ATLANTA BARCELONA CHICAGO FONTAINEBLEAU LAUSANNE LOS ANGELES MILAN NETHERLANDS PARIS PITTSBURGH SAO PAULO SINGAPORE TEL AVIV TORONTO "Someday This Will All Be Yours" Requires a Plan Dr. Otis Baskin, Consultant FBCG

ATLANTA BARCELONA CHICAGO FONTAINEBLEAU LAUSANNE LOS ANGELES MILAN NETHERLANDS PARIS PITTSBURGH SAO PAULO SINGAPORE TEL AVIV TORONTO “Someday This Will All Be Yours” Requires a Plan Presented by: Otis Baskin, PhD Family Business Consulting Group Professor, Pepperdine University

Today’s Agenda Family Business – the secrets to Success Success in Family Business requires Parallel Planning –Family and Business Continuity are too important to leave to chance. Succession: How to prevent the crises that plague too many. –Succession as a Process – Not an Event The Critical Role of Non-family Key Executives

The Family Business Advantage Performance Competitive Advantage The Role of Trust

Family Business Performance  BusinessWeek – 2003 “Family, Inc.” – “Surprise! One third of S&P 500 have founding families involved…and they are usually the better performers” Industry studies show Family Business –Perform Better –Pursue Different Strategies

Benefits of family ownership hold around the world Long-term view on behalf of an aligned group of shareholders with shared values and goals Life long preparation of the next generation Opportunity to pursue long-term strategies Strength to weather long economic cycles

The Challenges of Family Business Also Hold World-wide (Wealth doesn’t go beyond the third generation) ความมั่งคั่งร่ำรวยจะไม่อยู่ไปถึงลูกหลานรุ่นที่สาม “ 富不过三代 “ “ 富不過三代 ” “La richesse ne va pas au-delà de la 3ème génération”

The Family Business Paradox Business Dominance Sustainable Competitive Advantage or Destructive Constraining Behavior Explosive Conflict

The Challenge of Generational Transitions From Entrepreneur to Group Ownership –Less than 35% Survive to 2 nd Generation From Sibling Group to Family Branches –Less than 15% Survive to 3 rd Generation

Generational Challenges in Transition Planning 1 st Generation2 nd Generation3 rd Generation Owner/ManagedSibling OwnedCousin Owned Entrepreneurship Unity of decision- making Small group of owners Leadership conflict Family branches Multiple owners Return on investment?

Lessons from Multi-Generation European Family Businesses Sample: 7 th to 14 th Generation Family Businesses Common Factors: –Well Defined Processes –Transparency in Planning –Consistency in Application Perceptions of “Fair Processes” Mindset of “Ours” vs. “Mine” Concept of Stewardship for Future Generations

The Global Foundation of Competitive Advantage for Family Business T R U S T

The Relationship Capital Model Ownership Management Family T R U S T

Achieving Family & Business Continuity A Parallel Planning Process

Parallel Planning Processes Parallel Planning Processes Corevalues Familycommitment Familyvision FamilyEnterpriseplan Managementphilosophy Strategiccommitment Businessvision Businessstrategyplan Values Strategic thinking Shared future vision Formulating plans Family Business

Family Business Three Systems in Harmony Ownership F.B. Protocol/Policies (Rules) Shareholder’s Agreement (Laws) Family Statement Values, Mission, Vision (Values)

Voluntary vs. Inherited Ownership Voluntary owners Create or purchase ownership Inherited owners Given/provided with ownership Heirs can become “voluntary” owners through their actions How? Aronoff and Ward, Family Business Ownership: How to be an Effective Shareholder, 2002

Four Generations of Ownership Owner-Managed Family Partnership Sibling Partnership Cousins’ Collaboration Family Syndicate Adapted from John Ward

Different Types Of Owners Operating Owner –Owner/manager involved in day–to-day operations of the business. Governing Owner –Full-time overseer but not involved in operations – like a Chairman of the Board. Active Owner –Not employed in the business but takes a genuine interest, attentive to all its issues. Passive Owner –Collects dividends. Makes no conscious decision to stay an owner. Investor Owner –Like a passive owner, but if satisfied with returns, makes a conscious decision to retain ownership. Aronoff and Ward, Family Business Ownership: How to be an Effective Shareholder, 2002

Functions of Active Ownership Strategy Understand RisksUnderstand Risks Offer Meaningful Support to ManagementOffer Meaningful Support to Management Monitor Vision and GoalsMonitor Vision and GoalsCulture Serve as AmbassadorsServe as Ambassadors Monitor ValuesMonitor Values Help TeachHelp Teach Governance Maximize Advantages of Private ControlMaximize Advantages of Private Control Provide Checks and Balances of PowerProvide Checks and Balances of Power Assure Continuity of LeadershipAssure Continuity of Leadership Provide Clarity of ExpectationsProvide Clarity of Expectations

Ideally, all owners... Understand and respect the challenges of management including the competition for funds in a family business. Make themselves financially independent of the business (except those employed there) Find ways to get involved and be an asset to the business Are trustworthy

Ownership Requisites Ability to read a financial statement Basic knowledge of the family’s business and industry Understand the family’s goals and how to evaluate the company’s progress toward them Be aware of company culture and how to contribute

Ownership Requisites Know your legal rights and responsibilities Understand compensation in your industry Awareness of appropriate policies Knowledge on choosing and using advisors Understand and appreciate the difference in wielding voting power vs. building economic value

What Family Business Owners Deserve A financial return Appropriate corporate leadership Information Psychic income Accountability Appropriate corporate governance Business protection

Steps to fulfill owner responsibilities Address issues that define their relationship with the business and develop policies around them. Assure excellent governance and respect the chain of command Serve as a partner in strategy Let managers do their job – express appreciation

Steps to Next Generation Preparation Develop good values, morals and ethics in children and point out connection to the business. Instill the value of stewardship It’s not about power or control Understand the power of the dinner table Family meetings

Family Assessment Why does this family own this business? –Vision for family in business? –Vision for business in the family? What is the level of family commitment to the business? What does the family expect as owners of the business? –ROI –Legacy

Family Business Governance Management, Directors, Family Shareholder Roles Family Business Governance : Management, Directors, Family Shareholder Roles Owners Define Vision & Values for OwnershipDefine Vision & Values for Ownership Clarify Stakeholder PrioritiesClarify Stakeholder Priorities Set Shareholder GoalsSet Shareholder Goals Establish Family Business PoliciesEstablish Family Business Policies Select DirectorsSelect Directors Affirm CEO ChoicesAffirm CEO Choices Directors Assure Objective Decisions and Fair ProcessAssure Objective Decisions and Fair Process Monitor Results to Meet Shareholder GoalsMonitor Results to Meet Shareholder Goals Guide Officer Succession, Evaluation and CompensationGuide Officer Succession, Evaluation and Compensation Provide Business CounselProvide Business Counsel Management Define MissionDefine Mission Lead and Establish CultureLead and Establish Culture Develop and Implement StrategyDevelop and Implement Strategy Perform to ExpectationsPerform to Expectations

Family Council Shareholders Board of Directors Family education Committee Next Generation Committee Family Gathering Planning Committee Management Family Family Foundation Committee Family Employment Policy Committee Business of the Business Business of the Family Strength from balance of three Dimensions of Family Governance

Succession Crisis Prevention for Business Owning Families

“The final test of greatness in a CEO is how well he chooses a successor and whether he can step aside and let his successor run the company” Peter Drucker

FIRST STEPS IN TRANSITION PLANNING Business Strategic Plan Founder’s Personal Financial Plan Family’s Mission Statement Owner’s Estate Plan

PRINCIPLES OF EFFECTIVE GENERATIONAL TRANSITIONS Traditions that automatically handed the business to the eldest son have faded. An early designation reduces the risk that unexpected death or disability will leave the business drifting. Openly consider all potential candidates with a set of known criteria.

The Goal of Successful Transition: a Non-Event Consensus of Family, Board & Executives Expected, Anticipated and Understood

THE KEYS TO LETTING GO A deep commitment to family succession. A secure retirement for myself and my spouse. A chosen successor and a target date. A belief that there is “life after retirement”. An ability to delegate decisions and authority. A willingness to let others take new business risks. An ability to trust key people with financials.

Clear Goals and Expectations Growth Profitability Risk Liquidity Vision Values

How to turn Family Values into Family Agreement: "a set of written principles and/or rules that regulate the relationship of a family with its business"

Family Agreements = Basic Understanding Parties Involved (Who is covered?)Parties Involved (Who is covered?) Statement of Family Values and Beliefs (Why?)Statement of Family Values and Beliefs (Why?) Outline of Family Business Principles (What?)Outline of Family Business Principles (What?) Policies that Govern Family and Business Relations (How?)Policies that Govern Family and Business Relations (How?) Methods to Amend (When?)Methods to Amend (When?)

Family Agreements Define Boundaries Ownership unity and commitment Family strength Company development Family Constitution or Protcol Family Enterprise Plan Shareholders Agreement

Family Business Three Systems in Harmony Ownership Success depends upon more than family

Key Non-Family Executives Provide abilities and knowledge that may not exist in the family Often are the stable “bridge” between generations Can be effective mentors for the next generation Provide credibility to family management

Key Non-Family Executives Play an Important Role When: They understand the goals and interests of all owners They can be objective and non-judgmental of family They are respected for their knowledge and contributions They have clear guidelines to follow from a functioning board They are held accountable for reasonable performance goals They are compensated at industry standards for performance They are not brought into family disputes

Board Ownership Competence CommunicationConsistency Caring Management Family Enterprise Plan Strategic Plan Operating Plans Family Constitution or Protocol