Family Governance for SME’s: Issues of Succession

1. Family Governance for SME’s: Issues of Succession Programme Organised by HK Trade Development Council Management Consultancy Assn. Time: 10:15 - 10:45p.m. Friday, 28th June, 2002 Alvin Au Executive Director

2. Governance System - Legal Forms - Distribution of Ownership - Board of Directors - Mission and Goals - Decision Making Process Systems of an EntrepreneurialFirm Business System - Mission - Strategy - Structure - Technology - Culture - Systems (e.g. Reward and Information) - Process (e.g. Communication, Decision Making) Family System - Roles and Relationships - Cultural Patterns - Decision Making

3. Interventions in Entrepreneurial Firms Stage of Development System Start-up Growth Succession Business Business - Strategic planning - Strategic planning planning - Structural change - Succession planning - Team building - Career development Family Family council - Family strategic - Asset management planning board - Career development - Estate planning - Family therapy - Conflict management - Family therapy Governance Partner - Board of directors - Ownership and board relationship interventions interventions transition planning

4. Model of Organisation Development }Evolution stages Large }Revolution stages Company in high-growth industry Company in medium-growth industry Size of Organisation Company in low-growth industry Small Mature Young Age of organisation

5. Manage the Corporate Culture Developmental Emphasis in a Stage I Firm Develop Management Systems Develop Operational Systems Acquire Resources Develop Products and Services Identify and Define a Market Niche

6. Manage the Corporate Culture Developmental Emphasis in a Stage II Firm Develop Management Systems Develop Operational Systems Acquire Resources Develop Products and Services Identify and Define a Market Niche

7. Manage the Corporate Culture Developmental Emphasis in a Stage III Firm Develop Management Systems - Planning - Organization - Management Development - Control Develop Operational Systems Acquire Resources Develop Products and Services Identify and Define a Market Niche

8. Manage the Corporate Culture - Values - Beliefs - Norms Developmental Emphasis in a Stage IV Firm Develop Management Systems Develop Operational Systems Acquire Resources Develop products and Services Identify and Define a Market Niche

9. Profit Profit orientation; profit is an explicit goal. P/E Ratio Long term earnings growth Comparison of Professional Management and Entrepreneurial Management Key Result Areas Professional Management Entrepreneurial Management • Profit seen as a by product. • ROI or family dividend Planning • Formal, systematic planning: • Strategic planning • Operational planning • Contingency planning • Coordination of divisional & corporate plan. Top down or Bottom up approach • Capital rationing • Informal, ad hoc planning.

10. Key Result Areas Professional Management Entrepreneurial Management • Formal, explicit role descriptions that are mutually exclusive and exhaustive. • Informal structure with overlapping and undefined responsibilities. Control • Formal, planned system of organisational control, including explicit objectives, targets, measures, evaluation, and rewards. • Partial, ad hoc control; seldom uses formal measurement. Organisation Board Activities • Regular Meetings • Strategic Decisions • Formal Minutes • Board sub committees • Board Policy Development • Family forms the Board • Infrequent Meetings (4 or less per year) • Poor Corporate Governance

11. Professional Management Entrepreneurial Management Key Result Areas • Planned management development: • Identification of requirements • Design Programmes • Ad hoc development, principally through on-the-job training Management Development Systems • Explicit • IT Strategy • Marketing / Market Research prior to key divisions • Formal Pay Fringe Benefit grading structure • Performance Appraisal • HR Information System • Production Control • Quality Control • Productivity Measurement • Budget not explicit; no follow-up on variances

12. Key Result Areas Professional Management Entrepreneurial Management Budgeting • Management by standards and variances • Budget not explicit; no follow-up on variances Innovation • Orientation to incremental innovations; willingness to take calculated risks. • Orientation toward major innovations; willingness to take major risks. Leadership • Consultative or participate styles • Styles may vary from very directive to laissez-faire. Culture • Well-defined culture • Defined Vision, Mission & Values understood by all members • Loosely defined, "family"-oriented culture • Family culture/founder culture

13. Six Classic Symptoms of Board Problems which Lead to Corporate Collapse: (1) One man rule (2) A non-participating board (3) An unbalanced top team (4) A lack of management depth (5) A weak finance function (6) A combined Chairman and Chief Executive role

14. Nine Survival Skills-9 ways to avoid botching your company's recovery 1. Don't overtrade. Keep a careful view as to the level of growth that the company can sustain while maintaining a reasonable balance of internal and external funding. by Patrick Wadsted

15. Nine Survival Skills- 2. Maintain tight credit-control systems. Ensure that all liquid resources are preserved. They may be needed in the next recession.

16. Nine Survival Skills- 3. Review your stock-control systems. Stock costs money, not only to manufacture or to purchase, but to finance. While "just-in-time" controls may be too extreme, regular stockholding reviews should occur.

17. Nine Survival Skills- 4. Don't forget overheads. For example, does every manager need a secretary, or could they share? As for a fixed asset, if you don't need it, don't buy it.

18. Nine Survival Skills- 5. Don't neglect strategic planning. Use SWOT(Strengths, Weaknesses. Opportunities and Threats) analyses or another measure of performance.

19. Nine Survival Skills- 6. Review your financial and management information systems. Ensure that they keep pace with existing and anticipated growth.

20. Nine Survival Skills- 7. Motivate your staff. Consider bonus or share schemes and implement performance management, a shared understanding about what has to be achieved and what brings the best results. $

21. Nine Survival Skills- 8. Review your professional advisers. Do they still meet your needs and understand your strategy?

22. Nine Survival Skills- 9. Don't be at the mercy of your bankers. be open, honest and provide any financial information they require on a timely basis. It may be that your recovery gives your bankers a perfect exit route if do not want you as a customer any more.

23. How to Save the Family Business • Family members working in the business must be at least as able and hard-working as any unrelated employee. • Family-managed businesses, except perhaps for the very smallest ones, increasingly need to staff key positions with non-family professionals.

24. Need Help? How to Save the Family Business • No matter how many family members are in the company's management, and how effective they are, one top job must be filled by a non-relative • Before the situation becomes acute, the issue of management succession should be entrusted to someone neither part of the family nor part of the business.

25. Basic Requirements foran Effective Business • Strategy Businesses need to articulate their strategy

26. Basic Requirements foran Effective Business (Cont’d) • Structure Structure is a function of business purpose and must fit the strategy. Job descriptions, levels of authority need to be agreed and publicised so that everyone knows who they report to, what their responsibilities are and what decisions they can make.

27. Basic Requirements foran Effective Business (Cont’d) • Control To control you need information to make decisions. Thus you must install systems that provide the right information to the right people at the right time. Information is required in the following areas:- • Purchasing of raw materials, plant and equipment • Sales vs Plan and customers • Market information, what is happening in each market

28. Basic Requirements for an Effective Business (Cont’d) • Manufacturing, output, quality, cost and capacity • Distribution and storage - cost of distribution and storage and productivity measures • Invoicing and credit control • Purchase orders and payments due • Monthly P/L account by main business stream • Capital expenditure • Cashflow

29. Basic Requirements foran Effective Business (Cont’d) • People • Obtaining and retaining the right people • Motivating and retaining them • Control of establishment • Management of Performance through business related goals and measurement vs plan • Appropriate pay systems and personnel policies

30. Basic Requirements foran Effective Business (Cont’d) • Investment • Determine the mission and purpose of the business • Invest in the right businesses • Manage the deal flow and impact on balance sheet • Determine mix of JVs, wholly owned business and business sectors you wish to enter • Then stick to it.

31. Basic Requirements foran Effective Business • Governance • Appoint a responsible and qualified Board • Meet at least quarterly to review the business and make major strategic decisions • Decide what issues the Board will deal with. • Seek continuous improvement in the performance of all business, people and processes.