By: Prof. Enrique Soriano
“WEALTH does not last beyond three generations.”
Research confirms the truth of this old saying.
A significant 90 percent 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, and no rules when joining and exiting the business.
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. What is unfortunate is 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.
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. 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.” I will further enlighten participants on this topic when I fly to the Philippines to do a three-city public seminar engagement covering Bacolod City on May 15, Cebu City on May 18 and Manila on May 19. The Manila leg sold out a few weeks back.
There are business owners who would tend to ask if they really need a family constitution. Many family businesses appear quite able to get by without concerning themselves with any form of agreement. 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 50s to 80s, 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 being incapacitated, the business you nurtured with your spouse will end up being the single biggest source of conflict.
Clearly, the advantage of a family constitution 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 constitutions:
-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, family enterprises without a family constitution will likely head to a crisis. It is just a matter of time.
Prof. Enrique Soriano is a World Bank/IFC Governance Consultant and an International Family Business Coach, National Agora Awardee for Marketing Excellence, Book Author of two best-selling Business books and Executive Director of ASEAN-based Consulting group, W+B Strategic Advisory. He is also a Professor of Real Estate, former Chair of the Marketing Cluster at the ATENEO Graduate School of Business and a senior fellow at the IPMI Indonesia International Business School.
Prof Soriano is slated to hold three important Family Business Seminars this May:
-Bacolod City on May 15 at the L’ Fisher Hotel. The title is “Ensuring Your Family Business Legacy: Initiate Governance and Succession so you can Preserve Your Wealth”
-Cebu City on May 18 at the Hotel Elizabeth. The title is “Family Constitution: Your Greatest Gift to the Next Generation”
-Ortigas Business District on May 19 at the Discovery Suites. The title is “GO Entrepreneurship for Families: Learn to Pass the Torch Successfully.”
Slots are very limited so best to reserve now. For information regarding Bacolod and Cebu City, please contact W+B at 0922-860-3186 or (032) 564 2824 For the Ortigas talk in May 19, please email firstname.lastname@example.org.