WHY do most family businesses fail? That is the gist of my family session here in the United States East Coast. And I have listed some of the most common causes:
The senior generation leaders ignore family dynamics, thinking that the issues raised are petty. They ignore basic business issues thinking that family members should have special privileges. I call this entitlement, and it’s bad. The senior generation leaders are tax-driven. They are fixated on day-to-day selling.
These businesses have very limited initiative on strategy, structure and human resource. The senior generation leaders rarely involve “the next generation.” Everyone wants to avoid confrontation.
When family members admit committing at least one of these causes, then you can expect trouble to start brewing. It is just a matter of time.
Role of the family advisor
Rey affirmed that his family committed some of the listed causes and admitted that he was lost and helpless right after his father passed away.
I told him that my role as a family business advisor is to create a program, starting with the education of family members on the interrelation of all three governance structures, whose members are expected to collectively coordinate the succession, continuity and leadership processes of the family, business and ownership groups.
Separate yet integrated, the three groups need both a sense of each structure’s importance and sense of what is best for the family business’ overall interests.
Education on governance is key
When the time to gather everyone to start my program came, the four things I reiterated to the family were:
Every family member involved in these governance structures is expected to have important roles and responsibilities during the transition process.
The death of the father triggered an avalanche of change in the family business system.
Everybody is expected to participate with an open mind so they can collectively pursue family unity, a shared vision, shared values, harmony and renewed competencies.
My role is to iron out a fair ownership plan for everyone. Wealth preservation, stewardship and legacy-building are primary objectives.
Nobody wins in a messy family conflict
I also pointed out the downside. Should my intervention fail and the family members refuse to cooperate, the likelihood of the family business failing is high and will result in a power struggle where all siblings will fight for every voting opportunity to assume control.
The result will be so messy that everybody will end up as losers. When discord happens, the family business will break apart and shares will be sold to very lucky non-family investors for a song.
The list of companies who suffered similar fates is getting longer, and among the family businesses I used as unhealthy examples in the past is the case of the Wong Family of the famous brand Cosmos Bottling Corp.
This family conflict stands out
The story of the rise and fall of Cosmos is an all-too-familiar tune for failed family businesses. The patriarch, Henry Wong, at the relatively young age of 54 was given six months to live after doctors discovered a tumor in his brain, leaving the family members unprepared.
With Henry gone and no anointed leader, shareholders and family members started to form alliances within the board. As they mustered voting rights by virtue of their shareholdings, the different branches ended up in skirmishes after constantly disagreeing on how the company would be managed.
Henry’s siblings ended up taking over management, and within a few years the frequency of clashes in and outside board meetings became so acrimonious that, eventually, cracks developed, relationships were strained, shouting matches became louder, and conflict erupted. And as if in unison, everyone in the board scrambled to look for buyers.
After a messy power struggle, the RFM group ended up acquiring Cosmos for less than P1 billion in the 1980s, made a sweeping turnaround, and flipped it to the San Miguel group for a cool P15 billion.
Who helped RFM grow the brand? The eldest son of the patriarch who was bypassed twice by his uncles and my WB colleague and Cebu Managing Director Professor Danny Barrechea.
(esoriano@wongadvisory.com)