An estimated 80 per cent of Asia’s wealth is tied up in family businesses, so adequate succession planning is crucial - not just for individual families but for Asia’s economy.

An estimated 80 per cent of Asia’s wealth is tied
up in young family businesses, so adequate succession planning is crucial - not
just for individual families but for Asia’s economy at large.

Currently, there are more than 8.4
million family-owned businesses in China alone, accounting for 87.4 percent of
all company types, according to a poll conducted by hexun.com
and consultancy DATA100. These businesses account for around 60 per cent of the
country's gross domestic product.

However, due to strong cultural influences including an inherent Confucius syndrome, particularly
prevalent in Asia, many family businesses are carrying around
“ticking time bombs” according to Coutts’ head of family businesses and
philanthropy, Mark Evans.

The ticking time bomb

“We use the analogy to explain a situation where there is an unspoken yet potentially catastrophic threat hanging over a family business,” said Evans, who joined the bank in 2005 when he was appointed to
lead the UK private bank’s ultra high net worth business.

“For example, when a father isn’t sure how to tell his
eldest son that he thinks his younger son is better qualified to take over the
businesses. Or if a son is not interested in coming into his father’s business, but leaves it too late to tell him."

Unhappy shareholders, divorce or death, can all mean game over for a family business if not prepared for adequately. Evans points
out that often, families are not as focussed on these areas as they are on
the running of the business.

"When you look at why family
businesses fail, it is often more to do with the family dynamics than the
business dynamics,” said Evans. “In Asia informality in family businesses is
common, but the risk is that differences in understanding turn into
misunderstandings that lead to disputes that turn into family wars!"

Evans was speaking to WealthBriefingAsia at the bank’s Hong Kong office, with Fan Choi, head of wealth planning for North Asia at the bank. Evans had
flown over to join Choi at an inaugural family business conference in Hong Kong,
which assembled a group of the region’s wealthiest families to discuss the
hurdles facing themselves and their peers.

One of the key messages that came
out was the need for cementing a succession plan, said Choi. “The
challenge is that family businesses in China are entering
a transitional phase. Most entrepreneurs started their businesses in the early
1980’s when China opened up after the cultural revolution and economic reform.
These entrepreneurs are now in their 50s but in the next ten or twenty years
they will need to look for a successor,” she added. 

Engaging the young

The importance of engaging the next generation in a timely
and sympathetic manner is clear, but this is often easier said than done. A recent
survey from Shanghai Jiao Tong university on around 180 privately owned
companies of China, found that only 18 percent of fuerdai
- the Chinese word for children born to rich families – express willingness to
take over the family company.

This came down to two reasons. Number one, they saw how hard
their fathers had worked and did not want to have to work as hard. Secondly,
they did not want to feel constantly scrutinised by their parents in the
day-to-day running of the business. A blurring of
lines between ownership and management of a business, when a patriarch believes
they have the right to a say in every business decision, even after it is
handed over, can be partly to blame.

“Ownership and management are two very
different things but they frequently are mixed together in Asia. Ownership is
about being a responsible custodian of the business while management is the
leadership of the businesses,” said Evans.

But the reversal of the situation can be equally
problematic. A family member may feel an entitlement to have a role
in the business, said Evans, even if they are not the best qualified.

“There is a growing debate on the
issue of heritocracy versus meritocracy. Some families take the view that
family members are entitled to work in the family business and some feel that
they must earn the right to work in the family business. In the UK, a lot of
family firms are including non-family members in their search to fill
leadership roles. Although there are signs that Asia is moving in this
direction too, there is a strong tradition of giving male family members the
opportunity to work in the business."

Then there is the issue of fairness, which can sometimes be a bone of contention in Asian families. “There is
sometimes confusion over what is fair and what is equal – but equal isn’t
necessarily fair,” said Evans.

Communication is key

One thing is clear. That an open
dialogue about the challenges facing family-owned firms helps to overcome the
hurdles. “The more families that are putting in place family governance that
talk to each other, the more likely these firms will survive.”

To encourage the conversation, Coutts has launched the Knowledge
Exchange, to provide education and knowledge for
its high net worth clients in Asia.

Based on a similar programme launched
last year in the UK, the platform features insight from academics experts,
interviews and tutorial films to promote greater understanding and provoke
discussion. The content includes short video clips discussing issues facing
family businesses in Asia and how to retain family values. With philanthropy
growing in importance, the new network also plugs into the HNW giving community
in the region.

Evans said of the new portal: “Firms
that have an appropriate level of family governance are more likely to survive
than firms that have none. We want to encourage our clients to talk to each
other, as well as talk to advisors."

Ultimately Coutts is a bank and it wants
clients to be paying fees, for as long as possible. By appealing to the
personal rather than the private side, there is more chance of a longer-term
partnership.

Said Evans: "The end game for us is
building relationships with clients. As a
relationship manager, you want to make your first meeting about getting to know
the client. If you go in and say, ‘we are interested in sharing our recent
research on family businesses in Asia’, people are more inclined to open
up."