The What Ifs and More: The Importance of Formal Agreements

By Prof. Enrique Soriano

Ensuring the success of a family business is a dream for many founders. Creating a formal family agreement is a critical step toward cementing their legacy for generations to come. The goal of any governance effort is to anticipate potential challenges, create harmony, and unite family members. The key is to prepare robust family and ownership agreements.

Today’s column delves into family agreements, focusing on what industry experts Lansberg and Gersick refer to as “institutionalizing control.” They highlight that “Governance is concerned with all of the ways that the interests of owners are reflected and implemented in the organizational system…”

Formality in Family Businesses Is a Must

Formality is crucial in family businesses. Assuming that relatives will always support the family business and remain consistently productive is a flawed mindset. Acknowledging the diverse nature of family members involved in the business is essential. Some may perform exceptionally well, demonstrating commitment and trustworthiness. Others might be indifferent, self-centered, and view their position in the family business as a birthright. For some, entitlement is the extent of their contribution.

Changing Behaviors

As your children become adults, they change. When they get married, they change. Any significant life event can alter an individual’s behavior, for better or worse. A Business Week article emphasizes that family business leaders must recognize the individual differences among family members—personalities, attitudes, behaviors, opinions, values, demands, expectations, capabilities, and evolving life priorities. The behavior of your siblings in their youth may differ significantly in midlife.

Given these potential scenarios, family business leaders must anticipate the challenges of achieving the level of certainty needed from family members to operate the business professionally and direct it towards specific objectives.

The core group in any family business is the family itself, which can be either a catalyst for positive outcomes or a source of significant problems if they do not align with established guidelines.

Familiarity and Entitlement

Family business issues often stem from familiarity and entitlement. Family members may become complacent and presumptuous, believing that their blood ties or marital connections to the influential family leader exempt them from accountability for underperformance or weaknesses.

In many cases, “free riders” within the family can jeopardize the business. They believe their entitlement allows them to contribute little to no effort while still benefiting from salaries and dividend sharing. Worse, some might moonlight and start separate ventures outside the family business, further straining resources.

Conflicts can also arise from dealing with different family personalities. Some members may be highly intellectual, capable, and productive but also greedy, controlling, and manipulative. Others may quietly question every policy, disrupting growth initiatives.

Managing Growth and Maintaining Unity

In the intricate world of family-owned enterprises, the transition from founder to the next generation often marks a pivotal phase filled with challenges and opportunities. As businesses expand in size and complexity, managing growth while preserving family unity becomes increasingly daunting. Predictably, this growth phase brings forth internal struggles among siblings, conflicts stemming from entitlement, and the inherent complexities of navigating a competitive industry landscape.

To sustain growth and competitiveness, institutionalizing behaviors and infusing the organization with fresh talent become imperative. Enter the Family Code of Conduct (FCOC)—a pivotal yet often overlooked tool in many Asian family enterprises. This document not only formalizes governance structures but also safeguards the momentum necessary for sustained success.