“THE family company is an inheritance to be protected and handed in the outcome of the last geeration and each generation’s commitment to the next” – Gianni Agnelli Late President of Fiat, founded 1899 Most of the wealth in the Philippines is first generational in nature and many of these family businesses are set to change hands in the coming years. However, as of today, only 10 percent stand successful — the rest are struggling and facing dangerous conflicts that may lead to closure and worse, bankruptcy. It can take a lifetime to build a successful business. Unfortunately, figures show that more than three-quarters of founders literally throw away their life’s achievement by failing to plan adequately for succession. Lack of succession planning for next generation, and lack of disclosure and transparency from the “Father/Dad” who micro manages the business, would create havoc to the future of a family-run business. This is what I articulated in my recent Family Business workshop in Cebu attended by 80 families last week. In the Philippines, more than 85% of all corporations are family owned corporations. Despite this fact, very few family business members, especially those who are leaders, want to invest time in building unity among shareholders and professionalizing the strategies and structures through which they interact. Filipino families do not build on relationship capital because it is often taken for granted. Yet it is these same soft side issues which prove to be the stumbling block for so many companies to advance to the next stage of development and growth. In order for a growing family business to make it to the next growth cycle, it must professionalize and address issues on corporate governance and succession planning.
As financial advisors know all too well, no one wants to think that he/she is going to die. Entrepreneur-founders hate discussing their own mortality; hence they put off preparing wills and discussions of estate planning. While it would be logical to assume that smaller firms lack the time to invest in succession planning and professional management, statistics reveal that this trend persists across firms of all sizes and levels of sophistication, according to a Pershing Advisor Solutions report entitled “Developing a Sustainable Business and Succession Plan”. “When you know you have to go to the doctor, you keep putting it off,” says Kim Dellarocca, head of practice management at Pershing. “It’s the characteristics that make us human. It’s an element of, ‘Nothing’s going to happen to me, nothing’s going to happen to my business, everything’s going to be fine.’ We all prefer to go through life thinking that way.” But the price of ignoring the inevitable can be steep, the report warns. First off, high-net-worth clients want to know that their financial plans will continue even if their advisor doesn’t, and they may move elsewhere if they aren’t convinced a succession strategy is in place, Pershing says. So, how important is it to professionally manage a family business? Similarly, Nadia Chauhan, joint managing director & chief marketing officer, Parle Agro expresses that a professionally managed organisation gives way to decentralisation of activities, empowerment of employees, decisions made methodologically and set systems and processes. “All these factors are critical to the success of an organisation, as decentralised functions lead to decisions made at every level, which brings in a sense of ownership among the employees; set systems and processes lead to smooth interaction between departments. Thus, it is important to manage the family business professionally,” she asserts.
Prof. Kavil Ramachandran, Chair Professor of Family Business and Wealth Management, Indian School of Business, Hyderabad points out, “There are two kinds of benefits to professionally managing a family business — one is that the business will grow as the environment changes and the opportunities emerge and the second is that the wealth created by the business will come to the family. There are also additional benefits. One is in terms of the prestige and brand equity it brings. The second is that family governance will be better. Family conflicts will come down if there is an agreement that they will run the business professionally. This also gives an opportunity to the family members to withdraw from the operations and pursue something else that interests them.”
So, what is the best way to hand over a family business to a professional management team?
Nadia Chauhan points out: “Professionalising family business management is an evolutionary process that affects every family business interested in sustainable growth. It can be done in the following ways: decentralising functions and empowering the managers to make decisions or handing the business over to a professional management team – which ever works best. In both cases, the professional management team or managers hired for different functions need to understand the vision, mission, beliefs and culture of the organisation. The basic philosophy, values, goals, basic work routines and expectations of customers, vendors and other business relationships need to be re-evaluated as well. Because of the complexities, the professionalization process is best accomplished over a protracted period of time; it should be an evolution and not a revolution.”
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Prof. Soriano is the chairperson of the Marketing Cluster of the Ateneo Graduate School of Business. He is also a Senior Consultant of Wong+Bernstein Business Advisory Group. For comments, send email at [email protected]
