Family Office – Erosion of the Entrepeneurial Culture
The entrepreneurial stage is widely recognized as one that endows the organization with the capacity to be nimble, largely because at that formative stage owners know that the essence of being successful is making the sale.
But it does not take long for successful family businesses to be expected to comply with standard accounting principles that promote greater transparency – and the accompanying paperwork – and to have to comply with a growing number of industry standards and government-initiated requirements. Increased regulation and the expanding need for coordination create the impetus for more meetings, more memos and more e-mail that make the business of the family naturally become more bureaucratic. Collectively, these multiplying requirements may contribute to the family enterprise or family office experiencing time delays that the founder’s business never experienced during its entrepreneurial phase.
More importantly, there is the possibility that the family itself may have become an important source of inward-focused time-wasters (like who gets to use the company plane or the country home for the holidays, both administered by a nonfamily staff member), in which case, the family begins to represent a cost to the enterprise rather than the resource that a family member in a combined owner-manager role represented
during the entrepreneurial stage. And, more importantly, by focusing inward, it can lose its ability to keep an eye on new competitive dynamics, the everchanging marketplace, and the financial landscape.
Ignacio Osborne, reflecting on this very development, commented:
“The biggest source of resistance to any change may have been that the family name is on every product label. So we had to try to explain to family members who have been managing the company that in business today you have to focus on the customer and you have to forget a little bit about the vineyards, the countryside and the craftsmanship in production and look more into the market and what is going on in the world. I think that was the biggest resistance. After all the company has been very successful with the original business model for many years, so why change?”
For a number of companies with entrepreneurial cultures the costs of losing this competitive advantage only become evident when their leadership transfers to later generations of the owning family. Ownership-transfer policies motivated by a founder’s desire to love and treat all heirs equally or, from the next generation’s perspective, expectations by family members of equal treatment, are likely to promote an impasse, to the detriment of continued agility and competitiveness. Distributing voting shares equally among a growing list of shareholders often erodes a next-generation owner-manager’s ability to lead. Stock ownership by complicated trusts can also create difficulties for successor generation leaders. Unless ownership and management have been sufficiently differentiated through the presence of nonfamily managers with a great amount of influence in the top management team, trustees, too, can second-guess a firm’s management into paralysis. Successors need to be able to manage the company with agility, flexibility, and speed, and have ample leeway, including freedom from family constraints such as those mentioned above, to sustain the entrepreneurial culture of the first generation.
Multigenerational family-controlled businesses, even those with some exposure to public markets, are largely illiquid enterprises. This lack of liquidity and need for selfless interest can be a burden for family members operating in a society that tends to focus on the short term, the last quarter, the day trade. They will bear this responsibility willingly only if opportunities to acquire information, to be educated, and to engage with important family values of stewardship are plentiful. Inclusion, affection, and mutual influence across generations and between active and inactive shareholders are an absolute necessity.
Investing sweat equity in disseminating information to family members and encouraging multiple avenues of participation gives rise to trust, a spirit of service, and a sense that everyone is in the same boat on the same long journey.
For further information please contact us via LNKD or follow us on TWTR “Swiss Family Office”.
Family Office – Challenges of Succession Planning
For a CEO parent, the need to pick one, and only one, descendant to lead the family company is not an easy task. It is avoidance of this extremely difficult decision that motivates many CEO parents, who deeply doubt the viability of a sibling partnership, to turn the succession question over to the board. Regardless of how compelling the arguments may be in favor of a particular successor, choosing one offspring over another for the top job can be extremely difficult and emotionally distressing for the CEO parent.
While a board of directors may rely on many different sources of information when exercising its due diligence in evaluating successor candidates from among siblings, it should always be able to rely on its independent outsider members to review the facts and render objective opinions and recommendations. For this reason, a board is in the unique position of being able to enhance the perception of the quality and fairness of the succession decision by shifting responsibility away from family members. This third-party stamp of approval significantly increases receptivity to the new company leader on the part of both key nonfamily management and family members.
An example of how this works follows. A hospitality company with $150 million in annual revenues owned and operated several restaurant and hotel concepts. It had been working on its succession process for approximately five years. The company was now being managed and operated by three brothers, who already owned a significant portion of the company stock. The second-generation CEO remained chairman of the board. The owner-managers met periodically with a family-business consultant and had initiated a family council to air and address issues pertaining to the family and its control of the business.
This firm and its owners were not short of advisors and consultants, yet they depended heavily on the board when it came to succession planning. In fact, while all the other consulting was going on, the issue of how the company was going to be managed— whether by a single owner-manager and CEO of the next generation to whom his siblings would report, or by a sibling team operating as an office of the president—was being deliberated by the board.
Sibling teams often do not work. So the board, after hearing recommendations made by the family business consultant, agreed to a trial period on the sibling team concept. During this trial period all three siblings, running two separate business units and the corporate finance function, would operate as a top team and report directly to the board. After a year of tracking the performance of the company, meeting with the siblings individually, consulting with key managers of the various properties and talking to the parent/chairman of the board, the board recommended a single CEO structure and chose one of the siblings as the best candidate to fill that position. The chairman and father agreed with, and implemented, the board’s recommendation. Ultimately two of the three siblings continued in their jobs while the other moved to a related venture as its general manager, and after the initial hard feelings subsided, all three remained co-owners and best of friends.
For further information please contact us via LNKD or follow us on TWTR “Swiss Family Office”.
Family Office – Family Policy and the Family Constitution
To govern the relationship between family members, managers, and shareholders, some family enterprises write family constitutions. The family constitution makes explicit some of the policies and guidelines that shareholders will follow in their relations with each other, other family members, and family office/ family company managers. While family constitutions are more prevalent in larger multigenerational families, they represent an important asset to family unity and the culture of patient family capital starting with second-generation family enterprises. The family constitution usually has no legal standing with regard to the issues covered but it does have a bearing on the legal documents, including articles of incorporation, buy–sell agreements, and so on, that support the family’s intentions and goodwill as set out in its family constitution. The principal articles contained in family constitutions typically deal with the following topics:
- Mission and vision.
The family’s vision and the nature of its commitment to the firm and its continuity are presented in the first article. - Values.
The family values that have successfully guided the firm in its relations with customers, employees, suppliers, partners, competitors, and the community are detailed. - Family brand.
This article guides family members in its owner–firm visibility, the use of the family name, relations with the government, traditional and social media. The desired behavior of the family toward its enterprises and their management is spelled out—what behavior is expected of family members who are in management and what family members need to be aware of in order to protect the company’s and the family’s reputation. - Employment policy.
The requirements family members need to meet in order to be considered for employment are enumerated. These are often segmented into requirements for employment in management posts, requirements for internships, and requirements for lower-level positions. Requirements for management posts often include an undergraduate degree plus five years of work experience outside the family business or three years plus an MBA. This policy may also spell out whether in-laws qualify for employment or are prohibited from becoming company employees. - Next-generation family-member development.
This policy sets out the commitment and procedures guiding the education and professional development of next-generation members. It often also defines the level of financial support available for the college and graduate education of next-generation family members. - Ownership policy.
Stock ownership, classes of stock, and ownership transfer policies are defined. Business-valuation processes are often spelled out. Buy–sell agreements in existence are discussed. Voting and shareholder representation on the board and other entities may be acknowledged. Legal documents governing transactions of any kind are listed and their authority is recognized. - Family bank and/or family venture capital fund.
Special funds allocated to sponsor the development of new ventures or new initiatives by members of the family are discussed and the overall terms of use of these funds are explained. - Dividends and family benefits policy.
This section of the constitution educates and guides shareholders on the expectations for returns on invested capital. It discloses reinvestment requirements. It may also, if the family has agreed to it, set a ratio of reinvestment to distribution of shareholder returns. Policies related to risk and risk management, including debt-to-capital ratios, may also be discussed here. - Liquidity policy.
This article discusses business valuation, buy–sell agreements in force, redemption funds, if any, and their use in wealth-creating events. - The board of directors or advisory board.
Its make-up, standing, authority, and relation to management, shareholders, and other entities are discussed. Its primary functions and operating procedures are disclosed. - Family council meetings.
Their purpose, primary functions and relation to the board and shareholder meetings are discussed. Membership and its standing and operating procedures are discussed. - Shareholder meetings.
Their role is discussed, as are their authority and legal standing. Their relation to the board and the family council is also discussed.
Make sure to act when you have the time instead when it is needed!
For further questions please contact us directly via LNKD http://bit.ly/1Sibxay or follow us on TWTR @stefan_becker
GetItDone 