Navigating the complexities of family business succession planning

Underlying the complexities faced by business family members, participants of a survey indicate that there is a wide gap between having a sense of belonging and being actually involved in the business. While more than 82% of them are proud to declare their lineage, only 56% agree that they feel included in family and business decisions and matters. Another 21% disagreed, and the remaining 23% are neutral about this issue.

 

The survey, which drew responses from 102 business families across Asia, was carried out by the Singapore Management University’s Business Family Institute (BFI@SMU) and funded by a research grant from Deloitte Southeast Asia. It is an ongoing bid to help business families manage succession planning and build for the future.

 

Most would understand that having a good set of governance practices is essential for sustainable growth, but the issue is implementation. While 71% of the survey respondents want to set up decision-making bodies, only 12% have managed to establish a working governing body, chosen by the family, to deliberate and coordinate the interests of all family members. In short, proper corporate governance practices are clearly lacking.

 

“This survey is not only about the now, but the future,” said Professor Annie Koh, SMU’s vice-president for office of business development and academic director of BFI@SMU, at a presentation of its findings on May 26. “We hope to break the third-generation curse,” she added, referring to the general belief that family fortunes are often lost after being placed in the hands of the grandchildren.

 

Koh distilled the survey findings into four “C”s. To be sustainable, she said, family businesses need to hold close to their own culture and values. With that as the anchor, commitment to family and corporate governance can then be applied. However, that is not enough; a third “C” — changes in family governance and practices — has to be introduced when needed, and in the continuously changing business environment.

 

Last but not least, the fourth “C” — continuity and succession — is the fundamental driver of all the fuss. “Why work so hard? We want to see continuity. This is not about the business, but the family,” Koh said. After all, not every successor can be as committed as Winnie Chan of fine stationery maker Grandluxe, who reportedly said: “I’ve only wanted to work for my father, he’s my hero. This is my first and last job.”

 

 

However, according to the survey, only 25% of the respondents are using family offices. The majority, or 84%, relies only on corporate boards — a set-up distinct from family offices — to keep matters organised. “I must tell the bankers, you are barking up the wrong tree,” said Koh.

 

Another piece of discouraging news for the wealth management industry is that demand for professional advice is not high. Only 10% of respondents see the need to have training and support in growing wealth and investment- related issues in the next one to five years.

 

By contrast, 49% of respondents see demand for advice on family governance practices, in the form of implementation of constitutions and councils, over the same time frame. “I hope the findings will encourage business families to address upfront, and with priority, the important issue of strengthening family governance practices,” said Koh.

 

Tam Chee Chong, regional managing partner of financial advisory services at Deloitte Southeast Asia, noted the urgent need for succession planning. The survey has shown that 85% of families expect to undertake this process in the next five years. But only 17% of respondents have systematic succession and training plans in place. This “missing piece” can probably be attributed to the fact that 68% of the family businesses surveyed are still headed to see through a leadership transition.

 

“We hope these new insights will enable business families to establish a clearer framework for family governance and move current practices into best practices. A good and effective corporate governance structure is imperative for the preservation of both the family and the business,” said Tam.

 

Logic and rationale

In a sense, no matter what advice the professionals offer, nothing beats the wisdom and experience imparted by elders of the family to the younger generation. During a panel discussion that followed Koh’s presentation, Dr Stephen Riady, executive chairman OUE Ltd, recalled how his father, Mochtar Riady, handed him US$10 million as start-up capital when he finished his studies, and carte blanche to do whatever he wanted.

 

Stephen took the money and started trading commodities and other goods, and made some profits. However, Mochtar was not too happy as his son could not convincingly explain why he had made certain trading decisions. Every business decision, right or wrong, has to be backed by sound logic and reasoning, and the Riady family hones that by making sure every member gets a solid education. “Give people the opportunity to make mistakes early, so they will grow,” said the second-generation Stephen.

 

The generation after Stephen’s already has 15 members involved in the family business, and with the next generation having 92 members thus far, more relatives are likely to be involved down the road. The family introduces new members into the business by finding out where their interests lie and letting them try their hand at developing new business activities instead of handing them established, well-managed entities. “My father said, ‘Run this as a business, not a country club,’” Stephen said.

 

The discipline of logic-based decision-making is practised by other Riadys as well. When Stephen’s son, Brian, was ready to join the family business, he was given a few options, including turning around half the 130 regional Delifrance outlets that were loss-making. 

 

But Brian, a former analyst with Credit Suisse, chose to undertake a bigger task: He set his sights on a cinema operation in Indonesia, and taking on the market leader by setting up 700 cinema screens. It wasn’t too foolhardy a decision: of the 700 screens, 200 were in the 60 malls owned by the family’s Lippo group, which made it possible for Brian to take back the management of those screens.

 

Then, by dividing the multiplexes in each mall into smaller halls with seven to eight screens each, instead of three to four, Brian already had nearly the same number of screens as the market leader. Coupled with organic growth elsewhere in the second- and thirdtier Indonesian cities, the company became an even closer competitor to the market leader, said Stephen.

 

Recognising that local productions are more popular than Hollywood films, particularly in the targeted new markets, Brian started producing original content. The way Stephen sees it, his son’s plan has the logic- and rationale-driven decision-making emphasised by patriarch Mochtar.

 

 

The 69-year-old, who has asked nephew Kevin to take over the business, believes the key to a successful family business is a harmonious relationship between family and company. He recently wrote a book titled Tiao Qin, which can be literally translated as “tuning the musical instrument”, to expand on this point.

 

On their part, younger business family members appreciate the elbow room that their fathers give them. Ho Ren Hua, vice-president and executive director of Banyan Tree Holdings, spoke about the autonomy given by his father, Ho Kwon Ping, to go forth and do his own thing, at least in a different market, and pursue his passion and not fall [prey] to the danger of developing “claustrophobia”, if merely told what to do.