By: Prof. Enrique Soriano
THE fight for money is just the finale and likely to be the last and often climactic event to end the years and decades of acrimony and infighting. Sadly, there is no end. There are no real winners, only vicious lawsuits and broken hearts. This is a story repeated all over again, a lesson many families will never learn. Research confirms the truth of this old saying. A significant 90% of family owning businesses lose their wealth by the end of the third generation. The real tragedy is “If wealth disappears, so does the family.”When family members are pitted against each other, expect familial ties severed for good. It’s a sad commentary on the reality that faces family business.
The reasons are naturally predictable: generational conflict (father and children), power struggles (between siblings, among cousins), pride, emotion, personality differences, In-law issues, unfairness, petty but unresolved past family issues, entitlement, no rules when joining and exiting the business.
Kochs vs Kochs
This is a family business that most of you may have never heard of. Koch industries is a global giant grossing $115 billion in annual sales and has a workforce of 100,000 employees, making it America’s second-largest privately held family business next only to the Cargill group. Charles, David and Bill followed their father in earning engineering degrees from the prestigious Massachusetts Institute of Technology. While eldest son Frederick was more of an outlier as his interest was into arts. When the father died in the 1960s, Charles took charge. As the business grew, younger brother Bill, feeling sidelined and concerned over the company’s direction joined forces with Frederick in 1980 and attempted to unseat Charles. The power struggle shook the organization and the Board stepped in and sided with Charles.
In 1983 Charles and David bought out their brothers’ share. Unfortunately, more lawsuits followed, with Bill and Frederick alleging they had been cheated on the valuation. It would take almost two decades for a court to rule in favor of Charles and David and finally put a closure on this storied sibling rivalry. The payout was resolved but the animosity was so deep that the brothers ignored each other at their mother’s funeral in 1990. Blood and money usually spells conflict. And Bill emphatically calls it a very explosive issue!”
Source of conflict is almost always Internal Issues
It is increasingly recognized that family issues more than business issues determine the outcome of generational change in family businesses. My experience in dealing with dozens of families across Asia provides an important perspective in managing this change—educating members related to family and business governance and creating legacy building measures that will ensure a seamless handover to the next generation.
A significant milestone in the life of a family business is the adoption of a family constitution (family agreement). Happily, more companies are now drawing up family constitutions to help them manage growth and navigate the perilous journey of transitioning to the next generation. As Bernard Rennell, head of family governance at HSBC Private Banking highlighted, “Where the goal of the family is to continue to manage the family business or the family wealth collectively across the generations, a constitution can be very helpful.”
There are business owners who would tend to ask if they really need to craft family agreements. Many family businesses appear quite able to get by without concerning themselves with any form of pre agreed rules. Of course, for as long as the business leader is alive! But what if he or she suddenly goes? Therefore, it’s always better to be prepared. To business leaders who are likely to be in their 60’s to 80’s, my message is loud and clear… stop procrastinating! You are neither supermen or superwomen. You know very well that your years are numbered. Your gut tells you there is something brewing amongst family members and you can sense that if you lose your grip by reason of death or becoming incapacitated, the business you nurtured with your spouse will end up being the single biggest source of conflict.
Clearly, the advantage of documenting pre agreed rules by way of a family agreement is that it ensures clarity, professionalism and every signatory knows what to do when conflicts arise. From my experience working with family businesses across Asia, there are generally common issues that are addressed in family agreements:
- Balancing family and business issues
- Family member Entry and exit rules
- Role of In-Laws
- Role of Active and Non Active Members
- Compensation, Dividend Policies
- Maintaining ownership control
- Mentoring a successor
- Enforcing compliance and accountability
Inevitably, a family enterprise that ignores any attempt to formulate rules related to the crafting of governance agreements will likely struggle as it precariously heads to a complex and multigenerational transition.
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This August 31, a Saturday, I will be sharing the stage at Manila Marriott with prominent Governance Leaders / family business owners in the biggest Family Business gathering in the Philippines. The public event entitled, “Can Family Run Businesses Last Forever? I will share the secrets in building 100-year old enterprises. Seats are limited. To reserve, please call Flor and register at 09228603186 or events@wongadvisory.com
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Prof Enrique Soriano is a Book Author, World Bank/IFC Governance Consultant, Senior Advisor of Post and Powell Singapore and the Executive Director of Wong + Bernstein Family Advisory Group, a research and consulting firm in Asia that serves family businesses and family foundations. He was formerly Chair of the Marketing Cluster at the ATENEO Graduate School of Business in Manila, and is currently a visiting Senior Fellow of the IPMI International School, Jakarta.
