By: PROF. ENRIQUE M. SORIANO
IN the Philippines and in Asia, I rarely come across family members working in family businesses having employment contracts. Their entry in business is usually guaranteed by their last names, a sort of a birthright.
For most family businesses, requiring family members to sign formal employment contracts may be a waste of time, especially for businesses in the startup phase.
However, as the business transitions from a mom and pop, single proprietorship type of business to an organization in the multi-generational phase where siblings, cousins and in-laws are involved, then it is hugely important for family members to have clear and concise employment contracts.
Without rules on how family members will work together in the family business and with different views of what the family business should be about and what should take place, conflict is almost inevitable!
Family businesses need rules by which to operate – and if they don’t have them, they will fail.
What are rules? Rules are authoritative statements of what to do or not to do in a specific situation, issued by an appropriate person or body. It clarifies, demarcates, or interprets a law or policy.
What are rules for, anyway? Rules replace thought. If you know the rules, you always know what to do. Discretion among family members can almost always cause disagreements. If you know the rules, you never have to stretch too far. As Douglas Bader, the aviation hero said: “Rules are for the guidance of wise men and the obedience of fools.”
According to an article published by the KBH Group, a full-service chartered accounting firm based in Canada, there comes a time in every company—a tipping point—when growth prompts the need for more formal policies and procedures. One of the areas where this need quickly becomes most obvious is in the human resources arena. As the number of family members increases from generation to generation, the complexity of hiring, training and managing relatives can quickly overwhelm the original founders.
It further elaborates that part of the problem is that sometimes, typically after the second generation of family members is hired, there’s an expectation that all of the third generation of children and cousins will find life-long careers in the family business. While this works beautifully for a few family companies, it’s untenable for most.
We can naturally anticipate that some family members are more talented and hard working than others while some possessed unique skills that make them indispensable to the company. On the other hand, we can also expect that others are less motivated, or just aren’t interested in pursuing a career there.
Family employment policies must be intentional
To perform financially and grow, the family business must initiate an institutional approach in dealing with the entry of family members. This type of governance, written by the family members themselves to articulate the rules that govern the way the business is managed, is often referred to as a family employment or participation agreement.
A participation agreement entitles siblings to comply with certain rules in the family business to establish equal opportunities, maintain unity and direction, value respect and foster communication. The agreement provides what is due and lawful, monitor and evaluate the quality of performance, recognize and reward who is creditable, and ensure proper exit strategies. It also contains the rules on how the family business is to be managed and directed.
I have listed 10 essential components typically found in a family employment agreement:
Requirements for being accepted into a job post at entry level
To prevent loss of motivation among employees due to a situation wherein the top positions are deemed reserved only for the owner’s children, specific job requirements must be firmly solicited among the siblings. Whatever the position is, educational attainment and significant experience from another company are two basic requirements that give backbone for the siblings to be acknowledged as qualified for a position. The family business is also advised to accept participations/applications only when a position/s is/are open. If not, then accepting the siblings would cause budgetary and management issues that would be detrimental to the business.
To be continued…
Prof. Soriano is a National Agora Awardee, an ASEAN Family Business Advisor, Book Author and Executive Director of ASEAN-based Consulting group, W+B Strategic Advisory. For those who are interested to grab a copy of Prof Soriano’s book entitled “Ensuring The Family Business Legacy”, please call Wong + Bernstein Advisory Group at (02) 730-3237/ 0925-5224713 and look for Ms.Marianne Revilla. Prof. Soriano’s business articles can also be accessed at www.faminbusiness.com
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