Family Wealth and Family Businesses: From the SEW and Governance Perspectives

Family Wealth and Family Businesses: From the SEW and Governance Perspectives


a)Family Relationships Are a Strong, Cohesive Force in a Family Business
 

Ms. Paddy Lui, Executive Director of K. Wah International Holdings, shared how she felt about her family’s business during her childhood and during the succession process. The second-generation entrepreneur said that even when she was a child her parents’ hard work made a deep and positive impression on her. “While still a student, I hoped that one day I’d be able to help grow my family’s business. I didn’t think about succession at that time, my mindset was simple: if my dad needs us to help one day, then we’ll help him. I didn’t think that I deserved a high position in the company simply because my father was the owner. Instead, I hoped to grow with my colleagues and that we will be happy as long as our business keeps growing,” Ms. Liu said.


Whether or not the intergenerational relationship is cohesive has a direct impact on family business succession. Ms. Liu was thankful for what her parents had given her. She said her father’s hard-working spirit was one of the reasons for the success of the family business. Her mother was a caring and kindhearted person, always nice to others, including employees. Integrity was valued highly in Ms. Liu’s family.
 

A family business has to be managed by talented people, though they don’t necessarily need to be members of the controlling family. When a person joins their own family’s business, they must have professional expertise, be emotionally committed to the company and willing to cooperate with colleagues. Harmony should be fostered in both the family and the business. Though the family and the business are two different entities, family harmony is the basis for corporate harmony. China has been growing rapidly, but it will be difficult for the country to achieve further growth unless it is supported by a strong spiritual culture. Both first and second generation family business owners should lead by example and care about everyone around them, including their employees. Showing your employees that you care about them is a key aspect for building a strong workforce.
 

Family Wealth and Family Businesses: From the SEW and Governance Perspectives


b)Beyond Wealth:No Rules, No Standards
 

China’s rapid economic growth over the past two decades provided a unique environment that enabled many first-generation entrepreneurs to accumulate huge sums of wealth. But it would be a nightmare if they pass only their wealth to the second-generation. Mr. Lo Tien-An, Chairman of Christine International Holdings Limited, thought that succession problems only exist between the first and second generations, not the second and third generations. China is a unique country in terms of its economic growth rate, so how should we define the development models for family businesses in Greater China? Family businesses in Taiwan and Hong Kong are at the stage of second-to-third-generation succession, and China is now facing strong competition brought about by needing to shift to a new economic model. In this changing economic environment, what should family businesses do in order to ensure their survival? Without a clear answer to this question, young people may find it difficult to establish a clear direction. Many young people today are not willing to pick up the baton from their parents. Compared with the first-generation, the second-generation is faced with far greater risks and challenges in daily business operations and may find it even harder to maintain profitability.
 

No matter how much wealth they inherited from their parents, second-generation entrepreneurs should not rely on their inheritance, nor should they have the illusion that investment is easy. Investment is often fraught with great pressure and responsibility. A family business is a living entity and must be governed by business rules rather than the shared norms of the family or region it is located in. If we consider a family business as a building, it must have a solid foundation (i.e., sound rules and internal controls) to withstand strong storms. To build a truly outstanding family business that can survive and thrive for many future generations, one must be open-minded and have sound corporate governance in place.
 

Family Wealth and Family Businesses: From the SEW and Governance Perspectives


c)Building Trust with Professional Managers

Some say that as family ownership gets increasingly diluted it’s inevitable for family businesses to go public and become publicly held companies. But that’s not entirely true. Let’s take Voith Paper Asia, where Ms. Liu Mingming is the President and CEO, as an example. Voith is a little-known champion that has achieved rapid growth while remaining 100% family-owned. Voith began with just five blacksmiths, and today Voith has made many achievements due to its consistent commitment to innovation. When control of Voith was passed to the second-generation, a dispute arose between two brothers: the younger brother was not interested in manufacturing, so he sold his entire stake in the company to his older brother.
 

When a family business reaches the stage of rapid development, it often faces two bottlenecks: one in human resources and the other in capital. At this point, some family businesses will pursue an IPO to raise funds. If it doesn’t go public, then it must have a good capital pool to draw upon.

In a survey of family businesses in China, 67% attributed a high rate of job-hopping as one of the reasons they do not employ a professional manager. Professional managers often quit when there is a dispute about interests or values. However, it is important for them to identify themselves with a company’s culture and values, and always be loyal to the company.
 

When transferring ownership to the next generation, family business owners don’t necessarily have to hand over management rights to their children. The inheritance of family spirit is also very important.
 

Family Wealth and Family Businesses: From the SEW and Governance Perspectives


d)The Challenges of Family Business Succession in China
 

Mr. Desmond Shum, Founder of the Kaifeng Foundation, has been keen to promote research activities on family business and is very concerned about the future development of Chinese family businesses. In his opinion, family business succession is particularly difficult in China. This is partly due to China’s macro business environment. Protection of property rights was established in the UK six or seven hundred years ago, but has not yet been established and regulated in China. Therefore, China’s macro business environment poses a significant challenge on family inheritance. How can one plant a tree to last 1,000 years on land where one cannot secure the rights? Another challenge to family business succession in China is the lack of a sound legal system. This makes it difficult to establish mutual trust with people who don’t share the same family ties. We are dependent on kinship because often the law fails to punish those who break their promises. The relationship among family members is another challenge to the sustainability of family businesses. Family harmony is quite important and family businesses should be committed to building family legacies.
 

Family Wealth and Family Businesses: From the SEW and Governance Perspectives


e)A Dialogue Between Two Generations
 

  • The First-generation: In their own words
     
  1. A family business should be governed by corporate rules. It’s impossible for family members alone to run a business. How should we manage a large management team? This difficult issue has to be solved by our second-generation.
  2. Private enterprises don’t have any special privileges regarding national policies and industry environment. If we fail to upgrade, transform, and innovate these enterprises, their growth will soon come to a halt.
  3. We should pass down our corporate culture as well as a hard-working entrepreneurial spirit to the next generation. Each family business should have a distinctive corporate culture. A culture passed along from generation to generation can help solve many conflicts.
  4. The first-generation should give the second-generation a platform to act independently and to use their positive energy to influence others. The second-generation can never truly grow up if they rely on their parents for everything. We should give our children enough room to try, to experiment, and they will surely outperform us one day. A successful transfer to the second generation makes it easier for the third, fourth, and fifth generations to succeed.
  5. As first-generation entrepreneurs, we should learn to step aside and be tolerant and open-minded in helping the second-generation prepare to lead.
  6.  

Family Wealth and Family Businesses: From the SEW and Governance Perspectives

 

  • The Second-generation: In their own words
  1. The first thing a child should do is to practice filial piety. Whether he or she can be entrusted with the family business depends on his or her morality and capabilities. When preparing to assume a leadership role, one should try their best to do things well.
  2. My father said he didn’t give us any specific training, but in my eyes, while we were still children, he began to cultivate our sense of responsibility and affection for the family business.
  3. The two generations should seek common ground while preserving their differences. But when it comes to matters of principle, my parents often stick to their position while I often stick to mine. We must figure out how to resolve these differences.
  4. Inheritance refers not only to the family business, but also to wealth and, in some cases, the values and character of the older generation. The earlier we gain experience, the better prepared we will be.
  5. We should establish a clear process for communication and decision-making in order to help promote healthy corporate growth. This is highly imperative for our generation.
  6. We should have a clear understanding of ourselves and cherish the opportunities and resources that we have. We should also grab more opportunities and do everything well and with a down-to-earth spirit.


f)Effective Family Business Governance in the Long Term
 

In their initial stages of development, family businesses face the same challenges. At first, people are passionate about launching the business, but gradually, they may develop divergent views about the direction in which the company should grow. The company may encounter some development obstacles before its founders finally find a way to put their business back on track. No matter the result, this is an extremely meaningful process for family business owners. The founding generation should pass down not just wealth but also value-creation wisdom to the next generation.
 

The role of each family member should be consistent with his or her position in the family business. For example, as a business leader, one should foster sustainable growth of both the family and the business. Family members should develop themselves while developing the business. If a leader is too conservative, then the company may fail to survive into the third-generation. Therefore, a company has to constantly innovate and develop itself in order to survive in the long run.
 

Regarding corporate governance, a family business should set out very specific rules to regulate its cooperation with various stakeholders; more importantly, it should always rely on signed contracts for important agreements. For example, a contract has to be signed when a new shareholder joins the company. Everyone should have the same affections towards the family business. This includes all family members, managers, shareholders, subsidiaries, partners and employees. A family business should also provide extensive training for new recruits.
 

Mr. Ge Yongbin, senior partner of Zhong Lun Law Firm, offered several basic criteria for evaluating the status and sustainability of family business succession in China.
 

First of all, many family businesses have shareholders’ meetings, a board of directors, and a management team in place. But how many outside or independent directors does the company have? Outside directors are people brought in from outside the company to help make board decisions. The number of outside or independent directors indicates how effective a board is. Though many family businesses boast a large board, their directors often do as their boss wishes. This is why at least one-third of board directors should be independent or outside directors. The board is very important because it is the main decision-making body of a company. To truly delegate power to lower levels, a company should first make changes at the board level.
 

As the second-generation may be inferior to the first-generation in many ways, family businesses must ensure that a sound board system and effective rules of governance are in place. The first-generation should learn to step aside and gradually entrust their children with the major responsibilities of running the business.
 

Second, are family members willing to share their wealth with others? The entrepreneurial process is not easy, but a family business must learn to share its wealth with others. The word “wealth” here refers to not just the wealth a family has accumulated so far but also the incremental wealth that will be created in the future. After reaching a certain stage, a family business has to bring in outsiders to help create more wealth. As you need their help, it’s natural to share your incremental wealth with them. A family can keep the wealth it has accumulated so far, but to entice professional managers to stay, it has to share its incremental wealth with them.


In addition, not every family member wants to become a shareholder or a member of the management team. Children should be allowed to have an interest in other industries or businesses. A family foundation benefits the whole family, thus family members don’t necessarily have to participate in the management of their family business. A family foundation can have dozens of beneficiaries. Eligibility should be decided through family meetings. Every beneficiary can enjoy the profits generated by the family business and a family foundation can help to reduce tax burdens and alleviate severe disputes and conflicts.
 

Family Wealth and Family Businesses: From the SEW and Governance Perspectives


People are the most valuable assets of any business. Family businesses should attach great importance to their employees, while also fulfilling their social responsibilities. Human capital is an important evaluation metric. A family business must learn to trust others and keep its employees informed of the company’s latest developments. Family members can also learn from professional managers, and should establish a good relationship with professional managers to facilitate mutual understanding, learning, and growth.


The qualifications of a professional manager should be closely related to the longevity of the family business. Time matters. A professional manager who’s been with the family business for over 10 or 20 years often identifies with the company’s culture and philosophy. The trust between professional managers and the family business owners is often built through decades of hard work. It’s essential for professional managers to identify themselves with the culture of the family business. Only in this way can they truly fit in and grow alongside the company and their colleagues.
 

Family members and professional managers should build a platform for interaction and training. It makes things much easier when they share the same ethics and values. Family businesses differ greatly from multinational companies in terms of culture, and their cooperation with professional managers may fail to achieve the intended results if they don’t make the necessary cultural changes. Family business owners should learn to empower their employees and treat employees as equals. They should not hire someone they don’t trust, but they have to trust their hire. Conflicts can be greatly reduced if family members (both parents and children) and professional managers agree upon a set of rules to guide their discussions.