Stop old practices, Family businesses told to focus on competence

CEBU, Philippines - A family business management expert told family-run businesses to cut off old traditions and focus on competence in order to survive in the fast evolving business environment.

For one, Ricardo H. Mercado, professorial lecturer of John Gokongwei School of Management at the Ateneo de Manila University, said businesses should avoid giving positions and salaries to family members whose passion and competence are not aligned with the business.

This is just one of the myriad of reasons why most family-run businesses do not survive in this more competitive and much complicated business environment.

Mercado said that it is important for family businesses to identify the management circle early.

He added that the business environment is evolving and family enterprises should reassess wasting money by giving management positions to family members who do not have passion for the business and instead give credit to those who literally work for the business.

"Extravagance (among family members) can be and may be an apparent downfall to business," he said referring to family members who use company money for extravagant (personal) purchases, among others.

According to Mercado, competence is very important, and the family business board should decide to cut off old traditions of giving the high positions to family members who have less interest and do not have the competence to run the business.

He said business after all is equivalent to productivity and competence, if money is wasted for salaries to non-functioning family members, it should be eradicated, and part of the profit should be set aside for re-capitalization purposes.

If a family wants to continue their business, it should take a shift in terms of dynamics and system, otherwise the business is likely to land on the legal battle ground.

Part of the solution, he said is to get a third party in the company's decision making circle, and that a family council should be formed.

A family council is a group who periodically come together to discuss issues arising from their family's involvement with the business. The fundamental purpose of  family council is to provide a forum in which family members can articulate their values, needs, and expectations vis-a-vis the company and develop policies that safeguard the long-term interest of the family.

There are at least four important reasons to set up a family council:

- It provides an ideal setting for educating family members about the rights and responsibilities that come with the business ownership and management;

- It helps clarify the boundary between the family and the company, and gives family members who are not in the business or ownership circles a chance to be heard;

- Experience shows that business families frequently rely on informal family gatherings, such as birthdays, Christmas or Thanksgiving, to discuss pressing family business matters, usually with frustrating results;

- A family council can provide the structure to help the family create shared vision and a "code of understanding" – a family plan. (FREEMAN)