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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

© Ram RAMAKRISHNAN 2

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Source- The Economist Aug 17th-23rd 2002
© Ram RAMAKRISHNAN 5

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

© Ram RAMAKRISHNAN 6

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DYNAMICS OF FAMILY OWNED
AND MANAGED BUSINESSES

™GENERATIONAL CHALLENGES
™THE FAMILY BUSINESS MODEL & ITS
VARIANTS
™THE SOLUTION

© Ram RAMAKRISHNAN 9

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

© Ram RAMAKRISHNAN 11

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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

© Ram RAMAKRISHNAN 15

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

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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

© Ram RAMAKRISHNAN 25

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

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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

© Ram RAMAKRISHNAN 27

The Stakeholder Business Model

OWNERSHIP
(BOARD OF DIRECTORS)

BUSINESS
(MANAGEMENT)

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The Shareholder Business Model

OWNERSHIP

FAMILY
1 DIRECTION

BUSINESS
(MANAGEMENT)

© Ram RAMAKRISHNAN 29

The Family Business Model-


Family Managed
4 FAMILY MEMBER
2
NOT EMPLOYEE

OWNERSHIP
5 DIRECTOR & EMPLOYEE
(BOARD OF DIRECTORS)
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


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The Family Business Model-
Professionally Managed

2 4

9
OWNERSHIP 10MANAGEMENT
(BOARD OF DIRECTORS)
12

5 6 11 6
FAMILY BUSINESS
7

1 3

© Ram RAMAKRISHNAN 31

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

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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?

© Ram RAMAKRISHNAN 34

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 ?????????

© Ram RAMAKRISHNAN 35

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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
© Ram RAMAKRISHNAN 36

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

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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

© Ram RAMAKRISHNAN 55

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

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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

© Ram RAMAKRISHNAN 57

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

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THE SOLUTION FRAMEWORK

© Ram RAMAKRISHNAN 59

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

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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)

© Ram RAMAKRISHNAN 68

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

© Ram RAMAKRISHNAN 69

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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

© Ram RAMAKRISHNAN 71

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