Tag Archives: Succession Planning

The Toughest Decision You Will Ever Make

High profile billionaire, real estate mogul and one of the world’s top philanthropists, Yu Pang-Lin passed away at the age 92 in 2015 but in a gathering five years earlier, he announced that he would entrust his entire wealth valued at USD1.5 Billion to a bank and the money would then be donated to charity after his death.

Yu was believed to be China’s first billionaire to donate an entire fortune to charity. He gained prominence when he acquired Bruce Lee’s home in the early 70’s and rose from toilet cleaner to billionaire. He once said, “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.”

In the West, there appears to be a growing awareness on the dangers of children entitlement. Elton John whose net worth is around USD550 Million has the same mindset. He has no plans of leaving much of it to his sons, “Of course I want to leave my boys in a very sound financial state. But it’s terrible to give kids the silver spoon. It ruins their life! Listen, the boys live the most incredible lives, they are not normal kids. But you have to have some semblance of normality, some respect for money, some respect for work.”

The world’s most savvy investor, Warren Buffet whose fortune is estimated at USD65 Billion intimated that only a very small fortune of that money will go to his three children. According to Fortune magazine, Buffet pledged to give away 99% of his wealth over his lifetime. “My family won’t receive huge amounts of my net worth. I still believe in the philosophy…that a very rich person should leave his kids enough to do anything but not enough to do nothing.”

It looks like Jaycee Chan will have to make it on his own as well.  His celebrity father, Jackie Chan, has decided to donate his money to charity instead of his son. As reported in Hong Kong media, Jackie Chan, who has a fortune estimated at USD350 Million, recently announced that he will donate all his wealth to charity. The “Bleeding Steel” star, who originally intended to split his wealth between his family and charity, has decided to give it all to the needy. Chan was quoted as saying that his son Jaycee should be capable of earning his own money now that he has his own career.

Inheritance can be tricky so discussion is often avoided. However, as the founder reaches the age of 60 and up and the children are all grown up and likely to have been forced (lured) into the business with zero outside work experience, founders can expect the following worrisome scenarios:

  • Escalating  dispute between founder and children related to management style
  • Simmering sibling rivalry on family and business issues
  • Children jockeying for power aggravated by In Law influence
  • Worsening marital spats between the founder/spouse
  • A competitive and highly regulated marketplace
  • Growing tax pressure exacerbated by different sets of Internal books
  • Urgency to align a complicated ownership structure for estate and transition planning

When these combustible issues are mixed, the process of initiating an inheritance plan can be so overwhelmingly daunting that owners tend to naturally forego the process. Procrastination or the “Do Nothing Option” then ends up as the most convenient choice.

So when an event like death or illness strikes the founder, expect the phenomenon to reappear, “Rice bowl to rice bowl in three generations”.

esoriano@wongadvisory.com 

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The 70/30 Succession Curse

The month of May has been quite challenging. An ugly feud erupted for control of a family-owned business in country A and I have been requested to intervene.

The sons of the founder are attempting to wrest control of the company from their father. Several thousand miles away in country B, another scenario has befallen another company, this time pitting siblings against siblings after the sudden demise of the matriarch. In both cases, my intervention posthaste was due to recommendations from associates that felt there was still a glimmer of hope for mediation.

The caveat is that should my initiatives fail in the next 12 months; a litigious process pitting lawyers from both sides will ensue. I can almost anticipate a very public mud-throwing spectacle between the warring parties much like the Lotte Group conflict in South Korea and the Philippine’s Ilusorio and Romero family disputes.

In my initial research, the problems started manifesting when the children were forced to join the business without any clarity related to their roles and responsibilities. After the ownership structure was distributed to the children, the plot to unseat their father intensified. I cannot pass judgment nor speculate on the motivation of the four siblings why they rebelled against their father. One thing is clear –– the issues are deep-seated and have created so much strain on the family. The children are now in their early 40’s.

Theoretically, I refer to the first case as rebellious. It is one of the three patterns of ineffective succession where the next generation launches a clean slate approach to the organization as an overreaction to the founder’s control of the firm. As a result, traditions, legacies and even the business model are rejected and discarded.

This case is just one of a handful of unwarranted family squabbles where the children would attempt to dislodge their parents from controlling the companies that the older generation founded. Predictably, these conflicts implode when governance, succession and ownership processes are set aside. And these same type of issues can happen to any family owning business, big and small.

As a family business advisor, I have never been remiss in constantly reminding leaders to initiate the process of succession immediately. Unfortunately, procrastination, an air of invincibility (superman mentality) and an inflated ego can oftentimes obfuscate the founder’s rational mindset.

The facts are clear, seventy percent of wealth and ownership transitions are not successful and seventy percent of family wealth ends with the 3rd generation.

So I am posing a direct challenge to family business owners: Be among the thirty percent who have successfully transitioned their wealth and ownership to the next generation.

One of the worst mistakes entrepreneurs can make is to postpone naming a successor until just before they are ready to step down or when death comes knocking.

Sometimes founders avoid naming successors because they don’t want to hurt family members who are not chosen to succeed them.  Yet, both the business and the family will be better off if, after evaluating the candidates as they work in the business, the founder picks the successor based on that person’s skills and abilities, early enough.

So my advice to business owners in their 60’s and 70’s is to have an open mind on the topic of succession planning. It can be both exciting and daunting at the same time. Daunting as the “letting go” phase for someone else to take over can be initially tough on founders. However, for visionaries dreaming of perpetuating their businesses, they must recognize that this leadership transition is both critical and indispensable.

esoriano@wongadvisory.com  

 

Founder Inaction Can Cause Business to Fail

Allow me to share the story of a Family Business run by Mr. C. Like most entrepreneurs Mr. C migrated from Southern China, started a trading business and through the years expanded to several businesses like manufacturing, food and retail. The business was founded 44 years ago and at its peak, had a total employee count of more than 15,000.

Early this year, I conducted an organizational audit and found out that the employee headcount sharply dropped to just below 5000. The decline started right after the founder took a back seat due to a life threatening condition.

Family C’s case is unique. It is a live case full of twists and turns and ever unfolding. Live case also means that it is a “work in progress” (WIP) project. This is also one of the reasons why I spend more time in Asia than in the Philippines.

Our sessions have been quiet challenging and gratifying at the same time. My core team was able to diffuse a family “ticking time bomb” that started more than a decade ago involving two warring sides of the family…three younger siblings pitted against two older siblings.

The problem started with the employment of the first 2 children, who were untrained and ill equipped to handle the rigors of managing an enterprise belonging to different industries.

Straight from college and without any formal entry policy, they were asked by their father to help out in the business. Confident that the children were ready to assume bigger roles and the companies’ consistently better performance year after year, the father decided to slowly detach from the day to day chores.

Through time, they married, produced children and the family grew faster than the business. With their new found power, the older children started to apportion for themselves the departments and business units that they were already managing.

This was also the time the three younger siblings joined the business. With 5 children in the business, each vying for control, the departments were like a separate kingdom without any semblance of a collective plan moving in one direction.

With the children at the helm, heated discussions among them became more frequent and their incompetence manifesting by way of lapses in major decisions. It was obvious that apart from the breakdown of governance, the lack of vision, poor judgment, conflict of interest, high attrition rate for employees, no planning and a certain level of entitlement contributed to the decline.

Primary Causes of the Sharp Decline:

  • With the same surname as the founder, any family member can freely join the business
  • Some were plain lazy, while some did not have to work as hard and still got the same pay as those who were fully engaged
  • Distrust and self-dealing among family members were becoming apparent
  • Relatives or friends can be a supplier without the necessary accreditation.
  • In-laws got infected with the “entitlement bug”
  • No rules of entry and exit including accountability for family members.
  • Employees started to take sides out of survival
  • Frequent clashes due to personality differences
  • Constant friction as to where the business should be heading
  • No expansion as family members spent much of their energy fighting one another over money and power
  • Family members never exerted effort nor time to cooperate.

To be continued…

 

https://www.towerswatson.com/en/Insights/IC-Types/Reprints/2014/10/Succession-Planning-The-Answer-to-Leadership-Crisis

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)

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LINK:

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

 

Family Charter and Succession Planning

I will now continue my Family Business Longevity Series using Royal Selangor as a gold standard for Family and Business Governance. Family owned businesses reaching a milestone of more than 100 years are indeed extraordinary and Royal Selangor, a Malaysian company that started in the 1880’s and with Chinese descent has proven that with a well-crafted Family Charter (constitution) and a timely succession process, the family business can continue to survive and grow amidst a complex and competitive marketplace.

Allow me to continue Royal Selangor’s amazing 132-year story.

The Yong brothers started out as tinsmiths making everyday items catering to the growing mining community at that time. Gradually, they started a side business crafting pewter to make Chinese ancestral worship items.  In time, Yong Kong veered off and established Malayan Pewter Works. The company — jointly run by Yong Kong’s four sons — expanded into making cigarette boxes and tea sets in the 1900s, which got the attention of European clientele.

After World War II, family feuds tore the business apart and the brothers set up rival companies Tiger Pewter, Selangor Pewter and Lion Pewter. However, only  Selangor Pewter, which was renamed Royal Selangor in 1992, survived. Right after the Malayan independence, it began making souvenirs and corporate gifts.

What were the lessons learned that led to the break up?

“My father told me to beware of family feuds. If you have family members contesting over the pot, then nobody looks after enlarging the pot,”says Yong Poh Kon, the Managing director of Royal Selangor International and third-generation leader of the family business. Although in one interview he concedes that for this type of business to survive, product innovation is the key to stay in the game, however he also emphatically asserts that succession planning should be given utmost attention.

While he wouldn’t say whether his son or his nephew would eventually be chosen to lead the business, the third-generation patriarch stated criteria and gave advice for his successor.

“It will be based upon the track record of the person and the support he will be able to derive to bring his idea into action.  Maintain the family harmony so that everybody feels that they are part of the business… continue this, then you are able to have the passion to drive the business forward,” Yong said.

In the PwC Family Business Survey 2016 — the Malaysian chapter points out that although 69% of local family businesses have members of the next generation working in the company, but only 15% have a robust, documented and communicated succession plan. That survey reflects a looming universal trend among family businesses that tend to overlook the dire consequences when senior business leaders set aside or completely neglect succession planning.

Another source of major conflict and possibly one of the biggest dangers faced by family businesses today is the risk of the younger generation taking it as a free ride and feeling a sense of entitlement to a position in the company purely because of his or her surname. To avoid this, Royal Selangor employs a policy wherein every family member has to work in another company for a period of time before joining the business.

“The rationale behind working in another organization and the reason why that rule is in place is because you have to have something to contribute and bring to the table if you want to work for the company”.

(esoriano@wongadvisory.com)

Role Confusion Can Lead to Disastrous Results

I am now sharing the last half of Benny’s email (the 37 year old grandson and eldest 3rd Generation family member), that he sent to me together with his Easter Sunday greeting:

“Prof, despite our imperfections and the family members’ stubborn nature (it is in our DNA), we are grateful that you never gave up on us. Collectively as a family, we are more than determined not to let this governance opportunity pass and we are absolutely committed to pursue our role as stewards aiming for 100 years or more!

So, in behalf of the family, our second-generation leaders and my third-generation cousins, we sincerely thank you for believing in us. 

We look forward to the next Family Council meeting next month!”

Positive feedback like this one I received on Easter Sunday lifts my spirit and emboldens me to continue my advocacy of helping family businesses in Asia.

The Goal of 100 years is Unfolding

Now the C Family is united in its vision of becoming a family-inspired enterprise. The family is now on its way towards fulfilling the founder’s dream in building a legacy that promotes harmony, growth through strategy, professionalism, free from petty conflicts, supported with mutual covenants and a powerful set of values reinforced with legally enforceable shareholder’s agreements!

Governance work is about compliance and it is challenging. There is no guarantee that the ride will be smooth.  As a matter of fact, it will have its twists and turns but their journey to becoming a world class family enterprise will no longer be elusive.

The C Family Crisis mirrors 90 % of the World’s Family Enterprises

Without any form of proper mentoring related to governance and role definition, these next generation family members will end up managing non-family employees with disastrous results.

Additionally, family member entitlement is oftentimes a result of a confused role when these children crosses over from a purely family member role to a family member employee or shareholder role.

By observing how the patriarch (matriarch) or other senior generation family members gives out orders and discipline subordinates, the new family member employee will naturally imitate these behaviors and the senior leader’s management style. Good thing some of the family members realized that an intervention was needed so a looming crisis was averted. It would have been the beginning of the end for the C Family Business.

Solutions Must Be Long-Term

A non-executive Shareholder or family member who is active in the business but with an “owner mentality” mindset is naturally unreasonable and may demand the use of company resources or to impose his or her will on employees in how to behave.

Such role confusion can often be clarified by conducting a series of educational forums initiated by a Family Business facilitator in which the boundaries of appropriate and inappropriate shareholder behavior are clearly explained. Depending on the planning area where intervention is urgent and immediate, I am suggesting critical planning areas to choose from:

1. Family Governance and Succession Planning as a prelude to the Crafting of the Family Constitution where the topics covered will be the natural transition to the next generation members and the predictable problems that goes with the transition

2. Business and Growth Planning entails the formulation of a Strategic Plan that will serve as the family business’ 3 to 5-year vision and growth plan. The option to do an IPO, if the family members are receptive, can be discussed in this forum.

3. Ownership Plan addresses key topics that clarifies the roles of owners, management and the board level family members

(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.

Why do founders dislike retirement?

IN one of my meetings yesterday here in Vancouver, I heard this reaction from a founder and visionary after I posed a challenge on the urgency and need to initiate succession planning: “Professor, building a family business from practically nothing is all about hard work. My children never experienced any of the hardships I went through. And planning for the continuation of my business long after I am gone is actually many times harder and poses the greatest challenge for the next generation.”

“So put yourself in my shoes. There is no doubt that I deserve to enjoy life outside of the business. Who doesn’t want to spend time with one’s grandchildren? But under the circumstances, tell me, how can I let go?”

With that said, I am not surprised why founders refuse to give up power and control. For one, the process of handing the business over to the next generation is something that’s specific to each enterprise. And there are various elements that may work for one family business but not for another.

A family is strongest when united. Unfortunately, all too often a family can fall into infighting that can compromise family business succession.

Available estimates (Dun & Bradstreet, 1973) indicate that approximately 70 percent of all family firms are either sold or liquidated after the death or retirement of their founders (Beckhard and Dyer, 1983). The founder’s unexpected death can force a major upheaval in the pattern of authority and ownership distribution.

In this situation, conflict among the founder’s heirs often becomes so intense that they are unable to make the strategic decisions needed to ensure the future of the firm. Failure to plan for succession also threatens the family’s financial well-being by leaving many thorny estate issues unanswered; a distressed sale of the firm is often the result.

Max Weber, the great German sociologist, was among the first to identify the importance of having the founder of an organization turn over power to a successor who could solidify the administrative structures required for the continued development of the enterprise.

Weber (1946) referred to this process as the institutionalization of charisma and saw it as one of the greatest challenges of leadership.

Ambivalence: a major cause of a failed succession

The word “ambivalence,” according to Merriam Webster Dictionary, is a simultaneous and contradictory attitude or feeling toward an object, person or action.

Founders adopt different ways of coping with their ambivalence toward succession planning. One common response is to compromise opposing feelings by enacting a number of self-defeating behaviors. Let’s look at the case of a founder who chooses his oldest daughter to be his successor but undermines her authority by refusing to give her the coaching and training that she needs to perform competently in the top position (Rogolsky, 1988).

Anointing his daughter as the successor addresses the founder’s desire to “do something” about the continuity problem. Passively compromising the daughter’s development placates the founder’s need to remain in control. The two behaviors prevent any real progress toward a feasible succession plan.

(esoriano@wongadvisory.com)

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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.