Family or business first? The global pandemic has imposed challenges on many Asian families who are in the early stages of the succession cycle, encouraging them to review their plans and consider professionalising the way they manage the intertwined family business, family relationships and legacy.
by HSBC Global Private Banking
Family businesses are unique. While they enjoy the benefit of shared values, history and solid relationships, families bring an emotional variable into the equation that can be unpredictable. By merging family and business, families open the door to unique internal pressures that can complicate or enrich the long-term financial returns of the business.
If family businesses are to last, they need a mechanism in place to keep family and business matters apart, without upsetting either.
“This is true for everyday operations as well as when the business is transitioning between generations,” says Amy Lau, Director, Family Governance Advisory, Wealth Planning and Advisory at HSBC Global Private Banking.
Set against the context of Asia’s “Great Wealth Transfer” between the ageing founder generation of many of the region’s most successful family businesses1 and their next generation heirs, intergenerational relationships are more crucial than ever. However, differences in perspective and approach to business can lead to conflict and communication breakdowns.
Driven by their strong emotional bond to the business they’ve built, founding family members are used to making decisions at the dinner table and taking a very hands-on approach to running the company. However as family businesses grow in scale and complexity, this traditional approach may no longer suffice.
We know that younger generations of affluent Asian families are relatively open minded on adopting more structured and professional approaches to managing family wealth and business2, allowing them to focus on their own pursuits and aspirations.
“The younger generation are more direct. A lot of them studied abroad and have a clearer vision of what they want to achieve. They believe open communication is key and welcome exchange of ideas,” Lau explains. “Third-party professionals could bring in objectivity to strike an appropriate balance between the business outlook and family relationships across generations.”
Headwinds brought about by the COVID-19 pandemic revealed the importance of governance and succession plans, and served as a major catalyst for families to reconsider their existing strategies.
They had to grapple with travel restrictions, remote governance and having to make ‘unprecedented’ decisions in reaction to unforeseen financial situations – positive and negative.
As a result, family dilemmas began to emerge. For example, due to the downturn caused by the pandemic, one Hong Kong-based family sold off part of the manufacturing business that the next generation heirs expected to take over. This sudden change of plan provoked disagreements over succession and governance.
This family was not alone. We saw some family enterprises focusing more critically on profitability and future-proofing plans to safeguard the business for future generations. For other families, they saw new opportunities for investment and engaging in philanthropic ventures to support communities affected by COVID-19. All these activities require alignment and agreement between family members.
“Families are now taking this opportunity to re-examine how the family as a whole can work together,” Lau says. “The pandemic has created a sense of urgency.”
Formalising frameworks and introducing agreements can bring objectivity back to the decision-making process and remove the burden of emotional conflict.
As another Hong Kong-based family discovered during the pandemic, choosing between familial harmony and financial success can be challenging. A heated discussion arose over the sale of a property belonging to the family business – the first generation founder wanted to hold on to it for his daughter, while younger family members would rather sell it in order to compensate for the negative cash flow due to poor retail performance.
Without pre-agreed governance processes in place, this type of situation can easily result in a decision with less optimal financial outcomes for the business in addition to jeopardising relationships between family members.
There are multiple strategies available for addressing these situations. For some families, shareholder and family agreements that outline clear decision-making protocols can ensure conflicts are dealt with constructively.
Other families may look at writing a family constitution outlining a shared family vision and purpose to guide decision-making. What is most important is giving the family a platform for communication so that they can come to the table for transparent conversations and define a forward-looking strategic direction for the family.
What successful families have in common is an appreciation that while assets are transitory, shared values enable a lasting legacy. As Lau notes: “While all these processes may change, it’s these values that last and bring the family together.”
Speaking to values, it would be imprudent to ignore the context that Asian families find themselves in.
“Asian families are in general characterised by strong family orientation where family members may even put family cohesion above self-interest,” Lau says.
Family legacy, culture and values play a vital role in shaping Asian family businesses and hence bring the right balance between familial bonds and profitability, making the business unique and long-lasting.
Family and business are more closely intertwined in Asia with more family members managing key aspects of the business, unlike the West where families rely more on professional managers to run the business. This reflects that, in general, the progress of professionalising family businesses is at an earlier stage in Asia. But looking post pandemic, this is a trend that is beginning to evolve.
With 75 years of experience in advising families in Asia, HSBC Trustee, as part of HSBC Global Private Banking, is uniquely positioned to support the changing needs of family enterprises as they grow, manage and preserve their wealth for the future.
Our heritage and expertise in family governance and succession planning can help to professionalise family businesses and facilitate smooth transitions – mitigating dilemmas between family and business to help clients build a sustainable legacy for generations to come. To learn more, contact us or your Relationship Manager.