damage to family relationships.

Managing the day-to-day business

Family members are so focused on wealth generation and set aside the constitution. Obviously, under stress and confronted with a heavy load every single day, which management activity loses out? Hands down, the clear priority will always be the business and never the governance part.

How unfortunate.

To be continued in Tuesday’s issue: Setting up the family council.

Constitution on top shelf

CONSTITUTION on top shelf or perhaps rephrasing it to Governance on top shelf is probably my biggest frustration in coaching family businesses!

That is the crux of this week’s article. Statistics of failed family businesses that went through a constitution building exercise and missed out on the implementation is alarmingly high.

Failure rate at 60 percent in ASEAN

Six out of ten family agreements (constitution) are most often than not relegated to the top shelf and continue to gather dust. In my last two seminars in the country on family business governance, I saw a significant number of attendees in a bind.

One family member even courageously went up to me and in a sad, booming but almost desperate tone lamented that the family members are still at odds despite formulating a family constitution (done by another consultant) five years ago.

He went on to relate that the family members were herded into a hotel, went through a two- day session with the third and final day devoted to the signing. Family members went home happy and optimistic that finally they can envision a harmonious relationship among family members with the enterprise finally moving forward sans family related hiccups.

My reply was direct. Without activation nor compliance, developing a family charter is just a paper exercise.

The emotional effort and energy that goes into the process of drafting the agreement is extraordinary…well at least if I benchmark our W+B working model. The latter goes through an eight to 12 rigorous session process before a final agreement is signed and document.

The process is equally important

After the signing of the agreement, an additional two to three sessions should be devoted to drawing a shareholders’ agreement. This is critical as this last piece of aligning ownership among family members is a legally enforceable document.

A family constitution without a shareholder’s agreement is empty!

For most families, the process represents their most significant investment of vulnerability and openness as well as discussions related to very sensitive and often times personal issues.

If nothing comes out of the family discussion, the family will be reluctant to try again.

Families can become very cynical toward future attempts to revisiting the failed family constitution.

A constitution is not a “cure all” document

A constitution is never a quick fix. It is a product of session after sessions of discovering new things and uncovering concerns that are affecting family and business relationships. It is also a living document that seeks to provide solutions to future problems. And it can only work unless the family members who signed the dotted lines proactively pursue the fourth and critical requirement–implementation!

Implementing the Family Constitution is non-negotiable. Non-compliance is a recipe for a bigger conflict especially if the head of the family is no longer around to provide the leadership and decision.

Alarming statistics

Statistics culled from the Economic Intelligent Unit showed that in the Philippines, the biggest stress (and this is very disturbing) comes from major disagreements among family members over corporate strategy. The EIU rated it at 48 percent for local family owned businesses and 52 percent for its Indonesian counterparts. This particular issue can only be resolved if the family constitution is done right and implemented correctly.

Now you know why I frequent Indonesia.

I have listed below several reasons why family agreements fail:

-Lack of senior management belief and commitment to implement and activate the governance councils

-Time/resource commitment isn’t there to plan, unrealistic expectations

-Day to day growth and pressures too dominant

-Lack of willingness of family members to be proactive and creative

-Tough choices avoided, failure to set priorities

-Reactive, low risk, rewards mentality, low reinforcement for governance thinking

-Past history and mistakes in previous planning attempts

-No desire in pursuing the implementation process itself

-Frequently changing priorities and focus; not persevering on one track; inconsistent decisions

-Low commitment to the implementation

-Governance on Top Shelf, no formal implementation

-Failure to provide the needed resources–financial and personnel

-Conflict, politics, lack of interpersonal skills amongst siblings, cousins when working together