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A lasting legacy

Strategic thinking is crucial to the success of inter-generational wealth transfer, says HSBC's Bernard Rennell

'Family governance need not be too different from corporate governance, but it is on the ownership level, not the business level. The two must be separate.'

WEALTHY families who are business owners must think strategically about how the ownership of their business is to be transferred through successive generations, says Bernard Rennell, HSBC's global head of family governance and family enterprise succession.

Failure to think strategically is likely to give rise to infighting and eventual dilution of the legacy.

He says it is important to define what a family might mean by success in planning for inter-generational wealth transfer. "A lot of families think about wealth succession as the preservation of the family business. But there is also value succession. Are my children going to work hard and contribute? I don't want them to just sit... or fight and bring the family name into disrepute.

"The families that succeed - what they have in common is that they think strategically about inter-generational wealth transfer. They put as much effort into planning for the ownership level, as they do for the asset level."

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Mr Rennell, a lawyer by training, spends time personally counselling ultra wealthy families on the potentially thorny issue of a family business' ownership and how this is to be passed on to younger generations, as well as family governance and architecture.

His career history makes him uniquely qualified to advise on the diverse issues that ultra wealthy families may face. He was a partner in a law firm in New Zealand (NZ), had a stint as a financial markets regulator in NZ and the UK, and was general counsel for a listed energy company - all before he joined HSBC's trust business in 2003.

"I feel like I've had five distinct careers. This (current) work pull together the threads of everything I had done - the legal bit, financial markets, corporate work... I'm very interested and passionate about the work I do."

HSBC has had a trust and succession planning business for about 100 years. The division, set up in Asia in the 1940s, has around 500 experts, including lawyers, accountants and social workers.

"My involvement at this level is with the biggest business owning families in the ultra wealthy space. There is quite a commitment of senior resources and expertise and families pay for that. It's not hidden in any commission. They will pay significant fees because I think they see demonstrable value. We can't do this for everyone."

Strategic thinking about ownership of a family business is likely to call to mind three options. One is to split the assets so that the children need not work together. This effectively defers the issue to future generations.

A second option is to sell the business, which he says is a common practice with clients in the UK and the US. The third option is to plan for continuity - that is, to keep the business so that it continues to provide benefits for future generations. "This (latter option) seems to be the one most families in the region prefer. If you follow that route you have to think seriously about how you make decisions.

"The 'D' word is hard to talk about. But if you think about strategic planning at the ownership level, and the planning horizon isn't the next two or five years, but the next 10 or 50 or 100, you can start to think about how to ensure there aren't disputes between family members."

Many families, he says, focus on the business level and take an overly simplistic approach to the ownership issue. They believe, for instance, that a trust can be a simple solution. "The problem is that once the key decision maker is no longer around and you have one or two family members running the business, all sorts of things can cause differences of opinion. It can be something as simple as the dividend policy...

"Families being families, they get caught in the spiral of petty disputes. You take your eye off the business and things start to fragment. Wealth can be a great blessing. But it can also be a great burden and a source of conflict and pain. In this region there is a lot going on behind the scenes that you don't see."

Hence, the need for family governance. "Governance refers to how we make decisions as the family grows in number. What is the structure and process? Family governance need not be too different from corporate governance, but it is on the ownership level, not the business level. The two must be separate."

Ideally family governance provides a structure and process for issues such as the criteria for family members who want to join the business. It is also an avenue for strategic thinking about the business to allow it to adapt to changing circumstances.

"You have to have a more formalised and rigorous process that enables decisions to be made and the family to adapt as business circumstances change. Look at families in the sixth or seventh generation. Those that have succeeded need to be able to make decisions, such as should we still be in this business? How do you make those decisions if there is no formal structure in place?"

Philanthropy can bind families together and enrich a family's legacy. "There is a family in Asia where the foundation has become the centrepiece. Generations later they identify with it and there is a sense of pride in the family legacy and what the founder has built. They write histories of the family.

"It's also an opportunity for the children to get involved with wealth in an environment where they can't squander it, and they learn to work with family advisers. It's a lot more constructive than doing nothing, seeing the family fight and the wealth disappear."

Philanthropy, he adds, provides an avenue for the family to work together. "Philanthropy is a good place to start, you can set up a foundation board. The family gets to work together on assets that they're not competing over. It can be a good entry to decision making as a family." W