Prof. Enrique Soriano
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, 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.
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 50’s to80’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 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./WDJ
(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, a senior fellow at the IPMI Indonesia International Business School and a member of the Singapore Institute of Directors (SID).)