Transferring and sustaining the family wealth
THE Chinese have a saying: "Wealth doesn't last three generations". To avoid such an outcome, families need to think strategically about inter-generational wealth transfer as much as they do about their businesses and investments.
The economic centre of gravity has been shifting back to Asia, and much of Asia's success is owed to a remarkable generation of entrepreneurs whose vision and hard work lifted them, their families and their societies out of poverty.
While these family leaders think about their businesses and investments strategically, when it comes to transferring wealth from one generation to another, the same commitment of time and effort to planning is often missing.
Research from Joseph Fan, professor at Chinese University in Hong Kong, shows that the value of family corporations owned by ethnic Chinese in Asia declines on average by 60 per cent in the period from five years preceding the departure of a family patriarch to three years after.
As if monetary loss is not enough, it is frequently accompanied by tabloid stories of implosion as family feuds destroy the family wealth and break up the families themselves, and once-great family names are dragged in and out of courts. And the cases that reach the papers are just the tip of the iceberg.
What is important, then, is that these entrepreneurs and their families understand and plan for the potential pitfalls in inter-generational wealth transfer, particularly at the first or second-generation stage, after which wealth often starts to atrophy. Many Asian family businesses hold a variety of assets, in addition to the family business, including real estate and financial portfolios. Although it can sometimes make sense to split these assets between children, often it does not. The legacy is, in many cases, greater than the sum of its parts.
Keeping legacy assets under a single roof is dependent on building constructive and harmonious relationships between the members of the next generation, a task that is made harder by the increasing diversity of talents, interests and expectations brought on by wider access to international education, new definitions of self-fulfilment and rapidly evolving gender roles.
The challenge is to create a structure that builds on the legacy of the founder, nurtures the skills of younger generations allowing them to flourish, minimises the potential for conflicts between different family members and creates a framework for resolving differences of opinion.
A key area of focus needs to be how families make decisions as a group after the controlling member such as the patriarch or matriarch moves on. Even something as simple as dividend policy can create disagreement within a family. Some may want to take the money out of the business, while some may want to re-invest it into the business. Families need to learn to become good owners or stewards (as opposed to managers), and ownership and management roles need to be clearly defined and appropriately separated.
When decisions are made by the controlling owner, they tend to be made quickly and easily. As the business grows, decisions need to be made by an increasingly disparate group of people with different ideas and priorities. This may mean the decision-making process can end up in gridlock, family disagreements turn into family conflicts, and people take their eye off the business, resulting in the dissipation of wealth.
As Asia's longest-established advisers to high net worth individuals, we have found that creating a trust or a family office is an effective solution to a number of the problems posed by inter-generational wealth transfer. A clearly defined ownership structure with a clearly defined decision-making process can not only preserve a business legacy, but also help promote the harmony that is at the heart of continuing success.
