When succession can go wrong: Learning from failed family enterprises (part 2)

IN A family business succession article entitled “The Case of Yung Kee” written by Prof. Fu-Lai Tony Yu of HKSY University, one of the major causes of the Yung Kee family conflict happened in the fiscal year of 2009 when the restaurant earned HK$51.1 million in net profit.

Next generation’s sense of entitlement

The continuing schism among the two brothers about the management of the company reared its ugly head with the appointment of the younger Kam brother’s son Kam Lin-wang as a director, drawing a salary of HK$45,000 a month for only a few hours of work.

It was also stated that Kevin Kam Shung-hin, the first son of Kinsen, was pre-arranged to work in Yung Kee after finishing education in Canada in 1996. Despite being lazy and lacking in motivation to run Yung Kee, Kevin was promoted as assistant manager. Meanwhile, Ronald appointed his children, Carrel and Yvonne, as the director and alternate director (and chief financial officer), respectively.

They were also assigned “right at the top and took over” Yung Kee without any prior experience in the culinary industry.

Subsequently, Ronald was successful in taking majority control in the board of directors. He also paid “excessive” wages to his family members. It was reported that the two sons of Kinsen were paid only a monthly wage of HK$17,500 per month while the two children of Ronald received a salary of HK$45,000 per month.

These actions initiated by the next generation family members are very common and will inevitably result in enmity and conflict. We refer to this behavior as a form of entitlement that if ignored or tolerated will escalate into conflict that can threaten the stability of the enterprise.

Establish a family council

In my last column, I ended with the letter D, by way of setting up a family council as one of the governance units in the family business.

With the Yung Kee conflict, it is now clear that family business owners, especially the senior generation leaders, must be put to task in crafting very clear agreements that can be molded into a detailed family constitution.

In a constitution, the family articulates a collective vision for the business, define its core values and put into writing the policies and guidelines that will maintain a certain level of family discipline. In a Harvard Business Article entitled “Three Components of Family Governance”, it enumerated several governance policies including the setting up of a family council tasked to formulate the following guidelines:

a. Employment standards and compensation for the next generation
b. Career development policies for family employees
c. Succession process, including retirement ages
d. Ownership, including buy-sell agreements
e. Dividends

E. Have a family advisory board. It is a small group of people who meet periodically during the course of a year to offer advice to a company – some sort of an organized group of consultants who do not have any immediate or direct involvement in running the family business. Some of their functions are to provide assistance in assuring the continued success of company operations, to aid in the selection and development of the next generation of owners and leaders and to counsel regarding succession and retirement plans.

Each member of the board should be intimately familiar with the business and they are supposed to give advice within the context of the business plan. Minutes of the board meetings should be recorded and filed for future reference.

F. Have a family shareholders’ agreement. Most Asian family businesses do not have a family shareholders agreement or other form of “exit plan” in place. This might be one example of the impact of a culture where generation of wealth is more important than than the preservation itself. An Asian family that can talk about the need to put in place an exit plan today to provide for the future is going to be much better off than one without such a plan.

The late Kinsen’s family, who applied for the court liquidation order, demanded HK$1.3 billion or US$168 million, for their 45 percent stake. But Ronald, who currently runs Yung Kee, was only willing to pay HK$1.1 billion in cash and almost HK$100 million worth of assets. This problem could have been avoided had there been a shareholders agreement beforehand.

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