Soriano: The inconvenient truth

·4 min read

Family businesses evolve. Change matters. It’s the same as life, it is never static. And yet most business owners dread the word change. The Greek philosopher Heraclitus once said “change is the only real constant in life.” That remark was made more than 2,500 years ago, yet families still struggle to embrace it. If change is the only way for family businesses to survive and thrive across generations, why are founders and visionaries resisting the urge to change?

The answer is control. These visionaries dread losing control. That is the inconvenient truth. We all acknowledge that change not only requires a different mindset, it also instills fear and discomfort among founders and leaders. So much so that owners prefer taking the route of “doing nothing” until it’s too late. The Covid-19 pandemic opened a plethora of deep-seated issues and revealed many facets in the life of many family-owned and -controlled businesses and their leaders. Some of them came out of the pandemic unscathed but for many owners, death came knocking and for the rest unspeakable misery as a result of weak leadership.

Bad leaders get away with a great deal when times are good, but a major slump like the current crisis turned many minor issues into major problems. The lack of a governance structure (no succession, archaic systems, nepotism, entitlement, emotion-based management, etc.) could not handle external pressures as a result of the crushing blow brought about by the pandemic. As they say, good times can cover many sins but bad times uncover many weaknesses. I highlighted that statement to emphasize one very important point, the current global economic crisis exacerbated by the two-month-old Russian-Ukraine war is yet another blow that will prove to be a litmus test of leadership for many owners. More than just experience, skills and willpower, the relational success of the family and the business will once again reveal itself in the next three quarters when major economies will swing into recession. The role of the clan leader is not just to guide the business from survival mode to growth mode but in shepherding the succession process that may have been set aside due to a two-year lag and the founder’s fears of sharing power. When the dust settles in the near future, we can either call their action (or inaction) an epic turnaround or a failed leadership.

What should family firms do?

In one of my virtual public sessions, I was asked two questions: How do you differentiate a healthy family enterprise from an unhealthy one? My answer was straightforward: Healthy family businesses embrace change and change unequivocally means governance and succession, shared purpose and alignment of vision and values. Then how did these successful firms manage to change? Commitment, passion and the desire to do what is best for the greater good. In short, families embracing change have one thing in mind, to always think beyond self and that means family and organization.

What is the difference between family, corporate and ownership governance?

Successful family business owners are learning to navigate three critical phases of governance. The first is corporate governance where the thrust is to cover board leadership and business competency with an eye toward a strategic mindset. The next phase is ownership or shareholder governance. In this stage, ownership alignment is paramount. As the enterprise transitions from a parent/founder role to several multi-family ownerships (sibling to cousins), clear, regulated and legally enforceable documents must be the overarching mandate to guide shareholders to pursue their fiduciary roles. Last but not least is family governance, it is the source of light or inspiration, especially for family members joining the business as it provides a framework of rules that define family members’ roles and responsibilities, and how the family interacts with their business. As Prof. John Ward said, “Good family governance can take many forms, but its key function is to promote effective ownership communication and deliberation.” Despite its overarching role in institutionalizing rules and harmonizing family relationships, I must admit that family governance ranks as the least recognized among the three phases. It is still the road less traveled.

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