Tag Archives: succession

Are You Really Committed to Succession?

June 26Prof. Josep Tàpies of IESE Business School in Spain is absolutely right when he remarked, “No one assumes that the son of a great violinist will also be a virtuoso on that instrument,”

So when do we consider a succession successful? First, it is when the company’s founder hands over the business seamlessly to the children, along with their spouses without any fanfare nor disturbances in any of the three critical pillars: Family, business and ownership systems.

Second, it includes the transfer of power to the most qualified and deserving next generation leader, who will navigate the enterprise together with his or her siblings. The transition to a chosen successor is a critical decision made unanimously by all the siblings, the BOD and the senior executive team.

The third element in the succession journey is that every strategic move is guided by a family agreement or a charter where governance issues are raised to the family council for approval using pre-agreed barometers. It is also essential for every member of the family council to be involved in a consensual decision-making process under a culture of transparency and respect.

In my family governance work at W+B Advisory, it can take up to 10 to 12 sessions or close to a year to create a family agreement. Why that long? There is no short cut to creating a real and authentic governance process. Just to initiate a transition from an informal set of rules to documenting formal agreements can be daunting for family members who are not used to corporate best practices.

During sessions, family members are made aware of their inherent responsibilities. They are guided on every item covering a slew of code of conduct policies where they simulate a formal meeting and collectively negotiate an acceptable governance solution to predictable problems that will likely happen in the future.

The fourth element is the creation of a Family Business Training Institute meant to inculcate good parenting programs, values formation training, business skills enhancement, shareholders education, a rigid successor program, Board level governance and institutionalizing a culture of stewardship to all family members.

And finally the last element in the succession journey is the creation of a Single Family office (SFO) that seeks to manage and preserve the family’s wealth. An SFO is a private company that manages investments and trusts for a single family. Other services include family governance, financial and investment education, philanthropy, estate planning and tax mitigating services. For ultra-high net worth (UHNW) families ably assisted by my firm, we assist family businesses in pursuing diversification strategies using private equity and liquidity investments.

Tàpies concludes, “All companies are subject to risks committed by governments and managers, but family companies, because of their very nature, can more easily succumb to a series of mistakes. The succession process is a key issue that the family company must confront. It is a long process that requires planning and collaboration with outside advisors. A well-prepared succession requires the intensive training of one or several different successors. It also requires you to establish conditions that will regulate relationships between shareholders, managers and corporate personnel in the future.”

In closing, succession is a new beginning, a process, an ever evolving phenomenon. Most of all, it is a journey. Hence, adequate preparation is key and this includes:

  • An agreement or willingness of the successors to go on the trip
  • A common destination with shared values
  • Milestones for monitoring progress
  • Fuel to sustain the journey
  • Fundamental skills for dealing with road obstacles
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Entitlement is a Dangerous Disease

Jeff Faulkner once warned business owners, “Entitlement issues are rampant in family owned businesses. It is a stealthy and dangerous disease that can have a widespread and prolific impact on our business culture, as well as at home. How do we keep it from becoming an epidemic in our business and family lives?”

Bequeathing a business on the other hand is a once-in-a-lifetime event and any poor, hasty judgment on succession can take out a business in one fell swoop. When you are planning on retiring soon, then having someone ready to take over the business is undoubtedly very important. But it is not an easy task to just turnover the business to someone.

The family business ecosystem is so complex and naturally confusing. It is further aggravated when family members are actively working in the business.  An enterprise with several family members has twice as many opportunities for conflict, misunderstanding and resentments. Therefore, teamwork is essential and effective communication is critical in aligning the entire organization to the succession objectives initiated primarily by the visionary, advisor and the family members.

Consultant Rick Johnson correctly stated that “an attitude of entitlement that is displayed openly can create major challenges for even the most successful family business. This attitude is often displayed by the family member’s work ethic expecting every employee to “live to work” and give of themselves unconditionally while Junior takes off every Friday afternoon or goes on extended vacations.”

Johnson further expounds that “these children often manage with an autocratic style with little empathy for employees and leaving the impression that they can do whatever they want because they will run the company someday.”

Having entitled and confused successors in the family business is fraught with danger. When they are made (forced) to join the family business straight from college and without rules that define their participation, you can expect them to act like spoiled brats and bully their way by demanding power without accountability.

Entitlement and the next generation “owner mentality” is one of two evils (Patriarchal control is the other evil) that every parent/ business owner has an obligation to resolve. This apparent role confusion is a real danger and must be nipped in the bud before it goes out of hand.  It is pervasive as the entitlement feeds into the child’s last name and becomes a birthright then suddenly degenerates into a mindset of an owner mentality.

So how can you turn the business over to your children sans entitlement? Why do other family businesses transition successfully and some woefully tragic? This is probably the toughest question any business owner will ever face. And it can be thorny.

Firstly, it all depends on how well the owner has prepared himself or herself and the children for this transition. Second, what really touched off the succession? Was it due to a triggering event like death, an illness or a medical scare? Was it a bruising conflict among senior business owners (siblings and cousins) or plainly the owner’s advance age. Or a realization that death is near and that he or she has to “pass the baton” now.

I am highlighting four very important and non-negotiable criteria in laying the foundation for a successful succession to happen:

  1. The candidate must have the right leadership qualities, acceptable to all and a proven track record
  2. Appoint highly qualified directors with proven integrity and competence
  3. Institutionalize a culture of accountability reinforced with corporate governance
  4. Every decision must be guided on “what is best for the company and not self”

esoriano@wongadvisory.com 

Founder Inaction Can Cause Business to Fail Part 2

With tension escalating and family members demanding for more entitlements, Mr. C, the founder, no longer had the passion to grow the business he started in 1973.

Unless there was real intervention, it was obvious that the family business was on a downward trajectory.

In the course of our assessment, there were instances we hit a brick wall.  We discovered that the gap was so wide and the acrimony between siblings so deep.

There was a time in my advisory work that every meeting I attended would always end with a virtual confrontation punctuated with a shouting match that can be heard by employees and visitors in the executive floor. And as if on cue, assistants would immediately disallow visitors from entering the floor. Mr. C would then just quietly leave the boardroom, disheartened and embarrassed by his children’s actions.

At one point and out of desperation, Mr. C became emotional and told me “how he wished his business never grew so big so he will never have to contend with his entitled, squabbling and disrespectful children”.

He also lamented about the issue of money and power plaguing his adult children… “why are they fighting for the small pot? If they can just work as a real, united family, there is a much bigger pot to create!

Mr. C was used to the hard life, at a young age of 12, desperate and hungry, he decided to join the exodus of Chinese laborers leaving China with only one thing in mind…hope for a better life.

As he was about to tear up again, I comforted him that all was not lost. In tense situations where the Patriarch or Matriarch is being pressured by family members to make decisions, there is a very strong likelihood that they will end up suffering in silence and feeling helpless. Such is the case of Mr. C. He chose not to decide, opted to procrastinate and remained neutral in the course of our intervention.

This pattern of indecision is not only wrong but destructive. Unfortunately, the “Do Nothing” option is by far the most popular option. Therefore, it makes sense to consider a third party intervention as time is critical.

An experienced family business advisor, bereft of any emotion, will guide the family members the appropriate governance mechanism to make critical decisions based on what is best for the family and the enterprise.

After the children swapped accusations of wrongdoing, it was apparent that if my firm, W+B Family Advisory cannot help them, their only recourse was to seek the legal route. It didn’t help that both parties were being goaded by their lawyers to seek court intervention.

In a KPMG report, this case is what they refer to as a classic Rags to Riches and likely back to Rags family.

The report highlights that starting a family business is easy, relatively speaking; sustaining it beyond 2 or 3 generations is the hardest part. Indeed, it’s often said that the rags fall on the third generation. It’s a sad commentary on the reality that faces family business.

Every family member must recognize that family issues, not business nor external events, will define the very survival of the next generational change in family businesses.

After a series of assessments, one on one sessions with the family members and a slew of governance interventions replete with drama, a breakthrough happened that averted what would have been the biggest mistake the warring family members would have committed… go to court and scar the family for life.

Why Am I Passionately Espousing Family Governance?

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Samsung

Samsung Electronics, the crown jewel of the Samsung group, has reported record profits despite Lee’s arrest in February and a damaging recall for Galaxy Note 7 phones that were prone to battery fires. The financial success was largely thanks to events set in motion by Lee’s father in the 1990s. The elder Lee made the decision to break into the memory chip industry and followed up with massive and risky investments that rivals could not match every year.

Those investments are paying off. Samsung, the world’s largest maker of memory chips for servers, mobile devices and computers, was the biggest beneficiary of supply constraints and explosive demand for mobile devices that pushed up prices.

Longer term, however, some analysts see risks for Samsung and its flagship Samsung Electronics.

“South Korea’s chaebol system is similar to monarchy,” said Park, the Seoul National University professor. “In the monarchy system, you need a king.”

There is also potential for a destabilizing family feud over inheritance when the elder Lee dies.

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Over the past seven years, our firm, W+B Family Business advisory has been spearheading family and business governance in Asia.

Most of our alliance partners in the business sector and the academe in North America, Indonesia and Singapore have referred to our vigorous campaign as “relentless”.

In our head office, we modestly refer to our work as the “W+B Method”.  International clients have acknowledged our method as best in class and we solely look at it as our compelling value proposition.

Why is W+B vigorously campaigning to promote Governance?

It is a race against time. We have witnessed first-hand, emotionally charged families being torn apart because of rivalry, greed, envy, vengeance and sometimes senseless loss of human lives.

There have been quite a number of cases where family members would “kidnap” a parent allegedly suffering from dementia in order to prevent an asset sale or overthrow a sibling in power or seeing siblings conspire in forging documents so they can surreptitiously sell assets.

I have experienced several cases where I had to enforced disciplinary action and initiate expulsion of family members engaged in self-dealing, conflict of interest transactions and in rare cases absconding with large amounts of money.

These are unfortunate but live cases of family conflict! When the battle lines are drawn, you can expect discord among family members, sometimes violent confrontations, parents inconsolable and confused, and the business on the brink of a major setback or at worse, imploding.

Without any doubt, as Family business advisors, we have the herculean responsibility to intervene and affect the governance process because it is the way forward and the right thing to do.

To quote a Bloomberg report related to the never-ending family drama unfolding at Samsung:

“Sabotage, espionage, succession battles, and sibling rivalries — it sounds like a season of “Game of Thrones.” But it’s the real-life drama of the Lee family, the Korean dynasty that founded Samsung with wealth equal to 17% of the country’s GDP.

It’s a fragile situation. If successor Lee Jae doesn’t navigate this right, there are family members waiting to take his spot.“

Currently, Lee Jae is in jail and family members and non-family shareholders are allegedly plotting separately to let him stay in jail for good.

Governance Intervention Must Be Holistic

Our coaching interventions are straightforward. As a Senior Advisor, my role is to articulate very important and purposive set of ideas and beliefs before any actual engagement. The key is to educate and prepare members for the journey toward corporate governance.

Educating family members is critical. The willingness and readiness of every family member to go through the process is equally vital.

Finally, the advisor’s role is to underscore the importance of embracing pre-work rules before starting the process of change. These are the following:

a. Governance and Succession is non-negotiable.

b.Size of the business is immaterial.

c.The bigger the number of family members, the more complex it can become.

d.Intervention should be on the 3 circles (Family, Business and Ownership). Each circle has its own unique characteristics so a tailor-fitted approach must be in place.

e.Procrastination is like a thief of time. Delaying governance further can increase the volatility of the family and the business.

f.Age is a factor. As the founder and the business leader ages, succession and related issues in a multi generational family can offer more challenges.

g.Compliance of the rules and activation of the Governance Councils as enshrined in the constitution is non-negotiable.

(esoriano@wongadvisory.com)

*****

http://www.chicagotribune.com/business/ct-samsung-prison-qa-20170825-story.html

 

Padre Noble, Hijo Rico, Nieto Pobre

Sept 25

Governance

As the family and business grow and become more complex, the need for effective governance structures increases. A well structured governance system promotes harmony within the family and business, improves communication and promotes accountability.

Governance defines a process and structure for decision making within each of the systems involved in a family business – family, business, ownership.

Essentially, governance encourages the right people to have the right conversations at the right time.

Effective governance is critical to the long-term success of any organization. This is especially true for family run businesses where the complex dynamics that accompany overlapping family, business and ownership interests can often create conflict where none need exist.

 

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“Father Founder of the company, Son Rich, and Grandson Poor” is Mexico’s powerful equivalent to Asia’s popular saying about family-owned businesses, “Wealth Shall Not Last Three Generations”!

Citing an article penned by Lee Iwan, a leading Business Strategist in Mexico, he avers that the “founder works and builds a business, the son takes over and is poorly prepared to manage and make it grow but enjoys the wealth, and the grandson inherits a dead business and pronto an empty bank account.”

Family Governance Is Non Negotiable

I always reiterate that the first step towards governance is for family members to be cognizant of the major causes of the tension. Second, after identifying the source, the family with the assistance of a family business advisor, proactively work to ensure that adequate measures are adopted so that those conflicts do not spillover to the other circles (John Davis et. al. Three Circle Model). Lastly, if there are differences, they must not be avoided. This will only postpone the issue and create bigger problems in the future.

I strongly encourage the patriarch/matriarch not to waste time in pursuing the governance process. Your action now can help your grandchildren avert not just going back to being part of the “poorhouse” but the ignominy of causing the demise of the family business during their watch.

But to be truthful and fair about the wealth dissipation issue as to which generation caused the demise of the business? The blame lies on the failure or inaction of the first and second generation to initiate governance and succession early.

Tension is Normal in a Transition

When governance is initiated, natural tensions occur as they cannot be avoided. In fact, if there is no tension, it can mean that family members are passive, incompetent, either not thinking or trying to improve or have no power to assert. All of which are equally red flags that a family business will not last.

With any multi-generational transition, you can anticipate tension. With more family members, you can expect more complex family issues emerging that will further exacerbate and breed more tension.

It is important that Family Business governance be set in motion, where rules and expectations are articulated and compliance integrated in the family ecosystem.

It is equally important to note that “every single-owner enterprise passed through various stages of transition and the process improvement is dispersed over time”. But when issues that cause strain and conflict remain unsolved during the governance initiatives, you can expect many of these challenges to manifest and re-appear when the second and subsequent generations enter the business.

The 3 Components of Family Governance

In a Harvard Business Review article with the same title penned by noted Family Business Professor, Dr. John Davies, he adeptly highlights 3 components of Family Governance:

a. Periodic assemblies of the family

b. Family council meetings for those families that benefit from a representative group of their members doing planning, creating policies, and strengthening business-family communication and bond.

c. A family constitution—the family’s policies and guiding vision and values that regulate members’ relationship with the business.

He further points out that for governance to be effective, there should be a working family assembly and family council that focuses on the roles and responsibilities of family members. He outlines the critical areas:

  • These are clarity on family member roles and rights.
  • Actions of Family members, family employees, and family owners to act responsibly toward the business and the family.
  • Regulate appropriate family and owner inclusion in business discussions.

 

(esoriano@wongadvisory.com)

*****

http://www.mcgowangroupinc.com/services/governance/

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.

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“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)

 

Businesses Must Aspire to Reach 100 years (Part 2)

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Cosmos Bottling Corporation

One of the more popular alternative soda brands in the Philippines after the war was a product of the Manila Aerated Water Factory, located on Misericordia St., Manila. It was founded way back in 1918 by Wong Ning, a Guangdong native who migrated to the Philippines.

The eldest of his 7 children—Henry Gao-Hong Wong—rebuilt the business post-war and renamed it in 1945 as COSMOS Bottling Corporation. Cosmos is the first softdrink manufacturer in the country.

Among its branded products include Pop Cola, Sarsi, Cheers Lemon, Orange and Ruby, Jaz Cola and Sparkle. Sarsi and Sarsi Light are directed at the Class A and B markets while Pop, Jaz, Sparkle and Cheers brands are primarily marketed to the Class C and D segments.

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TORONTO, CANADA According to the Family Business Institute, only 30% of Family Business organizations last into the second generation, 12% remain viable into the third, and 3% operate into the fourth generation or beyond.

Family businesses face major challenges in working through ownership and management succession and family business leaders acknowledge the problem. However, few know where and how to develop a Governance and Succession plan. Let me continue part 2 of the article.

b. The Romero Group, a Philippine conglomerate with interests in construction and port services, got thrown into a turmoil when the son allegedly refused to cede control of the port business to his father. This led to a volley of court cases filed between them amid allegations of fraud, betrayal and financial improprieties. The son was a co-faculty at the ATENEO Graduate School of Business in the late 90’s and the father, a colleague in another business association. Common friends asked me to intervene but it was too late. The lawyers were already swapping accusations and the courts ended up taking over jurisdiction over the brewing conflict.

c. Another Philippine company is Manila Cosmos Aerated Factory, a beverage company started by Wong Ning in 1918 and successfully steered by the second generation only to fail in the third generation due to the sudden death of the patriarch and the lack of succession planning. This led to a power struggle between the uncles and the cousins ending with a sell-out to the RFM Group. Cosmos would have celebrated their 100th year next year. The third generation leader, Prof Danny is one of W+B’s Family Business advisor.

d. Family conflict is universal. In the US, the New England grocery chain Market Basket faced six weeks of mounting employee protests losing a hefty $583 million in sales as two cousins-both grandsons of the founder—publicly and bitterly fought for control of the company. The employees refuse to follow the directives of the newly installed CEO after removing his cousin Arthur T. Demoulas.  With pressure coming to a head, the feud ended with Arthur T, initiating a buyout and reclaiming his old post as CEO of Market Basket.

I have written in my column successful cases of family owned businesses overcoming hardship and triumphantly extending the founders legacy (Eu Yan Sang, Royal Selangor).

Visionaries need not go through the same periods of adversity.To preserve their wealth, theymust initiate governance and succession at the onset and not when they are old, sickly and dying.

Imagine the benefit, if the company mastered the art and science of governance, people management, leadership development, and succession practices?

Imagine the enormous rewards, if governance is reinforced with a shared vision supported with powerful values that the founder passed on to the next generation.

Imagine legacy-building benefits, if the founder put in motion the training of the next generation leaders so they can wholeheartedly embrace the value of fairness and meritocracy and the importance of making decisions based on “what is good for the company”.

The real challenge is to make every family member and future stakeholders understand early on the all-important concept of stewardship rather than ownership.

How? By learning from the best in their class… large family-owned businesses and their leaders that have defied the odds, went through rough patches in the second generation, summoned extraordinary strength to set things right, and deftly overcoming the third generation curse. They continue to prosper with some becoming certified century-old organizations.

Governance and Succession is non-negotiable. It is your wonderful gift to the next generation!

(esoriano@wongadvisory.com)