When bloodlines rule boardrooms: Asia’s answer to defying the third-generation wealth curse
It’s not about inheritance, but stewardship balanced with self-authorship, says UOB’s Angela Koh
[SINGAPORE] When it comes to wealth preservation, the cautionary tale of fortunes vanishing down the lineage haunts even the most time-honoured of family legacies – today more so than ever as Asia sits perched on the precipice of a bumper generational handover.
History posits that the third generation is where it unravels. Chinese and Japanese proverbs warn of riches not lasting beyond it; the English expression describes it as going from clogs back to clogs within the century; and the Scots put it simply as: the father buys, the son builds, the grandchild sells and his son begs.
The threat of generational wealth loss is very real, said Angela Koh, head of wealth planning and family office advisory services at UOB Private Bank. But it is precisely because it happened so often in the past that families today can learn from the mistakes made, she contended.
Take for example the equal distribution of shares among descendents – one traditional approach to wealth transfer that Asian families are increasingly moving away from.
“People saw that that’s exactly where trouble starts brewing,” said Koh.
Multiple key decision-makers exist on paper yet only one may be actively involved in running the business. She explained that this creates tension in times of shareholder disputes, which is why wealth creators these days turn to holding structures, such as trusts, as their succession vehicles.
Such an approach also means that heirs are inducted as stewards of the wealth rather than owners, and this is key to breaking the curse, she said.
“Family members need to understand this: You are not here to inherit the wealth. Your role is to be the steward of the wealth that’s been created. Your role is to preserve it, grow it and make sure subsequent generations are looked after,” explained Koh.
She added: “The financial, social and human capital that the families then have can be so powerful that they can really drive social and environmental goals as well.”
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Raising Singapore as an example, Koh pointed out that older generations tended to donate to schools, religious institutions or clan associations, while scions these days are very much into the environment, sustainability, mental health and arts causes.
“Giving these days is a lot more structured,” she added. “We see a lot of families that not only support the end charities, but actually give towards improving the ecosystem.”
As Singapore families navigate environmental, social and governance requirements and the need to innovate beyond traditional sectors, succession pressures play out differently elsewhere in Asia.
Same story, different struggles
In Malaysia, heirs tend to be educated abroad and begin their working lives overseas. By the time they return to join the family business, many find themselves lacking depth in on-the-ground experience and institutional knowledge, observed Koh.
For these scions to take over, the business will have to evolve.
Herein lies the crux – both generations will have to find a common path forward, built on open communication, that ensures sustainable growth while maintaining a professional environment that can attract the next generation of managers, she explained.
“They may be very well-trained, but don’t forget that the business for many years has been run a certain way and a lot of the senior managers are also used to being managed this way,” she said. “And, so, we find that in companies that do their succession well, you need the second generation to grow their own teams and hire their own people.”
Another point to note for Malaysia is that the distribution of assets for Muslims is governed by its Islamic inheritance law, which comes with specific principles, added Koh.
Thailand’s pain points lean culturally. “It is not in their DNA to challenge their elders,” said Koh. “Bringing up succession planning is extremely taboo because it’s almost disrespectful to (initiate the conversation) if the parents did not say anything.”
Likewise, Indonesian families face a cultural reluctance to formalise the succession.
Being the ones who fought tooth and nail to grow the business from scratch, the first-generation leaders may feel that only they know how to deal with the challenges, explained Koh.
She added that the conglomerates tend to be focused on commodities, which the younger generations are not necessarily keen on.
And given how important connections with government agencies are in Indonesia, she pointed out that the question then becomes how the relationships and tacit knowledge can be transferred down the lineage.
In the Philippines, tax planning is key. Koh highlighted that while the businesses themselves tend not to be global, the next generations often stay in overseas jurisdictions such as the US and this complicates their tax situations.
China presents a unique confluence of factors: families often have few descendants able to take over the reins of large, diversified businesses that are mainly still led by first-generation founders.
“They have never really gone through a huge generational transfer to see for themselves what could go wrong,” said Koh.
This forms a stark contrast to Taiwan, where she observed that businesses are commonly led by the second, third and even fourth generations.
“For them, they are very used to a lot of risks, so it’s really about diversification out of hard assets and businesses” in the home market, said Koh. She added that the Taiwanese have set up some of the most sophisticated family offices, having seen the value of employing private professionals to manage investments outside of their primary operating businesses.
Likewise, in Hong Kong – where a lot of wealth has been made out of real estate and beverages – family businesses are increasingly seeing the need to diversify, she noted.
Different pains, same playbook
And while succession pains manifest differently across Asia, Koh’s recipe to outliving the three-generation curse and creating a sustainable family legacy boils down to the same three timeless principles.
It begins with identifying the families’ values and what they want to be known for.
“People don’t remember families for how many billions they have (but for) the work that they do and how they supported the community they operate in,” she said.
Next comes open communication.
Koh explained: “Very often, I find that it’s really about identifying and having people actually voice out what they think are issues or what they’re unhappy with – once this is out, finding the solutions to deal with it is actually the simplest part.”
Time and agility are also needed for families to test the changes out and make further adaptations if need be, she noted.
Thereafter comes proper governance frameworks.
These serve as the families’ guiding principles going forward and set out clear rules that would help steer decisions in the right direction, she said.
Borrowing the quote “love rules” from IMD Business School’s family business professor, Marleen Dieleman, Koh added: “Happy families are able to work together to achieve great things (but) you also need discipline and clarity.”
She said: “I always tell my clients that when you make decisions, put yourself in the shoes of the people affected and (consider) how they would feel or perceive them.”
Koh noted that business schools tend to advocate for functional distribution instead of equal distribution, but therein lies the problem. Humans get hurt when they perceive unfairness, and, in her experience, that is where disharmony and conflict sprout.
Koh’s advice: Spend time understanding each family member and help them see that with privilege comes the responsibility of stewardship.
“I always find that once the families are engaged and understand their role as stewards – to preserve, grow and look after the wider community – that gives them purpose.”
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