Tag Archives: Succession plan

Rule No. 3 No Extra Marital Affairs

The rule definitely appears controversial and has raised many eyebrows every time I introduce the topic during Family Governance talks. Even my best friend who is a second-generation Chinese family member weighed in on the rule that it is very “un-Chinese”.  I leave the readers to interpret what my Chinese friend said.

Lee Kum Kee Policies

But for the 129-year-old Lee Kum Kee Group, the family edict related to extra marital affairs is one of the most powerful rules that the third generation and grandson of the founder, Lee Man-tat has required the next generation shareholders to obey especially those sitting on the board.

There are equally unique and governance rules that Lee Man-tat espoused as well and these are:

Rule No 1: No Late Marriage

Rule No 2: No Divorce

Rule No 3: No Extra Marital Affairs

Any family board member who contravenes Rules No. 2 and No. 3 are expected and required to leave the board automatically and will no longer have the right to speak and participate in the family council and business decision-making process.

Family Constitution and Family Council in 2002

For Lee Man Tat, these rules are important and crucial as the family members have grown in size, some have lost personal interest in the business, the market environment has become complicated, shareholder ownership are dispersed and owners have varying versions of where the future is headed.

After weathering through two major corporate battles, the Lees agreed to finally set up a family council and draft a family constitution in 2002.

In an article penned by Jeff Pao, he highlighted the different corporate governance systems set up by LKK and what came out of the initiatives, most notable was organizing the Family Council Board and the roles of the 29-member family assembly.

Pao further contends that the family council is in charge of the family business, family office, family investment firm, family charity fund and family training center.

I will share more initiatives that the Lee Kum Kee incorporated in their Family Constitution:

a. All family members have to work at least three to five years in other companies after graduating from college if they want to join the family business

b. Family members who violate rules do not just defy the values enshrined in their Family Charter but will also lose their moral and business ascendancy to implement, enforce and discipline erring or wayward family members.

c. Another powerful value worth repeating in this article is their strong adherence to “Si Li Ji Ren“, a Mandarin saying meaning “Put Other’s First, before yourself.”

d. If family members quit the board or company for personal reasons, they can sell their shares to the company and remain as family council members

e. The next generation are allowed to inherit shares even if they are not involved in the daily business operations.

These rules are the heart and soul of Lee Kum Kee’s flourishing existence and the foundation of their commitment to pursue business excellence and stewardship so the business can be handed to the next generation seamlessly.

Lee Kum is the name of the founder, and Kee is a Chinese word that means a new family business.

The enterprise will be celebrating 130 years in 2018 and there are no signs of the group slowing down. On top of their strict observance of protocols, the other critical and indispensable governance rule that the Lee family initiated was formalizing their succession plan.

The family believes that the plan is critical to sustaining a long-lasting family business.

(esoriano@wongadvisory.com)

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Are Business Owners Doing It Right? (Part 2)

  • Do you think your children are dedicated in pursuing business continuity?
  • Are your children qualified to assume leadership roles?
  • Do you have rules for in-law participation?
  • Have you already identified a successor?
  • Do you have a succession plan in place?
  • Do you honestly believe your eldest child is the most qualified? 
  • Are your children entitled? Were there rules when they joined the business?
  • Did you require them to work outside the family business before joining?
  • Are you compensating your children commensurate to their skills and annual performance?
  • Does an HR policies cover family members? Does your HR Manager have the power to discipline family members?
  • Have you established criteria for family members owning shares? For selling shares? Assigning shares? Encumbering shares? Selling to siblings or other branches?

If you answered “NO” to just a handful of the questions above, sadly your family and the business may be headed to a bruising conflict.

If you sense the undercurrents and tensions building amongst family members now, it is wise not to disregard them. As their leader, do your family a big favor, fix the problem. If you cannot fix it, find someone who has the competence, experience and objectivity to help.

Let me take this opportunity to say that this extremely sensitive subject will be highlighted and discussed in my one day workshop in Cebu on Saturday, May 20 at City Sports Club.

The simmering tensions are telltale signs of a “baby elephant in the room”. Ignore these issues and the family and business will suffer. You might think that these issues will heal over time. It will not. As a matter of fact, the conflict will manifest in many forms and through time, implodes as you start losing your grip of the business due to advancing age or when you are no longer around to make important decisions.

It is obviously clear that these problems surfaced many years ago and you brushed them aside. These problems relate to entitlement, sibling rivalry, generational conflict, conflicting interest, in law and cousin participation.

When you procrastinate, the problems are magnified, emotions takes center stage, entropy pervades and battle lines are drawn.

Emotion and entitlement

At this juncture, legal intervention assumes a more active role and my capacity and influence as a family business coach diminishes. As family business advisor, our governance intervention is more effective if lawyers are kept out of the conflict.

Immediately right after helplessly watching his children bitterly fought for ownership and control of the business he started 50 years ago, a client confided to me:

“Prof, I failed as a parent. How I wished I were poor again. I never expected that the wealth I created has cause so much pain and misery amongst my children…we used to live simple lives but things have changed, all because of greed and pride!”.

If I hasten to add, emotion and entitlement remained as aggravating circumstances to any conflict.

With no policies in place, it will be overwhelmingly tough for the family to move forward in one direction.

I can go on and on with more nagging questions but inarguably, it will still reflect on the most fundamental question for family business owners…

“Are you doing it right? If you think you are not doing enough to ensure your legacy, do you plan to urgently do something to create harmony amongst family members?”

It is not too late though. There is still time to do something right but you must start the process now!

(esoriano@wongadvisory.com)

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Prof Soriano is slated to deliver a talk to family business owners in Cebu on May 20, 2017. The talk this month is part of W+B Cebu’s advocacy campaign related to Family and Business Governance. Seats are limited. Those interested to reserve a slot may call Octopus Events at 09159108686 and look for Ms. Cherryl.

 

Avoiding a Cain and Abel (Part 2)

LUCY rejoins the family business.

After separating from her husband, Lucy called Irene one night and decided it was time for her to come home and rejoin the family business. Whether it was planned or not, it was obvious that Lucy’s re-entry would reinforce and embolden Irene to raise the matter of governance, business direction and the unfair ownership distribution.

It was just a matter of time that the original distribution of shares among the children would end up becoming an urgent and sensitive issue. And with Lucy siding with Irene, the children are heading toward a collision course ready to draw swords with the slightest disagreement.

Clearly, the brothers understood that their sisters felt betrayed with the unfair ownership structure created by their deceased father but they chose to ignore it.

Over time, the business continued to grow and there were attempts by the sisters to discuss the ownership structure, including the major contribution of Irene. But in several occasions, the brothers deliberately avoided discussing the injustice related to ownership. Avoiding the “forbidden issues” ended up with heated discussions, resulting in intense and volatile relationships among siblings.

One day, Irene decided it was time to seek advice from a third-party family business advisor.

The first meeting was tense and the siblings felt awkward discussing a myriad of sensitive issues with me. My role was to listen, but there were times I had to interrupt them as the discussions ended with a lot of finger-pointing. After hearing all sides, I finally made my position very clear.

I went to task by addressing critical issues related to family involvement, ownership and the business. Below is the process as well as my intervention in creating a governance system for the family:

a. Helped resolve the ownership and business problems in a fair process

b. Assessed the state of family and the business

c. Facilitated a discussion in developing long term goals for the business

d. Helped the family craft policies that will govern family- business relationships

Established a family council to provide a discussion forum

e. Provided a forum for family members to participate in policy making

f. Prioritized the “sensitive agenda” like ownership, decision making, conflict resolution and define the ground rules

Developed a family constitution

g. Encouraged family members to identify their values and sense of purpose and why they have to work together

h. Documented all the rules and the agreed-on principles among the siblings

Developed a succession plan

i. Helped them lay out their role changes

j. Prepared documents that will make retirement timely and unequivocal

Without the appropriate governance tools, the transition of the family to a sibling partnership right after the death of the patriarch was a key risk factor that led to a breakdown in communication, ineffective decision-making and frustration and conflict.

When there was no intervention, the desire to dissolve the family enterprise became so intense that on the day I met Irene, she confessed that she already reached a tipping point and ready to confront her siblings with her plans meant to further shatter the business: to fight her siblings, to sell her shares or challenge them to sell the enterprise.

I told her to try family and business governance. She answered back, “What if it will not work Prof.?” I said, “The greatest failure is never to have tried at all.”

(esoriano@wongadvisory.com)

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Prof. Soriano is a National Agora Awardee for Marketing Excellence, an ASEAN Family Business Advisor, Book Author and Executive Director of ASEAN-based Consulting group, W+B Strategic Advisory. He is also an International Business Lecturer and Professor at the Ateneo Graduate School of Business.
He is the author of two bestselling books related to Family Business Governance and Succession. Those interested to order can call the W+B Group 09228603186 and look for Ms. Aira.

My personal advice to business owners (Last part)

SURABAYA – As this article sees print, I will be in Indonesia’s second biggest and most populated city with a population of three million and an extended metropolitan area with more than nine million inhabitants covering several cities.

Surabaya is a port city and was once the largest city in the Dutch East Indies and virtually the center of trading in Southeast Asia, competing with the likes of Singapore and Hong Kong. It is pretty much like Cebu and Iloilo as the local economy has a thriving Chinatown district.

Together with neighboring Singapore, which is a short two-hour flight, Surabaya and Jakarta form part of my regular coaching itinerary due to my numerous engagements with some of the country’s biggest family owned conglomerates.

Compliance after implementation

Allow me to complete the last part of the time tested formula that I strongly encourage every family member to embrace:

8. Compliance on business governance. It is essential that family members define and set boundaries, including drawing clear management lines in running the business. Mixing business, family and ownership issues every day can strain relationships, transforming the same into unnecessary conflict and disagreements.

Discretion follows conflict, so the best way to understand each other is to put in writing rules for participation in the business, qualifications, duties and accountabilities of each family member.

For senior generation leaders, there is no other time than now to initiate and document protocols and define roles and responsibilities to avoid hard feelings or miscommunication.

9. Require outside work experience. Children of owners desirous to join the family business should be required to get at least three to five years’ business experience elsewhere first, preferably in a related industry.

This will give them valuable perspectives on how the business world works outside of a family setting. Here, the child appreciates the value of discipline, competition and control. It is also in the outside world where he is humbled and challenged to perform by his peers and superiors.

10. Seek outside advice. The decision-making process for growing a family business can sometimes be too closed. Fresh ideas and creative thinking can get lost in the tangled web of family relationships. By having a non-family advisor, objective solutions minus the emotions are effectively laid out. The advisor’s entry can also be a good way to give the business a reality check.

11. Develop a succession plan. A family business without a formal succession plan is asking for trouble. The plan should spell out the details of how and when the torch will be passed to the younger generation. It needs to be a financially sound plan for the business, as well as a way for retiring family members to enjoy the quality years ahead. The phrase, “There is only one boss” is so appropriate when a successor is in place. Having a single leader does tend to be less complicated from the point of view of corporate decision-making.

The country’s biggest and most diversified family owned businesses like JG Summit Group and the Filinvest Group have already anointed next generation leaders to lead their billion-dollar conglomerates. With their succession plan firmly in place, mandates are established and the next generation leaders identified early so they can continue their stewardship role to the next generational phase.

12. Empower the next generation family members. Allowing the next generation of leaders to make contributions and introduce change is a major step in the right direction. Establish guidelines for competency, leadership and accountabilities for the next in line family business leaders.

The time to start the process is now

Applying these success formulas in the course of growing the business plan is like experiencing the seamless, graceful exchange of a stick between runners in a relay race. The new runner is fresh and has maximum energy; the concluding runner is decelerating as he has already spent his energy by running at maximum speed early on. The athletes never come to a stop to exchange the baton; instead, the handoff takes place on the move, almost effortlessly.

Good succession planning does not merely involve designating a family member and training him or her for the takeover. In fact, grooming the successor is the founder’s greatest teaching and development responsibility because it involves a long-term, continuing effort to balance competing interests and pressures that are integral in a family business.

Learning from the demise of the Cosmos empire

“Today is hard. Tomorrow will be worse, but the day after tomorrow will be sunshine.”

NEW YORK – When confronted with a crisis, it’s all about preparing for the future says, Jack Ma, Alibaba founder.

Family-owned and closely held businesses endure or die out depending upon how effectively they plan for the future. Similarly, even small and medium-sized family businesses must respond to a crisis. No company or family can escape some crisis at one time or another.

What is a crisis?

It’s any unplanned event, occurrence or sequence of events that family businesses have not had to deal with before. A crisis might be external to the business,-an economic downturn, a calamity, and earthquakes-or internal such as the death or disability of the founder, workplace violence, product failure or management failure.

Whatever the cause, the key to survival is planning way ahead and the ability to “take the long view”. The irony is that the very definition of a crisis is that it is an event that can’t be fully planned for. However, there are things you can do.

Prevention is best. Preparation is better.

Evaluate the ways in which your family or company are most vulnerable to a catastrophe. Identify possible risks and what can cause them. Any company should have an internal ‘alarm system’. Pay attention to the warnings. A patriarch suffering a stroke and given six months to live, like in the case of Henry, would have given the family sufficient time to transition and prepare the process for a leadership change.

The Cosmos family’s failed succession plan after the untimely demise of its patriarch, Henry Wong, is a valuable lesson for family business leaders to prepare for the worst case scenario.

Cosmos patriarch should have prepared a succession plan early on.

Without a clear succession plan, many businesses fail after the original owner passes away. The key is to plan well ahead. Succession is a long-term complex process, not a one-time event.

Business leaders must think what his or her long-term goals and objectives are, both in business and personal terms. They must ask themselves many questions before they even begin to consider the actual process of transition, such as whether they will play any active role in the company’s future operations, how the transition or even sale will affect the employees, customers, suppliers, and other stakeholders in the company.

The criteria must be made very clear, including the qualifications of the successor, to whom ownership of the business will go to, exactly when that will occur, and under what conditions.

Planning for the sudden death of the leader/owner of the company

As the saying goes, “Failure to plan is planning to fail.” Founders of companies that don’t plan can cause financial as well as emotional chaos in the company they have nurtured and spent their lives on. I have listed the following immediate steps when confronted with the warning signals. For SMEs with 100 percent or majority family ownership, you can also simplify the process:

Create a family council or an executive leadership team who will meet with advisors and stockholders. Decide who will be the leader albeit interim for the team.

Develop a written document describing who does what and what is to be done. For companies with many shareholders, it is better to prepare a corporate management statement that includes the following:

Guiding philosophy: What overriding principles of your business are important for your successors to continue?

Interim structures: How should the company be managed, the family organized around it and ownership handled in the interim and in the future?

Direction and outside support: Who should be involved in determining key issues related to company direction, and how should that input be organized?

Benchmark: What metrics, or key success factors, need to be monitored—and what should those benchmarks be?

Location of documents: Where do you keep the important personal and business documents that will be needed in handling that transition?

Appoint a family spokesperson or lead communicator with your customers, suppliers, banks, and other stakeholders to give assurance that it’s business as usual. Articulate the truth and tell it fast with openness and consistency, realistically upbeat and reassuring.

Involve the stockholders, board, executive management team and family to put into operation the plans that were made before the leader’s death.

It is better to incorporate in the plans the succession programs and the estate plan.

Keep your plans current and review them regularly.