The title of the article was at the very heart of my advocacy talk in Boston a month ago. After spending weeks exchanging notes and doing collaborative work with eminent Family Business advisors based in the US and Canada, I feel I have much to share to my colleagues and clients in Asia.
Creating a best in breed family enterprise is definitely not a walk in the park. In a Family Wealth articled penned by James Hughes, he highlights this very important conclusion…
“As families grow, the development of a family governance system becomes a critical component of the family’s plan for managing its wealth for the succeeding generations. Without effective family governance, many families are unable to preserve their wealth beyond the third generation. This unraveling of a family legacy tends to follow a familiar path: the first generation creates the wealth; the second generation preserves the wealth; and the third generation spends the wealth.”
Families Grow Faster Than Businesses
In most cases, the founders of the business are obsessed with wealth creation but never about wealth preservation. They keep everything to themselves and rarely share succession and ownership plans to the children…until it’s a little too late in the game.
Over time as the children join the business, get married and have families of their own, they will have varying and increasing personal and lifestyle needs. With more siblings having ownership stakes, the number of shareholders naturally increases.
At this juncture share ownership becomes fragmented, which makes it harder for the family to make business decisions. At this time the patriarch may have semi detached from the day to day functions of the enterprise.
For some family members they may opt to suffer in silence on matters related to the “forbidden agenda” like ownership, succession, sibling rivalry, conflict of interest, etc while others will openly show feelings of discontent.
In the end, the majority of family businesses fail as a result of internal issues, rather than external or macro environmental factors.
Steps to Becoming a World Class Small and Medium Enterprise (SME)
I am sharing a list of questions that i use when I facilitate business and governance coaching to family owned enterprises. Clearly, this will serve as any family leader’s wonderful guide posts for businesses transitioning to becoming a world class SME.
Corporate and Business Goals: Wealth Generation
1 What is the business Five Year Goal? Does it have a compelling shared Vision?
2 What will it take to make the business reach an EBIT or NIAT of X amount from the current X amount?
3 What is your annual growth rate? What is the industry growth rate?
4 What kind of professionals/specialists do we need in driving the business forward?
5 Is the business ready to embark on an IPO event in 5 years?
Family and Governance Goals: Wealth Preservation
1 How will you preserve our family wealth?
2 How will you address ownership issues in the second (or third generation)? Is there a vehicle to transfer ownership to the next generation?
3 Who are qualified to own shares in the family business? Who are not qualified?
4 If there is conflict, who will be objective enough to make the final decisions?
5 Who are qualified to join the business? What are the rules for entry?
If you have no answers to the questions raised and you are at least in your 50’s, then it is time to gather family members and let everyone commit to pursuing governance. Becoming a world class SME requires painstaking, collective work. The good news is there is still time. (email@example.com)
Prof. Soriano is a National Agora Awardee for Marketing Excellence, an ASEAN Family Business Advisor, Book Author and Executive Director of ASEAN-based Consulting group, W+B Strategic Advisory. He is also an International Business Lecturer and Professor at the Ateneo Graduate School of Business.
He is slated to deliver a one day seminar entitled FAMILY CONSTITUTION: YOUR GREATEST GIFT TO THE NEXT GENERATION on August 5, 2017. This public seminar is ideal for SME’s and family business owners. Please call the Octopus Events Group 0915-9108686 and look for Ms. Cherryl. Registration is a requirement.