On the 27th March this year, “Week in China” publication reported that an increasing number of patriarchs in Hong Kong are beginning to pass power down to the next generation. Alongside this, 2019 Wealth Report from Knight Frank identified Asia as a critical market that is set to outperform as the global wealth slows. It is time to stop and think about how Asian entrepreneurs of the 60’s & 70’s wish their legacy business to continue in the future. Not only is it necessary to consider the concerns of the founder as to the continuation of the business, but it is also prevalent to consider the capabilities and desire of the next generation to take over the family business.
Corporate and family governance is ever evolving and has been more widely considered in recent years with entrepreneurial families wanting to avoid becoming a “shirtsleeves to shirtsleeves” family but instead to be in control of their legacy. While governance in the sense of legacy may be seen as relatively new, some families have clearly developed a great skill in ensuring their family business lasts for centuries, leaving a significant and continuing legacy. For example:
To consider the family business we need to look at who is involved. Whilst we may think principally about control moving down generations, there are in fact many interested stakeholders that are affected by the business. For example:
The ownership and governance of the family business should be discussed and agreed upon well in advance of the need to shift power to the next generation. The family, whether through formal assembly or informally over dinner, should establish policies to govern issues where interests of the family and the interests of the business conflict or overlap.
Will it be family first or business first? Depending on how this is considered, what will the effect be on the culture within the business, and how will non-family employees strive to develop their careers within the business?
A balance must be sought between generous remuneration packages which may leave little profit to distribute to shareholders and miserly remuneration, leaving significant profits to fund generous dividends. This clearly has a considerable impact when considering if owners should work in the business or not.
The other aspect this comes back to is whether the view of ownership is seen as “value-out” or “custodial”. Value out ownership will be looking for a market yield and expect dividends even when profits are low and cash-flow poor. However, custodians are content with whatever dividend the business can afford, often insisting that a certain level of profits and cash flow be retained to build a reserve and re-invest in the business activities.
Whilst there may be traditional balance of power it is likely owners may wish to reserve powers to control matters which represent a significant financial or reputational risk.
By discussing these areas and having a clear way forward, it will help with generating fair discussion between family members and provide a clear way forward for those both wishing to be part of the business in the future and those who want to follow a different path.
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For most entrepreneurs, it has become vitally important that the successive generations do not dissipate the wealth accumulated over a number of years.
As an independent owner managed fiduciary services business, with a highly experienced board of directors, we can assist with guiding families who are considering their long-term views on the family business. We can meet with the families and support discussion around the governance for the family business and thereafter build a bespoke solution fitting the needs to each family. We are seeing a growing number of family businesses being settled into trust or foundation structures, thereby helping with a smooth transition of the business through the generations rather than relying on the future generations “knowing” what the founder wanted. Depending on the structure put in place, it may also provide independent oversight of the business without a need to interfere with the day to day activities.