Why Asia's family-owned corporations need to plan for the future

The strategy and planning discipline that a business implements to drive growth and success should also be applied to a family corporation's succession planning to ensure sustainability and wealth.

Why Asia's family-owned corporations need to plan for the future

Electing a successor for a family business can be a tough decision to make, and it becomes even more challenging when family relationships need to be taken into consideration.

It’s a delicate negotiation highlighted by the fact that in virtually every culture, there is a proverb that says “wealth does not pass beyond three generations.” While the first generation creates wealth, the second generation preserves it. After the fortune is passed on to the third generation, wealth often dissipates.

In Asia, where wealth is rising at the fastest pace in the world, we’ve seen our share of headlines about prominent families feuding over fortunes and empires. So, where does a family go wrong in succession planning?

For many family-owned companies, succession is a sensitive topic, and reluctance to tackle the issue is often one of the initial headwinds, explains Michelle Lau, head of private wealth solutions, Southeast Asia, HSBC Private Banking.

HSBC's Michelle Lau

“If left unaddressed, the problems for a family business typically become complicated and unmanageable over time,” Lau said. HSBC’s Private Wealth Solutions, which provides private trust services, wealth structuring and succession planning, has been helping family businesses in Asia over the past 70 years.

One of the critical drivers of success is to put in place a formal, well-structured process for succession and ownership. This process needs to be clearly communicated to all family members. Such an approach will ensure clarity of transition, preventing a situation where future leaders and family members, are left in the dark and given few choices about business succession, thereby sowing the seeds of unwanted and costly disputes.

WHY ASIAN BUSINESS VALUES ARE IMPORTANT

Besides a structured process for Asia’s family business transition, another essential element to consider is the successful passing of business values and the entrepreneurial spirit between generations.

The Fu family, who own the Wen Ken Group, a Singapore-based company that has manufactured traditional Chinese medicines since 1937, ensures each generation understands the company’s vision and its sense of purpose, as established by the group’s founding fathers.

These shared values, which include a commitment to create products that benefit consumers and to provide a better life for its employees, have been one of the drivers of the company’s success, says third-generation brothers Fu Siang Jeen and Fu Shou Jeen, respectively the group’s managing director and executive director.

“In successful family businesses, values and the entrepreneurial spirit are also an important part of the family’s legacy,” says Lau.

Another cause of disputes among business families is the dispersion of authority as families grow in numbers, from one generation to the next. To avoid conflict, and for the family to remain united, there needs to be a framework for collective decision-making, which should be ingrained into the ownership structure.

“Putting in place an effective framework for governance that helps the decision-making process will ensure the recognition of different members’ roles and responsibilities within the business. This is crucial to maintaining family harmony and sustaining company growth over the longer term,” says Lau.

Wen Ken Group has 30 third-generation shareholders, and they are mainly the descendants of the four families that co-founded the company. Despite this massive number of connected-family shareholders, only three are actively involved in the day to day running of the business. According to the Fu brothers, it is paramount to establish a structure that defines business roles because such an arrangement will help support transparency and communication.

DIVIDE AND AGREE

Executive director Fu Shou Jeen explains that each of the four families has a representative who meets with management regularly to understand the company’s performance and future plans. This information is then communicated to the extended families who are shareholders of the business.

Another way to ensure that the decision-making process is accomplished objectively, efficiently, and transparently, is to engage a third-party professional.

In family-owned businesses, the overlap between family and business, as well as blurred boundaries between ownership and management, often results in disputes and can create obstacles to future growth. Having an impartial and experienced third-party professional in charge can make a real difference in smoothing the family business transition and the decision-making process.

Engaging a third-party professional has worked well for Luxasia’s Chong family. Luxasia’s chairman Patrick Chong founded the Asian beauty products distribution, retail and e-commerce enterprise more than 30 years ago. His daughter Sabrina Chong, previously a practicing lawyer, is now part of the family firm.

While there may be a tendency for the younger generations to feel it is their birthright to manage their family-owned business, Sabrina Chong, who currently serves as the group head of corporate development, recognised the fact that the family’s business must be run by the best person for the job. In 2016, Patrick Chong appointed Wolfgang Baier to lead the company and to manage its transformation into an omnichannel digital powerhouse that can adapt to e-commerce and digital channels. As Lau points out, “Non-family professionals are less emotionally invested, and their principal focus would be to pursue business growth.”

There is no one-size-fits-all solution as each family is different. HSBC Private Banking advised that while it is essential to think ahead and protect the business or wealth that has been created, succession planning is critical not only to avoid disputes but to ensure the sustainability of the family legacy. Lau says the same degree of strategic focus and rigour that is employed in managing the family-owned corporation should also be put to work in the business of managing the family.

More details about HSBC Private Banking is available here

Important information:

The information contained in this article has not been reviewed in the light of your individual circumstances and is for information purposes only. It does not purport to provide legal, taxation or other advice and should not be taken as such. No client or other reader should act or refrain from acting on the basis of the content of this article without seeking specific professional advice. Issued by The Hongkong and Shanghai Banking Corporation Limited and HSBC International Trustee Limited.

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