Tag Archives: Succession Planning

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

 

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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.

Shocking succession decline in Asia (part 2)

THE      subject of family-owned business is important globally, and more particularly in Asia where it is further exacerbated by the fact that many of these enterprises are first or second generation family-owned companies.

In my coaching work all over Southeast Asia, topics like succession planning are still pretty new and, in most cases, have not yet received significant attention. They are aware of the importance that a seamless succession planning can do to the organization but see no urgent need to initiate the process. It doesn’t help that the first generation are highly entrepreneurial and often tend to “forget” about succession planning until the last moment. This makes the task even harder.

Professor Joseph P.H. Fan emphasized in his book “Critical Generations – Out of the Succession Dilemma of Chinese Family Businesses” that the cause of the shocking succession decline in Asia is based on two compelling reasons. First, intangible assets such as values, skills and networks, although commonly found among the first generation entrepreneurs, are difficult to pass on to the next generation. Second, Chinese families also face various family, industrial, and institutional obstacles such as family brain drain, regulatory changes, and political uncertainty, which can devastate the families and their businesses.

To overcome these challenges, Fan has identified three critical tasks that every family enterprise must embrace. These are family governance, ownership design, and corporate governance. These effective tools should be consistent with Chinese cultural values. For the benefit of my regular readers, I have written more than a dozen articles related to these three tools. Perhaps it is important to urgently reflect on these governance tools, especially that succession is inevitable.

Procrastinating is fatal and can lead to devastating consequences.

Western influence may compromise the family business

Direct transplant of Western solutions are usually not applicable. In addition, Chinese business founders often prefer to “lock-up” the wealth and ownership of the business in some way. Family members however, expect to get a “fair” share of their inheritance and after the founding generation passes away, family fights and court action inevitably follow.

Again, my articles about the local Cosmos family and HK’s iconic Yung Kee Restaurant are two cases of a failed succession. For the Yung Kee group, the acrimonious parting happened right after the death of the patriarch, erupting in bitterness, litigation and the eventual liquidation of the business. On the other hand, for the Wong Family of the Cosmos Beverage fame, the business ended up being sold to the RFM group triggered by the demise of its patriarch, Henry Wong.

Younger members will never replicate the work ethic of the older generation

Another important observation according to Prof. Fan is that successors of family business, even if they share values and passion of their parent founders, may not be seasoned business professionals. It is therefore important to build a strong management team and put into place an effective model of corporate governance which can effectively monitor leadership and results. They must also implement more transparent accounting practices and greater checks and balances.

Chinese family founders are using a range of different methods to solve their succession problems and often these are ad hoc resulting in varying degrees of success. Ad hoc can mean employing crude means like informal delegation, allowing a bit of empowerment, rotating function, etc. But because of the higher incidence of family conflict, many Chinese business founders are now becoming more proactive on this matter and are joining classes and seeking knowledge to resolve the succession issue.

Fading traditional values

Another culprit in internal family disputes is the fading of traditional Chinese culture and values within family businesses. “The Chinese practice of bequeathing all the family wealth to the eldest son is diminishing. This tradition, although perceived by some as ‘unfair,” has helped preserve family wealth and preempt conflict. However, the new generation of Chinese family members who have been influenced by Western culture and education are adopting different family values such as equality and democracy. Succession planning says Prof. Fan is therefore, “less straightforward and more complex with greater potential for family disputes.”

The only solution to these pervasive problem is for families (and not just confined to the Chinese) to install and enforce a system of governance, internalizing shared values, consolidating family interests and putting in place a mechanism to manage conflict. Succession planning in the Asian context is really a precarious event.