Getting your house in order

20 May 2014
Putting in place a proper family governance structure will help sustain the success of family businesses in Asia

UNLIKE business families in the US and Europe with several generations of successful and sustained transitions, many Asian business families are, in comparison, in the early stages of their life cycle with most of them in their second and/or third generations. As such, Asian business families are grappling with the challenges and constraints that are intimately related to business family succession including issues related to family governance. Recognising these sentiments, HSBC Private Bank organised a Family Governance Workshop in April this year for a select group of clients to discuss how family governance can sustain the success of a business-owning family.

One of the panellists at the Family Governance Workshop was Professor Annie Koh, the Vice-President of Business Development and External Relations at the Singapore Management University (SMU) and the Academic Director of Business Families Institute @ SMU (BFI @ SMU). Prof Koh cited various examples on a no-name basis to encourage the attendees at the HSBC Private Bank Family Governance Workshop that Asian business families have been introducing governance systems within the family and, by extension, the business in order to better manage the complexities that arise from a growing business family evolving from the founding generation to sibling teams and then cousin consortiums. She added, “There was one Asian business family who implemented a transparent process to recruit a CEO including having a non-family advisory panel undertake the selection process. It was all very above-board and very clear. When questioned by family members about the decision, there were no ifs and buts. It was a systematic approach to something as simple as finding a CEO”.

One of the biggest challenges facing Asian family businesses is planning effectively for succession. Putting in place an effective family governance structure can sustain the success of a business-owning family. This will allow for the next generation of owners and/or managers to be brought in while maintaining a harmonious family, a key factor in protecting and growing its wealth.

“Family governance essentially incorporates the key elements of the more familiar concept of corporate governance – which puts in a transparent system of processes in place to ensure the proper running of a business – but adds to the mix issues like family dynamics and values, as well as running a business in a somewhat emotionally charged environment,” said Ms Wendy Sim, Senior Director, Head of Family Governance Solutions, Private Wealth Solutions, South Asia, HSBC Private Bank. One important issue related to family governance and succession is legacy. There are three main considerations in this area that founders of the business and their families look at: first, that the business continues, secondly that the family continues to be cohesive and united even if the business is eventually sold, and finally giving back to society in the form of philanthropy.

Starting succession early

There were some interesting succession-related sentiments of business families Prof Koh picked out from the Asian Business Families Succession Research Survey Report (Research Survey). Interestingly, 77 percent of the Generation 1 respondents surveyed have a distinct preference for a family member or next generation to continue managing the family business (see Figure 1.1). This is understandable as the founding generation usually has the closest ownership connection with and management relationship to the business that they had built from scratch.

Further, it was also fascinating to note that almost two-thirds of the Generation 1 respondents of the Research Survey indicated that the current generation should only transition out of management control when they are in their 70s (see Figure 1.2). While there is wisdom in having the incumbent generation stay on in the family business to provide strategic advice, it would appear that successive generations of Asian business families seem keen to have the incumbent generation transition out of their management role earlier (i.e. in their 50s and 60s). On the flip side, there seems to be consensus across generations that the incoming generations should take over management control when they are in their 30s to 50s (see Figure 1.3). This is when they are in the prime of their careers.

To tackle the issue of succession, Asian business families must plan for it with at least a 10-15 year time frame in mind, advised Prof Koh, which gives Asian business families sufficient time to implement a succession plan from initiation, development, selection, transition through to review. “You must start working now when the patriarch and senior members are still around. And you need to do the development stage before you do the selection and transition. The journey is long, but the important thing is to commit to it,” she said.

“Putting in a governance structure early is important as it allows for the robustness of the system to be tested when the key senior family members are still involved and can recommend refinements or changes after they have worked within the new governance framework. One other reason is also before too many family members come into the picture, such as a cousin consortium,” added Ms Sim.

Finding the right candidate

“Another challenge in succession is finding a candidate with the right qualities to take over the reins. Apart from having the right qualifications, the job would ideally fall to someone who is passionate about the job, but also humble enough to operate within a family environment, where deference is important,” said Ms Kala Anandarajah, a Partner at law firm Rajah & Tann LLP.

“If you have the right qualifications, are passionate and at the same time humble, then the patriarch would be happy to step aside because he has found someone who can succeed him. It’s about finding the right people to do the right thing at the right time,” said Ms Anandarajah, who is also the Head of Competition & Antitrust and Trade Practice at Rajah & Tann LLP.

Families should also look to groom their younger generations from a young age, either by letting them work from the ground up at the family enterprise, or sending them to gain experience outside. Ms Sim related the story of a shipping business family, who sent the youngest son to learn how to build ships. He spent two years working at the shipyards.

“So that at the end of the day when he takes over the shipping business, when they buy ships or charter ships, when he negotiates pricing with the shipbuilders as well as risk with the insurance managers he knows exactly what he’s talking about. Till this day he finds it an invaluable experience,” said Ms Sim. In addition as CEO of the company, he is well respected within the company and among his family members as he is not only well equipped to do the job but has the passion and the drive to make it a success. This is an excellent mix of all the qualities mentioned by Prof Koh and Ms Anandarajah.

Peer succession

Increasingly, families in Asia are resorting to selecting new leaders through a process involving their peers rather than adopting a top down approach. Prof Koh noted that many families now do not name the successor immediately, but rather have a team of potential candidates, each looking after a certain part of the business. When time for a new leader to be selected arrives, it will be this leadership group that decides who that person will be. “We have learnt some very good lessons, but there is no one size fits all. Every family has its own unique strengths,” she said. The way that senior members of the family step down is equally important. Older generations should go with dignity, and be given a role to play even after they step away from the day to day running of the business.

“Don’t make the person feel that they have no value. They don’t need to be running your business but they will love it if you come to them for advice. Keep them busy,” said Prof Koh. This may involve them getting involved in the family office, philanthropy or even starting a social enterprise, she added. The complex nature of family dynamics means that disputes are likely to arise even in the best-run businesses. To deal with such situations, a proper system to resolve disputes – one that is transparent and enforceable – is critical.

“Dispute resolution mechanisms are not difficult to put in place. But is that going to be truly effective in a family structure, that’s another ball game altogether. And for that you need much planning, discussions and a proper framework to be drawn up,” said Ms Anandarajah.