SUCCESSION is the greatest single challenge to family business continuity due to the fact that close family ties and overlapping management and ownership interests often make objective decisions difficult. Poor or no succession initiatives can disrupt the family enterprise and fundamentally impact business continuity and planning in many ways. Whether it is illness or death of a key family figure, misalignment of family values, major fight among siblings, rivalry between family branches, family scandal or any issue involving relationships among family members can trigger conflict and instability.
For example, the death of a principal owner can affect not just estate taxes but possible infighting among the surviving and unprepared members. When there is discord, the chances of the enterprise moving forward grounds to a halt.
Start by crafting good agreements and policies
As a fundamental guide to business owners and to continue the article I wrote related to crafting solid agreements, I have listed below a succession process tailor fitted to families that are ready to embark on this governance journey.
First phase: Pursue family governance by way of aligning expectations within the family system
What is there to align, you might ask?
I am sharing as many possible pain points where family members can focus on. When these elements are managed by way of family agreements, a significant part of the relationship process is addressed.
• Communication is key
• Enhance human/intellectual asset
• Educate the next generation
• Stewardship over ownership
• Create a conflict resolution mechanism
• Address ownership issues
• Minimize entitlement
• Pursue succession
• Emphasize shared vision and values
Second phase: Pursue corporate governance by way of aligning expectations in the board level
Family business expert Dr. Ivan Lansberg once said, “For all the lip service given to the importance of trust, it is still a relatively scarce commodity in family businesses. By trust, I mean the certainty, confidence, or faith that someone we depend upon will act in ways that benefit us and will refrain from acting in ways that bring us harm. Trust is not created by talking about it. It depends on behavior. It’s what we do, not what we say, that makes a difference.”
A good corporate governance mindset can best be summarized by Jaime Augusto Zobel de Ayala (Jaza), the eighth generation successor of the illustrious Zobel family whose lineage can be traced back to 1834, making the Ayala Group the oldest family business in the Philippines. “We try to ensure that the next generation leaders know that they are not merely owners but also stewards of business. Each new generation should know early on the difference between ownership and stewardship. Ownership is like possession; stewardship is a fiduciary role.”
I have listed several key corporate governance metrics to guide family members on the importance of having that fiduciary mindset (single-minded loyalty to the company).
• dividend policy over reinvesting
• most deserving qualities
• cost control vs. growth
• owners’ commitment
• strategic intent
Family unity is critical for business continuity. When family members bicker among themselves, the resulting shareholder squabble could lead to the loss of family jewels.
Jaza explained that they must work to prove their worth to deserve something. As part of their governance metric, the family does not award positions as a birthright or entitlement. They also value educational achievement and encourage the next generation to likewise work hard to gain the respect of the professional managers.
The Ayala Group also promulgates the “stewardship” principle to the younger ones by educating them on the family’s history, what it has achieved through the years and its role in the national agenda.
Their hope is that this will instill a sense of pride to build on the family legacy and inspire the next generation to make their own distinct contribution in the future.