There are few individuals or institutions that handle change well and it is a well known adage that the most stressful times in your life are moving house, divorce and bereavement. Perhaps we should include the transition point for a family owned business, which produces its own types of pressure due to the structures and individuals involved.
Family businesses have been central to business activity throughout history and touch all parts of the globe, from the Kongo Gumi in Japanese construction, to the Antinori’s in Italian winemaking, Rothschild’s in banking or the Fords in car making. All of them have made crucial yet sometimes difficult decisions about how their businesses should be run and who was best suited to be at the helm.
The personal impact of these significant shifts cannot be understated. For the family, the business is part of their collective identity and that emotional attachment is hard for anyone outside this circle to fully comprehend. The dynamics of this transition point are fascinating and the permutations are endless. Does the patriarch want to hand over the reins or are they anxious to retain control? Or on the flip side, do the dependents (the next generation) want to take on this responsibility?
Writer for The Economist, Adrian Wooldridge, tells us that ‘the worst thing about family companies is succession’ in a recent piece he did on family companies. This is a sentiment echoed by many and was a natural topic at the HSBC Private Bank Next Generation Programme in Macau in May. This Programme centred on ‘Exploring The Future of Wealth’ and saw a recurring theme focusing on families needing to plan ahead and communicate more effectively.
There should be recognition from within of how the family and the business are intertwined and both need to be actively managed, a concept that the programme sought to highlight to the mid-20s to early-40s participants from different geographies. All were the offspring of family business owners and tied to the future of these successful enterprises. As Bernard Rennell, Regional Head of Global Private Banking for Asia-Pacific and Global Head of Family Governance and Family Enterprise Succession at HSBC Private Bank suggests, a key focus is “shifting people’s thinking from the Family Business to the Business of the Family”.
Given the complicated dynamics, it is hardly surprising that significant tension can emerge in transitioning family businesses, with some high profile cases attracting unwanted media attention. But Rennell proposes that “it is not the transfer of wealth and responsibility that is the issue in causing conflict, but the underlying problem is in fact the dispersion of decision making authority”. After all, for families that have only had the business and wealth for one or two generations, the ‘power’ tends to have been concentrated and consolidated. “As you move to the third or fourth generation there are many more parties involved, more outside interests that lead easily to indecision and disagreement” he suggested. These families will undoubtedly have employed strategic rigour in growing their business, “a similar approach is needed for their planning for the future of the family”.
Communication is a key element to a family successfully navigating difficult times. Michelle Lau, Head of Wealth Planning for Asia at HSBC Private Bank, believes that without communication, the level of mistrust increases around the intentions of other family members when future matters of wealth are being discussed. Open conversations around “who will be taking over the business, who will get which part of the assets, can cause high levels of emotion and disputes may arise”. She suggests that “people will have a lack of confidence, they are not assured of their direction or their source of income…and this causes disputes”.
But is it then the job of the second and third generations to lead these discussions? It would appear that they may need to be aware of these issues as it is their future at stake. But as Connie Ho, Head of Family Governance and Family Enterprise Succession for North Asia at HSBC Private Bank points out, “for Asian cultures this might be particularly difficult as open communication is not an automatic trait”. Because of this she believes that “for the Next Generation it’s quite difficult for them to understand what’s expected from them by the older generation”.
With no cookie-cutter solution, and acknowledged complexities within the parties involved, prudent families would tackle the tension of transition by planning, talking, and removing it before it occurs.