ONE of the most neglected governance documents in the family business ecosystem is the family code of conduct or behavior. Sadly, family business consultants in Asia tend to head straight to the crafting of the family constitution, hoping things would be resolved and time would heal all strained relationships. This is a huge mistake!
As family business expert Dennis Jaffe said: “The codes of conduct bring families together to listen.” A code of conduct or behavior is like the GMRC (good manners and right conduct) you took up in your middle-school years. It lists rules (or expectations) for communication that everyone must agree to adhere to when they meet or interact as a family. The business is an extension of the family and its growth comes at a cost. As the enterprise grows in size and scale, it becomes increasingly hard for the leader to manage the business. Predictably, when the company reaches this phase, we can expect internal struggles among the children; conflicts; and challenges resulting from the complexity, bureaucracy and competitive nature of the marketplace.
Sibling partnership: A make-or-break phase
Business Families Foundation says that “a sibling partnership is a partnership of brothers and sisters who inherit — totally or in part — a family business developed by the previous generation. There may be other owners in the partnership from previous or succeeding family generations, but typically the ownership and leadership is concentrated among siblings from the same generation. The most crucial challenges for a sibling partnership is to manage entitlement by virtue of the offspring’s birthright and team leadership. Sibling partnerships often struggle with defining what they view as rights versus responsibilities and ownership versus stewardship of the business(es) and family assets.”
Over time, this natural transition and conflict (the shift over generations from founder to family owner/managers to cousin consortium) can strain family relationships. The family leader may impede growth because he or she does not have time to make all the necessary decisions. A number of skilled executives may be hired in response, which promotes the development of new cultures within the organization. Another scenario is when the children would manage the business without non-family members, further fueling conflicts.
For the business to grow and remain competitive, institutionalizing behavior and reinforcing the organization with new talent is imperative. This is where a family code of behavior (FCoB) becomes a powerful enabler to safeguard the growth momentum. This is one critical and important document that most Asian family enterprises sorely lack. Setting this valuable governance charter aside can render a family constitution inoperable and useless.
Why is a code of behavior important?
Fundamentally, it all boils down to the SPA (structure, policies and accountability). A FCoB is a set of rules that help manage the conflicts that might happen. A well-written code provides clarity and imposes rules on family members that are correlated with standards of professional conduct. It also articulates the values the organization wishes to foster among leaders and family members who are active in the business. In doing so, it defines and regulates behavior of every family member whether working or not.
The main objectives of a FCoB are the following:
— Formulates the rules, roles, rights and responsibilities and accountability of family members (4Rs and A);
— Identifies problems and solve them before they happen;
— Creates decision-making simulations by ensuring that policy formation is informed and objective, rather than based on emotion;
— Reduce family tension in the future;
— Increase the likelihood of long-term business and family success, survival and prosperity; and
— Strengthen the family with the experience in coming to an agreement.
Additionally, the code provides a set of rules and expectations that an individual adheres to in compliance with his or her being a member of the family. It is essential for any type of family to prevent problems from emerging and hostile situations from occurring among its members. Any group dynamic can be volatile and, once it simmers, become very difficult to handle. A FCoB is necessary to establish common ground among members who have differing points of views and needs.
In the end, a group that values and adheres to such a code would remain solid and resilient because there are constant elements being followed. These are shared goals, family and work standards, scope, accepted behavior, and disciplinary measures.
Prof. Enrique Soriano 3rd is an author; World Bank/IFC governance consultant; senior advisor of Post and Powell Singapore; and executive director of the Wong + Bernstein Family Advisory Group, a research and consulting firm in Asia that serves family businesses and family foundations. He was the chairman of the marketing cluster at the Ateneo Graduate School of Business in Manila, and is currently a visiting senior fellow of the IPMI International School in Jakarta.