Let us begin with a brief introduction to Family business:-
Family businesses have being in existence since the dawn of mankind, evolving with time and advancement in technology. From the discovery of fire in combustion, to steam power, discovery of fossil fuel, electricity, nuclear and the world of electronics. Each era brings with it innovations, creations and commercial values. Who created those enterprises? A brilliant scientist/inventor and entrepreneur who introduce it to the mass market for commercial reasons. These business leaders were name Founders for being the pioneer to champion the cause.
Family business have always being the backbone of a country economy as reported in Family Firm Institute website1. These statistics cannot be ignored and it was only the turn of the century, scholars have begin to pay more attention to the impacts it has on global economy. It was estimated that globally family businesses represents 70 to 90% of the global GDP1. It also states that in the US alone, it represents 80% to 90% of firms in North America, that contributes to 64% of US GDP or US 5,907 billion and 62% of the country employment sector1. In the UK, family businesses represents 41% of country GDP1. Nearer to our shores, Indonesia, 3% of the Chinese ethnics owns 70% of the country businesses and controls 80% of the biggest companies1. In Japan, the stories were staggering, having one of the oldest family businesses in the world at 46th generations already exchanging hands1.
How do family businesses have the ability to sustain centuries of economic turmoil? There was a saying in Chinese that wealth successions don’t succeed third generation, I think we need to rewrite it to “Wealth succession or family businesses can succeed and will succeed beyond 3rd generation if there is a written plan by the Founders”. We should be thinking forward to create legacies that can have lasting impact culturally and nation wise.
Definition to Family Business:-
What constitute a family business? It has very complex structure because it involved at least three different roles and they are overlapping in responsibility as shown in diagram 1 below:-
Diagram 1:The overlapping roles of Family business owners and the enterprise
According to the PWC Family Business Survey 2010/2011, the definition of a family owned business are identified by the company with majority shareholders of family members and at least one member of family involved in the business. If it is publicly listed, the founder/family members must hold at least 25% of voting right shares and at least one member sits on the board of directors. Family business owners have to strike a balanced between family first or business first approach when having family meetings. Too much of the either side may bring destruction to the family business.
A journey back in time:-
Let’s now take a time machine and go back in time to imagine how the founding members first start the business. The journey taken by the founders were a lonely, unconquered terrains and full of challenges. In the Asian context, most founders have limited education levels but are opportunists. Many uses their hard earnings to start a small cottage business, those who have more wealth begins to invest into land and developed their business from the investment acquired. Either way, these founders have one thing in common; succession planning issues. Because the founders spend most of their lives building the business, they may not have the fore slight to train or even mentor their children into the business. The strong emotional attachment to the business and lack of communications also hinders successful succession. In Asian family culture the next generation don’t question or debate on family matters out of respect for the elders/founders, that leads to a lot of misconception and breakdowns in family communications. The founders are often known to be a “dictator” who calls all the shots and decisions, unaware of the consequences of frustrations the next generation feels and eventually destroying the next generation interest in the family business. So often we see in the movies about the next generation plotting on what do to when the founder was still alive but laying helplessly on the death bed, just to witness a terrible and painful dissection of what use to be his marvellous empire, the business enterprise. In this story unfortunately the next generation can’t wait to have control of the business as well as the wealth in it. What a tragic end to a once amazing story of one man’s struggle to success ,great achievements, sacrifices and lessons that could be pasted down for the next generation to embraced as part of family heritage.
The Japanese culture is a very closed knitted nation, embracing not only centuries old katakana language and also generation of heritage that eventually builds the nation to where she stands today. The successful stories we heard about long generation of family businesses in Japan was not build over a generation but centuries of proper record keepings and education. The discipline, hardworking nature, loyalty and mutual respects for the community yet humble nature of the Japanese culture allows a natural progression to generation of succession planning. How many times do we hear a leader or minister in Japan stepping down voluntarily when crisis happens without even being asked too? That’s natural succession taking place!
Now back into the time machine, even with succession to next generation, these siblings of the 2nd generation have better education, they can read and write well but lack of leadership due to the strong presence of the founder making all the decisions. They now have to find their footing in the business and learn to make business decisions. By now they have learned to live cohesively and make decisions together, if the family culture and values are strong they may stay together possibility surviving to the 3rd generation. The 2nd generation have a stronger bonding as siblings and are better connected due to openness in communications. Each maybe given a role in the business depends on the seniority, eldest sons usually are expected to take up the business role while their female siblings are just owners but not involved in the day to day operation of family business. With the 3rd Generation coming on, the family members begins to see more fragmentation and individualism. This may be due to the enlargement of families resulting in less family meetings, overseas migration in families and 3rd Generation being send off at very early stage of their childhood to further their studies abroad and embracing foreign cultures. Not only that, most of the 3rd Generations are born with a silver spoon laced with gold linings on plate, hunger or sacrifice was never part of their vocabulary. Without a strong heritage and family values being part of their lives, the 3rd generation begins to find own values and interest in life. The only interest they have on the family business is the wealth created and lifestyle them can continue to enjoy as they waste the financial resources on their own indulgence or for the more ambitious to venture into other business of their own interest. If this is the path 3rd generations are taking there will be no more succession in business when it comes to their 4th generation and the family business will be sold out eventually.
Back from the future:-
The way forward for Asian Family business to succeed is by having a proper and professionally structured exit and succession planning. This is where Family Office creation comes into the picture. Like it or not in family business the two core importance areas are the dynamics of family units and the business enterprise itself. Neither one can coexist without the other, both are intertwined and owners needs to learn to adapt to changes as well as evolved to survived. Founders need to establish if they want their businesses to succeed, if so how do they transit to next generation? The common answer is always a yes because the business brings along wealth for the family. Frequent family meetings to discuss succession issues and mentoring , apart from day to day business issues must be address early to see who wishes to be part of it and who is not interested. Founders must realised that not all the children like to take part actively in the business, some may feel obligated because “ I am the eldest” or the youngest may want to become an artist not an accountant of the firm. The key to address succession planning issues is to have an open communication with the founder and successors. The successors needs to be sensitive not to dethrone the founder quickly but to satisfy the founders request and wishes in the succession process. Because of the founders attachment to the business, the next generation needs to appreciate and value what the founder have gone through to bring the business where it is today. By properly documenting the historical events, core values and branding clients have appreciated in form of a video or handbook, the founder is more willing to be open to sit down and listen to the next generation what they wish to do for the family and business when they take over.
In a family office structure, there are three important elements 1)family council, which represents family with voting rights and founder.2) Family constitutions, which in cooperates the company mission statement, core values, work attics, appointment of successors, governing issues,etc.3)Officers, accountant, lawyers, licensed financial planners, private banker, administrators, etc. Above the umbrella of family office, sits the underlining business and assets owned by the family. Refer to the diagram 2 for an overview of the Family Office structure.
Asian family businesses have very complex wealth in the country and in overseas. Exposures to taxation, creditor issues and family feuds are some of the concerns faced by family businesses. By having a more efficient structure to address these issues, an offshore trust or foundation are placed above the Family Office to ring fenced the assets. Because the nature of a trust or foundation is preservation and protection of assets, by ring fencing the family wealth, total privacy including confidentiality will be achieved. In event of a failed business or divorce in a family, the assets in the trust will not be affected. Without the asset protection element, wealth in the family is subjected to financial losses due to the said events.
By having a Family Office and asset protection in placed, business owners can be rest assured with a succession plan and sustainability in the business. With these two powerful combination, generation of wealth planning and business succession becomes part and parcel of the future generations considerations as well as guidance into the ever changing landscape of business world. Not forgetting, with the help of the professionals elected as Officers by the Council Members to support the family office governance and administration issues.
This article is written by Mr. Lawrence Seow, Head of Financial Planning, VKA Wealth Planners Sdn. Bhd and was published in Money Compass Magazine (English) on December 2012.