Family businesses have been in existence since the dawn of mankind, evolving with time and advancement in technology from the discovery of fire in combustion to steam power to the discovery of fossil fuel, electricity, nuclear and the world of electronics. Each era brings with it innovations, creations, and commercial values. Who created those enterprises? A brilliant scientist or inventor and entrepreneur, who introduced it to the mass market for commercial reasons. These business leaders were named founders for being the pioneer to champion the cause.
Family businesses have always been the backbone of a country’s economy as reported on Family Firm Institute’s website, www.ffi.org. These statistics cannot be ignored and it was only the turn of the century that scholars began to pay more attention to its impacts on the global economy.
It was estimated that globally, family businesses represent 70% to 90% of the global gross domestic product (GDP). In the United States (US) alone, it represents 80% to 90% of the firms in North America that contribute to 64% of the US GDP or US$5,907 billion and 62% of the US’s employment sector.
In the United Kingdom, family businesses represent 41% of the country’s GDP. Nearer to our shores, in Indonesia, 3% of the Chinese ethnics own 70% of the country’s businesses and control 80% of the biggest companies.
In Japan, the stories are staggering. The country has one of the oldest family businesses in the world with 46 generations already exchanging hands.
The Sustainability of Family Businesses in Economic Turmoil
There is a saying in Chinese that wealth successions do not succeed the third generation. We need to rewrite it that “wealth succession or family businesses can succeed and will succeed beyond the third generation if there is a written plan by the founders”.
We should be thinking forward to create legacies that have lasting impact culturally and nation wise.
The definition of a family business is very complex. What constitutes a family structure because it involves at least three different roles and they are overlapping in responsibility.
According to the PWC Family Business Survey 2010/2011, the definition of a family-owned business is identified by the company with majority shareholders of family members and at least one member of the family involved in the business.
If it is publicly listed, the founder or family members must hold at least 25% of voting right shares and at least one member sits on the board of directors. Family business owners have to strike a balance between the family first and the business-first approach when having family meetings. Too much of either side may bring destruction to the family business.
A Journey Back in Time
Let us go back in time to imagine how the founding members first started the business. The journey taken by the founders was lonely, unconquered terrains and full of challenges. In the Asian context, most founders have limited education levels but are opportunists.
Many use their hard earnings to start a small cottage business, those who have more wealth begins to invest in land and develop their business from the investment acquired. Either way, these founders have one thing in common: succession planning issues.
Because the founders spend most of their lives building the business, they may not have the foresight to train or even mentor their children into the business. The strong emotional attachment to the business and lack of communication also hinder successful succession.
In the Asian family culture, the next generation does not question or debate on family matters out of respect for their elders or founders. That leads to a lot of misconceptions and breakdowns in family communications.
The founders are often known to be a “dictator” who calls all the shots and decisions, unaware of the consequences of frustrations the next generation feels and eventually destroying the next generation’s interest in the family business.
Often we see in the movies about the next generation plotting what to do when the founder is still alive but lies helplessly on the death bed just to witness a terrible and painful dissection of what used to be his empire or business enterprise.
Unfortunately, the next generation cannot wait to have control of the business and the wealth in it. What a tragic end to a once amazing story of one man’s struggle to success, great achievements, sacrifices, and lessons that could be passed down for the next generation to be embraced as part of family heritage.
The Japanese culture is a very closed knitted nation, embracing not only centuries-old katakana language but also generations of heritage that eventually build the nation to where she stands today. The success stories we hear about family businesses in Japan are not built over a generation but centuries of proper record keeping and education. The discipline, hardworking nature, loyalty and mutual respect for the community yet humble nature of the Japanese culture allow for a natural progression to generations of succession planning. How many times do we hear a leader or minister in Japan stepping down voluntarily when a crisis happens without even being asked to? That is natural succession taking place!
Even with succession to the next generation, the siblings of the second generation have better education; they can read and write well but lack of leadership due to the strong presence of the founder making all the decisions.
They now have to find their footing in the business and learn to make business decisions. By now they have learnt to live cohesively and make decisions together. If the family culture and values are strong they may stay together possibly surviving to the third generation.
The second generation has a stronger bonding as siblings and is better connected due to the openness in communications. Each may be given a role in the business depending on the seniority.
Eldest sons usually are expected to take up the business role while their female siblings are just owners but not involved in the day-to-day operations of the family business.
With the third generation coming on, the family members begin to see more fragmentation and individualism. This may be due to the enlargement of families resulting in fewer family meetings, overseas migration in families and the third generation being sent off at a very early stage of their childhood to further their studies abroad and embracing foreign cultures.
Most of the third generation is born with a silver spoon laced with gold linings on a plate; hunger or sacrifice is not part of their vocabulary. Without a strong heritage and family values being part of their lives, the third generation begins to find their own values and interests in life.
The only interest they have in the family business is the wealth created and lifestyle they can continue to enjoy as they waste the financial resources on their own indulgence. The more ambitious ones venture into other businesses of their own interest.
Back From the Future
The way forward for the Asian family business to succeed is by having a proper and professionally structured exit and succession planning. This is where family office creation comes into the picture.
Like it or not in a family business, the two core important areas are the dynamics of family units and the business enterprise itself. Neither one can coexist without the other as both are intertwined. The owners need to learn to adapt to changes and evolve to survive.
The founders need to establish if they want their businesses to succeed. If so, how do they transit to the next generation? The common answer is always a “yes” because the business brings along wealth for the family.
Frequent family meetings to discuss succession issues and mentoring apart from day-to-day business issues must be addressed early to see who wishes to be part of it and who is not interested. The founders must realise that not all their children like to take part actively in the business, some may feel obligated because “I am the eldest” or the youngest may want to become an artist and not an accountant of the firm.
The key to address succession planning issues is to have an open communication with the founder and successors. The successors need to be sensitive not to dethrone the founder quickly but to satisfy the founder’s request and wishes in the succession process.
Because of the founder’s attachment to the business, the next generation needs to appreciate and value what the founder has gone through to bring the business to where it is today. By properly documenting the historical events, core values and branding clients have appreciated in the form of a video or handbook, the founder is more willing to be open to sit down and listen to the next generation what they wish to do for the family and business when they take over.
In a family office structure, there are three important elements:
• A family council, which represents family members with voting rights and founder.
• Family constitution, which incorporates the company’s mission statement, core values, work ethics, appointment of successors, governing issues, etc.
• Officers, accountants, lawyers, licensed financial planners, private bankers, administrators, etc. Above the umbrella of the family office sits the underlining business and assets owned by the family.
Asian family businesses have very complex wealth in the country and overseas. Exposures to taxation, creditor issues and family feuds are some of the concerns faced by family businesses.
By having a more efficient structure to address these issues, an offshore trust or foundation is placed above the family office to ring in or fence the assets. Since the nature of a trust or foundation is preservation and protection of assets, by ringing in or fencing the family wealth, total privacy, including confidentiality, will be achieved.
In the event of a failed business or divorce in a family, the assets in the trust will not be affected. Without the asset protection element, wealth in the family is subjected to financial losses due to the said events.
By having a family office and asset protection in place, business owners can rest assured be with a succession plan and sustainability in the business. With these two powerful combinations, generations of wealth planning and business succession become part and parcel of the future generations’ considerations and guidance into the ever-changing landscape of the business world.
This is not forgetting the help of the professionals elected as officers by the council members to support the family office’s governance and administrative issues.
This article was first published on 18 December 2018
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