Family businesses: struggles around succession
With a focus on family business succession, Citywealth focuses on the issues that arise when working on succession planning.
An increasingly tech-filled world is having an impact on all sectors and family businesses are not exempt. With a focus on family business succession, Citywealth focuses on the issues that arise when working on succession planning and when heirs don’t wish to stay in the traditional family business, looking at what to do in the long-term outlook.
An overview on family businesses: issues when coping with technology
Intended as the ability of digital technology not only to collect data, but also to establish trends and make business decisions, digitalization impacts the way business is done. Looking at the issues family businesses are facing operating in the current tech-filled world, Arabella Murphy, Mediator, IPOS Mediation, says: “Family businesses face the same issues as every other business, but with the additional backdrop of their desire to keep the business going for future generations. In a fast-moving business world, that’s not always easy.
One key risk for family businesses in the modern age is the lightning speed with which information flows. Any family member’s unwise social media post or unflattering comment can be instantly linked to the business, leading to difficulties not generally faced by publicly owned companies. Many family-owned firms have had experience of a grandchild speaking out against something core to the business, a high-profile divorce in the family, or siblings squaring up to one another in court. If an individual shareholder in a public company suffers a setback, nothing happens; but with a family business, the association is made and can never be deleted.”
Ee Lin Chan, Family Business Succession and Governance Adviser from Singapore shares some insights on the SEAsian family businesses she is in direct contact with. She confirms: “In terms of the SEAsian family businesses that I work closely with, indeed one main issue they face is formulating and adapting strategies suited for an increasingly digital world, which often plays out as G1-G2 conflicts in the boardroom and elsewhere. Besides this, the main issues they face depend on whether the family business is listed or not.
For families with significant control of listed family businesses (which form the bulk of listed companies on Asian stock exchanges), I consistently see that their main issue is with regards to professionalising the business, e.g., where family members move away from daily management roles into purely non-executive director roles. This requires planning and careful transition to ensure that the staff, family members and the professionals who join the family business, are mentally prepared for the change in culture, in order to maximise the successful entry, successful integration and long-term retention of the right professionals. I have witnessed significant value destruction of the family business if this process is not well managed.”
Ee Lin Chan continues with a mention to private family businesses: “On the other hand, SEAsian families with private family businesses where family members remain in active management roles tend to continue to wrestle with certain corporate governance practices, such as consistently segregating family assets from business assets (requiring a mindset change across all members of the family) or not allowing family members to operate/own competing businesses while working in the family business. Lack of such good practices often leads to much tension and argument within the family which inevitably overflows into the boardroom and impacts the running of the family business.”
Ineke Koele, Attorney at law, Tax lawyer, Koele Tax & Legal Perspecta, focuses on the key role of younger generations and adds: “Increasingly, the need to regenerate is pressing family businesses in a world where technology is more important every day. Regeneration and revitalization is, in some respects, contrary to the life cycle of a family business, where the elder generation has difficulties in ‘letting it go’ and younger generations are far more tech savvy than their parents. Only families that respect the importance of younger generations for the revitalization of the business, have the chance to remain successful.”
Family business succession: when heirs don’t want to stay in the (traditional) family business
“For any family, the transition from one generation to another is a unique moment, but for the heirs to a family business it’s particularly striking,” outlines Arabella Murphy. “It is usually an event for which everyone has prepared, and everyone knows what their place will be. Those who are going to take over the business will usually have been identified years before and are likely to have worked in the business to ensure they are ready. Until recent decades, there was an almost universal assumption that one child (often the eldest son) would succeed his father in running the business, and they would be trained for years to do that – no matter how undeserving the father thought his heir was.
More recently, it’s not at all uncommon to find either that the parents don’t see any of their children as likely successors, or that none of the children want to take on the business. It’s an interesting shift, as Generation Z have a much broader range of career options – and often a desire to ‘give back’ or live in a more environmentally responsible way which, for some, precludes a career in business. More interesting still is how each child will then ‘honour the legacy’: they may not run the company, but they may inherit huge wealth. How will they take that unique opportunity to make their mark in some other way?”.
Ineke Koele stresses: “There is indeed a trend that younger people do not automatically step in the business. That should not necessarily be a problem, as management of a family business does not necessarily have to be executed by family members. Of course, it raises the main question that every family must ask itself: ‘What is the reason we stay in this business?’ If it’s not linked to creating a future for the younger generation, what is it?”
Considering SEAsian family businesses, Ee Lin Chan dwells upon the sense of duty as the driving force behind heirs’ decision to stay in the family business: “From my experience working closely with SEAsian family businesses for over a decade, heirs generally still want to stay in the family business, sometimes more out of a sense of duty than passion for the business, mainly out of a sense that it is an honour and privilege to do so. In most highly traditional Asian families, the first born male or male of highest birth order is expected to be the successor regardless of aptitude or skill, although I have seen the more progressive families select younger sons as successors if they are exceptionally talented and suited for the role.
For SEAsian families where there are no sons or the (only) daughters shy away from being the successor, it is my experience that professionalisation becomes the most often chosen path, with preparation starting well ahead of the expected point of transition.”
What are the problems that usually arise and possible solutions to implement when working on succession planning for family businesses? Our experts think that…
… the biggest challenges usually fundamentally stem from unresolved emotional issues that impede authentic communication within the family, rather than disagreement over the content or technical issues of ‘what to do’. These communication problems (across generations and/or within the same generation) then impede the succession planning process because family members are unable to truly understand what each person’s concerns and wishes are, and the family continues to operate alongside unspoken assumptions and misconceptions. A family is an emotional system and any change impacting the system (new birth, death, illness, marriage, divorce, economic impact etc) disrupts existing patterns of behaviour, resulting in stress and tension. The families I advise are often stressed, meaning they are emotional systems flooded with anxiety. To cope with this, family members often use automatic patterns of behaviour to manage the anxiety, such as passing anxiety around (e.g., scapegoating/ name-calling) or bringing a third party or entity into the relationship to reduce tension (triangulation), amongst many other coping mechanisms. However these are mere distractions and do not resolve the real root of the problem, but in fact often keep the issue going on and on.
The situation usually requires an advisor who is able to mediate and help the family communicate better. Neutral facilitation over time helps parties better understand the perspectives and concerns of the other, and I often find that family members do eventually come round to working together to co-create a succession plan that engages key members and secures sufficient buy-in. The process cannot be rushed and some families take much longer than others. Even if some may not agree 100% with the plan or family rules, the crux is to help them reach the point where they do not object to enough to stymie the entire process. Ee Lin Chan
… the head of the family business may often be looking among his children for his successor – that is, someone who thinks like him and will run the business the way he has. The ‘carrot’ of succession may be dangled or withdrawn, offered as a reward for ‘good’ behaviour, or cancelled as a means of signalling that the heir is not sufficiently aligned with the father. There are plenty of very public examples of businessmen in their 70s or 80s still running the family company. They have incredible talents, but some may also not want to give up the reins or admit their mortality. For some of those people, none of their children will ever measure up. Can that lead to a crisis? Yes, it’s the kind of mindset that can lead to an unprepared heir taking the company on, or a family disagreement, or even businesses leaving family ownership.
More forward-looking families talk about succession at an earlier stage – most successful family businesses have been doing this instinctively for decades or even longer. People talk a lot about ‘family governance’, often in a way that suggests it can lead to a written manual that embraces both the business succession and what happens to everyone else. It can, but it doesn’t have to. It can be a big conversation – a project leading to a written agreement – or a series of discussions to which the parents and the children each contribute, and which leads only to a common understanding. Some families find it helpful to have a mediator or other facilitator to help them with this process. Sometimes, as with one family I worked with, the children’s own answer is that the business should be run by professional management, or should be divided or even sold. Not every business owned by a family has to be a dynastic family business – sometimes, the shares (or just their value) will pass down the generations, but not the management. Ensuring the future success of the business through professional management can still ‘honour the legacy’. Arabella Murphy
… most problems arise because the ‘client’, normally the elder generation, has strong ideas about ‘who is what’ – one son is excellent, the other is chaotic, the daughter is married to a spendthrift man, all kind of stereotypes – however they do not see their own responsibility in the patterns that are created within the family. In reality, the situation is always far more nuanced and sometimes completely contrary to what the client is thinking. The problem is that lawyers and advisors take these stereotypes as ‘relevant facts’ and therefore, as a starting point for a succession plan. Another problem is often created where families consider the tax position as the premier reason to plan around: for example, in the Netherlands, families expect a reduction or even abolition of the very generous exemption of gift and inheritance tax for business enterprises and therefore they transfer the business as soon as practically possible to the next generation. As this may cause serious consequences for children, they tend to seal the transaction with mechanisms that effectively block the children from the practical consequences of ownership. This is often a recipe for disaster, as children have the legal entitlement without the responsibility that comes with it and will not feel taken seriously. These structures are therefore used as a way for the elder generation to maintain control, not seldom infinitely, with tax issues as excuse.
The remedy to most of this is to create a process for a succession plan, and not consider it as a transaction. The process should take a few years and in this process the various family members should be involved at an equal footing and be inspired to transform into a new configuration. It is important that there is an open-minded atmosphere, not excluding possibilities from the outset and to be curious about how the family is transgressing going through the different phases of transformation. Tax and legal aspects are of course relevant, but only in the last phase of the succession planning when the new configuration has emerged. Ineke Koele
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