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Taking over the helm
THE BUSINESS TIMES' WEALTH ROUNDTABLE
Genevieve Cua, BT Wealth Editor, speaks to wealth and family enterprise experts about stewardship and succession
Cameron Senior, HSBC Bank (Singapore) Head of Wealth & International. Cameron has almost 20 years' experience in HSBC retail banking and wealth management across key markets such as Hong Kong and Singapore. He enjoys travelling, spending time with his family, and providing his children with international experiences.
Annie Koh, Singapore Management University, Vice-President for Office of Business Development. Annie is SMU Finance Professor (Practice) and Academic Director of the Business Families Institute. Her research interest is in family office and business. She loves to read, travel, meet people and tries to find 30 hours in a day to balance all three.
Richard Loi, Deloitte Private Singapore Leader and Singapore Family Enterprise Consulting Leader. Richard works closely with Asian business families to help them articulate their vision and values, and help them flourish across generations. He enjoys spending time with his family on holidays.
Goh Siow Hui, Ernst & Young Tax Solution, EY Asean Business Family Leader. Siow Hui works extensively with entrepreneurs and family businesses, and advises on family wealth planning and succession. She enjoys food and wine.
MILLENNIALS (born between 1982 and late 1990s) are expected to be in control of over US$2 trillion in wealth in Asia over the next decade. It is thus of utmost importance that they become good stewards of wealth and family values. We ask our panel of experts what this challenge means for Asian business families.
What are the most important elements or steps that families must take to ensure that wealth and family ties are sustainable for future generations?
Cameron: Succession planning often involves years of planning and execution to ensure that the next generation has a clear sense of purpose and the framework to carry it through. They must be ready to take over the family business or manage its wealth. Heirs also need to be equipped with the skills and knowledge for a smooth transition.
There are many moving parts in generational change, but the key to success is getting the balance and timing right. Something simple underpins all these dynamics - communication. While this is obvious, it is striking how often this is the root cause of intra-family business disconnects.
The discussions that need to take place between founder and successor are almost akin to parents discussing how they want to raise a child and reaching a view on how the responsibilities will be divided; future aspirations and scenarios that could arise; and how these would be dealt with.
Some things to consider in mapping out a succession plan include identifying successors and the active/non-active members of the family. Where there is a business, a collective vision for the company must be worked out and a governance process for involving family members in decision making must be established and documented.
The plan should have flexibility because succession planning is an ever-evolving process.
Annie: As you know - we don't put Asian business families in one generic basket. South Asia (specifically Indian families) and Japan have longer history and have undergone more than one transition. So these families are likely to have more institutional knowledge to draw upon in areas such as wealth planning and succession planning.
In Singapore, Malaysia, Indonesia and Philippines, we have a range of business families going from second to third generations and some straddling third into fourth, with a handful having transitioned into the fifth generation and beyond.
For many business families in Vietnam, Myanmar or even Cambodia and Laos, these are markets opening up only in the last 20 years. And they look almost similar to China with their fast growth and rapid creation of wealth.
The most important element or step that families must take to ensure that wealth and family ties are sustainable is to establish family values and the family name as anchors. Justin Rockefeller, in one of BFI's closed door sessions with our families, shared that the Rockefeller name has to be carried with great responsibility and consciousness - not as a burden but as a badge of honour.
Just as countries remind their younger generations of citizens about the history of the country, Asia's business families remind their younger generations of the ties that bind. We cannot shortchange the communication and time spent with family members. So it's not so much about having council meetings or a family constitution, it's about having time to repeat and retell the stories and writing these stories down to share. Family values are the glue. The many hours of engagement and bringing joy to the business are keys to building success and sustainability.
Richard: Asian businesses are built on strong family traditions and a deep sense of family responsibilities that pass from one generation to the next to preserve family values and wealth. The development of the next generation is critical in ensuring the sustainability of wealth and family ties for Asian business families.
From our research, there seems to be a common thread amongst Asian business families where the emphasis is placed on the next generation to continue to manage the business. Training opportunities and enhanced developmental support to develop committed, passionate, and competent Next Gen management successors will help cement the long-term viability of business families' succession plans.
Whilst education, training and development needs have always been high on the agenda, it is interesting that more business families today rely on trusted professionals in management roles or use non-family advisors to help with the transition to the next generation.
Siow Hui: Business requires strategy, practicality and strong commercial acumen, while the family needs nurturing and care. Integrating the two to create a lasting legacy of entrepreneurial success and family unity is a challenge and an imperative. The core to continuity and sustainability is ensuring that the future of the family business will reside in a ready and strong pair of hands.
The successful transition of the business from one generation to the next depends on how well-prepared a family is for succession. Succession planning is key. Careful thought must be given to who will lead the business, who will own the business, the family values and governance structure that will guide the business, as well as plans for sharing wealth with family members where appropriate. It is also important to consider an independent review of exit options, including preserving family ownership or opening up to external shareholders.
However, succession planning is not without challenges. Complicated family dynamics and the emotional connection with the family business can make succession a minefield. It is thus advisable for family business leaders to place a higher priority on succession planning and start the process as early as possible, to engage the next generation. This involves making plans together to determine how and when the next generation will take over.
External advisors may also help facilitate these discussions. Having a shared dialogue brings comfort and confidence to the family, as family members are not kept in the dark about what comes next.
The EY global family business survey 2018 revealed that large family businesses thrive by creating cultures that are agile, foster innovation and reward fresh thinking. Many respondents recognised the role that the next generation can play in identifying disruptive threats and trends that could reshape the marketplace.
They also conceded that more can be done to harness the talent of the next generation. As competition for talent intensifies, family business leaders intending to find a suitable successor amongst family members will need to ensure that their succession planning includes a framework to adequately nurture and reward next-gen family members to retain them in the long term.
What do you see as the biggest challenges in terms of advising Asian families on wealth structuring and governance?
Cameron: Many family businesses fail not due to poor business strategy but because they haven't developed strategies to address complications they will inevitably face. Issues such as how to deal with the loss of a family leader or how to transition to collective decision-making as the family grows will make or break a business.
For many first-generation wealthy entrepreneurs, the family business complicates succession planning. Many say that while they've invested a significant amount of time and resources on building their businesses, they haven't really considered the transition of wealth to future generations.
Given the rising number of wealthy households, inter-generational transfer of wealth has become a priority in Asia.
Annie: If families haven't been communicating or building those ties or practising respect and love, the sudden imposition of the challenge of wealth structuring and family governance will seem completely alien to them, and mistrust and discomfort will set in. When we set up BFI five years ago, we saw the gap among many family firms which have to prepare for transition. We recognised then that trust building had to take place through our legacy series. We held closed door learning sessions where business families, which have built some framework or guidelines resembling some form of family governance, are encouraged to share.
We are delighted that at our upcoming BFI Gala dinner celebrations, the Bukit Kiara Family Next Gen leader Mr NK Tong from Malaysia will share about how family ties are built and a shareholding structure which has accommodated over 40 members of the family in the cousin generation.
We do think that for many of our family firms in Asia, the timing is right as they have built trust with an ecosystem of advisers and families with best practices to guide them. A trusted third party may be needed to help start some of the conversations, and not wait till the patriarch or matriarch has fallen ill or is no longer in a position to exercise judgement. We always advise our families to plan for tomorrow and build today.
Richard: Most often, family governance is a decision-making undertaken by a family council, enabling business families to govern their relationship with wealth and enterprises.
Many family businesses do not have family business planning and governance frameworks in place to deal with the future strategy for their business and families. As a result, there are no mechanisms in place to deal with everyday issues such as methods of ownership and policies for change, formalising family employment policies, establishing effective communication and succession planning.
Family governance remains relatively unrecognised as an essential element in governing the family and its relationship with the business. The establishment of a structure for planning will not only encourage the family to articulate and examine their values, needs and goals on a regular basis, which is essential to family union, but will also develop their commitment to the business.
The extent of the planning and governance frameworks required will depend on a variety of factors that evolve over time. These include the size, complexity and geographical spread of the business, the number of family generations involved, the number of family members and their geographical spread, and whether the business has non-family executives or independent non-executive directors.
Siow Hui: Many Asian business families are in their second or third generations. The concept of family governance and wealth structuring for succession planning is new to such families. This is because the passing of wealth from the first to the second generation may be relatively straightforward and smooth. Families tend to run into difficulties in later generations. Also, planning for succession may be less of a priority unless there are significant inheritance taxes and estate duties involved. There may also be a lack of awareness of the complexities or challenges until visible rifts in the family start to appear.
Also, the interests of family members may not always be aligned with that of the family business. So it cannot be assumed that the next generation are willing to take over the business. In the EY report Coming home or Breaking Free, the succession intentions of next-generation members of family businesses were found to be low and even in decline.
Only 1.1 per cent of the Singapore students surveyed, whose parents have a family business, intend to become a successor directly after graduation, while 3.8 per cent intend to take over five years after graduation. This could be due to various factors, including more attractive career options elsewhere.
One of the biggest challenges is to find opportunities to educate Asian family business leaders so that they become aware of the importance of wealth structuring and family governance for succession planning, and are open to discussions on these matters.
Family that are already aware of the importance of succession planning are generally open to advice and are eager to ensure that there is a proper wealth and family governance structure put in place. However, this is often a long-term process that cannot be hurried. Time is needed to navigate through the various issues as a family and ensure agreement with the vision and long-term goals of the family and family business.
What does it mean to be a good steward of wealth? How can families inculcate these qualities/values in their children?
Cameron: In the past, succession planning focused on how wealth was distributed after the death of the patriarch/matriarch. While appropriate in most situations, this isn't enough in the context of substantial wealth involving assets, such as family businesses and company assets.
Increasingly, Asian family businesses place a greater emphasis on establishing a succession plan that can sustain a complex, successful enterprise across generations. Key considerations include a robust governance framework that will clearly define the integration of ownership structures and decision-making processes, as well as philanthropic aspirations.
Good stewards of wealth must be forward thinking. They must consider the family's legacy that they wish to preserve and protect when putting together a succession plan. Our research indicates that family business owners create legacies which last by harnessing a unique blend of formal education and immersive learning from their predecessors. There is great value in involving the next generation in the business and exposing them to different aspects of the company. It's much like an internship programme to give prospective employees a broad company perspective. If the next generation wishes to lead, they have to take ownership and prove themselves.
Some gain external work experience before joining to the family business. A temporary stint away has its merits as it enables potential future leaders to gain different perspectives and insights that will benefit the family business later on.
Annie: Stewardship is a word we use often in BFI. We've noticed that families with the stewardship mindset tend to build successful and sustainable family firms. So when family members say they are stewards of the family's business, it means they should behave as responsible owners and create value in a sustainable way, adopting a long-term perspective and an inclusive approach. These generations of business owners will then be motivated and committed to nurture and grow what they are entrusted with, and to hand it over in a better shape to successors.
That's why generations of the Lee family behind the Lee foundation and the Tan family behind the Tan Chin Tuan foundation constantly remind themselves that they don't just preserve wealth; they have to create wealth to give to worthy causes.
Today, family firms think about growth and giving beyond having foundations. They want to build a business of good, and ensure that stewardship starts as a journey throughout the lifecycle of the family in business. So, they build and inculcate their values early, building businesses that contribute to the community and larger society. In the process, they create knowledge, contribute to economic development and build human and social capital to benefit others beyond the family.
Richard: Family values are the underlying foundations of a family culture. They set the moral compass, helping to direct and navigate the actions of the family and the business. The 4Hs - honesty, humility, hard work and harmony - resonate across diverse cultures in Asia and keep families together.
In Asia, particularly in regions influenced by Chinese culture and traditions, the first-generation business families typically seek wealth preservation and legacy preservation, followed by family harmony and unity.
In the Chinese culture, the family is seen as more important than the individual. Chinese families value tradition and filial piety is extremely important. The typical family culture tends to be hierarchical and leadership is often patriarchal. To a Chinese family, the term ''harmony'' implies there is a natural, structured order to things; this includes family relationships. Harmony also implies preserving balance: direct confrontations tend to be avoided, and maintaining ''face'' - essentially the prestige, honor or social standing - especially of one's seniors, is critical.
Siow Hui: Being a good steward of wealth means that each family member should work hard to help build the family business and preserve the family legacy for future generations. This involves inculcating values such as family unity, custodianship, family pride, being diligent and not complacent with existing success.
The older generation can inculcate these values in their offspring by leading by example in how they behave and treat other family members, and not letting the younger generation develop a sense of entitlement. Integrating the younger generation into the family business earlier and letting them see how the business is run will also help them appreciate their responsibility as future stewards of the family business, wealth and legacy.
Families may also put in place a family governance framework, where a set of family rules, such as a family constitution, is developed for family members to abide by. This will ensure that every family member is aware of and aligned with the family and family business's values and vision for the future.