SUCCESSION is the greatest single challenge to family business continuity due to the fact that close family ties and overlapping management and ownership interests often make objective decisions difficult. Poor or no succession initiatives can disrupt the family enterprise and fundamentally impact business continuity and planning in many ways. Whether it is Illness or death of a key family figure, misalignment of family values, major fight among siblings, the rivalry between family branches, family scandal, any issue involving relationships among family members can trigger conflict and instability.
For example, the death of a principal owner can affect not just estate taxes but possible infighting amongst the surviving and unprepared members. When there is discord, the chances of the enterprise moving forward grounds to a halt.
Start by crafting good agreements and policies
As a fundamental guide to business owners and to continue the article I wrote related to crafting solid agreements, I have listed below a succession process tailor-fitted to families that are ready to embark on this governance journey:
1st Phase – Pursue family governance by way of aligning expectations within the family system
What is there to align, you might ask? I am sharing as many possible pain points where family members can focus on. When these elements are managed by way of family agreements, a significant part of the relationship process is addressed
• Communication is Key
• Enhance Human/Intellectual
• Asset Educate the Next Generation
• Stewardship over Ownership
• Create a Conflict Resolution Mechanism
• Address Ownership Issues
• Minimize Entitlement
• Pursue Succession Emphasize Shared Vision and Values
2nd Phase – Pursue corporate governance by way of aligning expectations in the board level
Noted family business expert, Dr. Ivan Lansberg once said, “for all the lip service given to the importance of trust, it is still a relatively scarce commodity in family businesses. By trust, I mean the certainty, confidence, or faith that someone we depend upon will act in ways that benefit us and will refrain from acting in ways that bring us harm. Trust is not created by talking about it. It depends on behavior, it’s what we do, not what we say, that makes a difference.
A good corporate governance mindset can best be summarized by Jaime Augusto Zobel de Ayala (JAZA), the 8th Generation successor of the illustrious Zobel family whose lineage can be traced back in 1834, making the Ayala Group the oldest family business in the Philippines. “We try to ensure that the next generation leaders know that they are not merely owners but also stewards of the business. Each new generation should know early on the difference between ownership and stewardship. Ownership is like a possession; stewardship is a fiduciary role.”
I have listed several key corporate governance metrics to guide family members on the importance of having that fiduciary mindset (single-minded loyalty to the company):
• Dividend Policy over Reinvesting
• Most Deserving Qualities
• Values / Culture
• Cost Control vs. Growth
• Owners’ Commitment
• Strategic Intent
Family unity is critical for business continuity, when family members bicker among themselves, the resulting shareholder squabble could lead to the loss of family jewels. JAZA explained that they must work to prove their worth to deserve something. As part of their governance metric, the family does not award positions as a birthright or entitlement. They also value educational achievement and encourage the next generation to likewise work hard to gain the respect of the professional managers. The Ayala group also promulgates the “stewardship” principle to the younger ones by educating them on the family’s history, what it has achieved through the years and its role in the national agenda.
Their hope is that this will instill a sense of pride to build on the family legacy and inspire the next generation to make their own distinct contribution in the future.
Family before fortune
On behalf of the W+B Family Advisory Group, the event organizer ICON Executive Search and education partner, ExCED Institute, I want to personally thank all the participants who graced the 2nd W+B Family Business Conference titled, “CAN FAMILY-RUN BUSINESSES LAST FOREVER: A Talk About Building 100 Year Old Enterprises,” last August 31 at the Manila Marriott Hotel, Resorts World Manila. Thank you to Panay News for the media support!
I hope that everyone found the conference informative and worthwhile. The primary goal of the forum was to bring together Governance leaders (Institute of Corporate Directors), Wealth Preservation and Risk experts (Deloitte and Bank of Singapore) under one roof to discuss multi-generational issues currently confronting 92% of family-owned and managed businesses in the Philippines. Our objective was to share powerful strategies related to Family and Corporate Governance practices and inspire everyone by inviting a pragmatic Enterprise-founder/CEO and thought leader (Mr. William Tiu Lim) who willingly and generously shared his vision and legacy initiatives geared towards transforming the business he founded, Mega Global, to Centennial status (100-Year old).
Your presence helped to make this event a huge success, making it the biggest gathering of family business leaders in years!
Rags to riches to ruin
Few family corporations have survived way beyond three generations — a curse that summarizes the life cycle of a business from rags to riches and then ruin. In the three-generation effect, a family corporation usually starts with the patriarch establishing the company to provide for the family. The second generation inherits the business and grows it, then comes the third generation to squander it. Studies show that seven out of ten affluent families will lose the family fortune by the end of the second generation. By the end of the third generation, nine out of ten of all affluent families have blown through the family wealth, and many have suffered terrible family strife.
Research indicates that family business failures can essentially be traced to several factors:
Forbidden Issues. Lack of trust and misunderstandings in the family leads to conflict avoidance, lying, hiding things from each other.
Lack of meritocracy. The inability of next generation offspring to cultivate the requisite skills that match those needed by the current and future business environment
Lack of clarity. The lack of planning and governance at the business, family and ownership levels
Weak or misaligned values. Lack of common understanding of what values the company and the family lives by, and wants to preserve
An unfortunate lack of succession planning. Founders and owners are notoriously poor at planning for the future of their businesses. For one, death is not an easy subject to talk about; nor is retirement, especially for rugged individualist and entrepreneurs or their families.
A family business without a formal succession plan is asking for trouble. We often hear this statement from business leaders, “No doubt, my children are being groomed to lead the business eventually but they are too young and inexperienced to make critical decisions.” Family business leaders, particularly the founders, often neglect the issue of succession because they are so protective of the business they started.
Although they want their ventures to survive them and to pass the torch of leadership on to their children, they seldom support their intentions by a plan to accomplish that goal. They just dream of continuing the business long after they’re gone but take no steps to make that dream a reality.
Family Code of Conduct: The missing link
The business is an extension of the family and successful growth comes at a cost. As the enterprise grows in size and scale, it becomes increasingly hard for the leader to manage the business. Predictably, when the company reaches this phase, we can expect internal struggles among the children, conflicts, and challenges resulting from the complexity, bureaucracy and the competitive nature of the industry.
Sibling partnership: A make or break phase
Business Families Foundation states that “A sibling partnership is a partnership of brothers and sisters who inherit – totally or in part – a family business developed by the previous generation. There may be other owners in the partnership from previous or succeeding family generations, but typically the ownership and leadership is concentrated among the siblings from the same generation. The most crucial challenges for a sibling partnership are to manage: entitlement and team leadership. Sibling partnerships often struggle with defining what they view as rights versus responsibilities and ownership versus stewardship of the business(es) and family assets.” Over time, this natural transition and conflict (the shift over generations from founder to family owner/managers to cousin consortium) can strain family relationships. The family leader may impede growth because he or she does not have time to make all the necessary decisions. A number of skilled executives may be hired in response, which promotes the development of new cultures within the organization or only the children will manage which creates more conflict.
For the business to grow and remain competitive, institutionalizing behavior and reinforcing the organization with new talent becomes imperative. This is where a Family Code of Conduct or FCOC becomes a powerful enabler to safeguard the growth momentum. The latter is one critical and important document that most Asian Family enterprises sorely lack. Setting this aside can render a family constitution inoperable and useless.
Why is a Code of Conduct important?
Fundamentally, it all boils down to the SPA (Structure, Policies, and Accountability). An FCOC is a set of rules that help manage possible conflicts that might happen. A well-written code provides clarity, imposes rules on family members that are correlated with standards of professional conduct. It also articulates the values the organization wishes to foster among leaders and family members that are active in the business. In doing so, it defines and regulates behavior of every family member.
Briefly, the main objectives of a FCOC are the following:
• Formulates the Rules, Roles, Rights and Responsibilities and accountability of family members (4 R’s and A)
• Identifies problems and solve them before they occur
• Creates decision making simulations by ensuring that policy formation is informed and objective rather than made based on emotion
• Reduce future family tension
• Increase the likelihood of long term business and family success, survival, and prosperity
• Strengthen the family with the experience in coming to an agreement
Additionally, the code provides a set of rules and expectations into which an individual adheres to in compliance with his/her being a member of a family. It is essential for any type of family to prevent issues from arising and hostile situations from occurring among its members. The group dynamics is volatile which makes it very difficult to handle. An FCOC is necessary to establish a common ground among members who have differing points of views and needs.
In the end, a group that values a code of conduct will remain solid and resilient because there are constant elements being followed such as shared goals, family and work standards, scope and accepted behavior and disciplinary measures.
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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 has close to three decades of real estate experience and is currently the Program Director for Real Estate at the Ateneo Graduate School of Business.