2013

ENMA 4013
Family Corporation Management
ENMA 4083
Managing A Family Business

The course enables the student to understand how family

businesses operate in the country. The course touches on the
dynamics of the family within the business, transfer of
ownership, professionalism and succession.

Taken from the book

Setting Frameworks: Family Business
and Strategic Management Page 1
by Elfren Sicangco Cruz.
 1
The Life Cycle of
A Family Firm

Page 2
T
he Most critical framework to understand in a family business is its
life cycle. This concept is normally discussed in every book on
family business. It is to family business what accounting is to
finance, what mathematics is to physics, or the constitution to
lawmakers.

According to a research, ―it is family ownership that defines the family

business… The structure and distribution of ownership—who owns how
much of what kind of stock—can have profound effects on other business
and family decisions and on many aspects of operations and strategy.‖

Family corporations go through three main ownership stages:

1. The Controlling Owner (First Generation) stage, where one

individual exercises total management control of the whole
business.

2. The Sibling Partnership (Second Generation) stage, in which two

or more siblings of the controlling owner have more or less equal
management control and ownership.

3. The Cousin Consortium (Third Generation) stage, in which

cousins (the children of the siblings) exercise management control
of the business, and ownership is distributed in more than one
generation.

THE CONTROLLING OWNER STAGE

M
ost family businesses are started by a single individual or a
married couple who exercise total control over the enterprise.
Usually the employees are members of the nuclear family. These
may have token holdings but do not exercise significant ownership
authority.

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Many family businesses, whether large or small scale, are able to grow
and thrive within the first generation, earning huge amounts of revenues
and thus helping the family amass and
establish its fortune that can be passed on
The reason for the
to the succeeding generations. The reason
success of many
for the success of many first-generation
first-generation
family firms is that family firms is that most founders are

most founders are entrepreneurs, and are the source of the

entrepreneurs. original idea and inspiration that started it
all. The energy and commitment levels
are thus very high at this stage.

Challenges

Each ownership stage of the family business has inherent challenges. Here
are some challenges identified with the Controlling Owner stage:

 A strong parent-successor relationship is crucial for the transition

from a controlling owner to the same controlling owner form. In a
one-to-one succession where one person inherits all the authority, the
incoming leader will always be compared to the predecessor. During
the transition period, feelings of rivalry will also surface and tensions
will rise. In eight out of ten businesses that were successful in this
type of transition, the reason is because the old and the new leader
had shared activities outside the business that brought them close
together. This could be shared involvement in a sport, hobby or other
common interest.

 The creation of minority shareholders can lead to disappointment

and conflict for the new controlling owner. Many parents desire a
controlling owner structure because they want a single leader, but at
the same time they want to leave all their children some stocks. In
this case, the new controlling owner has management control without
ownership control. He also remains responsible for the economic well-
being of his extended family. The potential conflict arises from family

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 members-stockholders who are not working for the company but
whose income depends on the company and the decision of the
controlling owner-manager.

 When there are minority shareholders, resources should be set

aside in case a buyout becomes necessary. Minority shareholders
who do not work for the company may want to sell their shares
because of inadequate returns and/or because they feel they are not
given the opportunity to participate in major decision-making. It is
advisable that families with a controlling owner structure should set
up the ground rules and financial mechanisms necessary for buying out
dissatisfied shareholders.

THE SIBLING PARTNERSHIP STAGE

A
ccording to experts, the main characteristics of the Sibling
Partnership stage are that two or more siblings have ownership
control, and effective control is in the hands of one sibling
generation. The key tasks then are developing a process for shared
control among owners, defining the role of non-employed owners,
attracting and retaining capital, and controlling the factional orientation
of family branches. If there is an increase in the number of people who
are owners, but not employees, the balance of priorities between
reinvestment and dividends may shift, for obvious reasons.

This stage is one of the most difficult in

the life cycle of a family business.
Because of the
natural rivalry Because of the natural rivalry between

between siblings, siblings, conflict management becomes a

conflict management real challenge. As family psychologists
becomes a real have noted, there is an inevitability to
challenge. these conflicts arising from jealousies and
rivalries that often date back to

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childhood. This situation becomes more pronounced in families where
there are two older sons separated by only a few years. The eldest son is
normally considered as heir apparent and future head of the family. The
second son will, however, always feel that he is in a race with the eldest
son and will continually look for ways to prove that either he is as good as
the latter or that the latter is not good enough to become the head of the
family.

Challenges

Here are some challenges during the Sibling Partnership stage:

 Partnerships that are formed as a last resort—to preserve family

unity—are likely to fail. Sibling partnerships are difficult to manage
because the natural competitiveness of brothers and sisters often
carries over into adulthood. Even in the closest families, the pressures
of working together day after day, year after year, can strain personal
relationships and intensify sibling rivalries. Family members who ―feel
suffocated by too much closeness look for ways to assert
independence‖ such as withholding information, making secret deals
or fighting with siblings.

 The toughest call: Are the siblings capable of collaborating? At the

heart of most sibling rivalries is a process of social comparison. Adult
siblings continually compare one another in various ways ―including
achievements (e.g., who has the most money, the higher rank, or
most awards), sexuality (e.g., who is the most attractive, whose
spouse is most desirable) and social relations (e.g., who is the most
outgoing, charming, charismatic).‖ In business, siblings continually
compare each other‘s salaries and perks and compete as to who is
more efficient or productive and try to outsmart each other in
meetings. The underlying fear is that one sibling may get more or take
advantage of the other siblings.

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 For a partnership to work there must be evidence of strong
commitment to collaboration and an even distribution of
complementary skills and talents. For a successful transition to
sibling partnership, three conditions are necessary. First, the siblings
must have ―robust and congenial fraternal relationships.‖ Second, the
siblings must be ready to face a common future based on a Shared
Dream. Third, they must be willing to invest the time and energy
needed to forge viable work relationships. These conditions are easier
met if the talents and the skills of the siblings are fairly and evenly
distributed, and are complementary so that each is willing to accept
the role for which he or she is best suited. Another strain in the sibling
partnership occurs when one sibling aspires to a position for which the
others do not believe that he or she is qualified. Finally, resentment is
also caused by uneven distribution of workloads.

 Sibling partners must find ways to mange conflict in their business

relationships. Sibling partnerships are long-lasting if they have
effective conflict management mechanisms. In family businesses,
there is normally an aversion to voting as a means of resolving family
issues since that may leave certain siblings unhappy. Sibling
partnerships normally depend on consensus as a means of reaching
major decisions. If no consensus is reached, there is an astonishing
diversity of conflict management techniques that families have
resorted to. Each family, based on its own culture and tradition, must
design its own system. This mechanism will work if the family openly
acknowledges that disagreements are inevitable and it is necessary to
promote a sense of fair play and equity in the family business.

 Relationships with in-laws must be managed effectively. The role

that some in-laws play may either lead to aggravating tensions
between family members who work together in the business or be a
constructive mechanism in ―oiling the gears‖ of a partnership. Sibling
partners must find ways to enlist the loyalty and support of in-laws by

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 looking for opportunities to involve them in the Shared Dream and
create a sense of inclusion in the success of the family business.

 The emergence of a lead sibling—a primus inter pares—poses

strains that must be handled by the group. When leadership ability is
not evenly distributed, one sibling may carry more authority than the
others even though all the siblings remain equal owners. The style
may lead to resentment from other family members. A primus inter
pares, or ―first among equals,‖ must earn his authority and
continually justify it. This can be done four ways. First, the lead
sibling must offer clear proof that the family business will benefit
economically from his leadership (e.g., engineering the turnaround of
a losing company). Second, he or she must consistently demonstrate a
clear commitment to the overall objectives of a group rather than a
personal agenda, primarily by being sensitive to the needs and views
on key issues of the other siblings. Third, the lead sibling must show
that he or she will not abuse his or her power. Finally, the lead sibling
must share the glory of the achievements of the family business with
the other sibling partners.

 The partners must take steps to counteract divide-and-conquer

strategies, as well as the bias against shared leadership. Some
employees and outsiders will pursue their own personal agendas by
exploiting differences of opinion between the sibling partners. This is
a particular challenge especially for siblings with existing personal
rivalries. Other stakeholders may also view a co-leadership
arrangement as a fundamental organizational weakness that results in
uncertainty. Sibling partners must adopt strict rules to counteract
divisive strategies, such as presenting a united front when a decision
is reached. They must also show that they are committed to making
the sibling partnership system work effectively in times of stress as
well as normal times.

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THE COUSIN CONSORTIUM STAGE

U
nless the business belongs to a very small family, at this stage it
is usually owned by at least ten to several hundred family
shareholders. This means that there would be more conflicts and
hence a need for a more formal, more organized management system. If
the family has not shifted to professional management before this stage,
this is the time to do it if they want the business to survive.

Challenges

Following are some challenges during the Cousin Consortium stage:

 Institutional structures need to be put in place to manage the

complexity of a cousin
company. A family reaches the
A family reaches the Cousin Consortium stage normally
Cousin Consortium
only when it has enjoyed success
stage normally only
in business and has accumulated
when it has enjoyed
success in business great wealth. According to
and has accumulated researchers, ―Wealth and the
great wealth. size of the business are
important because below a
certain threshold of resources, a cousin consortium usually cannot be
sustained particularly when the re are several branches of the family
and large numbers of cousins depending upon the business for their
livelihoods.‖ This growth in the number of shareholders not involved
in management but whose rights must be respected introduces a new
level of complexity into a family business. While in the past,
decisions could be made on an informal basis among siblings, now a
formal structure like a board of directors becomes critical for
resolving major issues. Additionally, a formal forum is needed for
shareholders to discuss ownership issues. The greater the number of
cousins, the greater the complexity of the organization, and the

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 more time, energy and resources are required to set up formal
structures.

 The new system needs to maintain a balance of power among the

branches. The most important challenge confronting cousin
consortiums is maintaining a balance of power among the various
branches. For instance, when there are more heirs in one branch
than another, leading to more managers in that branch, resentment
could develop in other branches. The different branches may also
choose different types of distribution of ownership. For example,
one branch may divide shares equally among the children, while
another branch will set up another family holding company. In order
to bond a cousin consortium into a single entity, the cousins and
their parents must appreciate the extent of their differentiation and
―design leadership and governance structures appropriate to the new
conditions.‖

 The seniors must be able to openly discuss and assess one

another’s children. There are few topics more sensitive and likely
to fuel ancient rivalries among brothers and sisters than the
worthiness of their respective children. The seniors must have clear
mechanisms in which ownership and governance issues are
confronted and procedures worked out for appraising, selecting and
training successors from the pool of cousins.

 To avoid friction among the branches, ways need to be found to

prevent the disillusionment of the younger cousins. Again,
according to research, ―At any given time, the ages of the various
cousins determine who will be in top management positions. For
example, the children of the oldest sibling are the first to enter the
family business and the first to rise to managerial jobs. The children
of the second sibling come next and so on down the line. By the time
younger siblings‘ children are old enough, there may be too many

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 cousins who end up with minor positions and find the path to top
management blocked, can be the cause of divisions in the family.‖

The future of the family business is dependent not only on the successful
transition from one form or another, but also in the family‘s ability to
successfully address the challenges confronted by each family business
form.

QUESTIONS TO ANSWER:

1. Discuss the different stages in the life cycle of a Family Firm.

2. Enumerate the different challenges faced by a family firm in each of the

stages.

3. Discuss what is meant by the following: “Because of the natural rivalry

between siblings, conflict management becomes a real challenge.”

4. What is a primus inter pares? Why does his or her emergence pose a
strain that must be handled by the group?

5. Why is wealth and size important in the cousin consortium stage?

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 2
Setting Up a
Family
Governance
Structure

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T
he Most common mistake committed by families who own
businesses is that they focus only on managing the business. What
they don‘t realize is that in order to do this successfully and
professionally, it is just as important that they learn to manage family
issues, which often encroach upon the business environment, causing
confusion disorder and, in some cases, even collapse. If the family is the
entity that will govern the business, it is very critical that they must have
a governing structure just like any other organization.

The success of a family business will depend not only on how a business is
managed, but also on how the family is governed.

It is very important that the family first

It is very important learn to accept that business, ownership

that the family first and family issues should be addressed
learn to accept that separately. Each area requires its own
business, ownership structure, system and plans for
and family issues governance. But since most families are
should be addressed familiar only with management structure,
separately.
i.e., a board of directors and corporate
management, it is often the case that all
three issues are addressed through the same structure, which causes a lot
of confusion and eventually leads to the disruption of harmony within the
family, as well as the ineffective and inefficient management of the
business.

To avoid this, the family must set up a structure to discuss family issues
separate from the structure that takes up strictly business issues. The
core components of this proposed conflict management mechanism are a
Family Institution and a Family Statement. These evolve or vary over time
as the family business moves through the various stages.

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THE FAMILY INSTITUTION

T
he process and mechanism for putting into practice an evolving
family value system is the family institution, which may vary over
time from an informal to a highly formal body; depending on the
firm‘s stage in its life cycle.

For very small businesses, or those that are at the infancy stage, holding
informal family meetings will do. For larger family firms, however, there
is usually a need to establish two family institutions-the more formal
Family Council, which is the decision making body that handles major
business-related issues, and the less formal Family Assembly, which
provides a venue for the rest of the family to discuss family and business
concerns.

Three Types of Family Institutions

The Family Meeting

The simplest and most common family institution is the Family Meeting,
which is normally established during the Controlling Owner stage of a
family business. As the family matures, especially when the business
reaches the Sibling Partnership stage, these meetings become more
formal and structured. If there is resistance to this move, there is very
little chance of the family remaining together. If there is no resistance,
the meetings will be relabeled as Family Assemblies.

The Family Assembly

The more formal and more organized Family Assembly can function as a
temporary body for facilitating the transition from an informal Family
Meeting to a formal Family Council. The Assembly could function as an
electoral board that will select the members of eh Council. Otherwise, it
could function as the Family Institution for discussing relevant family and
business issues. However, when the Family Assembly reaches a certain
critical mass and becomes too unwieldy to do all the work necessary to

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govern the family and play a positive role in the interface between the
family and the business, then the family has to create a formal Family
Council.

Note that the Family Assembly and the Family Council can coexist.
Because only a select group of family members get to participate in the
Council to discuss the more relevant business-related issues and to make
major decisions, it might be necessary to establish a separate Family
Assembly which could provide a venue for the other family members to
discuss issues. Thresh out family conflicts and air their opinions. This
usually becomes necessary during the Cousin Consortium stage, when
there are a large number of family members involved in the business. All
members of the family could attend and participate in the Family
Assembly.

The Family Council

For family issues that are business-related, most family business experts
recommend the organization of a formal Family Council. If successful, it
can provide the rock of stability that will ensure the survival of the
company from one generation to the next.

Functions of the Family Council

The primary purpose of the Family Council is to facilitate free and open
communication between family members in a formal and organized
forum. Well-designed and effective Family Councils can help a family
minimize internal or interfamily conflict and hostility.

Aside from serving as a forum, the Family Council can also serve as a
vehicle for mediating conflicts that occur within all families. Experts say
that the Council can also be a forum for discussing issues of continuity
and succession. It can also be responsible for preserving and carrying on
the family legacy and instilling a sense of stewardship in the younger
generation. They suggest that the Council be used to undertake the
following activities:

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 Articulating family values for the guidance of the board, top
management and the family‘s philanthropic activities.

 Developing a challenging vision of the future of the family and the

company that all members can share – a Shared Dream.

 Planning educational programs and events for family members.

 Creating policies to regulate relatives‘ entry into or exit from the

business.

 Establishing standards of behavior for family members in the

community.

 Developing a family mission statement of credo.

 Furthering the development of young family members, for example,

by setting up scholarships and/or venture funds.

 Organizing celebrations of the family legacy.

 Establishing a distinct office to handle the family‘s portfolio of

investments not related to the family‘s main business.

 Establishing and overseeing the family‘s philanthropic initiatives.

 Coordinating measures to protect the personal security of family

members.

 Providing fun and leisure activities for the family.

 Establishing policies to regulate conflicts of interest among different

business activities of family members.

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Organizing the Family Council

The process of organizing a Council will obviously vary from family to

family. However, it is advisable that a small committee be designated
that will be responsible for organizing the Council. The Family Assembly
could function as such a committee. A Family Council is similar to the
Board of Directors of a corporation. Therefore, not all the family
members have to be included in the Council. If all the family members
want to have some form of participation, then a Family Assembly similar
to a shareholder assembly can be organized.

It is important, however, that a formal

structure be organized with procedural
Experts suggest that
rules for meetings.
it would be a good
idea to use a Experts suggest that it would be a good
professional
idea to use a professional consultant or
consultant or
facilitator to help establish a council. Such
facilitator to help
establish a council. a person can be especially effective in
introducing the Council concept to a
family at a retreat. For establishing an effective Family Council, here are
four suggestions to consider:

1. Membership in the Council should be open. Unlike a corporation‘s

Board of Directors which should not include all family members, the
Family Council and Assembly should be open to all family members
who have reached an agreed upon minimum age.

2. Designate Council representative for the Board of Directors. Not all

Family Council members should be involved in the business. Instead,
the Council should designate one or several of its members to serve on
the family business‘ Board of Directors. This ensures that while the
family perspective is considered, it does not dictate their business
decisions.

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3. Don’t be afraid to start slowly. Families may encounter initial
difficulty in engaging in open and candid discussion on sensitive
subjects. Many families have found that by first addressing relatively
uncontroversial matters, they can pave the way for alter discussions
of difficult subjects. It may be desirable to retain the services of a
professional to facilitate early Council discussions.

4. Establish ground rules for your Council. Effective Councils are those
that have ground rules designed to ensure that all family members
understand how the Council operates. This is the reason why a Family
Constitution goes hand in hand with a Family Council.

It is also important that the members of the Family Council meet on a

regular basis and not only when there is a specific problem to solve.

The Composition of a Family Council

The composition of a Family Council should depend on the ownership

stage of the business.

In the Controlling Owner stage, the Family Council should be composed of

the founder and the spouse. The children should be included as they
enter the business. Children who do not enter the business but have
ownership should also be included in the Family Council.

In the Sibling Partnership stage, the Family Council should be composed

of the sibling partners and their spouses. In-laws should be excluded if
they are working in competitive firms.

In the Cousin Consortium stage, a separate Family Assembly should be

organized. This should be a forum for discussion, while the Family Council
remains the decision making body. All relatives, who by now will include
cousins, should become members of the Family Assembly. The Family
Council, which should be a small body, should be made up of
representatives from the various family branches and different
generations of the now extended family.

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Experts recommend that for larger families, Council members should
report to a constituency of 10-15 family members, including people from
different branches of the family. However, similar to the election to the
Board of Directors, Council members should be elected through the vote
of the entire family with a cross-section of the family represented.
Council members should also have fixed terms. The typical formal Family
Council is organized into working committees with specific areas of
responsibility, such as ―hiring and firing policies, the family office,
education and family development, trust issues, family histories, family
recreation, family philanthropy and the Family Constitution.‖

For families that would like to have a formal governance structure for its
Family Council, the following offices reporting to the Family Council are
recommended:

1. Family Office. This is a centralized financial planning group that

enables the family to invest their wealth as a group. The family office
should be a separate operation from the business. Professional
managers may be hired for specific functions such as investment
management, taxation and estate planning.

2. Family Foundation. A single central foundation that will centralize

the family‘s philanthropic initiatives can be set up. These foundations
can confer tax advantages while enhancing the family‘s reputation
and stature in the community.

3. Internal Stock Market. The family may set up an internal stock

market that will manage the buying and selling of shares among family
members. This will not only facilitate the selling of shares by family
members, but will also insure that ownership remains within the
family.

4. Redemption Fund. A fund can be built by contributing a percentage

of profits to it each year. This can be used for shareholders who want
to cash in their stock at a fair price for personal reasons. A committee
of the Family Council can oversee the fund.
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5. Scholarship Fund. This is established to promote one of the Council‘s
most important functions, which is to support the career development
of the younger generations. A scholarship program can help qualified
or needy young family members to complete university and
postgraduate education.

When and Where to Organize a Family Council

Normally, families that are in business together will discuss family issues
during business meetings or during family affairs like Sunday lunches or
vacations. These two venues are in fact the worst for discussing family
issues. The appropriate venue is the Family Council meeting. A Family
Council should be organized as soon as the children are old enough to
enter the business. This marks the beginning of the transition of the
business from being ―Daddy‘s business‖ to being a family business.

Each family can best determine how to start the Family Council. One
ideal way of inaugurating a Family Council is to have a one- or two-day
family retreat at some quiet place away from the business.

It should be emphasized that the retreat should be seen as the beginning

rather than the end. Therefore, you should not expect to resolve all
issues during that retreat.

The Importance of Family Business Meetings

Conflicts can become very serious when, for instance, contending siblings
use the family business as the arena for their rivalry. This creates an
environment with tragic consequences for the enterprise. The most
visible manifestations of this situation occur during business meetings
where hostilities are publicly shown and discussion veers from business
topics to personal accusations.

One of the most effective tools in managing family conflicts is the

organization of a Family Council. The key however, to the success of this
type of organization are the actual family business meetings. After all,

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meeting regularly to thresh out conflicts and discuss major issues is really
the main activity of the Council.

Family business experts realize that the success of a business strategic

plan is intertwined with the successful resolution of critical family
business issues that will affect the implementation of the plan. However,
the resolution of these issues requires discussion among family members,
which again highlights the critical importance of family meetings.

A family meeting serves the dual function of resolving family business

issues and helping maintain social relationships among the members of
the family. Most important, it is through these meetings that family
conflicts are resolved and decisions re made that can be supported by the
whole family.

When a family does not hold regular

When a family does meetings, it will have no forum to resolve

not hold regular family issues. The temptation then is to

meetings, it will use business forms, i.e. boards or
have no forum to executive committees, which becomes a
resolve family hindrance to the formulation of business
issues. plans for these bodies. Furthermore, when
business bodies are used as substitutes for
family meetings, there will be a reluctance to include non-family
management professionals in these decision-making groups, thus
hindering the introduction of professional management to the company.

It is a clear sigh that the family will be unable to stay together in the
business if the members are not able to participate together in a family
meeting. There could be many different reasons for this failure, but the
conclusion will be the same—that if the members cannot agree to meet
regularly, there will be no venue for conflict resolution and a breakup is
inevitable.

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How to Organize and Conduct Successful Family Meetings

Based on several readings, the requirements for successful family

meetings are as follows:

Organizing the Meeting

 Ensure that everyone acknowledges the need for meetings. There

must be expressed willingness on the part of all family members to
participate in the meetings as a recognition of the importance of this
activity.

 Predetermined membership. Before the meeting begins, there

should be an agreement as to who should attend. A group of elders
can assume this responsibility.

 Organize a planning team. A planning team that will set the ground
rules should be identified to save embarrassment, encourage
participation, create the necessary structure and ensure that the
meetings are conducted in a professional manner.

 Draw up an agenda. An effective meeting requires a well-planned

agenda. A family member should be assigned to solicit agenda items
from the other members and ensure that these topics are of common
interest to the group and are of significance to the family within the
context of the family business.

 Establish a permanent meeting structure. There should be a

chairperson, a secretary to take the minutes and a fixed schedule
just like for board meetings. In case there is no recognized head of
the family, a facilitator may be invited during the first few meetings
until the family has agreed on a more permanent structure.

Conducting the Meeting

This is the most difficult task since family discussions are often
emotional. Oftentimes, feelings become a substitute for logic as a basis

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for discussions. Nevertheless, meetings should be conducted as
professionally as possible. The topics should be limited to items on the
agenda and participation should be encouraged. If possible, voting should
be avoided and consensus should be the basis for decisions.

Here are some guidelines for successfully conducting family meetings:

 Prepare an action plan. Decisions on family issues are often not

implemented because there is no ready structure for
implementation, unlike in business firms where there are
departments and divisions that handle this. Therefore, an action
plan that identifies persons responsible for implementation together
with deadlines should be formulated for each family decision.

 Ensure family fun. In order to strengthen family ties, some family

meetings should be in the form of recreational activities. During
these times, business concerns should not be discussed. Perhaps, the
elder members can tell stories of how members helped each other or
give examples of how family members have demonstrated their
affection for each other.

The foundation for managing conflicts in a family business is

communication. Without this, there will be no trust and no means of
discussing or resolving sensitive issues. Open communication is necessary
for conflict resolution and, therefore, for the continuity of the family
business. The only venue for this is the family meeting. Successful family
meetings are essential for the survival of a family enterprise.

THE FAMILY STATEMENT

F
or governance to be effective, family institutions need to have an
explicit, written document containing the framework for governing
the organization. For corporations, this is the Articles of
Incorporation and By-laws, and for stockholders, we sometimes see a

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Shareholder‘s Agreement. For family businesses, this written document is
called a Family Statement. It declares what the family stands for, its
expectations, its fundamental values, and the differentiation of roles in
the family and in the business. Family Statements may take a variety of
forms and have a wide range of titles such as:

 Family constitution

 Family strategic plan

 Family vision

 Family mission

 Family code of conduct

 Family protocol

 Family principles

 Family values

 Family policies

 Family culture

 Family creed or credo

 Family objectives

 Family programs

 Code of understanding

 Family charter

The Family Constitution

Although few families see the need for a written framework, experts
strongly recommend that if you made the effort to organize a Family
Council, you should also take the time to prepare a written and
Page 24
 comprehensive Family Constitution. This is

The Constitution a critical requirement for Family Councils

defines the family’s to succeed.
vision of the future
The Constitution defines the family‘s
and its core values
and beliefs. vision of the future and its core values and
beliefs. It spells out the purpose and
responsibilities of the Family Council, the Family Assembly and the Board
of Directors. There are many other components of the Family
Constitution. These may include the family‘s fundamental values and
beliefs, a code of behavior, policies regulating the relationship between
the family and the business, and policies governing family members
working in the company.

An example of such a policy is: ―During the first five years after entry into
the business, family members will be assigned only to line positions in
which their performances can be reliably measured.‖ Other constitutions
have even more specific provisions, such as a retirement policy for family
members, stock redemption policies for members wanting to sell their
shares or for when the family needs to maintain a balance of power
among family branches, and a dismissal policy that will allow supervisors
to fire family members only after they have informed the Family Council.

The Constitution should also spell out the structure, including the size,
composition and organization of the Council.

The Components of a Family Constitution

Various books on family business management contain recommendations

for the components of a Family Constitution.

Although there are variations, the different proposals are substantially

the same. An excellent model of a Family Constitution includes the
following components:

Page 25
1. A Mission Statement defining the family’s fundamental desire to be
in business together. This is a necessary declaration because without
that desire, there is obviously no need to write a constitution.

2. A statement of the family’s fundamental values and beliefs. This

should express the family‘s commonly accepted values which they
would like to ensure are preserved in the business arena. This can
spring from the family‘s shared experiences, for example,
―Maintaining low public profile for the family is essential for business
success.‖ Another source would be the family‘s ethnic and religious
roots. For example: ―It is better to have a good name than to be well-
known.‖ Or ―Our family name is our most important asset.‖

3. A Family Code of Conduct. This specifies the family‘s expectations

with regard to how the members should treat one another and
conduct themselves. For example: ―Family members should not argue
in public.‖ Or ―Family members should defend criticisms of other
family members by non-family members.‖

4. Policies for regulating the relationship between the family and the
business. These should include critical issues such as employment of
family members in the business. For example: ―A member of the
family who hopes to work for the company must have a college degree
or should at least have worked in another company for five years.‖

5. Performance policies. There should be rules governing the

performance evaluation of family members, such as: ―If after the first
two years of work they are not performing well, i.e., they are not
included in the top 25 percent of the company‘s executives, they will
be asked to leave.‖

6. A retirement policy. There can be a rule such as: ―All family

members should automatically retire at age 60 and can serve on the
board of directors only until the age of 70.‖

Page 26
7. A dismissal policy. This is a sensitive issue that should be addressed
directly. For example: ―The authority to fire a family member rests
solely with his or her direct superior. However, prior to dismissing a
family member, the general manager should inform the Family
Council, so that the ramifications of the dismissal can be anticipated
and properly managed.

8. Stock redemption policies. The Constitution can specify the process

under which the family members can sell their stock with a minimum
of family disruption. Goals for a liquidity policy may be established,
such that all transactions should continue to maintain the balance of
power among the family branches.

9. A non-competition agreement. There should be restrictions on

competition for family members who decide to leave and set up their
own businesses. This can include restrictions on commercial uses of
the family name.

10. Job descriptions for the key positions in the governance structure.
This should spell out the duties, terms, responsibilities and privileges
of the Chairman of the Family Council, Chairman of the Board and
other positions occupied by other family members.

11. Succession policies. The constitution should spell out the specific
process by which the leaders of the family and of the business will be
chosen. The process should also specify members who serve on the
Board of Directors are to be selected. In addition, it should also
specify the responsibilities of the Family Council for training and
developing family members.

The process of writing a Family Constitution is a powerful way to motivate

family members to work together because the authority of the Family
Council depends entirely on the willingness of the family members to
abide by its mandate. It is critical to understand that a Family Council
and Family Constitution can be effective only when there is trust. Finally,
everyone should realize that the foundation of trust is built on the ability
Page 27
of the family members to learn how they can openly communicate their
feelings and ideas with one another.

The failure to manage conflict leads to the splintering of family business

firms. The two key elements of Family Institution and Family Statement
are the necessary cornerstones in the governance of a family in business.
Not only are they requirements in the success of a family business. Not
only are they requirements in the success of a family business, but also
essential elements for a family business to continue existing.

QUESTIONS TO ANSWER:

1. Why is it important for the family to learn to accept that the business,
its ownership and family issues should be addressed separately?

2. What is the family institution? Enumerate and explain the three types.

3. Enumerate the functions of the family council.

4. What is the importance of family business meetings?

5. What is the family statement?

6. What is the family constitution?

7. Enumerate and discuss the components of a family constitution.

Page 28
 3
The Family

Page 29
R
esults of a study conducted in England revealed that the
characteristics of healthy families can be summed up by listing six
major rubrics. These show what is needed to ensure success of a
business family.

1. Positive Attitude to Human Encounter. Healthy families tend to be

warm and friendly not only to each other but also to outsiders. They
are good neighbors and help the communities they live in.

2. “Loose-tight.‖ These families are intimate and involved with each

other that the members have enough independence to be able to
maintain their own separate identities.

3. Efficient Communication. Healthy families not only maintain open,

clear, direct and frank communication lines with each other, but also
search out opportunities for more communication and dialogue.
Discussions, even when emotional and disagreeable, remain caring.

4. Control. Although there is consultation and accommodation, the

family retains firm control over its members.

5. Coalition. The families work hard to create a coalition where power is

equally shared.

6. Preparedness for Change. Healthy families teach their members to

consider change as natural and to be expected.

In the Philippines, and in many countries, it

is also stressed that healthy families are
In the Philippines, it those whose value systems are based on
is also stressed that
strong moral and religious codes. Aside
healthy families are
from the moral and religious foundations,
those whose value
systems are based on the family value systems should include the
strong moral and six following propositions as outlined by
religious codes. family business experts:

Page 30
1. Over time, conflict is inevitable within families.

2. Conflict is not inherently bad; it can be healthy or unhealthy,

functional or dysfunctional.

3. How conflict is managed is a determinant of the degree to which a

family and its business remains healthy and strong.

4. There are several conflict management strategies; no single one is a

universal remedy.

5. Pre-establishment of the rules of the game can obviate many family

business conflicts.

6. The goal should be to maximize the win-win prospects of all the

parties concerned and arrive at the best decision given the family
business‘s mission, goals and objectives.

HEALTHY AND UNHEALTHY FAMILY ENTERPRISES

T
o help family businesses, it is essential to understand what a
healthy and successful family business looks like. Of course, it is
also important to know the key features of a family business that
is not healthy.

Unhealthy Family Enterprises

The conditions of an unhealthy family enterprise are as follows:

 The family has poor communication skills and is unable to manage

conflict.

 There is a low level of trust among family members

 The goals and values of the family are unclear.

 Family members‘ roles and obligations are unclear.

Page 31
 The business lacks a sense of direction and does no strategic planning.

 The business lacks sufficient expertise—the family tries to do it all.

 There is little thought so succession planning; there is little

collaboration between family and non-family employees.

 There is no functioning board of directors.

 There is no one to turn to for advice and help with key problems.

 Family issues spill over into the business issues (and vice versa).

 Boundaries between work and family are unclear.

Healthy Family Enterprises

The following are the attributes of a healthy family business system:

Functioning of the Family

 Individuals can manage themselves and relationships with others.

 Family has the ability to resolve conflicts with mutual support and
trust.

 Boundaries between work and family are appropriate and respected.

 Knowledge is used wisely and is not blocked by unresolved relationship

problems.

 Communications are open and clear.

 Individuals are flexible and able to use advisers wisely.

 Family has the ability to make decisions and move forward.

 Family is clear about goals and navigates towards goals.

 Family has good direction and leadership.

Page 32
 Transitions are managed and marked by rituals.

 Intergenerational leadership boundaries are appropriate and

respected.

Management of the Business

 Knowledge is developed and mobilized as collective intelligence.

 The organization and its members make use of knowledge to adapt to

a changing environment and produce a sustainable, competitive
advantage for the business.

 Decision making is based on knowledge and expertise.

 Organizational learning develops new competencies and effective

behavior

 Responsibility and authority are balanced.

 Leadership is spread throughout the company/family.

 Succession is planned early.

Development of the Governance and Ownership System

 The mission and goals are clear.

 There is a functional board of directors with outsiders in it.

 There is a sound plan for succession and transfer of ownership over

the generations.

Effectiveness of the Boundaries Between the Family Business

Systems

 Business uses family values in strategic planning.

 Boundaries are porous and allow appropriate exchange of information

between systems.

Page 33
 Each system uses goals and values to steer the course.

 Business issues are not acted out I the family and vice versa.

 Mutual learning exists between the family systems (family learning

flows to the business and vice versa) and is put into action.

 Individuals understand core competencies of one another and of the

company.

RELATIONSHIPS: THE KEY TO FAMILY BUSINESS

A
research project about family business done in the US by a
husband and wife team revealed very intriguing results. The
researchers‘ primary assumption is that family business is a
business of relationships between family members. More
specifically, relationships are at the heart of family business. Therefore,
when relationships go well, this presents an opportunity for the family
business to do well. However, when there are problems in relationships,
this poses the greatest threat to the success of any family business.
According to this husband and wife team: ―The greatest threat to the
long-term survival and success of any family business has less to do with
what is going on inside with relationships among the key players,
especially among family members.‖

In spite of this observation, family business successors are often more

prepared with business skills and management knowledge needed in a
globally competitive environment, but they do not see the need to
develop the knowledge and skill needed to develop relationships. Business
heirs are trained in skills related to business functional areas like
marketing, finance and production. Families do not see the need for
relationship skills training.

Page 34
The researchers have a unique definition of a family business, which looks
at it from a more psychological point of view. From a purely business
point of view, a family business is defined

…a family business in terms of its ownership, thus, it is a

is defined in terms of business that is owned and managed

ownership, thus, it is predominantly by members of the family.
a business that is The researchers however, define a family
owned and managed business as ―any business in which
predominantly by business and family relationships have
members of the
significant impact on each other.‖ There
family.
is a certain logic to this if one looks at a
family business as a fact of life, meaning
that no one starts out with a plan to create a family business, it just
happens. A family business can also be a matter of choice, which means
the owner-manager of a company deliberately plans to have his children
and other family members join the business.

False Assumptions

Whether a family business is a fact of life or a matter of choice, once we

consider relationships as the basis for success or failure, the family
business presents a set of unique complexities. There is a tendency for
business families to deny the significance of these complex relationships.
This denial gives rise to certain false assumptions, which, if not
corrected, become detrimental to the business.

The husband and wife research team gives the following false
assumptions, which it considers detrimental to the business-owning
families:

False Assumption No. 1: All we need to do is learn how to communicate

better.

There is an assumption that communication among family members is the

solution to relationships. You often hear parents say to each other that if

Page 35
we can only talk to each other, it will solve all our problems.
Communication breakdown, however, is a symptom of something else that
has gone wrong in the relationship.

False Assumption No. 2: The biggest problem in families is the clash of

egos.

The assumption is that competition, which involves one person winning

and another losing is destructive to family relationships. It also assumes
that there is not enough recognition or opportunity for recognition for
everyone to share. But the real problem is not a clash of egos, but that
trust and respect in the relationships have broken down.

False Assumption No. 3: The solution is to really care about each other.

It is true that caring about each other is important, but tension and
friction are inevitable when family members work together. Caring
provides the motivation but does not provide the solutions. Knowledge
and skill in family relationships, which are often taken for granted, and
left unattended are the real solutions.

False Assumption No. 4: Who is to blame?

Whenever there is friction, there is a corresponding search for who was

responsible for the conflict. But in a family relationship, it is never
possible to find the first cause in any conflict. To determine where the
problem started, or what caused the present series of confrontations, one
will have to trace the whole history of relationships. For example,
disagreements may be caused by distrust, which may have been caused by
a series of events that could have been started as far back as childhood
days. Solving problems of relationships might begin with the
understanding that everyone is both a cause and a result.

False Assumption No. 5: Everything is going fine, we never have conflict.

Lack of conflict does not mean that everything is going well, because it
might just be an indication that people have become numb to the

Page 36
conflict. Family members believe that the answer is to adapt to the
environment of conflict. They get used to this environment until finally
the intensity of this conflict destroys them.

False Assumption No. 6: We will never work well together because we

are different.

Family members should realize that being different from each other is not
a condition that inevitably produces conflicts. It can even result in
relationships that can produce creativity. The goal is to manage personal
differences well and not to see these as an inevitable cause of conflict.

False Assumption No. 7: We have to focus on the bottom line and not
worry about getting along.

Family relationships cannot be found in income statements or balance

sheets. However, there are enough stories of well-managed and profitable
corporations breaking up due to internal family conflicts. Family
businesses must be willing to spend time and resources on repairing and
renewing relationships within the family.

False Assumption No. 8: As long as we keep family matters and business

issues totally separate, we will never have problems.

This is corollary to False Assumption No. 7. It is the economic

interdependence that ties family members and business tightly together.
Keeping family and business totally separate is an impossibility. On the
positive side, family and business, when combined correctly, can be a
powerful and positive mixture.

Keys to Quality Relationships

The two key ingredients that create quality in relationships are attitude
and aptitude. Attitude consists of the feelings, intentions and aspirations
present in a relationship, which provide the motivations in that
relationship. For example, in a successful marriage, there must be ―an
attitude based on love, lifelong commitment, willingness to give and

Page 37
 take, and the desire to grow old together.

There are relatively ― In an unsuccessful marriage, the

few cases where the attitude is ―indifference, conditional
husband and wife commitment, and self-centeredness.‖
work as a team.
The second ingredient, aptitude, consists
of relationship skills and abilities
congruent with the tasks, functions, and responsibilities of the
relationship. For example, in a successful parent-child relationship, the
parent‘s aptitude includes ―the ability to communicate, create safety,
plan for the future, maintain appropriate accountability, and establish
age-appropriate boundaries.‖

Families in business should realize that they do not have to choose

whether their family business is family-first or business-first. The third
choice, which is a relationship-first family business, ―is one in which there
is a deep sensitivity and understanding of the fact that decisions are often
a compromise between family and business.‖ There is also a great
appreciation that both the family and the business are more than either
would be by itself.

HUSBAND-AND-WIFE TEAMS

H
usband and wife working together in a family business is quite a
common occurrence in the Philippines. In many if not most cases,
the couple does not work as a team. Normally, the husband is the
head of the company and the wife takes a subordinate role. In most
cases, the wife assumes the role of treasurer or cashier, which is the
normal role of the wife in the home in our matriarchal society. There are
a few cases where it is the wife that heads the business, and the husband
works in a subordinate role.

There are relatively few cases where the husband and wife work as a
team. Perhaps it is because couples in business together experience

Page 38
tremendous stress, which gives rise to conflicts over personal and
company affairs, which ultimately destroys the business or the marriage
or both. The following have been identified as the most common areas
that cause friction, frustration and tension:

 ―We have different management styles and work habits.‖

 ―We worry or disagree about money.‖

 ―We cannot separate our business life from our personal life.‖

 ―It hurts when my spouse criticizes me.‖

 ―We disagree on business decisions or goals.‖

 ―We don‘t have enough time.‖

 ‗We work too hard. And we‘re tired all the time.‖

 ―We‘re together too much.‖

 ―My spouse won‘ listen to me.‖

 ―I have two jobs—being a business partner and running a

household.‖

Keys to Successful Husband-Wife Business Teams

Husbands and wives who succeed in successfully meshing business and

personal relationships find that blending the two enhances the marriage
and leads to successful businesses. The marriage is enhanced primarily
because of the intensified sharing and the bonds between a man and a
woman are deepened. Spouses discover that they understand each other
better. And the result is a rewarding lifestyle.

The business becomes even more successful because there is a greater

commitment on the part of the partners when they are husband and wife.
Business decisions that are made in the give-and-take between partners
are better than they would be if made by one person alone. However,

Page 39
couples must learn to adjust their lives to their business and to make
room in their business for their personal relationships. While there is no
one model for success, a study of numerous husband-wife teams shows
that some common threads emerge. The research proposes the following
keys to success:

 Marriage and children come first.

 The spouses demonstrate enormous respect for each other.

 There is a high degree of close communication about both

marriage and business issues.

 The partners complement each other‘s talents and attitudes. And

they create their own niche, accordingly.

 The partners are supportive of each other.

 Entrepreneurial couples have strong family ties, especially with

their children.

 Spouses understand they compete with the world outside, not with
each other.

 Laughter and humor help couples keep things in perspective and

ease disagreement.

 The couple put their egos in check and makes a commitment to

give the partner a voice in the business as well as in the personal
relationship.

How then can a couple know if they stand a good chance of successfully
combining a business and personal relationship? An American family
business expert provides a list of questions which will show strong clues to
problems that can undermine cooperation and whether the spouses have
the commitment to solve them. A good husband-and-wife team should
answer yes to all these questions. The questions are intended to help

Page 40
determine whether the couple can make a good business team and keep
their personal relationship strong. Here are the questions:

1. Do you totally respect each other? Are you able to give each
other‘s ideas and opinions a full hearing and to admit without
resentment when the other is right or has a better idea?

2. Do you have complementary skills and talents, with one person

strong where the other is weak and vice versa? If your skills are
not complementary, can you admit the deficiencies and work
together to resolve them by, for example, taking courses or hiring
consultants?

3. Do you have fun when you work together?

4. Can you share power and decision making comfortably with your
partner? And can you agree on how power can be shared and
decisions made in your business?

5. Can you leave business problems at the office and leave domestic
problems at home?

6. Does your relationship have a solid foundation? Has it been tested

sufficiently so that you know how you function as a couple under
stress?

7. Can you have disagreements with each other without taking things
personally or shouting at each other or attacking the other
personally?

8. Have you discussed your respective management styles? Can you

live with and respect each other‘s management style?

9. Do you enjoy spending a lot of time together?

10. Are you both totally committed to the business? Do you have a
shared vision of what the company should be like?

Page 41
 11. Are you both willing to pitch in and do your share of the tasks you
do not like as well as the tasks you do like?

12. Do you totally trust each other?

Disagreements can be greatly reduced if the couple agrees to write down

their business plans. This will provide the framework for them to conduct
their business. The couple can also write an ownership plan, a
management plan and even an operating plan. These plans should
establish rules and clarify issues enabling the couple to proceed with
making other decisions without fighting or unnecessary conflict, and
without power struggles.

One successful husband-and-wife team who have lived and worked

together for more than 20 years has this to say: ―As the business grows, so
our relationship deepens and becomes more and more complex. The
increasing complexity of the business contributes to the success of our
relationship in that it gives us more reason to be together, more reason to
want to be together, more reason to want to talk together, more reason
to want to share things, problems, ideas, love.‖

THE ASIAN AND FILIPINO FAMILY

M
ost experts of family business believe that it is possible to have a
universal model for the governance of family businesses.
Corporate governance is defined by many as the system by which
such companies are directed and controlled. However, these
―universal‖ theories or models do not always apply to Filipino family
businesses, because of the inherent differences between Filipino or Asian
and Western families.

An American family business expert writes that in the Philippines, the

family system is expected to provide ―for the care of minors, the sick, the
incompetent and the dependent.‖ Another expert says: ―The family has
long been the center of Filipino society. As in most parts of Southeast

Page 42
Asia, kinship is essentially bilateral; that is, ancestry is traced through
both the mother‘s and father‘s line. Effective kinship ties are maintained
with relatives of birth parents. A bilateral system gives a potentially huge
number of living kin.‖

The Chinese family is different in the sense that it is patrilineal. However,

the network of kinship is much wider as evidenced by the existence of
family associations in Chinese families. For the typical Asian family, the
commonality lies in the fact that the family is expected to perform a
broad range of economic, social and political functions. This is much less
pronounced in Western society because government provides certain
needs such as taking care of the unemployed, the indigent sick, free
education, all of which in Asia and the Philippines, are expected to be
provided by the family system.

Chinese Family Businesses

When we say Filipino family businesses, we are virtually referring to

Chinese family businesses because a great percentage of large Filipino
companies are Chinese-owned. It is therefore important that we take the
time to identify and analyze the factors that differentiate Chinese—or
Filipino—family firms from the typical Western family enterprise.

Chinese vs. Western

Experts agree that there are both similarities and differences between
Chinese and Western family enterprises. The similarities are the
employment of family in key positions, a family monopoly over strategy
making, and a relatively low level of formalization associated with small
and medium scale.

These characteristics lead to the universal problems of transition to a

more professionally managed enterprise, managing conflicts between
siblings, and succession from one generation to another.

Page 43
However, the experts say that there are at least two aspects in which
Chinese family business may be said to be distinct from Western patterns
of family enterprise. They are as follows:

 Chinese family enterprise has not so far entered the transition to

professionalism and public ownership which is such a common
feature of Western economic evolution, even though arguably it
had plenty of time to do so.

 The personalism used in cementing stable market relations

between enterprises, in general conditions of mistrust, seems to
reflect norms and values about cooperation that are highly
developed in the secular culture of Confucianism.

All family businesses are distinct due to the overlap of family and
enterprise. The Chinese family has learned how to grow and still retain
control partly through the art of alliance-building through the Overseas
Chinese network. This phenomena is attributed to the feeling of
insecurity of an ethnic minority, generally not assimilated and yet
successful in terms of wealth. Added to this, the Overseas Chinese come
from a ―society in which the combination of totalitarianism and
patrimonialism left a historical legacy of suspicion of any source of
security except the family.‖

There are three sets of reasons for arguing that the Chinese family
business is a product of a unique set of forces and has become unique in
itself. They are the following:

 Chinese culture has seeped into it and continues to do so;

 The social dynamics of the family play an important part in its

nature, but in ways that take on a Chinese flavor; and

 Its particular historical circumstances are not replicated for other

business systems.

Confucian vs. Global

Page 44
In any organization there are rules that govern vertical relationships,
which define authority and governance. There are also rules that govern
horizontal relationships which determine cooperation.

It is very critical to remember that is the case of Chinese organizations,

the norms for vertical relationships are defined by the Confucian ethic.
This provides very clear principles, most of which are based on the role of
the father figure as the pivot of the social system.

This system is strengthened by the ideals of family perpetuity, the

perceived importance of the family‘s reputation and the long standing
tradition of extended family support to members.

In terms of horizontal relationships, the Confucian view is that because

society is generally seen with suspicion and mistrust, the handling of
friendship takes on strategic significance. This suspicion of society and
government seems to be a very strong theme in this study. The thesis is
that this accounts for the very strong dependence on family protection
combined with a cynical attitude towards politicians.

The strong, protective attitudes and reliance solely on its own community
are perhaps understandable in countries where there have been and
continue to have overt persecution of Chinese such as Indonesia, and
legalized anti-Chinese policies such as Bumiputra in Malaysia.

In other societies, like Thailand and the Philippines, there is much more
racial tolerance and the majority and the ethnic minority share a common
religion, i.e., Buddhism in Thailand, Christianity in the Philippines.
Furthermore, the exposure to Western culture and political systems ahs
weakened the influence of Confucian philosophy among the educated
Chinese.

In contrast to traditional Chinese social norms, Western values emphasize

individualism and democracy puts a premium on the freedom and the
rights of the individual.

Page 45
No business system can forever be sealed from outside influences. The
Chinese family business, even with its foundation on the oldest existing
civilized culture in the world today, must begin to adapt to a radically
new competitive landscape brought about the globalization and extremely
rapid technological change.

PRUNING THE FAMILY BUSINESS

No business system TREE

can forever be sealed
Maintaining Family Harmony
from outside
influences. Even for the closest of families, maintaining
harmony within a family business is a
difficult, challenging and never-ending task. Many business decisions,
regardless of the importance to the success of the business concern, are
often seen from the viewpoint of the personal interests of individual
family members. The business outcome of decisions is placed on the same
level of importance as its effect on the family concerns. Thus, as the
number of people who care about the outcome of a decision increases,
the higher the probability of disagreement becomes. For example, the
potential conflict in decisions of whether a family member can work in
the family business or not, or which family member should fill a specific
role in the family business are decisions which will obviously benefit some
individual members of the family more than others.

It can be seen that as the number of family members connected with the
family business increases, the potential for conflict will also increase. If
you combine this with the conflict caused by clashes between roles that
individuals play in the family system and the business system, then the
conclusion is that conflict is virtually inevitable in a family business.

We have already discussed the techniques for reducing conflicts and

maximizing consensus, but these would not be sufficient as the number of
family members expands from generation to generation. The sheer

Page 46
numbers will prove impossible to manage for any family. Large families
cannot help but have conflicting agendas and aspirations.

A business organization cannot succeed unless it has single vision and a

single set of objectives. Profitability also depends on implementing a
commonly accepted strategic plan. All of these can be arrived at only if a
family can maintain harmony during its visioning, planning and
implementing process. If harmony cannot be maintained due to the sheer
size of the family, the ultimate solution is to prune the Family Business
Tree.

According to Western authors of family business books, there is a variety

of legal and business mechanisms and processes that are proposed for
pruning the family business tree. These proposals, however, must be
modified in Asia because the concept of family is very different, as
discussed above.

How to Prune the Family Business Tree

Within the Western context, the principal requirement for pruning the
family business tree is mechanism that will allow shareholders who wish
to cash in their stock to be able to do so at a fair price. This can be done
by organizing an internal stock market. An additional step could be the
setting up of a Redemption Fund that could be used to purchase shares of
family members who cannot find buyers. Usually, the Fund is built by
contributing a percentage of profits to it each year and a committee of
the Family Council oversees proposed sales to make sure they conform to
the terms of the shareholders‘ agreement.

Aside from this proposed mechanism, the Asian family business must
establish other structures if they feel that they are obligated to perform
so-called family obligations. A scholarship fund can be set up to ensure
that even children of non-employed family members will be guaranteed
their educational needs. A Venture Fund that may be funded out of

Page 47
 company profits can also be set up to

…the necessary permit some family members to leave the

element to save the business
family business is
It would be easier to prune the family tree
leadership.
if there is a Family Constitution that
regulates the relationship between the
family and the business, especially on the employment of family
members. In this way, the decision as to which family members to prune
does not have to be made on a case-to-case basis.

It can be observed that even with proper education and sensitivities of

the realities of life in a family business, family members still fail to
achieve peace and tranquility. This happens because as families expand,
they begin to resemble political structures. Each branch will have is own
agenda, they begin to resemble political structures. Each branch will have
its own agenda. These agendas sometimes overlap but often conflict.
With each generation, there are new waves of cousins and in-laws joining
the family, which add to the number of agendas that the family will have
to attempt to satisfy. There will always, however, come a point where
trying to satisfy all the agendas will have adverse effects on the business.

Too many relatives will lead to the crowding out of professionals and even
result in top-heavy hierarchies. Salaries and ranks, which serve as the
basis for salaries, will begin to be computed on the basis of needs rather
than merit. Business investments may even be made on the basis of
employment opportunities for relatives that new businesses will provide,
rather than on objective standards such as Return on Investments. Also,
relationships within the clan such as cliques will be mirrored in the
business organization.

In this situation, the necessary element to save the family business is

leadership. This leadership must come from one branch of the family that
typically assumes dominance in management. It is this one branch that
must take firm control and take the necessary steps to ensure that the

Page 48
performance of the company is not undermined by conflicts within the
family. It is this one branch that must assert leadership in the business
structure and ensure its profitability and continuity. At the same time,
this same branch must create a family structure that it will allow to
participate in the family business. One of the most critical, if not the
most critical, decisions it must make is to determine how many family
members the family business can realistically support and, therefore,
which members of the family can remain part of the Family Business
Tree.

QUESTIONS TO ANSWER:

1. Enumerate and discuss the six major characteristics of a healthy family.

2. What are the conditions of an unhealthy family enterprise?

3. “A family business is a business of relationships between family

members.” Discuss.

4. What are the keys to quality relationships?

5. What are the keys to successful husband and wife business teams?

6. What is meant by “pruning the family tree?” How is this done?

Page 49
 4
Managing
Conflict

Page 50
T
he Family Council, Family Assembly, Board of Directors and Family
Constitution are necessary structures that contribute greatly to
conflict management in a family firm, but these actually only
provide venues for discussion and conflict resolution. In the face of full-
blown, serious, company life-threatening crises, more stringent measures
must be resorted to—the appropriate conflict-resolution and conflict-
management strategies must be immediately applied.

THE IMPORTANCE OF CONFLICT MANAGEMENT

There are three ways families usually react to conflicts:

1. Avoidance. The family may choose to ignore the conflict either

because they are ignorant of its extent, or they withdraw or deny its
existence in the hope that the contentious issue will disappear.

2. Referral. When the conflict is acknowledged to exist, but the

contending parties are not prepared to meet it head-on, then many
families resort to referral. This is a poplar resource among Chinese
families who have strong family associations. In most other families
the third party may be a relative who is not involved in the business, a
close family friend or a lawyer or consultant.

3. Confrontation. The very word frightens many people. However, when

the stakes are high and the conflict is serious, the most appropriate
strategy is confrontation, which means face-to-face dialogue between
the contending parties. There should be an attempt to identify the
basic problem, its causes and alternative solutions.

Both referral and confrontation are acceptable—even recommended—

solutions. Avoidance, however, is not a healthy alternative for family
businesses facing conflicts.

The basic assumption that holds a family firm together is that there is an
agreement on a Shared Dream. However, no matter how steadfast and
Page 51
true they are to this dream, and whatever steps are taken on structures
created, the family must accept that sooner or later, inevitably, there
will be conflict. In fact, the conflicts are likely to become more frequent
and more serious as the family business moves forward in its life cycle.

The acceptance is critical because families mistakenly assume that

conflict can be or should be avoided or, at the very least, resolved. If
they accept the inevitability of conflict, either between generations or
among siblings, then they will realize that avoidance is useless because
the conflict will merely escalate and reemerge with greater force sooner
or later. They will also see that merely resolving the current issue is not
enough because the same kinds of conflicts will continue to plague them
unless they get to the real bottom of the issue. The answer then is to
focus on conflict management.

What is Conflict Management?

Managing conflict in a family business does not mean eliminating

conflicts. Rather it means accepting the inevitability of conflict and
establishing a mechanism or system for controlling conflicts and ensuring
that they cause the least amount of
distress and damage.
The key is to make
sure that whatever The key is to make sure that whatever
conflicts the family
conflicts the family encounters are
encounters are
productive and not destructive. This
productive and not
destructive. means, basically, facing conflicts head-on
and utilizing them to improve
communication and understanding within
the family or organization. To accomplish this, you need to contain the
conflict or issue—make sure it does not unnecessarily spill over other
areas or dimensions—and then work on getting to the root cause. The best
way to do this is by arranging a direct confrontation between all parties
involved. Once this is done, steps should be taken to address the real
issue. This is a great way to determine towards what direction a family

Page 52
business needs to go or what elements need to be revised, improved,
eliminated or included.

THE MOST COMMON SOURCES OF CONFLICT

The following are decisions that cause conflict.

1. When family members disagree about whether the company‘s profits

should be reinvested in the family business or distributed to the
owners. This is particularly common between family members who are
active in the business and those who are inactive.

2. When siblings have different directions or philosophies for their

business, e.g. one is a risk taker and the other is overly cautious.

3. When a leader insists on pursuing his business dream in spite of

adverse effects on the family business.

4. When a leader or senior, motivate by a sense of familial obligation,

allows family members to work in the business even if they are not
qualified, ignoring those who insist that only qualified persons should
be employed.

5. When a CEO or senior executive decides to favor his immediate family

to appease a spouse. This of course incurs the wrath of other family
members.

6. When there are not enough high-level positions available for all the
family members. Thus, the normal corporate turf battles extend into
the realm of family relationships.

7. When non-active family members believe that decisions made by

active members are motivated by self-interest rather than family
interests.

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8. Family relationships are affected when the ownership structure
changes and family members acquire a bigger share of ownership
begin to demand greater control in the management of the business.

9. Many family businesses are also affected when marriages fail but the
spouses insist on maintaining an interest in the business.

10. Personal disputes that are left unresolved which produce emotional
strain lead to conflicts over minor business issues.

11. When the owners of the family business begin to divide their assets
among their heirs, causing envy and resentment among siblings.

12. When there is no commonly accepted leader and one sibling takes
steps to become the leader.

13. When the current leader tries to retain his role when it is clearly time
for him to go.

14. When topics of potential disputes between siblings such as job titles,
compensation, perks, etc. are discussed and there is no conflict
management mechanism in place.

15. When the number of family members increases to such an extent that
it becomes unwieldy, especially if spouses and in-laws are included,
thereby making consensus very difficult to reach.

CONFLICT MANAGEMENT STRATEGIES

T
he challenge of managing conflict in business relationships is a
common topic in all family business books. Usually families resort
to voting as a means of resolving issues or making major decisions.
There are a number of alternative conflict management strategies which
were used by successful family businesses.

Page 54
A very successful business family from northern California in the United
Sates has worked out a system where every week, the five siblings meet
to discuss issues that might produce conflict. During these meetings,
every sibling is allowed to state his opinion and then the sibling that will
be affected by the decision must leave the room and let the rest of the
group decide the matter. The principle is that each sibling knows that he
must be fair in his judgment if he wants his other siblings to also be fair.

Another system devised by two brothers from Chile on the few occasions
when they could not agree, was to call on a certain gentleman who was
their father‘s trusted friend to make the decision. The brothers would
then abide by the ruling, no matter who was favored by the decision. The
principle is that a person respected by all siblings but is not personally
involved in the business can assume a quasi-parental role.

Another very interesting system is called management by triangulation.

Each of the siblings appoints a non-family manager closely allied to his or
her interests or viewpoint as his or her official representative. The
siblings then meet frequently in a committee that includes their
representatives. When the siblings do not agree with one another, they
question or attack not the brother or sister, but the non-family
subordinate of the sibling. Also, when they want to introduce a new
proposal that may be controversial, they do it through their
representative, which allows them to avoid arguments and save face.
Obviously, this is based on the principle of surrogacy.

Each family must determine for itself what kind of conflict management
system it will utilize. The only requirement is that the system must work.
There have been a lot of different systems proposed that sound a bit
bizarre but seem to have worked for certain families.

Page 55
CONSULTING

O
nce the conflicts in the family business escalate to a point when
they become unmanageable, one effective and well-used
strategy is turning to competent and qualified outsiders for help.
Hiring an expert consultant during times of extreme distress or confusion
may in fact be the only recourse that could save a floundering family
enterprise that is being wracked by internal strife.

What Is A Consultant?

A good definition for the term consultant is ―someone who provides a

specialized expertise, content, behavior, skill or other resources to assist
the client in improving the status quo. This intervention focuses on a
specific client need.‖ Consultants may work for an organization full-time
or on a regular or a situational basis.

There are sit should types of value added that a consultant should bring
to the business client:

 Content. This refers to the field where the consultant has comfort,
experience, and relationships. It is assumed that people enter
consulting in a field that they already know well due to vast
experience or intensive study.

 Expertise. Consultants normally have a particular expertise that is

applicable to a wide variety of environments and industry. For
example, expertise in strategic planning can be used for any client in
any industry seeking help with strategic planning. This value added is
normally the result of exposure to those areas of expertise during the
course of their work.

 Knowledge. The distinction is that knowledge is considered a broader

category than expertise. An example is engineering which is abroad
discipline. This value added requires an understanding of the process
aside from content.

Page 56
 Behavior. This refers to the ability to resolve conflict, enhance
brainstorming and creativity, focus on critical issues and listen to
feedback. Consultants require interpersonal skills because their role is
often that of an objective third party. They are often required to be
mediators and arbitrators.

 Special Skills. There are highly developed and well-defined skills that
are sometimes in great demand. Consultants in this area have a
specialized talent that business clients have difficulty acquiring
independently or find the cost of acquiring too prohibitive. Some
examples are image consultants and, more recently, IT consultants.

 Contacts. This is a debatable area because consultants that bring this

type of value added are those who are normally called in by
companies who require lobbyists. Thus, a former senator may be hired
to lobby former colleagues who still hold office. Others are hired for
name value only and are placed on boards or even appointed as
chairman emeritus simply to add prestige to the company.

Successful consultants must have one or more, if not all, of these

competencies in order to be able to help clients. For example, a foreign
firm moving into the Philippines will need contact in order to understand
the nature of the competition in this country. This company will need
expertise to help them prepare initial business plans, knowledge to get
the proper permits, licenses and incentives; behavior, to assist in the
initial work relationships between the expat managers and the local
managers and employees; special skills to assist in the acculturation
process of its management team with local institutions such as the press
and suppliers; and, contacts to build relationships with Philippine
governmental and business leaders.

The Ideal Consultant

Apart from providing the essential values listed above, a consultant, in

order to be effective, must also play the right roles. He or she should

Page 57
never forget that he/se has been hired to help he organization and to
move it forward. Family business authors agree that consultants can play
either destructive or value-creating roles.

Value-Creating Roles

There are three value-creating roles that an ideal consultant should play:

1. Being an equal partner. This is the role that starts when the initial
message of the consultant to the client is, ―We have the questions and
together we will find the answers.‖ The value-creating consultant
enacts this role by being generous with praise, looking for
opportunities to make the client look good, laying down clear ground
rules for the engagement, initiating and maintaining a shared
understanding of roles, treating the client as an intellectual equal,
engaging the client in joint decision making, and holding the client
and himself accountable for agreed outcomes.

The two key ingredients in maintaining this role are: the nurturing of a
long-term client-consultant relationship, and the acceptance by the
consultant to let the client shine.

With an Equal Partner consultant, the performance of the organization

is enhanced because the decisions made are grounded in sound
judgments; ownership of the project spreads faster throughout the
organization; the organization‘s leadership and problem solving
abilities are strengthened; and collaboration is openly modeled for
and adapted by the client‘s staff.

In order to sustain this role, the client has certain responsibilities. The
client must involve the consultant even in complex decisions about
the engagement and maintain visible involvement beyond the project
conception. The client must also ensure that adequate resources are
deployed, treat the consultant as an organizational equal, and agree
to joint responsibility for the outcome.

Page 58
2. Building Capability. A consultant taking on this role sends the
following message to the client: ―You‘re going to learn this time, so
that next time, you won‘t need me.‖ This type of consultant believes
that he has an obligation to help the organization stand on its own
without his help. Therefore, his objective is to help the organization
solve its problems and at the same time develop its employees to
become more competent in solving problems without help from
consultants.

To do this, the Capability Builder consultant must be generous in

sharing his knowledge, skills, ideas and processing with the client‘s
organization. He must also set specific learning objectives for the
client, push the client to stretch beyond familiar and comfortable
approaches, establish a feedback mechanism to monitor learning
progress, and draw attention to organizational strengths and client
progress to build confidence. With this type of consultant, the
organization‘s performance is enhanced because the speed of
innovation is increased, the ability to acquire and apply new
knowledge is strengthened, and organizational confidence is fortified.
The employees‘ sense of well-being also increases as they develop and
top talent is more easily retained. The organization as a whole
becomes more adaptable to change.

In order to sustain the Capability Building Role of the consultant, the

client must be willing to acknowledge organizational shortcomings,
hold the consultant accountable for knowledge transfer, ensure that
the staff is absorbing and applying newly acquired skills and
knowledge, and must risk trying new methods and approaches. The
client and the consultant must agree on critical learning milestones.

3. Being the Truth Teller. If the consultant is playing this role, his first
message is, ―Allow me to point out that the emperor really has no
clothes.‖ Consultants are normally hired during an organization‘s
crisis, at which time its management is more anxious, more fearful,
less tolerant and less capable of accepting the truth. Therefore the
Page 59
 decision by the consultant to be completely honest must be made on
Day One, at the very point that management lays out what it
perceived to be the problem and the solution.

The Truth Teller consultant must give honest, direct feedback, ask
tough questions to guide the client to an understanding of
unproductive behavior and must maintain an accepting,
nonjudgmental posture. The common perception is that organizations
do not always appreciate truth-telling consultants for their honesty.
However, nurturing a long-term client-consultant relationship for
truth telling is possible.

There are certain things a consultant can do to promote truth telling.

The first is to confront himself, and determine what prevents him
from being able to tell the truth to the client. This may be due to his
own fear of losing a source of income. The consultant must also
choose his battles wisely by making sure the client is ready to deal
with the issue when it is raised. It is also important to prepare ahead
of time for the discussions by rehearsing the messages, to avoid
misunderstanding. Because truth-telling messages have the potential
to cause bad feelings, the client needs to know that the consultant
believes they are capable of correcting mistakes and changing
unproductive behavior. Finally, the consultant must set the example
by being receptive to truth telling from the client‘s viewpoint
regarding his own effectiveness as a consultant.

Truth telling enhances the performance of the organization because

the real root causes are identified, organizational relationships are
enhanced as unresolved conflicts are addressed, and organizational
focus is sharpened as competing priorities are clarified and agreed on.
This organizational self-reflection enables threats and opportunities to
be identified and acted upon quickly.

The consultants who play these three value-creating roles of Equal

Partner, Capability Builder, and Truth Teller will transform an

Page 60
organization so that it will have the ability to attain its objectives more
quickly and become more adaptable to change.

Destructive Roles

Consultants, if they are not careful, could easily fall into three common
traps. These are the three destructive roles that an effective consultant
avoids:

1. Playing the Messiah. This occurs when the initial message of the
consultant to the client is, ―Thank God, I‘m here to save you.‖ It is
easy to spot a consultant playing this role. He is likely to use
dogmatic, highly directive language, take a dominant position in
meetings, assume a leadership role in every project, be evangelical
about his position, and use intimidation when confronted with
opposing views. The Messiah consultant desires respect, seeks
approval, enjoys attention, and pushes this need to be revered to an
extreme. The organization becomes overly dependent on the
consultant and risk aversion increases, ownership of outcomes
becomes diluted, and unhealthy political agendas emerge and impede
progress.

2. Creating Dependency. This occurs when the message of the

consultant to the client is, ―Don‘t even think of trying this without
me.‖ This type of consultant uses condescending language that infers
client inferiority, spoon-feeds information to the client, speaks in
complex jargon, and continually draws attention to flaws in the
organization. The Dependency Builder Consultant is driven by the
need to be needed and his greatest fear is the fear of losing the
ability to help. An organization that hires such a consultant will suffer
a significant decrease in learning, a loss of managerial self-
confidence, and an increase in resource expenditures as timelines
become longer and resistance to change increases, with the
organization unable to distinguish between the resented consultant
and the initiative or project.

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3. Colluding with the Organization. This occurs when the message of
the consultant to the client is ―Tell me what you want to hear.‖ This
type of consultant continually affirms client‘s actions, speaks in
―reassuring‖ language to build up the client‘s ego, hangs around with
key ―power players‖ in the organization, continually quotes the client
in meetings, and gets in the middle of organizational conflicts while
siding with the client. The Colluder Consultant is motivated by the
need to be accepted. However, the organization‘s performance will
be undermined as false confidence emerges and arrogance increases;
narrow-mindedness can set in as outside points of views are rejected;
decision making is slowed down by unresolved conflicts and competing
points of view; paralysis may occur due to competing and conflicting
agendas, organizational relationships are strained; and innovation is
stalled as people become adverse to offering dissenting points of
view.

The three destructive roles are primarily the result of gratifying the
consultant‘s needs at the expense of the client‘s needs. In order to build
and sustain lasting client relationships, consultants must avoid these
three destructive roles. They must instead make sure that they are
engaged in the three value-creating roles that consultants should play.

Value-creating consultants don‘t believe they are messiahs, don‘t foster

dependency in clients, and don‘t collude with or against anyone in the
organization. Instead, they insist on a balanced relationship, share
unstintingly in the desire to build organizational capability and tell the
truth regardless of the discomfort it may cause. They never forget that
they have been hired to help the organization and to move it forward

Page 62
QUESTIONS TO ANSWER:

1. Define conflict management.

2. What are the most common sources of conflict?

3. What strategies can be used to manage conflict?

4. What is a consultant? Elaborate.

5. What are the types of value added that consultants should bring to the
business client?

Page 63
 5
Succession
Planning

Page 64
M
ost family corporations do not survive to the second generation.
In fact, it is estimated that only fiver percent survive to the
third generation. Studies estimate that in the United States and
in most Western economies, 75 percent of all family companies are
majority-owned by brothers and/or sisters, and about five percent are
owned and controlled by cousins.

The rate of failure of The rate of failure of family businesses is

family businesses is almost the same all over the world. A
almost the same all study of American family firms revealed
over the world. that nearly 70 percent of all family-owned
businesses fail during the second
generation. Nearly 88 percent close shop by the third generation and 96
percent are gone by the fourth generation. The figures, according to
several studies, are even higher for Chinese-owned corporations.

Another study reveals that the average life span of an American family
firm is twenty-four years. Unfortunately, no statistics were available on
Filipino firms.

Several studies attribute this low survival rate to three main reasons. As
the family reaches the third generation or Cousin Consortium stage, there
is now a dramatic increase in the complexity of the family as it grows
through marriages and births, to a network of siblings, spouses and
children. Rivalries and jealousies increase and incompetent relatives have
to be dealt with. If not properly handled, all these will cause the collapse
of the family structure and the business organization.

The second reason is that the members of the first generation were
entrepreneurs, and, unfortunately, they often expect the next
generations to have the same entrepreneurial traits. There is seldom an
attempt to introduce professional management to the enterprise at the
time it can still be done, which ideally should be at the time the
dominant individual is still active in the organization.

Page 65
The third and most important reason is the controlling owner or siblings
failed to formulate an effective succession plan that would ensure smooth
transition from one generation to the next.

THE IMPORTANCE OF SUCCESSION PLANNING

T
he following story is about the breaking up of the Pritzker family
business empire, which includes 212 Hyatt hotels worldwide,
including 60 hotels that the family owned, and the Microtel Inn
and Suites chain.

The Pritzker family, one of the richest American families, also owns more
than 14,000 apartment units, luxury retirement communities, industrial
and office parks and commercial complexes. It also controls the Marmon
Group, a manufacturing conglomerate, as well as Reliant
Pharmaceuticals, and has major investments in other companies like
Royal Caribbean Cruise. The family owns or manages companies with
estimated annual revenues of more than $11 billion.

Jay Pritzker was the man responsible for building the business empire. In
1995, when he was in his 70s, Jay formally named his eldest son, Tom, as
his successor in a formal memo addressed to the family. In 1999, Jay
Pritzker died, and our years later, the family had become a classic
example of sibling rivalry. There are now lawsuits among family members,
petitions for independent accounting of family assets and other major
disputes.

This is atypical story of a family that remained united while the patriarch
was alive. However, a new leader may not be able to overcome
discontent and envy among his siblings.

In another story, the Dorrance family, who controlled Campbell Soup

Company, also became bitterly divided after the father died in 1989. The

Page 66
family members became united only a few years later, when a non-family
member was made the chief executive.

In the Pritzker story, the future seems to be headed towards a breaking

up of the empire. This is a viable option only if the surviving parts
become economically viable enterprises. In the Philippines, one can easily
see that a breakup, for example, of the Lucio Tan businesses could still
result in viable enterprises. After all, this empire includes Fortune
Tobacco, Asia Brewery, Allied Bank, Philippine Air Lines, Tanduay,
University of the East, Century Park Sheraton and other businesses.

Splitting up, however, is not a viable option for almost all the other
Philippine family businesses. Global competition and rapid technological
changes have made size and economies of scale necessary conditions for
survival in today‘s competitive environment.

The list of even the top 500 companies in the Philippines would show that
as much as 90 percent would be considered medium-sized enterprises
even by Asian standards. This means that if these companies ever break
up, the surviving parts would be less competitive.

This is why it is imperative that Filipino family businesses that are now in
the stage of ―passing the baton‖ must look for concrete models to ensure
that their businesses remain a going concern even after they have lost
their patriarchs

Most major Filipino family enterprises were started or expanded

dramatically after World War II, especially in the ‗50s. Therefore, up to
the early ‗90s, these enterprises belonged to the Controlling Owner
category. If one were to survey the present environment, it can be noted
that these enterprises—those of Henry Sy, Jaime Zobel, John Gokongwei,
Joe Concepcion and Alfonso Yuchengco—are now beginning to shift
towards the Sibling Partnership stage. During this phase, which usually
begins when the patriarch or head of the family reaches the age of 60 and
lasts until his death, the controlling owner will have to face three major
challenges: (1) disengagement from the business, (2) determining the
Page 67
composition of the next generation of leadership, and (3) the process of
succession, which includes choosing an ownership and management
structure for the next generation.

Even for big businesses, breaking up may not be a desirable option. Many
of the patriarchs that started these enterprises do not want what they
consider their legacy to disappear once they are gone. This is why
succession planning should be considered an urgent and necessary step.

Most owner-managers know that succession planning is absolutely

necessary if the business is to survive after they pass away. However, this
subject is often ignored, perhaps due to the lack of framework for and
the emotional stress of the succession process.

A family business has only two choices. First, it can ignore the problems
of succession and decide who should run the business at the time the
current head is physically or mentally unable to do so. Second, and
ideally, it should plan ahead and attempt to ensure a well-planned
transfer of leadership authority.

THE MECHANICS OF SUCCESSION PLANNING

B
efore a family or a patriarch begins planning for succession, two
major issues should be resolved. First, the family must decide
whether they want to continue the ownership lf the business as a
family. Some members may want to go on their own. This is a very painful
topic because the founder or the senior
generation normally does not want to
However, if there is consider the possibility of breaking up or
no unity and
liquidating the business. However, if there
harmony in the
is no unity and harmony in the succeeding
succeeding
generation, this will generation, this will very likely result in
very likely result in open conflict upon the death of the
open conflict…
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present leader. This topic is typically avoided while the current head is
still participating in the business. Talking about the family‘s commitment
to the business is likened to questioning the next generation‘s love and
respect for one another.

The second issue that must be dealt with is whether the leadership in the
next generation will be placed in the hands of one person or whether
there will be a transition from a single leader to that of a shared
leadership.

Drafting the Succession Plan

The following are the characteristics of a successful continuity plan:

1. The plan must be strategic. It should be based on a thorough analysis

of the macro environment and the growth prospects of the business.

2. The plan must be comprehensive. It must acknowledge the

interaction of family ownership and business issues.

3. The plan must be feasible. It must be based on realistic assessment

of attainability for both the family and the firm.

4. Most importantly, the plan must be managed. Its implementation

must be the responsibility of those with the power to make the
critical decisions.

Succession in a family business is a long and difficult process that must be

carefully planned and implemented if the business is to continue. A
successful process will take several years and the timing is very critical.

There is no such thing as a single plan that will work for all family
businesses. Each one must develop its customized plan and the
implementation process will have different dynamic for each family.

In developing a succession plan there are, however, several factors that

all family businesses must include in its framework for the planning and
implementation process:

Page 69
1. The objectives must be specified before the whole process begins.

Succession planning has three general objectives. The first is to pass

on the control of the family business in a manner that will ensure its
continuity. Second, there must be an efficient and fair distribution of
the assets from one generation to the next. Third, the plan must
maintain and promote family harmony during the entire process.

It is oftentimes very difficult to meet all those three objectives at the

same time because one objective may sometimes be in conflict with
another. This is certainly the reason for the necessity of succession
planning.

2. The succession plan is a business continuity plan.

The entire planning process is based on the assumption that the

purpose is to continue the business and maintain the ownership
and/or control of the business by the family. The plan must,
therefore, take into account the needs of the business and interface
these with the needs and values of the family.

3. There must be a clear strategic vision and strategic plan for the
company.

In developing the succession plan, the family must be able to visualize

what the business will be like in the future especially after the next
generation takes over. This will allow the family to determine the
interests and skills that the next generation must develop.

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4. Choose the family business structure that will work best in the
future.

There are three basic options in choosing a future family business

structure.

First, the present structure can continue. For example, the founder
can leave control of the business to one son or daughter, or a group of
cousins can pass on ownership to their children, this leaving control in
the hands of cousins.

Second, the structure can move from one stage to the next, thus from
controlling owner to sibling partnership to cousin consortium.

Third, the structure can be simplified by moving backwards to a

previous stage. Thus, it can move from cousin consortium to the hands
of one family or from sibling partnership to a controlling owner once
more.

5. Formulate a clear and specific strategy for succession that is based

on pragmatism.

There are many types of succession plans or strategies. There are

many factors that will determine the right succession strategy for a
family. It is therefore critical that all these factors be analyzed and
their effects carefully studied.

For example, the size of the business is a major consideration. There

is no sense in having a small business run by a group of siblings. If the
siblings have also been in conflict all their lives, choosing a structure
based on sibling partnership may be totally unrealistic.

Once the strategy and the basis of strategy have been formulated, it is
necessary that these be written down. This may take different forms.
One such form is the family constitution. At the same time, there
must be a legal study make to ensure that the succession plan will not
encounter legal obstacles.

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6. Make sure the successors are ready to take control of the company.

In the world of family business, mentoring the child or children who

will take over the business is a responsibility that has been treated too
casually be most owners. This attitude is especially true among
entrepreneurs who became successful without the need for any
mentoring.

A succession plan is contingent on their ability to transfer knowledge

and expertise to the next generation. There must also be a transfer of
family traditions and values if the business is to remain as family
business.

7. Make sure the company is ready for a transfer of control.

New leadership will bring changes in the company even if the

successors have been working in the company for many years. No two
persons will have exactly the same management style.

The company stakeholders, especially the non-family managers and

employees, must be prepared for a change in the organizational
culture.

There will also be changes in company priorities and policies. It is

important that the company be prepared to accept these changes
and, if possible, become an active force in the process of change that
will necessarily take place.

8. Prepare the entire family for the change in leadership.

It must be accepted that the entire extended family will be

emotionally affected by the succession process. The change in control
will not be able to satisfy all the hopes and expectations of everybody
in the family.

Unresolved issues will now have to be confronted, which will exert

additional pressures on the whole process.

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 In preparing the family, one cardinal rule is that there must be open
communication, which would begin long before a successor is chosen.
The best tools for this are establishing a family council and learning
how to make family meetings productive.

9. Letting go requires careful planning.

The hardest and toughest part of any succession is the final stage
when the persons in charge must let go. This is especially difficult if
the present head of the business is also the founder.

There is a high chance of a successful transition if the withdrawal is

gradual and is done with grace and style. There must also be a
continuing role for the founder wo has decided to retire.

This process must be as carefully planned as the transfer of control if

the whole succession process is to succeed.

Critical Tasks

Whatever the structure or the values the family wants to use in the
succession process, specific tasks must be done during the planning
phase. The following outlines a framework that a family may implement
to ensure a smooth and well-coordinated succession planning process.

 The family must assess whether it can withstand the emotional

stresses that succession planning inevitably generates. This process
requires open discussions of issues such as health, distribution of
assets among loved ones, and granting favored positions to some
siblings and cousins over others. It can be divisive and leave bitter
feelings if not properly handled.

 The family must develop clear and sensible criteria for selecting a
successor. If the family decides that the choice of successors should
be based on competence rather than on chronological age, then the
criteria should be specified before the selection process begins.

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 The succession plan must be communicated to the entire family
and “cannot simply be tucked away inside a few family members’
heads.‖ This communication process will minimize family conflict
because family members will know that there is a rational plan for
ensuring the selection of a competent successor. This will also
generate a sense of fairness among siblings.

 Appropriate forums should be organized for reaching consensus on

critical issues. In the succession planning process, at least three
separate structures should be developed. There should be a Family
Council for discussion of family issues. A board of Directors to deal
with ownership and policy issues, and a Succession Task Force to
formulate the strategic aspects of the process and assist in the
training of the successors.

 The family must develop a succession time frame and ensure that
everyone, including the current head, sticks to the timetable. If the
time frame keeps changing in order to allow the family to delay or
disregard the implementation of the plan, the whole plan loses
validity. The timetable should ensure that the outgoing leader is still
around to support and affirm the incoming leader‘s assumption of
authority.

The best time to start the succession process is when the senior
generation moves into late adulthood. This period is normally when
the elders reach their sixties. During this period, the business head is
still relatively active in the business and therefore can retain enough
authority to successfully implement the whole process. On the other
hand, the worst time is when the head is not able to perform his
functions due to failing health, or worse, when he has passed away.

 The family must develop a retirement plan for the outgoing leader.
Many leaders find it extremely difficult to let go of their business,
especially If they themselves founded it. The family business has
become part of their core identity and their self-esteem is tied up the

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 largely based on their leadership position. To them, life without the
family business is not worth living. It is important therefore that the
succession plan must be developed together with the plan that
ensures and emotionally, not just financially, satisfying retirement
plan which the leader can look forward to. One of the most common
conflict scenarios in a family business is that between an aging leader
unprepared to relinquish control of the business and a young successor
seeking to wrest control. The loss of authority over the family, as well
as of control over financial matters, especially compensation and
investment, are powers that most family business heads would be very
reluctant to give up. Ti is important that a structure be designed that
would allow a person to give up authority in the business but maintain
his authority over the family and all family financial decisions. The
family patriarch should never be put in a position where his personal
income has to depend on the collective decision of the family and
where he has lost all authority to make decisions affecting the
finances of the family.

 The family must design an estate plan that specifies how ownership
of the enterprise will eventually be distributed among the members
of the next generation. If the current leader would like to avoid the
misinterpretation of his intentions after he passes away as well as the
inevitable bitterness among his heirs, it might be necessary to let the
members of the next generation know what they can expect to
inherit.

 The family must help the successor build authority both in the
family and in the business. Basically, successors must earn respect on
their own through their educational attainment, their performance
inside and outside the company and by demonstrating that they have
the long-term interest of the company at heart. The designated
successors, therefore, must be given jobs with the appropriate power
and authority that they can utilize to prove that they deserve the
respect of the family and the other managers of the business.

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 Finally, there must be a clear vision for the future of the business
that all the key family members can enthusiastically share and
wherein each one has a specific role to play. Without such a shared
vision, it is doubtful that the continuity planning process can be
sustained.

Even if the family has decided to stay in business together as a family, the
planning process will be an emotional and painful one. Even when the
whole process is finished, there will be many members who will not be
happy with the final result. The principal reason is that the process
requires frank discussions on issues regarding the specific persons that
will be groomed for succession. For example, such issues as competence,
intelligence, character and work attitude would have to be openly
discussed. Even sensitive topics like marriages, in-laws, personal habits
and children—in line for future succession—would necessarily become part
of the discussions. Finally, there would have to be some decision made on
the distribution of economic assets, which may result in some siblings
getting more favored positions than others.

Choosing the Successors

The matter of succession sooner or later becomes a critical issue in any

family business. Most families take it for granted that the next generation
would succeed the present in upholding the company. But they should
realize that children should work for the family business only if they are
qualified. This means that, objectively, they would have been hired even
if they were not members of the family. It
is also important to determine if the
In order to ensure children really have any desire to work for
that when the time the business.
comes the children
are qualified, it is In order to ensure that when the time
important to plan comes the children are qualified, it is
the entire succession important to plan the entire succession
years ahead. years ahead. Families that intend to make

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their children work for the business are advised to follow some basic
conditions. First, let the children work for another company for the first
few years after graduation from college. Second, if it is affordable, they
should then take a master‘s degree which would prepare them better and
give them a more superior résumé. Third, when they enter the business
they should occupy a position that is part of the organizational structure
and not a position that was created just for them. Fourth, their authority
should be based on the position given to them and not the result of their
relationship to the owners. Fifth, their immediate superior should not be
a member of the family but someone who can be their mentor. Finally,
they should be subject to the same performance evaluation applied to
other managers or employees of the company.

In some families, the decision of who should succeed as the head of the
family business is being based on traditional Confucian values, which
dictate that the eldest son should automatically inherit the mantle of
leadership. This tradition is being challenged by several factors, including
the globalization of business, westernized education of the next
generation, and the spread of modern management practices.

Unfortunately, but understandably, the most common mistake is for the

family business head to look for a successor who would reflect his image
and likeness. The ideal choice is the person who is most competent. His
characteristics will depend on the type of family business leadership
which will be chosen for the next generation.

If there is to be only one head or leader, this person must posses the
characteristics of an entrepreneur. He cannot just be an exceptional
manager, but must also be charismatic and have the skills of a leader so
that he is accepted by the other family members as such. It is important,
however, that he is different from his predecessors so that he is not
burdened by comparisons and expectations. Second-generation leaders
who are unable to move away from the shadow of their father‘s memory
and legacy will not be able to meet the continuing challenge of change

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needed to keep a business profitable in an ever-changing business
environment

Mentoring, or the task done by a senior or experienced person in a

company or organization to give guidance and training to a junior
colleague, of the young sons and daughters who will one day enter the
business and lead it into the future is a topic treated much too casually
by too many owners. This attitude is especially true among entrepreneurs
who normally became business owners without the need for any
mentoring.

Parents who hope that their children will eventually join and lead the
business should understand that their dream will not come true unless
there is a transfer of knowledge and expertise from the senior generation
to the successors. There must also be a transfer of family traditions and
values if the business is to remain a family business.

It is a sad fact that family business owners do not pay any attention to
mentoring until it is too late. Normally, the lack of proper mentoring
becomes a major topic when the owners have reached the age when they
need to retire and turn over the management to the younger generation.
By that time, however, the children are in their forties or even fifties and
it is too late to do any proper mentoring.

The lack of proper mentoring could result in the absence of a suitable

successor or the profitability that conflict over ideas and goals may
become part of a power struggle between parents and offspring over the
company‘s future. The next generation may feel that there is little to be
learned from the parent. The parent may feel that his position and legacy
are threatened.

It is very helpful to think about family business mentoring in terms of

stages.

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Stages of the Mentoring Process

Stage One: Choosing the Right College Course

For most family business owners, this stage is correctly perceived as the
first step in preparing the child for eventual participation in the business.
However, the mistake lies in thinking that the specific career of the child
can already be decided at this point.

At a session with members of a family business, the father proudly

presented his children and said that they are all being trained for a
specific position. One would be the general manager, another would be
the finance manager, the other one would be the marketing manager and
the last one would be the production head.

The children were all in their teens and younger. The parents were to be
convinced that the children were too young to be evaluated for future
positions in the business.

The proper approach is to determine what course the child will excel in.
college is a time for the child to develop self-esteem and establish a solid
foundation for future learning experiences. A business degree is not
always the best preparation for a business career.

Stage Two: First Post-College Job

After obtaining a college degree, the family heirs should get several years
of work experience outside the family business before joining the
business. At this point in their lives, it is critical that they first learn the
values of work discipline, the skills required in working in an organization,
and the capability for continuous learning.

It would be ideal if the first job is in a company that provides a highly

professional environment. This will give these potential successors
possible models and benchmarks when they finally join the family
business.

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It is strongly advised that they work in the Philippines rather than in a
foreign environment. If they are going to work in this country and
eventually supervise Filipinos, it is essential that they learn and
understand Filipino culture and the challenges of the Philippine
environment as early as possible.

Stage Three: Graduate School

Today‘s business environment is very competitive because of globalization

and rapid technological change. It is these two characteristics that make
graduate studies a source of competitive advantage for any ambitious
manager or professional.

Graduate studies are recommended in general. Too often parents seem to

think that an MBA (Master in Business Administration) is the only
preparation. Of course, this is one of the best preparations. However, the
nature of the family business may give other courses even greater
validity.

School owners may consider educational management. Restaurant owners

may consider hotel and restaurant management or culinary arts.
Technical firms may place more value on and engineering or science
degree. Economics or computational finance courses are highly advisable
for firms in financial services.

Stage Four: Entry Job in the Family Business

Very often, the next generation‘s entry or first job in the family business
is mishandled. The new entrant is often thrown in a job with minimal
definition, unclear reporting relationships and non existent performance
appraisals.

This situation is often motivated by a parent‘s misconception that

―exposure‖ is the best form of mentoring. This is often the case when the
parent is an entrepreneur or one who entered the business when it was
still small.

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The new entrant finds himself working with other managers. However,
unlike them, he or she does not have any clear responsibility. Their
authority is not the result of the position they hold but the fact that they
are the children of the owners.

In this type of unstructured environment, many talented young people

become discouraged, disillusioned or, even worse, get used to the idea
that membership in the family rather than merit or competence is solely
sufficient source of authority.

It is important that the parents think very carefully about the best entry
point for their child. There are, however, certain rules that should be
observed.

The entry point should be a real job with

The entry point real accountability. There should be

should be a real job existing job description, performance

with real standards and clear lines of authority.
accountability.
The entry job should not be one where the
young person has to report directly to a
parent or any relative. Find a non-family manager who knows how to
nurture talent and encourage the best in others.

The position should not be too high so that it leaves no room for growth
and may be beyond the young person‘s present capabilities. If he or she is
a college or MBA graduate, the job level should not be too low or he/she
is not going to last.

The entry position should be challenging but not be highly visible. This
could save the new family member from possible public embarrassment
when he is still learning the ropes. The job should match the young
person‘s skills and interests and also provide a view of eh most important
functions of the business.

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Stage Five: Mentoring by the Parent

After some time, the parent must take over the mentoring role prior to
the anointment of the successor. There are many responsibilities in a
family business that can only be taught to the next generation by a parent
or a senior member of the family. The next generation must be taught to
make certain that their individual interests are congruent wit the
interests of the organization. There are also major aspects of the business
that only the highest offices, which is the parent, can teach the potential
heirs.

At this stage, parents may also try different approaches before naming
the heir as the second in command. A rotation plan can be implemented.
The person works for a specific period in each of the company‘s
departments or business units.

The owner can also give his son or daughter specials projects in order to
test his capabilities. For example, he or she could be given the
responsibility to formulate a strategic plan and monitor the
implementation and continuous review of strategic planning. He can also
be given the responsibility of launching a new business.

Parenting involves a lot of emotions, which makes parental mentoring a

risk to the parent-child relationship. However, parents must accept these
risks because there are things that only parents can teach. Only a parent-
owner can guide a son or daughter in applying family values to the
business practice, in managing issues of relations with non-family
employees and in understanding proper behavior for family members in
the community.

The hardest part of parental mentoring is accepting that this relationship

must come to an end. At some point, the son or daughter must be
accepted as an individual with his or her own views. At this point, a new
relationship must be developed between parent and successor. This new

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relationship could be derived from a continuing celebration of their joint
achievement during the mentoring phase.

Parenting and Mentoring

Parents and seniors must first understand that there is a difference

between parenting (teaching and caring for the child) and mentoring
(giving guidance and training). A critical factor for a successful transition
of generational leadership, in a family business, is to determine the
optimal or ideal blend of parenting and mentoring that is also well-timed
developmentally.

For example, seniors insist on parenting their offspring even though they
are already in their 50s. On the other hand, a teenager needs a parent
and not a mentor. A family business expert gives the following guidelines
for parenting and mentoring:

 Seniors cannot be effective mentors if they continue to see their

adult offspring simply as younger versions of themselves. Juniors
must be able to appreciate their parents‘ virtues as well as their
shortcomings—neither idealization nor criticism helps.

 Parents must accept that even the best of mentoring relationships

must not last forever. It comes to an end when the student feels
that he or she is capable of functioning independently.

 The end of mentoring relationship can be very traumatic. In some

family businesses, in order to avoid a blowup, the mentoring
relationship continues publicly, but privately not much further
learning is going on. Mentor and student arrive at an arrangement
that will allow them both to disagree privately and graciously.

 For parental mentoring to be effective, the whole process must be

carefully planned. From the very start, the children must be given
real jobs that can generate reliable performance data. In many

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 cases, jobs are especially created just for the child. There is,
therefore, no real measure of performance for the child.

 From the start, the process must include specific competencies that
need to be mastered at each stage before the children move on to
the next stage.

 The mentoring plan and career path must be designed with the
future in mind. Parents must mentor for the business of the future
and not the business of today.

 When mentoring is successful, the parents and offspring are able to

maintain love and mutual respect, while setting up real tests of the
children‘s capabilities. When the mentoring is not done or done
poorly, the result is either conflict between parents and children or
the absence of a competent successor.

Non-Family Mentors

Many family business owners choose not to mentor their own children
because they believe the emotional ties that bind families make it
impossible to provide career guidance to their own offspring. However,
even in cases of parental involvement, mentoring in a family business
cannot and should not be done by parents
alone.
While it is advisable,
there are risks in While it is advisable, there are risks in
assigning non-family assigning non-family members to mentor
members to mentor young successors. The most critical factor
young successors. is the choice of these mentors. They must
be ready and willing to perform the role
and they must know how to carry out their duty.

A family business expert and author points out that the emotional ties
that bind families make it next to impossible for parents to be the
mentors for their own offspring. Executives who are not related to the

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potential heirs make the best mentors. This is one of the most valuable
contributions a non-family executive can make in the family business. If
done properly, this will facilitate the successful transition of the future
chief executive.

The mentoring executive must, however, be ready and willing to become

a mentor and must know how to carry out his duties. As a mentor, the
executive will have to assume the following seven roles:

1. A career strategy advisor who provides general guidance and insight

on the types of opportunities and experiences that the children should
pursue.

2. An individual development councilor who will chart a specific career

development plan that the children should follow in their formal
process of development

3. A sponsor/mediator who makes sure that the children get the types of
assignment essential for development.

4. A monitor who evaluates the ongoing performance so that the

children can make further progress.

5. A role model who furnishes an example that the children can learn
from and imitate.

6. An organizational analyst who will explain the dynamics and

corporate politics of the company.

7. A liaison who will introduce the children to key players inside and
outside the company including bankers, suppliers and customers.

The mentor should work out a plan with the business owner and the heir
apparent that sets benchmarks and intervals for reviewing progress. As
the advisee begins to develop, the executive should gradually withdraw
from the mentoring process. If the mentoring assignment is done

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properly, it can ensure the future growth and profitability of the family
business.

Non-family mentors are expected to play a quasi-parental role. However,

the fact that they are not parents is one of their inherent advantages.
Mentoring by a non-family member has two clear advantages. The
absence of a familial tie makes the relationship free from the emotional
baggage inherent in a parent-child relationship and allows the mentor and
the children to understand and accept each other‘s needs more
effectively. The mentoring relationship is also temporary and must come
to an end while the parent-child bond is for life.

Mentoring the next generation is the only way to ensure the future of a
family business. After all, the ultimate destiny of the business will lie in
their hands.

INTEGRATING THE CHILDREN INTO THE BUSINESS

O
ne of the questions owner-managers of family businesses most
frequently ask is: How do you interest your children in taking
over the family business? This concern should probably be viewed
from a parent‘s role of helping their children make their initial career
decisions. From this point of view then, the parent has to decide which
would have more priority—the good of the family business or the future of
the child. It would be advisable for parents not to over-focus on this issue
and to realize that the process of children entering the business will take
place over a number of years and includes resolving many interrelated
issues.

Family business experts recommend that in the process of determining

whether offspring should join the business or be given a free choice, the
following questions should be resolved:

1. Will the business continue for another generation?

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2. Do the parents want their children to consider careers in management
in the firm or to participate only as owners?

3. Will several members of the next generation run the family firm
together or will only one individual be invited to join?

4. Do the parents want to structure opportunity and experience so that

they ultimately control who enters or do they want the offspring to
choose for themselves.

5. Will offspring who want to be in the business start immediately after

school and work straight through or go away and then decide about
coming back?

Sibling Dynamics

In this process of the younger generation entering the business, a critical

area that parents sometimes overlook is that of ―sibling dynamics‖ or the
dynamics of the relationships of brothers and sisters evolving from
childhood relationships largely shaped by parents into adult sibling
relationships. The main issue here is whether brothers and sisters can
sustain this relationship among themselves for the rest of their lives. The
decision to stay in the family business will mean that brothers and sisters
must accept that their adult lives will remain intertwined and that they
must remain on intimate terms with each other for a lifetime. More than
this, they must accept that their career and financial status will be
dependent on their relationships with their brothers and sisters.

Families who want to perpetuate their family business must therefore

create the right sibling environment. They must develop bonds among
brothers and sisters separately from work. This is easier in the Asian
context. In the American world, adulthood means leaving the family and
becoming independent. In the Asian world, maintaining strong family ties
even in their adult stage of life is expected and, even many times,
expected of relatives.

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For the children to be successfully integrated into the business, all the
siblings must possess the necessary characteristics. If not, then there
normally will be conflict among them. There should be strong sibling ties
to ensure harmony during the moments of disagreement. These ties
should be manifested by their willingness to share rewards and public
recognition. Instead of leadership skills, what would be required would be
skills in the areas of teamwork, communication and conflict management.
All these require an ability to work in groups. Finally, a lot of patience
and a sense of humor would be very helpful.

QUESTIONS TO ANSWER:

1. What are the reasons for the low survival rate of family businesses?

2. Why is succession planning important?

3. What are the characteristics of a successful succession plan?

4. What should be included in the planning and implementation process of

a succession plan?

5. What is mentoring?

6. What are the stages in the mentoring process? Discuss each.

7. Differentiate between parenting and mentoring.

8. What are the seven roles of a mentor? Discuss briefly.

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 6
Family Business
Management

Page 89
PROFESSIONALIZING FAMILY BUSINESS MANAGEMENT

I
n these times of economic crisis and business uncertainty, it becomes
more urgent to make the family business globally competitive. There
is a misconception, however, that professionalizing a family business
automatically means replacing family managers with non-family
managers.

Professionalization does not mean simply hiring outside professional

expertise. Professional management refers
to the successful integration of
Professional
professional knowledge, skills and values
management refers
to the successful into the management and organization of
integration of a family firm.
professional
Another definition is the running of a
knowledge, skills
and values into the business in a business-like manner, and
management and includes the installation of an accounting
organization of a system, the use of management accounts,
family firm. the use of human resource management
techniques, and the business training of
family members. If a company wants to grow, it should give up on its
instinctive management methods and adopt a more professionalized
approach—an approach based on planning and controlling growth through
the use of strategic management techniques.

Why must this be done? The following outlines the reasons for
professionalizing a family business and the alternatives.

There are three main reasons for initiating this process. The first and
foremost reason is the lack of management talent within the family.
Family members may luck specific skills in certain functional areas such
as marketing, finance or information management and the family must
acquire such skills if the business is to survive. If the business becomes
successful and it grows, it is highly unlikely that the family will be able to

Page 90
staff all the key positions and have all the necessary skills. The family
will, out of necessity, either look outside the family for help or attempt
to broaden the skills of family members.

A second reason is to change the personal values of its decision makers

and to reengineer the organizational culture. It has often been pointed
out that many times, family values such as unconditional love and
concern often conflict with such business values as profitability and
efficiency. Some family business experts believe that the family‘s lack of
professionalism and employees‘ lack of concern for efficiency and
productivity can be changed by introducing the management team in
sound business practices or by bringing in professional managers whose
values are more consistent with organizational efficiency and
productivity.

A third reason for acquiring or developing management expertise is to

prepare for leadership succession. The founder or family leader may want
to retire in the near future and may feel the family members in the
business need additional training before assuming the mantle of
leadership or the current leader may feel no one in the family is capable
of running the business after he or she is gone.

There are three basic options for family business leaders who want to
bring professional management skills into their organizations. The best
formula might be a combination of several alternatives.

The first option is to professionalize members of the owning family. This

option is most viable when four conditions exist:

 First, there must be family members who are willing and able to
gain the necessary management skills and who want to work in
the family business.

 Second, the family must feel that the cultural values established
by the family need to be perpetuated and that the family is best
able to ensure the continuity of those values.

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  Third, the family must wish to continue to both own and manage
the company.

 Fourth, the strategic focus of the business should not be likely to

change in the near future. This means that there must be
relatively good fit between the organization‘s strategy and its
environment.

Creating a training and development program for family members is

essential to the success of this alternative and leaders of family firms
have used a variety of methods. At one Fortune 500 company, the
business family has encouraged family members to get an MBA degree
before working in the business. Other families have required family
members to work in another company for a few years before returning to
the family business.

The second option is to give non-family employees the training and skills
that will be needed by the organization in the future. This option makes
sense if the following conditions exist:

 There are few, if any, family members who are interested in

working in the family firm.

 Non-family employees appear to have the necessary motivation

and ability to improve their performance as managers.

 The trust level between family and non-family employees is

relatively high.

 The family wants to perpetuate family values as well as continue

the strategic focus of the business.

In many family firms, non-family employees are treated as second- class

citizens and given little credit for the success of the business. Thus, they
are often an overlooked and underutilized resource although they often
understand the business better than family members. But they understand
the values and idiosyncrasies of the owning family and can act in ways

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that will meet the family‘s expectations which means they can play a
significant role in developing the business,
if given the opportunity.
If the family leaders
want to If the family leaders want to
professionalize non- professionalize non-family members, there
family members, are a number of steps that must be taken.
there are a number of First, there must be an appraisal system
steps that must be
to identify non-family employees with the
taken.
appropriate career aspirations and
potential and then offer them career
guidance and new career options. Second, the family should provide
incentives to encourage non-family employees to seek additional
education. This can include tuition reimbursements, seminars and in-
house training. Third, the family must be willing to treat non-family
employees as equals who can enjoy the benefits that may have been
reserved for only the family.

The third option is to bring in professionals from the outside which is

deemed necessary under the following conditions:

 There is little or no expertise, ability or interest on the part of the

family to manage the business.

 There may be a need to change business strategy or family values.

Those family businesses that have failed to maintain competitive
advantage are often in need of an overhaul. Without outside help
and new ideas, such changes cannot take place; thus, there is
need for new management expertise.

These measures, if implemented correctly, will allow the management of

a family business to be professionalized while still remaining a family
business.

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Prerequisites to Professional Management

It is clear though that a corporation must first reach a certain threshold

during a transition period before it can be truly professionalized. The
following enumerates essential milestones that a company must pass in
evolving towards professionalism:

1. ―Adequate formalized shareholders‘ agreement,‖ e.g., family

constitution

2. ―Agreement on goals and objectives for the business as an

investment, e.g., growth objectives, tolerable risk levels, returns
expected and so on‖

3. ―Timely, accurate accounting information in a form that facilitates

planning, operational decision-making and performance review,
e.g., operating and capital budgets, regular key-results reports
and so on‖

4. ―Strong, coordinated middle management motivated by an

incentive compensation plan that is geared to achieving
performance goals‖

Prior to professionalizing, it is imperative that families realize that they

must distinguish between business and family issues. A business can be
professionally managed only if the organizational structure of the business
firm is used to discuss and decide on purely business issues. The moment
these same structures are utilized for debates on family issues,
professionalism will be compromised and retarded. Therefore, a Family
Council as a forum for discussion of family issues is a necessary step to
professionalizing the business. Corollary to this is the need for a Family
Constitution which will embody the rules for running the Family Council.

Another prerequisite for the introduction of professional management is

the acceptance of the principle of accountability by all managers,
especially owner-managers. Essentially this means that all owner-

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managers must accept that they will be evaluated on the basis of the
results of their performance. Their scope of authority and even their
continuance in the business must be decided based on their performance
alone. The notion that family members inherit the right to mange a family
business is not compatible with the goal of professionalizing the
management of the business.

An American family business says: ―The directors serve to clarify the goals
of the company, to articulate plans, to enhance communication among
the owners, to build consensus for initiatives that might otherwise be
contentious and divisive. The challenge for boards of family companies is
not only to provide good corporate governance that is responsive to the
needs of the company, but to recognize and deal with the pragmatic
realities and idiosyncrasies of the family owners.‖

In today‘s business environment, where all business firms must become

globally competitive, the family business must realize that more and
more it cannot survive without a real and functioning Board of Directors.

Setting Up a Business Governance Structure

Once a Family Council is formed, and a Family Constitution is written,

then the family business is ready to be governed by a professional board
even though it is still being managed by members of the family.

As mentioned, owner-managers must be accountable to an individual or

group for the consequences of their decisions. The ideal group for this
function is a professional, active Board of Directors.

In most family businesses, the Board of Directors is a fictitious entity. The

board minutes are often simply contrived documents written to satisfy
the requirements of the Securities and Exchange Commission or the
Bureau of Internal Revenue. Board resolutions are made whenever banks
and other financial institutions require them and resolutions are based on
imaginary board meetings.

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Families do not normally have a functioning Board of Directors. If the
board is composed of only family members, then sessions are held
informally since formal sessions are considered too bothersome and
bureaucratic. If there are non-family members on the board, board
meetings are rarely held, because family issues are considered taboo
subjects not to be discussed in front of non-family members.

Even the so-called professional boards of family businesses serve mostly

as an advisory board to the owners. They usually have little authority and
seldom vote on major issues. They seldom fulfill the true function of a
board, which is corporate governance.

The Need for a Board

Globalization and trade liberalization are changing the competitive

environment. Family businesses must transform themselves to become
globally competitive. In this environment, the owner-manager cannot
continue shouldering total responsibility for the business. However,
sharing responsibility with a Board of Directors must also mean sharing
authority with the board. This critical step of decentralizing authority as
a transition to professionalizing the company is often the most difficult
for an owner-manager to accept.

Most family businesses therefore require significant evolution before they

can benefit from a Board of Directors that will assume the responsibility
and the authority for corporate

A board can only governance. A board can only become

become effective if effective if there is a transition from a

there is a transition solely entrepreneurial venture into a
from a solely professionally managed business.
entrepreneurial
venture into a Family businesses go through a very
professionally difficult period of transition when they
managed business. have gone beyond the founder‘s direct
influence but have not yet shifted to
professional management. According to an American business author,
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―Some companies take longer to cross the threshold into professional
management and size appears to have little to do with how quickly the
transition occurs. Even large organizations can function for some time in
this twilight zone.‖

The reason for this is that typical entrepreneurs start out with tunnel
vision, relying on dreams rather than rational analysis as a basis for
decision-making. They rely on drive, adrenaline and persistence to
remove all obstacles to their goals. An outside review by a board of
directors by contrast is normally analytical, critical and questioning in
nature. Obviously, this will be in clear conflict with the management style
of entrepreneurs. When they look at the ―real world,‖ they feel that
survival is like barnstorming and one can study the fine points of flying
later. To them, a board is just a group of backseat drivers.

There comes a point in a corporation‘s life when drive, adrenaline and

persistence are no longer enough. It is at this stage when the
participation of a component board begins to be necessary.

A Model for a Family Corporation Board

There has been very little attention paid on the need for a model for
boards of family corporations. Unfortunately, there is the wrong
assumption that the American or European model for corporate boards
will also apply. In fact, some people even believe that Asian family
corporations should be forced to accept Western models for their boards.

In the Western model, the board is the link between the shareholders of
the firm and the management of the corporation. This assumes that
boards, by general agreement, have three key roles:

1. Control—maintaining control over the management of the company

2. Strategy—responsibility for monitoring and influencing corporate
strategies
3. Service—providing advice and counsel to executives and providing
an institutional face for the organization
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In family corporations, however, the principal shareholders and the
managers are normally the same persons. These are members of the
family who own or control the corporation. There is, therefore, no need
for a link on the two entitles such as in public companies. For publicly
listed family corporations, the only substantial role of a board would be
to protect the interests of the minority stockholders from potential
abuses of the family owners who are the majority stockholders and
managers of the business.

There is definitely a positive role that boards can and should play even in
family corporations. However, outside board members in family
businesses must understand certain realities if they want to make
substantial and positive contributions to the company.

As discussed earlier, most family companies are owner-operated and the

board of directors is a fictitious entity designed to satisfy the legal
requirements of the SEC, BIR and other regulatory agencies. Most owner-
managers do not want to bear the cost of a real board or spend time
educating outsiders on the family business. Furthermore, they want to be
able to make decisions without interference from a board.

In closely held companies where the board or executive committee is

actually functioning, these bodies serve mostly in an advisory capacity to
the principal owners. They either have very little authority or their
authority is dependent on the implicit cooperation of the owners. In this
instance the roles of a board in a closely held family corporation are as
follows:

 Clarify the goals and objectives of the company

 Articulate and formalize corporate and business strategies
 Enhance and encourage businesslike communication among
members of the family in the business
 Build consensus for business initiatives that might otherwise be
contentious and divisive. In this instance, the board or executive

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 committee may actually become involved in making operating
decisions.

Only in family corporations that have lasted for more than three
generations do boards begin to operate like the boards of public
companies. This normally occurs when the number of inactive
shareholders becomes substantial.

In recent years, however, the new business environment caused by rapid

technological changes, globalization and worldwide economic crises has
made it increasingly difficult for the owner-manager to shoulder total
responsibility. There is a need to let others share the burdens of
management.

In other family businesses, changes are needed to ensure continued

growth or, in many cases, to ensure the survival of the business. In so
many of these companies, these problems have been compounded by the
need to resolve family conflicts or succession issues. Understandably,
founders will normally resist change. There will always be the fear of
letting go of the formula that was the basis for the original success of the
business. Even when the desire to change exists, there is normally no
process in place for the management of change in family corporations.

It should, therefore, be understandable that while the new business

environment requires the creation of a board or an executive committee
with independent members and real authority, the idea will still
encounter resistance. The challenge then is to have a board of directors
that is not only responsive to the needs of a family corporation, but one
that also accepts and knows how to deal with the pragmatic realities and
idiosyncrasies of the family owners.

Choosing the Board Members

In choosing a family business board, Friedman recommends constituting

these boards with three distinct groups of people:

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 1. Senior family leaders who are also senior executives in the family
business
2. Family members who are not managers in the business and whose
role will be to represent the interests of the Family Council
3. Non-family members who have demonstrated business experience,
acumen and success

Most often, family business boards are composed of shareholders, family

members and figureheads. However, in the classic model of corporate
governance based on the separation of ownership from management, the
primary shareholders are members of the family whose interests are
safeguarded by the Family Council, which is governed by a board of
directors composed of professionals and members of the family, and
managed by a mixed group of officers composed of qualified family
members and professional non-family members.

Outsiders or non-family members can be very effective board members,

but only if they possessed the right qualities. For example, CEO types who
take professionalism for granted may not have the patience to deal with
founders and entrepreneurs who have built businesses based on dreams
and ambitions rather than rational analysis.

When selecting the board members, you should consider not only their
professional competence but also their capability to work in a family
business environment. Therefore, in choosing outside directors, a family
must look for individuals with varied qualities. Ideally, these people must
have strong general management experience or expertise in specific areas
of business vital to a company‘s future success, such as finance and
information technology.

Another principal requirement is the chemistry between the outsider

board members and the family leaders. A non-family director must have
the owner‘s trust and possess credibility in the eyes of the owners. When
the owners are resistant to change, board members may have to spend
their time challenging the owners without losing their trust. In order to
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challenge effectively, the board director must have sufficient motivation
and skills and enough trust in his or her relationship with the owners.

In his article ―Choosing Directors,‖ Peter Davis says: ―Board members

have to know when to push and when to back off. They must be skilled at
depersonalizing discussion of sensitive issues. When the owner-managers
refuse to listen—so often the case—the members must doggedly persist
and have enormous reserves of patience. The board also plays an
important role in empowering a successor. Board members should be good
teachers and have the time and patience for mentoring. The board‘s role
in succession is to support the younger generation in building their vision
of the company‘s future and helping them to put together plans to
implement that vision.‖

Family vs. Non-Family Board Members

The practice of establishing family boards is based on the assumption that

a board composed solely of family members will be more united and be
able to make difficult decisions faster. However, this practice is not well
conceived and often results in disaster. Scott Friedman identifies three
factors that contribute to the ineffectiveness of family boards:

1. Directors are often expected to make difficult business decisions

that require a high degree of knowledge and sophistication. A
family member who lacks appropriate experience or education will
not be able to logically evaluate and decide on the best option.
Critical business decisions may be made by board members who
are not professionally and competently capable of evaluating
options.
2. Family members are often reluctant to criticize other family
members especially a parent or a sibling.
3. Shareholders and directors often have certain inherent and
fundamental conflicts of interest with each other. For example,
shareholders will want to maximize profits and the resulting

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 dividends while directors and managers would like to increase
compensation and bonuses.

Roles and Qualities of Non-Family Board Members

Non-family board members should be actively involved in decision-

making, especially in areas that are likely to create conflicts among
family members. They should, for instance, review transactions that
would benefit some family members more than others, as well as the
compensation of family employees and family policies that could cause
conflict between shareholders and the family managers.

A board can protect the interests of shareholders by ensuring that the

interests are managed responsibly. In pursuing its function of corporate
governance, the board should be allowed to review and make decisions on
all critical governance issues including annual capital and operating
budgets, quarterly results against targets, financial policy, management
control systems, long-term contractual agreements, performance of
senior managers, major organizational restructuring, succession plans,
corporate social responsibilities, and the company‘s strategic plan.

Virtually everyone will agree that a professional board is vital to the long-
term success of a family business. Outside directors are one of the richest
and least used resources available to family businesses. Business owners
have nothing to fear from active boards with outside members. These
boards can help them tackle major issues without depriving them of
control, independence, or any meaningful measure of privacy.

The key is to select the right type of outside board members. As I have
said, the most important ingredient is the chemistry between the owner-
managers and the non-family board members. Directors in family
corporations need to possess certain qualities that may not be critical for
directors in Western, publicly held corporations. The best outside
directors should have the following qualities: business acumen, good

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listening skills, good mentoring skills, patience and values compatible
with the family culture and the family‘s shared dream.

BOARDS FOR SMALL BUSINESS CORPORATIONS

A
small business is generally an enterprise in which management
decisions are made by one or two persons. These would normally
be the owner and the spouse or the eldest child.

There is a popular misconception that small businesses are run by

entrepreneurs. This is very far from the truth. An entrepreneur is one who
can identify and exploit previously unexploited opportunities.
Entrepreneurship entails creating new resources or combining resources in
new ways to develop and commercialize new products, move into new
markets and service new customers.

Many businesses are, indeed, founded by entrepreneurs. However, a quick

view of the small business scene reveals that small businesses fall roughly
into the following categories:

 Those that have been passed on to the next generation by the

founder
 Those that have been bought out from the founder of the business
 Those that have been set up, not to exploit new opportunities but
in imitation of successful enterprises. This list would include
nursery schools, bakeshops, gasoline stations, tailoring shops,
grocery stores, etc.
 Those whose founder has lost interest in managing and are now
being managed by other members of the family
 Those that are primarily low-cost suppliers of large retail or
manufacturing firms

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  Those where the founder is an entrepreneur and is still actively
managing the business. This is generally the most successful type
of small business.

Small Businesses Need Boards Too

The biggest weakness of small businesses is that they are often quite
unprofessionally managed. This is the result of the often-unavoidable
situation wherein all management decisions are being made by one or two
persons. No one has been endowed with the breadth of management
capacities that will make him or her sufficiently capable of making
decisions in all the areas of general management, marketing, finance,
production, accounting, product development and human resource
development. This is very basic management list and excludes other areas
that are increasingly becoming important such as information technology
supply chain management, product/brand management or cost
management.

At the same time, the varied and complex administrative demands of

management in a small business are such that there is little time or
opportunity for performing task outside the daily routine of operating the
enterprise. The owner-manager is faced with the complete responsibility
of managing the business, which means making daily decisions on the
operations in each functional segment. He or she, therefore, never makes
time to remove his or her attention from the daily administrative details,
which are normally considered imperative.

Functions of a Small-Business Board

Boards of small businesses can greatly contribute to those management

tasks that the owner-managers do not have sufficient time or even the
necessary education or expertise to accomplish. These areas would
include:

 Developing a vision and setting objectives for the enterprise

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  Formulating strategies and preparing an implementation plan
 Policy-making and policy implementation
 Preparing measurable, i.e., quantitative, performance
measurements and standards
 Preparing the enterprise for management succession

The Importance of Planning

Most small businesses do not have set objectives for three principal
reasons.

First, they often do not know how to prepare forecasts and budgets, and
have conceived themselves that these are unnecessary skills.

Second, the owner-manager does not want to be accountable for any

target and believes that no one has the power to impose accountability on
him.

Third, there is no logical basis for setting objectives because the

enterprise has no vision and the management merely reacts to changes in
the environment rather than focusing on preparing the company growth.

The typical small-company manager normally overlooks planning since he

or she is more involved than usual in day-to-day problems. Furthermore,
formulating strategies requires the capability to anticipate future changes
in the environment. This expertise assumes knowledge of certain
analytical tools which he or she may not
possess.
Most owner-
managers do not Most owner-managers do not understand
understand the need the need for policies as a management
for policies as a tool. They prefer to make daily decisions
management tool. rather than formulate policies. This failure
to distinguish between policy-making and

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day-to-day decision-making has the effect of burdening the manager with
innumerable repetitive tasks.

In one company I know, there was a daily morning meeting between the
owner and his three supervisors. A secretary was present to write the
minutes of the meeting. A quick glance at the minutes revealed many
identical matters, which kept being discussed in several meetings. This
became obvious to the owner when I advised him to prepare an agenda
for every meeting. I suggested to him that his time and his supervisor‘s
time could be utilized more effectively if he could decide which items
were of a recurring nature and then establish a policy as to what actions
should be taken on those items thereafter.

Preparing for Management Succession

Management succession in small businesses is of even more importance

than in medium-size and large corporations, since in these organizations
management knowledge and authority resides in only one person. The
owner-manager‘s premature or sudden death may so prejudice the
business that it may not survive. Continuity of management is an absolute
necessity if the business is to survive after the death or even the
incapacity of the owner-manager. A succession plan would be a major
contribution of the board.

The Directors of a Small Business Board

According to Professor Myles Mace of Harvard University, in order to have

a useful and effective board of directors for a small corporation, the
directors must have the following qualities:

 An awareness and intimate understanding of the nature of small

family-owned businesses. Expertise in the multinational is not
applicable to the environment of a small business where attaining
objectives must be done within limited- organizational capacities
and financial means.

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  The ability to mentor or coach the management team. The
teaching job can be accomplished most effectively when excellent
personal relations between the team and the board exist.
 The additional qualities of firmness and stability especially when
the board is made up largely of family members. They must be
sufficiently stable to withstand family quarrels that involve verbal
assaults and emotional outbursts, and determine the underlying
issues.
 The ability to maintain continuing and sustained interest in the
company they serve. Working relationships between the board
members and the management are important. If these
relationships are strained by indifferent and sporadic interest on
the part of the board members, the best interests of the company
cannot be served.

In the final analysis, the effectiveness of boards in small businesses is

totally dependent on the desire of the owner-managers to have
competent persons in their board and their willingness to accept the
latter‘s advice.

QUESTIONS TO ANSWER:

1. What is professional management?

2. What are the three reasons why management in a family corporation

must be professionalized?

3. What are the prerequisites to professional management?

4. What are the three key roles of a family corporation board?

5. What are the roles of a board in a closely held family corporation?

6. What are the three distinct groups of people that must constitute family
corporation boards?

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