family business – role of professionals
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Family Business – Role of ProfessionalsEIRC , 3rd September , 2013
Bharat Baid FCA
Family BusinessA business is considered to be a family
business if any one of the following three conditions are fulfilled
(a) if a majority of the voting rights is with a family
(b) If the Chairman /MD is from a family
(c) If it can be reasonably said that in the event of the death of the Chairman the successor will be from the family.
Family BusinessMain characteristics –Strategic decision vested with the
familyFamily culture and behavior reflects in
the familyBased on trust and loyalty between
familyEssentially long term in natureLow to moderate risk appetiteVulnerable to family feudsLow on innovation and creativity
Family Business - ChallengesUshering in professionalismSuccession planning and
implementationManaging technological changesWhether or not to go publicBalancing between Quarterly
results and long term goalsAdopting Corporate governance
practices in family run business.
Family Business - ChallengesGrooming family members to
face challengesDiversification into other
businessesCompliance issuesOwnership issues
First Generation -Strength Long term commitmentPassionate with strong belief and
value systemFast and straight forward
decision makingStrong relationship with
stakeholdersLow cost and overheadFounder has overwhelming
authority
Challenges for inner Circle ProfessionalsDefine and document Strategy
and policyGet “Buy in” from patriarch and
family managersProvide domain knowledge and
Management skillsMentoring and training Core
family managersInteracting with family
managers , power sharing , ego management
Sustaining the business in the second GenerationRecruiting and training the best
talent in the interest of businessDevelop culture of trust and
transparencyDevelop and formalize
organizational structurePromote competent family
membersFamily hierarchy vs Business
hierarchy
Sustaining the business in the second GenerationEqual opportunity to be demonstratedProfessional inner circle managers are the
buffer between family , extended family and professional managers.
Promote culture of trustPerception of fairness: Pay and perksReward for management must be distinct
from returns from ownershipExtra constitutional family benefits to be
controlled and reframed as expenses from ownership returns
Transparency within family and professionals on structured benefits as per organizational hierarchy
Family MembersAmbitious AchieversOptimizersAlternative Path Seekers
Ambitious AchieversDriven, committed, passionateHigh entrepreneurial spiritWant to create large institutions and set a
scorching pace of growthShare core family values Seek recognition for performance Believe they are the best, they are
marketable View family business as an opportunity to
charter own courseSeek freedom to workResist equality within family without
involving the criterion of merit
OptimizersCommitted to the business and the
familyView themselves as intrinsic part of
the family business Subscribe to core valuesSeek to participate in running of the
businessFocused on efficiency of operations Value status, security and the perks /
infrastructure that business providesReturns from business to translate into
enhanced cash pay outs
Alternate Path Seekers•Key interests lie outside the
business•No interest or inclination towards
business•Value the status, perks and
infrastructure that the business provides
•Seek support from the business to fund their interests
•Want to reserve the opportunity for their offspring to join the business
PrinciplesFour key principles need
acceptance by every family member
1.Core family values2.Wealth maximization -primary
purpose of business 3.Shareholding a birthright but
right to manage must be earned4.Leaders are trustees
Family Business should…Evaluate performance
transparentlyMeet expectation on Security ,
life style and infrastructure support
Ensure Dividend payout and enhance profitability
Create a central fund to finance new opportunities
Family Business shouldAlign selected projects with
profitabilityEstablish clarity with respect to
nature and quantum of supportProvide freedom for execution of
projectsEnsure Dividend payout to
compensate non-family executives
Option to encash shareholding without loosing family ties
Over the long termThe most competent people
should head the businessLeadership transition should be
smoothFamily Constitution should be
followedOnly continuous wealth creation
can sustain the family and the business.
Family Business GovernanceClear understanding between
family , business stake holders and management
Effective family CouncilFunctional Family ConstitutionSuccession PlanningAttitude of Trust and sacrifice
Growths of successors and Family BusinessBusiness becoming large and
globalisedAspirations and ambitions rising
among the successorsIntolerance among siblings ,
cousinsBusinesses under corporate
structure difficult to divideDemergers and SPVs among
some of the complex solutions
Strategic Management Process Balance between Family and Non
Family ProfessionalsKeep interest of Family above
personal InterestBe ready to forego Dividend
during recessionReasonable remuneration policyMissions , goals and aspirations
Succession – The ways to ease TransitionClear and frank atmosphereTransparency and not mysteryTake everyone on boardHear out all concernsLegal support to create a sustainable
succession planShareholder’s Agreement should be
binding on allFamily Constitution should be honoredCreation of a registered Will
Why Succession is postponedFinancial insecurity , Business ,
family , SpouseIdentity Crisis , reason to be is only
BusinessFear of Conflict among family
membersConcerns of the older generation –
reward and securityTaxes and other costsYounger generation – Lifestyle issues
Key to successful successionSeparate Business , family and
ownershipBusiness – Clear mission , Strategy ,
Structure, Technology , CultureOwnership – Legal Form , Distribution
of ownership , Board of Directors , Shareholders Agreements
Family –Roles and relationships , Cultural patterns and values ,Decision making ,Conflict management
Key steps in successionTransfer of Ownership of SharesTransfer of management
responsibilitiesTransfer of AuthorityThe transformation of
relationshipsTransfer of knowledge
Planning for next generation Outside work experienceCareer path with responsibility and
accountabilityPerformance responsibilityMentoring and coachingTransmitting family valuesEducation and executive
development activitiesPeer network
Shareholders AgreementsShareholders agreements -
regulate the rights and interests between family members as well as their relationship with external shareholders , if any
Incorporate the provisions of shareholders agreements , if any , into the articles of association of the Company
Family Constitution , Family Structures and External Advice Adopting a family Constitution that – Regulates the relationship between family members Lays down rules relating to induction into the
business Lays down rules relating to administration of the
business Lays down rules on succession to ownership and
management Establishes family and business relationship for
effective management. Lays down dispute resolution procedures Establishment of family council to address business
and non-business issues Have you appointed an external board of advisors
who can give you expert advice from a neutral standpoint
WillsExecution of a will disposing of your
interests in the business If no, have you considered the effects of
intestate succession under lawHave you appointed executors and made
provisions for the safe custody of your willHave you borne in mind the requirement of a
probate and letter of administration for the execution of a will
Have you made nominations that may be made under various laws to overcome the delays that may be caused in obtaining a probate
Trusts
Have you considered the option of streamlining succession to ownership through the establishment of long duration trusts
Have you factored in the restriction on perpetual trusts under Indian laws
Have you provided for a suitable representation of all family groups and interests in the composition of the board of trustees
Do you want to provide for disqualification of beneficiaries and trustees under certain conditions
Personal AssetsAre any of your personal assets
tied up in the businessHave you provided for the
transmission of your personal assets by means of a will
Have you considered settling your assets in a trust to streamline succession
Arbitration and Mediation
TrustworthinessNeutralityPerceptionArticulation and understandingKnowledge of BusinessDomain Expertise – Income Tax
and Company Law
Mentoring Interacting with the 2nd
Generation Training Skill sharpeningInformation Technology
Human ResourcesRecruitment of the right peopleEmployees Training HRD issues , facilities and policy
Conflict ResolutionResolving complex issuesDrafting the Family ConstitutionDrafting the Share holders
AgreementEnabling smooth separation Custodianship of Brands ,
intangible Assets
CustodiansServing as trusted and neutral
person on the Board as Independent Directors
Serving as trusted Resource persons for advise on key issues
Bridge between cousins consortiums
Custodians of WILLS
THANK YOU
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