FINH News and Comment Zone

The transition of family businesses through the generations is achievable with good governance – a famous example being the Houshi Onsen, a hotel and spa business based in Japan, which was founded in 718 and is currently in its 46th generation of management!
Being specialist Family Business Advisers we took particular interest in a recent article by Century Wealth Management from the US which deals with Family Governance issues. Historically, it quotes, 65% of family-owned businesses fail to survive to the second generation and 85% fail to survive to the third (no statistics available for 46 generations!). This is an ominous statistic for those attempting to establish a business which will become a family legacy. They suggest that the best way to avoid becoming one of these statistics is for family owned businesses to implement these 7 steps, governance related, to manage this business risk.

1. Embrace the Intangibles-
“A family business is the embodiment of a family’s values and culture. These are the intangibles that make a family business unique.” They suggest talk, talk and talk some more until you have defined the family mission statement and a history of the company for all stake holders in future years.

2. Split Personalities-
“In most businesses the roles – owners, directors, employees – are clearly defined. Not so in the family-owned business, where these roles are blurred and board meetings take place nightly” . When we talk to our clients this is a very common scenario. This definition and separation of roles is an important and progressive step for a family business to take.

3.  Consider a Board
“A board can direct strategy, major decision making, hiring and compensation of top managers, taking these potentially emotionally charged decisions and creating a framework to deal with them fairly and rationally”. This can occur when your business has reached a reasonable size and family members can be involved in the business decision-making at this level.

4.  Earn Your Voice
“It is important to separate membership in the family, a birthright, with involvement in the family business, which needs to be earned”. There are many known examples of how Australian family owned businesses manage this process: some state you must work out of the family business for a prescribed period of time before you can work in the family business, other state the family members must reach management level outside prior to coming back in. Each family business differs and the decision is unique to each circumstance but a level playing field is the outcome.

5. Solve Problems before they Happen
“Policies are the rails on which your increasingly efficient family business needs to run… in the emotionally volatile environment of a family business, problems must be solved before they occur, and the rules of the game must be clearly defined” . If you can proactively create policies which cover issues such as profit allocation, transition , the role of in-laws, training and reviewing of family members in the workplace then many crises can be avoided before they arise.

6. Honesty is a Policy
In our experience with family businesses, as difficult as it may seem, honesty is the first and last policy. “Remember, “this is how we’ve always done things” is the rallying cry of a family willing to settle for an 85% chance that the business will not be around for the third generation. If you want to beat those odds, than you need admit that what may have worked in the past may not be good enough for the future”

7. Keep the Dialogue Going
“ Develop a system of communication and accountability that ensures all this hard work has a lasting affect. Put structured communications in place – quarterly financial reports and an annual meeting – so owners get formal updates from managers (hopefully away from the dinner table)”.  If  Step 1 was about talking then this one is about talking some more. Keeping that dialogue going, keeping family members active and involved will only enhance the performance of the business and the satisfaction of the family members. 

At FINH we agree that thoughtful and proactive governance is the key to managing a business for long term success – even up to 46 generations!
If you would like  FINH to assist in taking the steps to make your family business last for generations please call on 3229 7333 or email via our contacts page.

If you would like a copy of the Century Article call or email via contacts page.

FINH Service Packages

Our Clients have consistently requested assistance in key areas of their business. As a result FINH has developed four service packages that achieve exactly what our clients want. Each package utilizes FINH’s experience, systems and frameworks to support businesses with their various stages of growth as well as individuals wanting to grow their existing wealth.

If you want a clear vision of the future for your business and peace of mind that you are financially compliant or you need the security of a professionally structured superannuation fund then we invite you to call us and make an appointment today.

VIZION™
Vizion™ assists business owners to develop a framework for determining immediate, clear and concise strategic direction. It is a 1-2 day scoping and brainstorming session that will deliver a revived business outlook for your business.
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SMART NUMBERS™
Smart Numbers™enables business owners to measurably improve their business performance and value using a specially designed reporting and evaluation system . Smart Numbers can be tailored to almost any type of business or industry.
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CONFIDENCE KIT™
Confidence Kit provides the business owner with peace of mind that your basic accounting, taxation and compliance needs are being fulfilled in a timely and compliant manner, in particular your taxation (ATO) and corporate regulator (ASIC) obligations. This service is provided for a fixed annual fee.
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FUTURE FUND™
Future Fund is FINH’s three tiered Self Managed Superannuation Fund package. There are three different levels to choose from, two of which have a fixed annual fee.
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FINH are members of the International body, Family Office Exchange (FOX). FOX is a central directory of leading advisors, resources and knowledge regarding serving families in business. If you are a family business we think you will enjoy the following article.See below a brief lead-in and then a link to this article…..

Family businesses face unique issues, as they involve complex interwoven relationships. For example, how do you separate “personal” family matters from those of the business? How does the next generation follow in the footsteps of the great entrepreneur who started the business? How do you encourage entrepreneurship in children who have been raised in a protective world of isolation and privilege? How does a family utilise its good fortune to encourage future generations to think “outside the box”, beyond the traditional family business? These issues become more complicated as family businesses grow in size and complexity and become multi-generational.
Click here for pdf to the article

Are you confused by the Emissions Trading Scheme? Well, according to recent opinion polls 80% of Australians are.

Let’s see if my “Easy Guide to the Economics of Climate Change” helps reduce the confusion.

The starting point has to be the reports of the  Intergovernmental Panel on Climate Change (IPCC) which is the United Nation’s major advisory group on climate change. The IPCC maintains that global atmospheric concentrations of greenhouse gases have increased markedly as a result of human activities since 1750. Major components of greenhouse gases are carbon dioxide; increases in which are due primarily to fossil fuel use and land use change. Other gases are  methane and nitrous oxide, increases in which are primarily due to agriculture.

The IPCC has concluded that “continued greenhouse gas emissions at or above current rates would cause further warming and induce many changes in the global climate system during the 21st century that would very likely be larger than those observed during the 20th century.”

These changes will have an economic cost- plausible estimates are about 5% of GDP a year roughly equivalent to the worst of the GFC. The cost of reducing emissions can be much less – about one per cent of GDP so there is an incentive to act sooner rather than later.

The Stern Review of Climate Change identified the major ways to reduce emissions; these are  increased energy efficiency, changes in demand and the adoption of new technologies of clean renewable energy. Also needed are cuts in non-energy emissions i.e. those from deforestation and agricultural and industrial processes.

Climate change is a case of very large market failure because those emitting greenhouse gases do not have to pay the costs of climate change resulting from the emissions but impose  costs on others. There are, broadly speaking, three ways the market failure can be rectified-

1) Regulation
2) A Carbon Tax
3) Emissions trading.

However, climate change is a global problem and the ultimate solution requires international co-ordinated action. The Copenhagen Conference to be held this month is the latest effort to get international agreement about binding targets and effective and comprehensive strategies.

Whatever system is used the use of fossil fuels will become more expensive and these costs will be passed on to final users ie consumers. There is no escaping it – moving against climate change will require some painful adaption and economic costs. The trick is to minimise these.

Regulation of emissions would require the government to ban certain emissions or place a ceiling on emissions and enforce this by inspection and monetary penalties.

The carbon tax, so much per ton of emissions, would increase the cost of goods and services produced with a carbon component. This may reduce output of those goods or increase their price to the consumer. The government would collect the tax and it could be used subsidise alternative energy or new technologies (or just use it to reduce the deficit.)

A carbon trading scheme would set an overall limit to emissions in the economy and require emitters to buy a permit to pollute (permits would be auctioned and subsequent trading in them allowed).

Both the carbon tax and the carbon trading scheme would be market oriented policies in that they would use price signals to lower carbon emissions.

In Australia, we have seen the introduction of a Carbon Pollution Reduction Scheme (CPRS) which, as I write this, is currently being debated in the Senate and whose fate is highly uncertain. The CPRS aims to reduce our pollution by 60 per cent of 2000 levels by 2050 including an unconditional 5 per cent reduction in carbon pollution below 2000 levels by 2020. There is a further but conditional target of a reduction of  25 per cent below 2000 levels by 2020 if there is an international agreement to substantial cuts in emissions by 2050. The basis of the CPRS is a carbon trading scheme under which emitters of carbon will require a permit which will be priced at so much per ton and the permits auctioned for full market trading to start in 2012-13.

The initial proposal has been radically amended in the Senate; the major amendments are to give a high number of permits away free and to compensate industries and households for the changes.

The changes have been of three major types:
1) To exclude some sectors of the economy from the Scheme  e.g. agriculture and transport;
2) To give permits away rather than selling them; and
3) To compensate some industries and households for the increased costs of the scheme.

The overall effects of these amendments are to suggest that big changes can be made without any cost and to transform the CPRS into a regulation based scheme which eliminates many of the price incentives to adapt. Exclusion of some sectors from the scheme means, of course, that others have to make a bigger adjustment to achieve the same target reduction in emissions.

The CPRS is far from the last word on carbon reduction. There may be some international agreement out of Copenhagen or we may just muddle along for a while longer.