Shocking succession decline in Asia (part 2)

THE      subject of family-owned business is important globally, and more particularly in Asia where it is further exacerbated by the fact that many of these enterprises are first or second generation family-owned companies.

In my coaching work all over Southeast Asia, topics like succession planning are still pretty new and, in most cases, have not yet received significant attention. They are aware of the importance that a seamless succession planning can do to the organization but see no urgent need to initiate the process. It doesn’t help that the first generation are highly entrepreneurial and often tend to “forget” about succession planning until the last moment. This makes the task even harder.

Professor Joseph P.H. Fan emphasized in his book “Critical Generations – Out of the Succession Dilemma of Chinese Family Businesses” that the cause of the shocking succession decline in Asia is based on two compelling reasons. First, intangible assets such as values, skills and networks, although commonly found among the first generation entrepreneurs, are difficult to pass on to the next generation. Second, Chinese families also face various family, industrial, and institutional obstacles such as family brain drain, regulatory changes, and political uncertainty, which can devastate the families and their businesses.

To overcome these challenges, Fan has identified three critical tasks that every family enterprise must embrace. These are family governance, ownership design, and corporate governance. These effective tools should be consistent with Chinese cultural values. For the benefit of my regular readers, I have written more than a dozen articles related to these three tools. Perhaps it is important to urgently reflect on these governance tools, especially that succession is inevitable.

Procrastinating is fatal and can lead to devastating consequences.

Western influence may compromise the family business

Direct transplant of Western solutions are usually not applicable. In addition, Chinese business founders often prefer to “lock-up” the wealth and ownership of the business in some way. Family members however, expect to get a “fair” share of their inheritance and after the founding generation passes away, family fights and court action inevitably follow.

Again, my articles about the local Cosmos family and HK’s iconic Yung Kee Restaurant are two cases of a failed succession. For the Yung Kee group, the acrimonious parting happened right after the death of the patriarch, erupting in bitterness, litigation and the eventual liquidation of the business. On the other hand, for the Wong Family of the Cosmos Beverage fame, the business ended up being sold to the RFM group triggered by the demise of its patriarch, Henry Wong.

Younger members will never replicate the work ethic of the older generation

Another important observation according to Prof. Fan is that successors of family business, even if they share values and passion of their parent founders, may not be seasoned business professionals. It is therefore important to build a strong management team and put into place an effective model of corporate governance which can effectively monitor leadership and results. They must also implement more transparent accounting practices and greater checks and balances.

Chinese family founders are using a range of different methods to solve their succession problems and often these are ad hoc resulting in varying degrees of success. Ad hoc can mean employing crude means like informal delegation, allowing a bit of empowerment, rotating function, etc. But because of the higher incidence of family conflict, many Chinese business founders are now becoming more proactive on this matter and are joining classes and seeking knowledge to resolve the succession issue.

Fading traditional values

Another culprit in internal family disputes is the fading of traditional Chinese culture and values within family businesses. “The Chinese practice of bequeathing all the family wealth to the eldest son is diminishing. This tradition, although perceived by some as ‘unfair,” has helped preserve family wealth and preempt conflict. However, the new generation of Chinese family members who have been influenced by Western culture and education are adopting different family values such as equality and democracy. Succession planning says Prof. Fan is therefore, “less straightforward and more complex with greater potential for family disputes.”

The only solution to these pervasive problem is for families (and not just confined to the Chinese) to install and enforce a system of governance, internalizing shared values, consolidating family interests and putting in place a mechanism to manage conflict. Succession planning in the Asian context is really a precarious event.

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