2. Generation to Generation: Managing a FAMILY BUSINESS Elfren Sicangco Cruz Cruzes@info.com.ph

3. 3 Business 2 Ownership 1 Family The Three Cycle Model of FAMILY BUSINESS 45 6 7

4. The Three Dimensional Development Model Maturity Expansion/ Formalization Start-Up Controlling Owner Sibling Partnership Cousin Consortium Young Business Family Entering The Business Working Together Passing The Baton

5. The Start-Up Stage of Business Development Characteristics Informal organizational structure, with owner- manager at center One product Key Challenges Survival (market entry, business planning, financing) Rational analysis versus the dream

6. The Expansion/ Formalization Stage of Business Development Characteristics Increasingly functional structure Multiple products or business lines Key Challenges Evolving the owner-manager role and professionalizing the business Strategic planning Organization systems and policies Cash management

7. The Maturity Stage of Business Development Characteristics Organizational structure supporting stability Stable (or declining) customer base, with modest growth Divisional structure run by senior management team Well-established organizational routines Key Challenges Strategic refocus Management and ownership commitment Reinvestment

8. The Controlling Owner Stage of Ownership Development Characteristics Ownership control consolidated in one individual or couple Other Owners, If any, have only token holdings and do not exercise significant ownership authority Key Challenges Capitalization Balancing Unitary control with input from key stakeholders Choosing an ownership structure for the next generation

9. The Sibling Partnership Stage of Ownership Development Characteristics Two or more sibling with ownership control Effective control in the hands of one sibling generation Key Challenges Developing a process for shared control among owners Defining the role of non-employed owners Controlling the factional orientation of family branches

10. The Cousin Consortium Stage of Ownership Development Characteristics Many cousin shareholders Mixture of employed and non-employed owners Key Challenges Managing the complexity of the family and shareholder group Defining the role of non-employed owners Creating a family business capital market

11. The Entering the Business stage of Family Development Characteristics Senior generation between thirty-five and fifty-five Junior generation in teens and twenties Key Challenges Managing the mid-life transition Separation and individuation of the younger generation Facilitating a good process for initial career decisions

12. The Working Together Stage of Family Development Characteristics Senior generation between fifty and sixty-five Junior generation between twenty and forty-five Key Challenges Fostering cross-generational cooperation and communication Encouraging productive conflict management Managing the three-generation Working Together family

13. The Young Business Family Stage of Family Development Characteristics Adult generation under forty Children, if any, under eighteen Key Challenges Creating a workable marriage enterprise Making initial decisions about the relationship between work and family Raising children

14. The Passing the Baton Stage of Family Development Characteristics Senior generation age sixty and above Key Challenges Senior generation disengagement from the business Generational transfer of family leadership

15. The Four Developmental Stages of Business Families 35-4041-5051-6060+ 00-18 19-25 26-35 35-60 Age of Juniors Age of Seniors Mid-Life and Managing Entry Working Together Letting Go and Taking Charge Young Business Families

16. Characteristics of HEALTHY FAMILIES Positive Attitude to Human Encounter. Healthy families tend to be warm and friendly not only to each other but also to outsiders. They are good neighbors and help the communities they live in. “Loose-Tight”. These families are intimate and involved with each other – the members have enough independence to be able to maintain their own separate identities.

17. Characteristics of HEALTHY FAMILIES Efficient Communication. Healthy families not only maintain open, clear, direct, and frank communication lines with each other, but also search out opportunities for more communication and dialogue. Discussions even when emotional and disagreeable remain one of caring. Control. Although there is consultation and accommodation, the family retains firm control over its members.

18. Characteristics of HEALTHY FAMILIES Coalition. The families work hard to create a coalition where power is equally shared. Preparedness for Change. Healthy families teach their members to consider change as natural and to be expected.

19. Challenges of SIBLING PARTNERS Partnerships that are formed as a last resort to preserve family unity are likely to fail. The toughest call for parents: Are the siblings capable of collaborating? There must be evidence of strong commitment to collaboration and an even distribution of complementary skills and talents. Harmony requires a clear division of labor and agreement on titles. Sibling partners must find ways to manage rivalries and conflicts in their business relationships.

20. Challenges of SIBLING PARTNERS Relationships with in-laws must he managed effectively. The emergence of a lead sibling poses strains that must be handled by the group. The partners must take steps to counteract divide- and-conquer strategies by others, as well as the bias against shared leadership. Tax and estate planning issues may improperly drive the choice of a sibling partnership.

21. KEYS TO SUCCESS Marriage and children come first. The spouses demonstrate enormous respect for each other. There is a high degree of close communication. The partners complement each other’s talents and attitudes, and they carve up turf accordingly. The partners are supportive of each other. Entrepreneurial couples have strong family ties. Spouses compete with the world outside, not with each other. They like to laugh. They put their egos in check. HUSBAND – AND – WIFE TEAMS

22. Managing Conflicts in a Family Business 15 Most Common Decisions That Cause Conflict Disagreement about whether the company’s profits should be reinvested in the family business or distributed to the owners. This is particularly common between family members active in the business and those who are not. When siblings have different directions or philosophies for their business such as one being a risk-taker and the other one, overly cautions. A leader’s insistence on pursuing his business dream in spite of adverse effects on the family business. Allowing family members to work in the family business even if they are not qualified due to a sense of obligation versus those who insist that only qualified persons should be employed.

23. Managing Conflicts in a Family Business 15 Most Common Decisions That Cause Conflict (cont.) When a CEO or senior executive decides to favor his immediate family to appease a spouse. This, of course, incurs the wrath of other family members. When there are not enough high-level positions available for all the family members. Thus, the normal corporate turf battles extend into the realm of family relationships. When non-active family members believe that decisions made by active members are motivated by self-interest, rather than family interest. Family relationships are affected when ownership structure changes and family members who acquire a bigger share of ownership begin to demand a bigger voice in managing the business.

24. Managing Conflicts in a Family Business 15 Most Common Decisions That Cause Conflict (cont.) Many family businesses are also affected when marriages fail but the spouses insist in maintaining an interest in ht e business. Personal disputes that are left unresolved which procedure emotional strain lead to conflicts over minor business issues. When the owners of the family business begin to divide their assets among their heirs, causing envy and resentment among siblings. When there is no commonly accepted leader and one sibling takes steps to become the leader.

25. Managing Conflicts in a Family Business 15 Most Common Decisions That Cause Conflict (cont.) When the current leader tries to retain his role even when it is clearly time for him to go. When topics of potential disputes between siblings such as job titles, compensation, perks, etc. are discussed and there is no conflict management mechanism in place. When the number of family members increases to such an extent that it becomes unwieldy, especially if spouses and in- laws are included, thereby making consensus very difficulty to reach.

26. Family Business Issues for Discussion Managing Succession How to identify the next president? When does the presidential transition take place (timing)? How do the current CEO and successor share planning and decision-making responsibilities during the transition? How to evaluate the next president’s performance and plan for his or her replacement? What non-business interest will keep the senior generation fulfilled during retirement?

27. Family Business Issues for Discussion Family Business Careers How to decide which family members can join the family business? How to plan management development experiences? What preparation or experience, if any, is required? How to evaluate performance and reward achievement? What if a family employee does not perform? How to encourage the contribution of non-family employees?

28. Family Business Issues for Discussion Family Business Careers (cont.) What if a family member chooses to leave the business? Whether to permit spouses, partners or other non-blood relatives to work full-or-part-time in the business? Whether to allow the next generation’s children to enter the business? Under what circumstances?

29. Family Business Issues for Discussion Compensation How to evaluate and compensate family members? How are bonuses determined? Who participates in stock option program?

30. Family Business Issues for Discussion Ownership and Governance How to assure the senior generation of financial security? Who can own stock in the business? What returns rewards do shareholders get? Whether to pay dividends? How to redeem stock to provide liquidity for shareholders? Does all stock have the same voting rights? How are members of the board of directors selected?

31. Family Business Issues for Discussion Family Relationships How to deal with conflicts between generations? How to deal with sibling or cousin conflict? How to teach young members and in-laws the business and also family traditions? How to share the family activities and customs with the next generation? How to develop and revise family agreements? How are family meetings and activities planned? How to create a process for family planning and decision-making? When to formalize the family governance by organizing a family council?

32. Family Business Issues for Discussion Responsibility and Code of Conduct How to help family members with financial, personal, or career difficulties? What responsibilities does one family member have to the others? What if there is a divorce? What if a family member breaks the law or acts in a seriously irresponsible manner? How much financial information to share with whom? How to support family member’s new business venture ideas? How to cope with the visibility and the public’s expectations of successful families? What responsibility does the family have to the community? How to share credit for the family achievements?

33. Family philosophy’s impact on business decisions Business FirstFamily FirstFamily Enterprise Spirit Specific job, if qualifiedAll welcome Opportunities will be developed for all individuals in the business, based on business needs Based on job description and market conditions Equal pay for family members of same generation Acceptable family standard of living assured for everyone Chief executive or family managers receive stock according to contribution or possibly among non-family employees Equal by branch of family Equal values for all – some in business stock, other in passive investments or entrepreneurial opportunities NoneStable, fair return to capitalVariable, modest return to capital Based on merit in a business hierarchy where each person has only one boss Equal titles for all members of same generations and role in decision- making for all shareholders Equal roles for all those with high degree of competence Board of outside directorsBroad family consensusBoard of directors and representative Family Council LeadershipVoluntary Active according to family needs and individual interests

34. Influences on the choice of family business philosophy Health and Magnitude of the Business 1 to 23 to 56 or more Weak and smallNo debate: business survival No debate: business first ModestNo problem: family firstConflict resolution critical Large (probably partially publicly held or external financing No problem: business first Conflict resolution critical No problem: business first Number of Family members in leadership generation Note : The majority of family businesses are in the conflict resolution critical stage due to typical family and business size. Those cases require deliberate planning and effort to develop the family’s philosophy and vision.

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