"Someday This Will All Be Yours" Requires a Plan

1. "Someday This Will All Be Yours" Requires a Plan Dr. Otis Baskin, ConsultantFBCG

2. “Someday This Will All Be Yours” Requires a Plan Presented by: Otis Baskin, PhD Family Business Consulting Group Professor, Pepperdine University

3. Today’s Agenda • Family Business – the secrets to Success • Success in Family Business requires Parallel Planning • Family and Business Continuity are too important to leave to chance. • Succession: How to prevent the crises that plague too many. • Succession as a Process – Not an Event • The Critical Role of Non-family Key Executives

4. The Family Business Advantage Performance Competitive Advantage The Role of Trust

5. Family Business Performance • BusinessWeek – 2003 “Family, Inc.” – “Surprise! One third of S&P 500 have founding families involved…and they are usually the better performers” • Industry studies show Family Business • Perform Better • Pursue Different Strategies

6. Benefits of family ownership hold around the world • Long-term view on behalf of an aligned group of shareholders with shared values and goals • Life long preparation of the next generation • Opportunity to pursue long-term strategies • Strength to weather long economic cycles

7. The Challenges of Family Business Also Hold World-wide (Wealth doesn’t go beyond the third generation) ความมั่งคั่งร่ำรวยจะไม่อยู่ไปถึงลูกหลานรุ่นที่สาม “富不过三代“ “富不過三代” “La richesse ne va pas au-delà de la 3ème génération”

8. The Family Business Paradox ExplosiveConflict BusinessDominance Sustainable Competitive AdvantageorDestructive Constraining Behavior

9. The Challenge of Generational Transitions • From Entrepreneur to Group Ownership • Less than 35% Survive to 2nd Generation • From Sibling Group to Family Branches • Less than 15% Survive to 3rd Generation

10. Generational Challenges in Transition Planning

11. Lessons from Multi-Generation European Family Businesses Sample: 7th to 14th Generation Family Businesses • Common Factors: • Well Defined Processes • Transparency in Planning • Consistency in Application • Perceptions of “Fair Processes” • Mindset of “Ours” vs. “Mine” • Concept of Stewardship for Future Generations

12. The Global Foundation of Competitive Advantage for Family Business T R U S T

13. The Relationship Capital Model Ownership Management T R U S T Family

14. Achieving Family & BusinessContinuity A Parallel Planning Process

15. Parallel PlanningProcesses Core values Management philosophy Values Family commitment Strategic commitment Strategic thinking Business Family Family vision Business vision Shared future vision Family Enterprise plan Business strategy plan Formulating plans

16. Three Systems in Harmony Ownership Shareholder’s Agreement (Laws) Family Statement Values, Mission, Vision (Values) Family Business F.B. Protocol/Policies (Rules)

17. Voluntary vs. Inherited Ownership • Voluntary owners Create or purchase ownership • Inherited owners Given/provided with ownership • Heirs can become “voluntary” owners through their actions How? Aronoff and Ward, Family Business Ownership: How to be an Effective Shareholder, 2002

18. Owner-Managed Family Partnership Sibling Partnership Cousins’ Collaboration Family Syndicate Four Generations of Ownership Adapted from John Ward

19. Different Types Of Owners • Operating Owner • Owner/manager involved in day–to-day operations of the business. • Governing Owner • Full-time overseer but not involved in operations – like a Chairman of the Board. • Active Owner • Not employed in the business but takes a genuine interest, attentive to all its issues. • Passive Owner • Collects dividends. Makes no conscious decision to stay an owner. • Investor Owner • Like a passive owner, but if satisfied with returns, makes a conscious decision to retain ownership. Aronoff and Ward, Family Business Ownership: How to be an Effective Shareholder, 2002

20. Strategy Understand Risks Offer Meaningful Support to Management Monitor Vision and Goals Culture Serve as Ambassadors Monitor Values Help Teach Governance Maximize Advantages of Private Control Provide Checks and Balances of Power Assure Continuity of Leadership Provide Clarity of Expectations Functions of Active Ownership

21. Ideally, all owners. . . Understand and respect the challenges of management including the competition for funds in a family business. Make themselves financially independent of the business (except those employed there) Find ways to get involved and be an asset to the business Are trustworthy

22. Ownership Requisites Ability to read a financial statement Basic knowledge of the family’s business and industry Understand the family’s goals and how to evaluate the company’s progress toward them Be aware of company culture and how to contribute

23. Ownership Requisites Know your legal rights and responsibilities Understand compensation in your industry Awareness of appropriate policies Knowledge on choosing and using advisors Understand and appreciate the difference in wielding voting power vs. building economic value

24. What Family Business Owners Deserve A financial return Appropriate corporate leadership Information Psychic income Accountability Appropriate corporate governance Business protection

25. Steps to fulfill owner responsibilities Address issues that define their relationship with the business and develop policies around them. Assure excellent governance and respect the chain of command Serve as a partner in strategy Let managers do their job – express appreciation

26. Steps to Next Generation Preparation Develop good values, morals and ethics in children and point out connection to the business. Instill the value of stewardship It’s not about power or control Understand the power of the dinner table Family meetings

27. Family Assessment • Why does this family own this business? • Vision for family in business? • Vision for business in the family? • What is the level of family commitment to the business? • What does the family expect as owners of the business? • ROI • Legacy

28. Owners Define Vision & Values for Ownership Clarify Stakeholder Priorities Set Shareholder Goals Establish Family Business Policies Select Directors Affirm CEO Choices Directors Assure Objective Decisions and Fair Process Monitor Results to Meet Shareholder Goals Guide Officer Succession, Evaluation and Compensation Provide Business Counsel Family Business Governance:Management, Directors, Family Shareholder Roles • Management • Define Mission • Lead and Establish Culture • Develop and Implement Strategy • Perform to Expectations

29. Dimensions of Family Governance Business of the Business Business of the Family Family Shareholders Strength from balance of three Board of Directors Family Council Management Family education Committee Family Employment Policy Committee Next Generation Committee Family Foundation Committee Family Gathering Planning Committee

30. Succession Crisis Prevention for Business Owning Families

31. “The final test of greatness in a CEO is how well he chooses a successor and whether he can step aside and let his successor run the company” Peter Drucker

32. FIRST STEPS IN TRANSITION PLANNING • Business Strategic Plan • Founder’s Personal Financial Plan • Family’s Mission Statement • Owner’s Estate Plan

33. PRINCIPLES OF EFFECTIVE GENERATIONAL TRANSITIONS • Traditions that automatically handed the business to the eldest son have faded. • An early designation reduces the risk that unexpected death or disability will leave the business drifting. • Openly consider all potential candidates with a set of known criteria.

34. The Goal of Successful Transition:a Non-Event Consensus of Family, Board & Executives Expected, Anticipated and Understood

35. THE KEYS TO LETTING GO • A deep commitment to family succession. • A secure retirement for myself and my spouse. • A chosen successor and a target date. • A belief that there is “life after retirement”. • An ability to delegate decisions and authority. • A willingness to let others take new business risks. • An ability to trust key people with financials.

36. Clear Goals and Expectations Risk Growth Vision Values Liquidity Profitability

37. How to turn Family Values into Family Agreement: "a set of written principles and/or rules that regulate the relationship of a family with its business"

38. Family Agreements = Basic Understanding • Parties Involved (Who is covered?) • Statement of Family Values and Beliefs (Why?) • Outline of Family Business Principles (What?) • Policies that Govern Family and Business Relations (How?) • Methods to Amend (When?)

39. Family Constitution or Protcol Family Enterprise Plan Family strength Company development Ownership unity and commitment Shareholders Agreement Family Agreements Define Boundaries

40. Three Systems in Harmony Ownership Success depends upon more than family Family Business

41. Key Non-Family Executives • Provide abilities and knowledge that may not exist in the family • Often are the stable “bridge” between generations • Can be effective mentors for the next generation • Provide credibility to family management

42. Key Non-Family ExecutivesPlay an Important Role When: They understand the goals and interests of all owners They can be objective and non-judgmental of family They are respected for their knowledge and contributions They have clear guidelines to follow from a functioning board They are held accountable for reasonable performance goals They are compensated at industry standards for performance They are not brought into family disputes

43. Family Family Constitution or Protocol Operating Plans Competence Caring Trust Management Ownership Consistency Communication Strategic Plan Enterprise Plan Board