October 29, 2020

I.H.T. Special Report: Net Worth: Business Dynasties Need to Plan for the Delicate Task of Succession

Around 70 percent of Hong Kong’s listed companies are controlled either by their founders or by members of founding families, according to Joseph Fan, a co-director of the Institute of Economics and Finance at the Chinese University of Hong Kong. Similarly high percentages of family control can be found in Indonesia, Malaysia and South Korea, he said.

Successful succession within a family business involves not just deciding how the shares in the business will be divided, but also who will be in charge of the business and who will make the final decisions after the transfer.

Many older Asian business chiefs have traditionally resisted making a will, fearing that such documents might be a bad omen. Patriarchs — and in Asia, the head of the family typically is male — also tend to keep their cards close to their chest to retain control of their business and maintain their public standing.

Advisers agree, however, that succession planning should not be put off. They say it should be actively considered and the plans revised on a regular basis.

“Asia is facing generational transition in many family businesses right now,” said Bernard Fung, head of family office services for Singapore at Credit Suisse.

“Founders have been very successful at building their business,” Mr. Fung continued. “In most cases they are of Chinese origin and carry a very built-in culture of Confucian values, such as the greater good.”

“The second generation is highly educated, often in the West, and they come back with fresh, different ideas,” he added. “Very often, it’s hard to bridge both side’s views.”

One relatively new way the succession issue is tackled in Asia is through the establishment of a family council, which includes various members of the family, typically some involved in the business, and some not. The family council in turn devises a family constitution, or charter, that documents the family’s values, outlines how its members will interact with each other, and explains how to resolve business-related issues like ownership, voting control and employment.

Mr. Fung said a family council could help multigenerational families manage issues related to the business in the present, and also be a forum “where the family thinks about the next generation of family leaders and how to groom them and train them.”

Terry Alan Farris, head of family office services at DBS Private Bank, said the concept of a family charter and a family council was not new in the West, but in Asia “this concept is just coming of age.”

“A family council is about bringing in different generations into the decision-making process,” Mr. Farris said. “The council is typically a flat structure and decisions are made as a group. Sometimes the biggest challenge is for the patriarch to be willing to give up some decision-making control.”

Christian Stewart, managing director of Family Legacy Asia, a company based in Hong Kong that provides advice to Asian families on succession, suggested setting up a family council before setting up a charter.

“Family businesses all over the world are fundamentally the same: there is an overlap between the family system and the business system,” Mr. Stewart said.

“Within the Asian family system the rule tends to be to treat everybody equally,” he said. “But when these rules are applied to the business, sooner or later it will lead to internal conflicts.”

“The majority of Asian family businesses fail because of internal conflicts, and a lot of that stems from applying family-system rules in the business,” he added.

Article source: http://www.nytimes.com/2011/03/29/business/global/29iht-nwfamily29.html?partner=rss&emc=rss

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