Wednesday, December 01, 2021

Soriano: When founders are playing with fire

Inside Family Business

When parent owners especially the founder professes his parental love by transferring his entire wealth to the children despite his tacit admission that his action may cause a death blow to the business, he is risking everything and his action may only come from a combination of the following issues:

a. The desire to win over the offspring to his side and even attempting to cajole them into the business, often enticing them with promises of money, power and prestige

b. Another perspective is the founder’s abject feelings of guilt for being an absentee parent for a long time

c. Referencing and highlighting what the prior generation leaders have taught him or

d. The ill-advised wealth transfer may just plainly stem from poor tax planning after consorting with inexperienced consultants

When a founder looks at inheritance and tax savings as more important variables than preserving wealth by employing the concept of share vesting, there is real danger in the ownership structure. When founders enthusiastically hammer deals without letup rather than show commitment in preparing the next generation set of leaders by way of investing in the children’s intellectual assets, it is courting disaster. When founders ignore the elephant in the room and deliberately set aside governance so they can continue to wield power and dismiss attempts to harmonize family relationships, they are tempting fate. When founders refuse to champion a change in the business culture nor inspire the organization to embrace transformation and continuously block attempts to bring in non-family executives, because “we have done it this way for years and it’s working,” they are playing with fire.

In an article, “Fighting the Family Feuds” penned by Dr. Bernard Kliska and Christopher Eckrich, the authors enumerated some specific challenges that can be expected when two worlds (family and business) collide:

a. Business owners may promote relatives or children on the basis of family consideration (emotion) rather than on merit.

b. An owner may be faced with keeping a child on the payroll to avoid breaking up a relationship in the family, though such nepotism can inhibit the company’s ability to retain or develop non-family employees and managers.

c. Family-business leaders may have an open-door policy that invites all relatives to work in the business. This may seem like an act of love. But what happens when there are more family employees than the company needs or can support, leading to a shrinking piece of the financial pie for each family member?

d. A founder’s children may be compensated according to their personal needs rather than their job performance. Non-family employees equate this system with an allowance from mommy and daddy, and it often drives competent non-family managers to seek employment elsewhere.

e. The family value of treating children equally may result in equal rewards to children regardless of their commitment, ability or contribution to the business’ success. This socialistic practice can be seen in some of the staunchest capitalistic family enterprises.

f. Childhood sibling rivalry can continue through the years. It can become full-blown warfare in a business setting, leaving other employees distracted from the business’ goals.

g. Parent owners often pursue equality in their estate plans, but do not invest in training the sibling or cousin group on how to be a team. Sometimes they don’t even communicate the plan. (“After all, we’re your parents—just trust us!”) This results in an ineffective ownership group taking over the business.

Founders that refuse to pursue governance are not just playing with fire but living dangerously. What was presented above are some of the most pervasive and pathetic actions of founders and key business leaders that refuse to heed the call for governance. When you sense these dangers in your family business, do something now! These are worrying signs that the business may be heading towards a turbulent phase and all it takes is one triggering event like death, incapacity and misconduct.


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