Thursday, June 20, 2019

Soriano: Elements of a flawed family constitution

Inside Family Business

IF THE first quarter of this year was any indication in predicting my governance workload in Asia for the rest of 2019, then I should expect a lot of real, painstaking hard work in the weeks and months ahead.

February and March will go down in history as the two months where I was inundated with so many desperate inquiries related to mediating conflict and the desire of families to revisit their “flawed constitutions.”

Flawed constitutions, completed or otherwise, are like botched or bungled procedures in medical jargon. And among the many requests for intervention, some tragic cases stood out primarily because consultants never got these agreements implemented.

The toxic cases from other countries are usually pre-screened before ithey are endorsed to us consultants. The one that stood out was an unfinished constitution resulting in tragedy when two family members died as a result of head injuries coming from a car chase instigated by another family member. The two other cases involve warring siblings and cousins belonging to prominent families in their respective countries. Both are now deep in litigation, with both sides trading insults in and out of the courtroom.

Clearly these conflicts exposed the deep-seated anger and erosion of trust among family members. For the cases coming from the Philippines that are on the verge of a major breakup, they are now locked in a fierce battle for control of the businesses left behind by their parents and founding grandfathers.

When litigation lawyers/barristers lead the way, I would usually advise families to kiss the legacy dreams of their deceased founders goodbye. My firm’s (Wong + Bernstein) Asean governance policy in helping family enterprises is clear: our consultants are discouraged from participating in acrimonious cases where local courts have assumed a certain level of jurisdiction. We only step in as mediators when lawyers officially recuse themselves.

What constitutes a “flawed constitution?”

First, let’s understand what really is a family constitution. Acknowledged family business expert and Kellogg School of Management Prof. Ivan Lansberg defines it as “a formal document developed collaboratively by family members to encapsulate the values, beliefs and objectives of the family, as a family, with specific reference to the family’s relationship and dealing with its family business.”

Secondly, why are there so many defective (completed and uncompleted) constitutions? Who among the stakeholders are at fault? Is it solely the fault of the family advisor or the reluctance of family members to go through the process? Is it the lack of experience of the advisor and or the lack of emotional commitment of the family members? Can it be attributed to the non-confrontational nature of Asian families, thereby preventing them from addressing the difficult issues?

“Flawed constitutions” are a dime a dozen in Asia and the reasons are highlighted below:

· Incompetence of the family business facilitator

· Adult family members were “forced” to participate because of the growing resentment between generations among siblings and or cousins or in-laws.

· The wrong assumption that with an agreement like a constitution, longstanding acrimony among family members can disappear like magic

· The initiation, formulation and approval phases were all done in a few days, meaning done in haste without getting everyone aligned and committed

· No proper orientation or buy-in of family members coming from different generations

· No activation of the family council immediately right after the signing

· The family did not bother to proceed with the crafting of the shareholder’s agreement.

To be continued...


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