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THINKING ALOUD (BusinessLaw) FAMILY BUSINESS: Policy Statements

Updated on December 12, 2015

Virtually every company will be going out and empowering their workers with a certain set of tools, and the big difference in how much value is received from that will be how much the company steps back and really thinks through their business processes thinking through how their business can change, how their project management, their customer feedback, their planning cycles can be quite different than they ever were before.

— Bill Gates American business magnate

Chén Róng’s Little English-Chinese Dictionary

  • an exception rather than a rule = tā shì yī gè lì wài ér fēi guàn lì

  • Set in stones = bù zài duō biàn

  • Have a handle on = yāo zài kòng zhì

  • No such a thing as a free lunch = tiān xià méi yǒu miǎn fèi de wǔ cān

  • For the long haul = xiāng dāng cháng de yī duàn shí jiān

  • Take a leaf out of = zuò yī xiē bié rén de fāng shì, yīn wèi tā huì gěi nǐ dài lái shòu yì

  • Go the extra mile = bǐ yù qī zuò chū gēng duō de nǔ lì


The writer makes no warranty of any kind with respect to the subject matter included herein or the completeness or accuracy of this article which is merely an expression of his own opinion. The writer is not responsible for any actions (or lack thereof) taken as a result of relying on or in any way using information contained in this article and in no event shall be liable for any damages resulting from reliance on or use of this information. Without limiting the above the writer shall have no responsibility for any act or omission on his part. Readers should take specific advice from qualified professionals when dealing with specific situations.

Policy Statement on HIRING FRIENDS

Writer: Chén Róng

We discussed why small business owners should never hire their friends for recurrent legal work and annual audits. Does it mean we also should not hire friends for full-time employment or for specific assignments?

It may be true that big companies are increasingly using their own employees to find new hires, saving both time and money – those hefty pay-outs to recruiters. Referrals generally put these companies on the fast lane as they hire some hundreds of staff every month. Small companies do not face the same challenges and they should adopt unambiguous Policy Statements on hiring of friends, if shareholders unanimously hold this recruitment method as a positive.

One of the endemic problems associated with small-business ownership is the overlapping between business and friendship. But when it comes to recruiting a friend for an important role in your company, letting personal relationships trump the needs of your business is one sure way to destroy both. Working with a friend creates a dual relationship and, more often than not, he creates new rules against acceptable norms, such as storming into your close-door discussions unannounced. There are few exemplary cases like that of Bill Gates and his college roommate, Steve Ballmer who joined forces at Microsoft in the 1980s and still work well together to this day.

One suggestion for the Policy Statement may be to have a Recruitment Committee in place. The introducer of an applicant should absent himself or abstain from voting, if he is a member of the Committee. Transparency of recruitment based on a standard hiring procedure and remuneration structure is paramount so that friend-employees are hired not under a non- standard method; such that he is seen earmarked for special treatments. If a candidate fails to gain employment with the company, it has nothing to do with his /her general competency. His/her qualifications and work experiences may be the reason why he/she did not get the job. If someone is hired, the leader of the Committee should explain that employing him is not due to family ties.

Equally important is the requirement for a termination procedure in the Policy Statement. The employee may abuse family ties and under-perform or is simply unable to perform certain tasks. Even when an employee is performing well, your company may need to downsize and terminate an excellent employee.

Terminating employees is never a pleasant event and it should never be carried out willy-nilly. Before discharging an employee, written procedures have to be followed and these have to be consistently administered by all persons responsible for dismissing the employee. If the person concerned is an employee-referral, the introducer should not be present at termination meetings. Termination should be conveyed in person by the Human Resource Manager or another senior member of the Recruitment Committee. Because termination interviews are fraught with emotion, at least one member of the Committee should be present to take notes to document the meeting. An employee file should provide a meaningful history that explains the dismissal. Whenever a termination is not put down in writing with warnings or efforts to improve employee performance, a likely conclusion is that there was an improper motive for the decision. Litigation may follow. Since every termination situation is unique, there may be a need for legal advice on how to properly terminate a key-employee, prior to taking any adverse actions whether or not he is a family friend.

A severance package may be considered if downsizing of the company is the reason. This has to be well thought-through matter to be included in the Policy Statement. Severance payment helps a displaced employee. It reduces animosity which goes toward preventing litigation. But any severance agreement should be carefully crafted otherwise an improperly drafted release may have no legal force.

In a family business where relatives hold various key positions, referral of recruits from family members is an inevitable outcome of the human resource structure. If steps are not immediately taken to have properly a drafted Policy Statement on hiring of friends, the recruitment process is likely to disintegrate into squabbles over choice of staff for specific positions. With a transparent and equitable Policy Statement in place, hiring, placements, transfers and promotions can be done on the basis of individual merits, qualifications and competencies for positions.


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Policy Statements

Writer: Chén Róng,

I once served as the Company Secretary of a family business that grew from a small rice importer to a wealthy group of companies owning a fleet of ships, warehouses, joint-venture shipyards, as well as, in property developments. The patriarch was famously known in the Chinese community as the rice-king of Burma; his business empire stretching from Rangoon, the apex of a golden triangle, to Singapore and Hong Kong at the other nodal points. Its corporate headquarters, a double-storey pre-war house, was unpretentious; and it was located at the epicentre of Chinese business community: Telok Ayer Street - Malay for waterbay, – a Chinatown precinct. In this bustling enclave were wealthy family businesses which formed the backbone of development of the Chinese immigrant community in early Singapore. I came to know family members of these self-made millionaires. These family businesses, with relatively little structure and formality, had humble beginnings. They survived and grew based on the ingenuity of their founding fathers.

There is this saying: Wealth does not last 3-generations. The first generation builds the business, the second makes it a success, and the third wrecks it. My patriarch’s family business success was an exception rather than a rule. He and a few of his contemporaries had their own version of an unwritten Policy Statements that governed the running of their respective companies. They were all fortunate in that the patriarchs lived long lives to see these otherwise unwritten statements set in stones, so to speak. Others were not so lucky.

These less fortunate Chinese family businesses had great fortitude in staying happily together in times of real hardships. But when good times finally put smiles on their faces, mistrusts tore them apart. There was this logistics company, building its foundation from scratch, became a top-notch provider of port management and stevedores - all within a period of ten years. There were no Policy Statements in place as the business was run informally under the leadership of its patriarch. Sisters were once had to share clothes; brothers, shirts and pants for special occasions. Paradoxically, they were happy when they were poor; they were deeply unhappy when the family became rich. Sibling rivalry was rife as family members kept watching over one another’s shoulders, like hawks over preys. The day its patriarch died, the siblings descended into a litigation morass that drove a wedge in the family.

Volumes have been written on business constitutions and the type of correct information that includes policy statements, mission statements and other corporate governance structures. With the exception of big family businesses, most may not have a comprehensive constitution. What they can and should have are policy statements for business ethics, anti-bribery & corruption, environment, employees' health and Safety, and most importantly, the following matters pertaining to dealing with outside professionals:

  • Never appoint a lawyer for all business matters just because he happens to be a family friend. Chances are: he may never be good at all legal aspects of a growing business. He might come and visit you at your office once every few days, chit-chatting over coffee, seemingly to give you some advice for free. In truth, he may want to have a handle on all your legal affairs. Marine related matters are best done by maritime lawyers. Buying a family home, consult a conveyancing lawyer. Sound simple enough, but I have seen business owners committing such common error of judgement. Why so? They were bolted down by uncalled-for obligations. There is no such a thing as a free lunch is true to the grind. You may be ill-advised on some legal issues by this family friend - a lawyer. Set yourselves free.

A related aspect is entropy – let things get worse before you take decisive steps. Companies often have trouble which can result in serious litigation. Acting decisively in settling matters amicably may save you both time and money. Yes, some people relish confrontation, but you are not in such a business. Your lawyer probably is. You are not in business to make enemies; you need more friends. Sometimes, lawyers may tell you to fight all your way to the appeal court; you don’t have to listen to them. There is such a thing as a commercial decision. Litigation creates uncertainty, and it takes you and your employees away from productive work. Of course, in some cases, fighting out in court is the only way out; but it will costs the business dearly in terms of money, time, as well as, a drain on everyone’s emotions.

  • · Never appoint an accountant/auditor -here again- because of old family ties. Accounting is no longer just straightforward debits and credits. The rules, they are a-changing to reflect changing times accurately. Put emotions aside when making appointments of such professionals. All the more so, if that someone tells you of every loophole; every tax haven you can use to evade tax - taxes for which you may be duty bound to pay. Of course, I am not saying all tax havens are bad. Singapore has been labelled as a tax haven. Every legitimate system gets its fair share of manipulators giving it a bad name. Besides, many multinational companies have their subsidiaries incorporated in British Virgin Islands or Bermuda; and single assets, and single development projects are owned by a tax haven entity to limit liability and tax. Yes, these corporate giants have extensive financial wealth; and they have highly qualified accountants to to advise them whether or not business arrangements fall afoul of the anti avoidance provision of the Income Tax laws. For all other business owners, may I suggest you exercise restraints, and seek second opinions whenever possible. Once you get very involved in a tax game of rabbit burrowing, you may think the ’tax-fox’ can’t get you. You are wrong. The auditor works to have you entrenched for the long haul - you know what I mean? The fact that he knows of your illicit gains, you may never come off clean. If both you and he go down that deep hole, you get a lot, lot muddier than him. What you thought was only mud may turn out to be quicksand, and you may never get to see the light of day again.

My take: engage accountants and auditors with a good reputation, and manage your company like you are planning for a public listing on a major stock exchange. Who knows, walking down this path, it may be your best path when coming down to raising capital for business expansion overseas. Probably you have never heard of bankers coming to your home for breakfast, just to beat all those other competitors lining up at your office door early in the morning. It is not uncommon. Size, while it still matters, may not be what bankers always look for. Banks now look at risk management, corporate governance and transparency when dealing with business owners. Some family-run firms have gone far beyond these basic rules.

If I may take a leaf out of the Constitution of family-run Olam Group of companies which are in the commodities trade (they were in the news for the past weeks, but I suggest you ignore those rumblings created by a short seller), look at how they formulated their Policy Statements - relatives such as in-laws and friends are allowed to join the organisation only if they fulfil certain stipulated criteria; as well as passing a due diligence test. As far as possible, they separate management from ownership – leaving the running of the business to non-family professionals. It is worthy of praise when family-run firms can go that extra mile for a most comprehensive Constitution.

Business owners, who still run their businesses like scenes in the Wild Wild West, are planting the seeds of their own undoing. Policy Statements do make a big difference to a company’s longevity. Take a look also at Singapore’s veteran rubber trading company Tong Teik: started in the 1960s and later merged with Dutch trader Wurfbain to form a conglomerate in RCMA. Here again, policy statements as part of the Constitution are key.

Who knows, you may be another success story in the making if you start formulating “Policy Statements of Dos and Don’ts” for your business.


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