Time for that governance talk

To families running their own businesses, here’s something to think about: Do you make decisions and solve problems together? Are your lines of communication always open?

According to a group of family business advisors from here and abroad, asking these questions is essential to a family enterprise’s longevity, because it will lay the groundwork for a proper governance structure—which, in turn, ensures that the business endures even the toughest circumstances, such as, say, a pandemic.

In the recent webinar “The Power of Succession Planning: Blueprinting a 100-year-old Journey” by Icon Executive Asia and W+B Advisory Group, experts on family business governance weighed in on how owners of these businesses can properly plan how to pass on what they’ve built to the next generations, in order to preserve their wealth and legacies.

According to Steve Legler of Canada-based TSI Heritage, a family business consultancy company, governance is a topic that doesn’t typically excite family business owners, and sometimes even “scares” them.

“What people are mostly unclear on is the family governance side, because sometimes it can feel like [a bunch of] unnecessary rules that are just going to make things more complicated,” says Legler. “And it really comes down to three basic questions: How are we going to make decisions together? How are we going to communicate? How are we going to solve problems together?”

According to Legler, governance, if done correctly, helps the founder, usually the patriarch or matriarch (or both), pass on the torch to the next generation without any hitch. It could be done formally, through a document like a family constitution, or just informally; either way, what’s important, especially amid a crisis such as the COVID-19 pandemic, is that family members keep communication lines open.

“[Building] family habits of getting together, and deciding things together—that’s much more important,” he says.

Josh Baron, cofounder and partner at BanyanGlobal, another family business advisory firm, says that family business owners can think of governance as having four “rooms”: the management room, the boardroom, the owner room and the family room. This kind of governance model, he adds, segregates the kinds of decisions families need to make concerning their businesses.

“It’s just like in a house, where you do things differently in the kitchen and in the living room, and so on,” he says.

Management room decisions should be, as the label connotes, about how to run the business (i.e. operations, talent development), Baron explains. Boardroom topics are more about strategy (who should be running the company?), while owner room discussions should be focused on long-term objectives, and major decisions, such as whether or not to go public.

“The role of the family room, therefore, is not to run the business, not to make owner, board, or management decisions—it’s to keep the family unified, develop talent, or manage family assets,” he adds. “What the family room does is create bridges connecting to the three other rooms so that anyone [from the family-owning business] can become board members, or managers, or just effective owners someday.”

Good governance in a family business is a step in the right direction when it comes to effective succession planning, says Enrique Soriano III, W+B Advisory Group executive director. However, it also requires a couple of other things: timing and the support of all family business owners.

Soriano also cites the need to enforce a code of conduct, a family constitution and a shareholders’ agreement.

“The family constitution is a process, and there are times when the process is more important than the result, because it brings families together,” Soriano says. “These three [documents] are the major pillars of the succession process.”

He does warn family business owners, though, that going through all these—establishing good governance, a succession plan, a family constitution, etc.—is “cumbersome,” and takes dedication from all parties involved. But, when done properly, Soriano says the payoff is a successful transition from one generation to the next, and the growth of the family business’ assets and enterprise value.

But money matters aside, Richard Eu, board chair of the 141-year-old natural health food and supplements company Eu Yan Sang International, also reminds owners of family-run enterprises to keep this in mind when planning their succession: Businesses may come and go, but family lasts forever.

Already the fourth-­generation successor, Eu says their company has had its share of hardships; at one point, the family even lost control, and it was through Eu and his cousins’ efforts that they were able to reclaim the business.

“I see us now as more of a business family rather than a family business. We have to find a way, as a business family, how to survive and maintain what we feel is our mission,” he says. “Common purpose is important, and it’s also important to get that alignment of values of all family members.” INQ