A little more than five years ago, I received an email from a second generation family member (JT) whose family business is based in Jakarta. Initially, he emailed to inquire about where he could order my books. I immediately endorsed his query to a colleague who was in charge of promoting my books online. After the endorsement, I thought that was the end of it. However, a month after, he emailed me again thanking me and expressing his gratitude for helping him facilitate the online order.
A week after, he sent me this email:
Dear Professor Soriano,
I am almost halfway through your book, and I am extremely thankful for the wealth of information contained in the chapters. I would like to further connect with you with regard to the current state of our family business.
I am part of the third generation family managers and currently one of three active cousins helping in the business. Five cousins are not part of the business. Some have businesses of their own and the rest are working as professionals. Our business is currently being managed by a family board of directors. They consist of my dad and his siblings, two uncles and two aunts. They belong to the second generation and have been directors for a long time. The siblings headed by my father have been co-managing the business together with his siblings for many years until an unfortunate event last year.
Around June of last year, things changed when my uncle fell ill and had to resign from the board. For his replacement, he appointed his son to represent his branch. The son was never active but being the eldest, he somewhat “assumed” the role as my uncle’s replacement. My uncle allowed it to happen, so we have a situation during board meetings where his son has been behaving differently. On several occasions, he questioned business decisions and demanded “transparency.” But what alarmed my father and his siblings in the board was when he refused to sign corporate documents that were needed to refinance a particular project. My father had to assert his role as president and motion the board to vote. Naturally my cousin was outvoted.
After listening to your previous talk about entitlement and the need to craft legally enforceable ownership and board level agreements, I am now more determined than ever to make sure our family business continues for the next 100 years. It just pains all of us that if the behavior of my cousin is not checked or contained now, we (among cousins) will find ourselves fighting. The signs are all over the place: When my cousin was outvoted, he walked out of the board room!
We plan to pursue having the shareholders agreement up and ready while the second generation are still alive and well. However, during your talk you also cautioned the audience not to fall into the trap of having the agreement solely drafted by lawyers? You also mentioned that the Board of Directors/Commissioners through pre-agreed provisions can be vetted even if they are shareholders. I believe the ideas you shared during your talk are very important provisions as my cousin simply assumed his board seat by way of his birthright. This is where I thought (with the blessings of my father) I have to seek your help as I am sure you have drafted and critiqued many shareholder agreements over the years.
I would greatly appreciate it if you could provide us the way to move forward. Thank you very much and I look forward to hearing from you soon.
Sincerely yours,
JT
Webster describes entitlement as “the belief that one is deserving of certain privileges.” A similar definition says, “Entitlement refers to a sense of being ‘owed’ such benefits as: wealth, employment and status without having to work to achieve these benefits. Some children who grow up in a successful family business can be inclined to a feeling of entitlement.”
According to authors Paul Karofsky and David Karofsky in their well-read article, Entitlement: Epidemic of our Era, “Entitlement is more than feeling ‘owed’ or ‘deserving’; it’s about expectation as well. Indeed, usually the problem isn’t the feeling of entitlement; it’s how family members act, and how such actions are perceived by others.”
One thing is clear, having entitled family members is a clear and present danger.