Governing Family Businesses

GOVERNANCE &PERFORMANCE
IN FAMILY BUSINESSES
V.RAMAKRISHNAN
© Ram RAMAKRISHNAN 1
SESSION IV
IMPACT OF PERFORMANCE ON
FAMILY BOARDS.
THE FAMILY BOARD CONSTRUCT
IMPACT ON
ACCOUNTABILITY
TRANSPARENCY
INTEGRITY
1
Source- The Economist Aug 17th-23rd 2002
The Family Dilemma
PROSPERITY VERSUS LOYALTY

¾ COMPETITIVENESS vs COERCION
¾ PRODUCTIVITY vs PRIVACY
¾ PROFITABILITY vs POWER
¾ GROWTH vs GERIATRIC PRACTICES
NEED FOR CAPITAL VERSUS LOSS OF CONTROL

¾ NAME LENDING vs NEED LENDING
INTERNAL GENERATION VERSUS EXTERNAL FUNDS

¾ ORGANIC vs INORGANIC GROWTH
2
DYNAMICS OF FAMILY OWNED
AND MANAGED BUSINESSES
GENERATIONAL CHALLENGES
THE FAMILY BUSINESS MODEL & ITS
VARIANTS
THE SOLUTION
Family Businesses are

Emotional Swamps
FAMILY BUSINESSES ARE
FIRST EMOTIONAL ATTACHMENTS
SECOND THEY ARE SAFE, STEADY SOURCES OF MONEY
THIRD THEY ARE SOCIAL UMBRELLAS
ALL ‘IRRATIONAL’ NEEDS
TYPICALLY
LOYALTY IS A VIRTUE
PERFORMANCE IS A THREAT
UNDERPERFORMANCE IS TOLERATED IF NOT EXPECTED
TENDENCY TO LIVE ON PAST SUCCESSES
PATIENCE & COMPLIANCE ARE VITAL & VALUED VIRTUES
3
Coming to Terms with
Generational Characteristics
THE GENERATIONAL CHARACTERISTICS

FOURTH GENERATION
THE DIFFICULTIES OF BEING A SCION
THE LIMITING CHARACTERISTICS-
2ND/3RD GENERATION ONWARDS
SOURCES OF CONFLICT
BASIC CONFLICT- INWARD FOCUS
TELL ME THE GOOD NEWS..& DON’T…(THE DOUBLE WHAMMY)
DIFFICULTIES IN ASKING THE RIGHT QUESTION
The Difficulties of Being a Scion

AS A STUDENT AS A BOSS
¾ ENVY
¾ FROM DAY ONE UNDER
¾ PRIDE IN SAHAVASAM
THE MICROSCOPE
¾ RESTRICTS CIRCLE
¾ COMPARISONS WITH
¾ NO PEER SUPPORT
MECHANISM FATHER, GRANDFATHER,
BROTHER ETC.
AS AN EMPLOYEE
¾ PEOPLE DON’T LET YOU AS A OWNER
FAIL
¾ CONSTANTLY BEING
¾ PEOPLE ALWAYS HAVE
AN ANGLE WATCHED
¾ PEER GROUP SUPPORT
AS A COLLEAGUE CAN BE HIGH

¾ NOT POSSIBLE AT ALL
OVERSEAS
¾ DON’T GET THE SERVICE
WE SEE AS BIRTHRIGHT
4
Tell Me The Good News……& Don’t…..
(The Double Whammy)
1ST GENERATION INTOLERANT OF CRITICISM
¾ “IF ONLY YOU KNEW WHAT WE WENT THROUGH…”
2ND GENERATION ONLY HEARS PRAISE

¾ ‘CHIP OF THE OLD BLOCK’
MOST ARE TOLD ONLY WHAT THEY WANT TO HEAR

¾ THE TIME SERVERS
OTHERS ARE TOLD WHAT IS FELT THEY NEED TO HEAR

¾ THE ROLE OF THE GREY EMINENCE
Difficulties in Asking the Right Question
LOYALISTS AFRAID OR CANNOT ASK DIFFICULT

QUESTIONS
EMPLOYEES COVER UP FAMILY ERRORS
NEWLY HIRED ‘PROFESSIONALS’ SELDOM HAVE ANY

EXPERIENCE DEALING WITH SIMILAR SITUATION
CONSULTANTS SELDOM UNDERSTAND ROLE OF

FAMILY DYNAMICS IN THE MANAGEMENT
5
Consequences of
Generational Infirmities
ACCOUNTABILITY IS IRRITATING
¾ MANAGEMENT BECOMES ADHOC
¾ DIRECTION INFIRM
TRANSPARENCY DROOPS
¾ COVER UPS & DEVIOUS RESPONSES BECOME THE NORM
¾ SYA STARTS BIG TIME- PROBLEMS DELEGATED
UPWARDS
SYSTEM AND INDIVIDUAL INTEGRITY FLAGS

¾ RELIABLE AND HONEST PEOPLE MIGRATE
¾ CANNOT ATTRACT AND RETAIN HIGH PERFORMERS
The Stakeholder Business Model
OWNERSHIP
(BOARD OF DIRECTORS)
BUSINESS
(MANAGEMENT)
6
The Shareholder Business Model
OWNERSHIP
FAMILY
1 DIRECTION
BUSINESS
(MANAGEMENT)
The Family Business Model-

Family Managed
4 FAMILY MEMBER
2
NOT EMPLOYEE
OWNERSHIP
5 DIRECTOR & EMPLOYEE
NOT FAMILY
4 5
6 FAMILY MEMBER,
CEO BUT NOT ON BOARD
7
7 FAMILY MEMBER , BUSINESS

FAMILY 6
DIRECTOR (MANAGEMENT)
& COMPANY EMPLOYEE 1 3
ADAPTED FROM GENERATION TO GENERATION- KELIN GERSICK & JOHN DAVIS

7
The Family Business Model-
Professionally Managed
2 4
9
OWNERSHIP 10MANAGEMENT
12
5 6 11 6
FAMILY BUSINESS
7
1 3
Rules of Engagement-
Ownership, Family, Board Balance
1. FAMILY & OWNERSHIP
2. OWNERSHIP & MANAGEMENT
3. OWNERSHIP & DIRECTION ( BOARD)
4. FAMILY, OWNERSHIP & MANAGEMENT
5. FAMILY, OWNERSHIP & BUSINESS
6. DIRECTION & BUSINESS
7. DIRECTION & MANAGEMENT
8. FAMILY MEMBER NOT EMPLOYED & DIRECTION
9. DIRECTOR & EMPLOYEE NOT FAMILY BUT ON BOARD
10. FAMILY MEMBER –CEO/COO- NOT A BOARD MEMBER
11. FAMILY MEMBER, EMPLOYEE & DIRECTOR ON BOARD
12. WHERE ALL CONVERGE
8
Vital Questions
HOW DO THE FAMILY ,THE BOARD AND BUSINESS

INTERACT ?
¾ HOW SHOULD THEY INTERACT?
¾ WILL THESE RELATIONSHIPS CHANGE OVER TIME?
¾ IF YES HOW AND WHY?
WHAT IS THE CHECK & BALANCE?
WHO IS GOING TO ADMINISTER THE CHECKS AND

MAINTAIN THE BALANCE?
MNC’s versus Family Businesses

PLANNED STRATEGY FLEXIBLE
COMPLEX STRUCTURE HIERARCHICAL
SOPHISTICATED SYSTEMS MINIMAL *
DO’S & DON'TS POLICY ONLY FOR TRIVIAL
PERFORMANCE PEOPLE LOYALTY
INTEGRITY VITAL PROCESSES IGNORED
OVER MANAGEMENT UNDER MANAGEMENT
•I GENERATION MENTAL MAP

•II GENERATION EYEBALL COMPASS
•III GENERATION ?????????
9
The Middle Road for Family Businesses
THINKING VS
PLANNED FLEXIBLE
PLANNING
COMPLEX ADAPTIVE HIERARCHICAL
SOPHISTICATED PRACTICAL MINIMAL *
DO’S & DON'TS PRODUCTIVITY DRIVEN ONLY FOR TRIVIAL
PERFORMANCE ACHIEVEMENT ORIENTED LOYALTY
INTEGRITY VITAL INTEGRITY PRESERVED IGNORED
•I GENERATION MENTAL MAP

•II GENERATION EYEBALL COMPASS
•III GENERATION BUILD A CULTURE
OF PERFORMANCE
Direction- 3 Dimensions
DIMENSION 1 –
¾ HOW THE BOARD RUNS AND WORKS
DIMENSION 2-
¾ DELIVERY OF GROWTH AND PROFITABILITY
DIMENSION 3-
¾ IMPROVING THE COMPETITIVENESS AND
PRODUCTIVITY
10
Accountability & The Family
ACCEPT ACCOUNTABILITY OF PERFORMANCE

¾ USE OF CAPITAL, CASH, TANGIBLE & INTANGIBLE
ASSETS
¾ LEVERAGE FAMILY VALUES TO BUILD PEOPLE-
HIRING OUTSIDERS SELDOM DELIVERS RESULTS
DON’T DELEGATE FAILURES!
WORK AT DEFINING AND REFINING STRATEGY,

STRUCTURE AND SYSTEMS
RESPECT COMMUNICATION HIERARCHY; DON’T

CREATE CHAOS OR BOTTLENECKS
Transparency & The Family
IF FINANCIAL PERFORMANCE IS EXPECTED STRATEGY

& NUMBERS MUST BE TRANSPARENT
¾ CLEAR AND UNIFORM SET OF STRATEGIC &
OPERATIONAL POLICIES
STRUCTURES SHOULD BE VISIBLE AND REASONED-

NOT WHIMSICAL
¾ PAY FOR PERFORMANCE MUST BE OBJECTIVE AND
RATIONAL
SYSTEMS
¾ PROCESS INTEGRITY MUST BE GUARANTEED &
ENCOURAGED
11
Integrity & The Family
STRATEGY HAS TO BE REALISTIC AND GOALS SET

ACHIEVABLE
¾ COHERENCE AND COGENCY VITAL- AVOID MBLBR
STRUCTURES MUST BE VISIBLE AND UNDERSTOOD

¾ AIMED AT LEVERAGING TALENT FAIRLY
SYSTEMS MUST BE ADHERED TO FAITHFULLY

¾ FAMILY CANNOT SUBVERT SYSTEM
If you Can’t Measure it, you Can’t Control It

“People Respond To What’s Inspected Not What is Expected”
MEASURE WHAT YOU MUST; NOT WHAT YOU CAN…….
¾ THE BOARD, THE DIRECTORS, THE ENTERPRISE, THE
INDIVIDUAL
¾ MEASURE WHAT IS TO BE CONTROLLED.
EMBED CONTROL IN SYSTEM

LINK ALL CONTROL & MEASUREMENT TO STRATEGIC
OBJECTIVES DESIRED (OUTCOME)
“Being metrics driven is an important part of scaling to

be a very large company.
In the early days you could feel it, touch it.
Now that is more difficult, so it has to be measured”
eBay CEO Meg Whitman
12
THE SOLUTION FRAMEWORK
CREATING A DIALOGUE MECHANISM

-A FORMAL, PARALLEL “FAMILY” BOARD
CREATING THE FAMILY CONSTITUTION
ROLE OF THE FAMILY BOARD
TASKS OF THE FAMILY BOARD
FAMILY COUNCILS- MECHANISMS FOR BUILDING TRUST
ROLE OF THE ELDERS
ROLE OF TRUST
STREAMLINING FAMILY BOARDS
EQUIPPING FAMILY MEMBERS TO DIRECT THE BUSINESS
13
Family Boards –Answer to the
Ownership-Direction Dilemma
ESTABLISH A CONSCIOUS BALANCE BETWEEN:
PERFORMANCE AND COMPLIANCE
DIRECTION AND MANAGEMENT
STEERING THE CONTROLS AND CONTROLLING THE

STEERING
OVERSIGHT AND INTERFERENCE

¾ (HAND ON STEERING, FOOT OFF THE
ACCELERATOR AND BRAKE)
Essence of Leadership
“I have learned that it is necessary to navigate rather than rule,”
……
“I have learned that we all have strengths and weaknesses, and a
leader needs to evaluate that personally and in others, and play
to their strengths. It really means knowing your own limits and
that of other people.” ……
“I learned not only to build neighborhoods but to be a good
neighbor. I learned that one needs a moral compass, that loyalty
and respect are earned and that good communications are
vital.”
Lynda Barness, president of The Barness Organization, home builders based in

Bucks County, Pa., After five and a half years of running her family business – a
company founded nearly 80 years ago by her grandfather and run for 50 years by
her father
14
NOT FOR USE WITHOUT THE
WRITTEN CONSENT OF
V.RAMAKRISHNAN
Managing Director
Organisation Development Pte Ltd
150 Cecil Street, #09-02
Singapore 069543
Tel: (65) 62222129;Fax: (65) 62222126
Hphone: (65) 97309365
email: v_ram@osl.com.sg
vram@odpl.net
http://www.odpl.net
15

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GOVERNANCE &PERFORMANCE

The Family Dilemma

 PROSPERITY VERSUS LOYALTY

¾ GROWTH vs GERIATRIC PRACTICES

 NEED FOR CAPITAL VERSUS LOSS OF CONTROL

 INTERNAL GENERATION VERSUS EXTERNAL FUNDS

Family Businesses are

ALL ‘IRRATIONAL’ NEEDS

 THE GENERATIONAL CHARACTERISTICS

The Difficulties of Being a Scion

 AS A COLLEAGUE CAN BE HIGH

 2ND GENERATION ONLY HEARS PRAISE

 MOST ARE TOLD ONLY WHAT THEY WANT TO HEAR

 OTHERS ARE TOLD WHAT IS FELT THEY NEED TO HEAR

Difficulties in Asking the Right Question

 LOYALISTS AFRAID OR CANNOT ASK DIFFICULT

 EMPLOYEES COVER UP FAMILY ERRORS

 NEWLY HIRED ‘PROFESSIONALS’ SELDOM HAVE ANY

 CONSULTANTS SELDOM UNDERSTAND ROLE OF

¾ SYA STARTS BIG TIME- PROBLEMS DELEGATED

 SYSTEM AND INDIVIDUAL INTEGRITY FLAGS

¾ CANNOT ATTRACT AND RETAIN HIGH PERFORMERS

The Stakeholder Business Model

The Family Business Model-

7 FAMILY MEMBER , BUSINESS

ADAPTED FROM GENERATION TO GENERATION- KELIN GERSICK & JOHN DAVIS

 HOW DO THE FAMILY ,THE BOARD AND BUSINESS

¾ WILL THESE RELATIONSHIPS CHANGE OVER TIME?

¾ IF YES HOW AND WHY?

 WHAT IS THE CHECK & BALANCE?

 WHO IS GOING TO ADMINISTER THE CHECKS AND

MNC’s versus Family Businesses

OVER MANAGEMENT UNDER MANAGEMENT

•I GENERATION MENTAL MAP

•I GENERATION MENTAL MAP

 ACCEPT ACCOUNTABILITY OF PERFORMANCE

 DON’T DELEGATE FAILURES!

 WORK AT DEFINING AND REFINING STRATEGY,

 RESPECT COMMUNICATION HIERARCHY; DON’T

Transparency & The Family

 IF FINANCIAL PERFORMANCE IS EXPECTED STRATEGY

 STRUCTURES SHOULD BE VISIBLE AND REASONED-

 STRATEGY HAS TO BE REALISTIC AND GOALS SET

 STRUCTURES MUST BE VISIBLE AND UNDERSTOOD

 SYSTEMS MUST BE ADHERED TO FAITHFULLY

If you Can’t Measure it, you Can’t Control It

 EMBED CONTROL IN SYSTEM

“Being metrics driven is an important part of scaling to

CREATING A DIALOGUE MECHANISM

 PERFORMANCE AND COMPLIANCE

 DIRECTION AND MANAGEMENT

 STEERING THE CONTROLS AND CONTROLLING THE

 OVERSIGHT AND INTERFERENCE

ACCELERATOR AND BRAKE)

Lynda Barness, president of The Barness Organization, home builders based in

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PROSPERITY VERSUS LOYALTY

NEED FOR CAPITAL VERSUS LOSS OF CONTROL

INTERNAL GENERATION VERSUS EXTERNAL FUNDS

THE GENERATIONAL CHARACTERISTICS

AS A COLLEAGUE CAN BE HIGH

2ND GENERATION ONLY HEARS PRAISE

MOST ARE TOLD ONLY WHAT THEY WANT TO HEAR

OTHERS ARE TOLD WHAT IS FELT THEY NEED TO HEAR

LOYALISTS AFRAID OR CANNOT ASK DIFFICULT

EMPLOYEES COVER UP FAMILY ERRORS

NEWLY HIRED ‘PROFESSIONALS’ SELDOM HAVE ANY

CONSULTANTS SELDOM UNDERSTAND ROLE OF

SYSTEM AND INDIVIDUAL INTEGRITY FLAGS

HOW DO THE FAMILY ,THE BOARD AND BUSINESS

WHAT IS THE CHECK & BALANCE?

WHO IS GOING TO ADMINISTER THE CHECKS AND

ACCEPT ACCOUNTABILITY OF PERFORMANCE

DON’T DELEGATE FAILURES!

WORK AT DEFINING AND REFINING STRATEGY,

RESPECT COMMUNICATION HIERARCHY; DON’T

IF FINANCIAL PERFORMANCE IS EXPECTED STRATEGY

STRUCTURES SHOULD BE VISIBLE AND REASONED-

STRATEGY HAS TO BE REALISTIC AND GOALS SET

STRUCTURES MUST BE VISIBLE AND UNDERSTOOD

SYSTEMS MUST BE ADHERED TO FAITHFULLY

EMBED CONTROL IN SYSTEM

PERFORMANCE AND COMPLIANCE

DIRECTION AND MANAGEMENT

STEERING THE CONTROLS AND CONTROLLING THE

OVERSIGHT AND INTERFERENCE