With No Planning, Business Can Disappear

By Prof. Enrique Soriano

While I was attending a Family Governance class at the National University of Singapore Business School many years ago, my corporate governance teacher, Prof. Yupana, shared with us an important message related to how founders of family enterprises think about succession: “In Asia, founders and leaders of family businesses tend to be patriarchs, and these men want to continue at the helm of the organization until their dying day and to even talk about succession is almost like putting a curse on someone! Family members consider succession as a very sensitive topic because it might sound as if they were wishing their father or grandfather ill.” This remark is still as relevant today as it was centuries ago.

For many Asian families, particularly in Chinese families, family businesses remain deeply rooted in cultural tradition. Practices handed down by founders (and ancestors) are firmly embedded in thought and behavior, translating into some form of practice handed down from generation to generation. However, changes are happening amongst the younger generation of Chinese businessmen. As they increasingly get exposed to Western values, the gap between them and the older generation has become a source of conflict in the succession planning of family businesses. Incidences of family court business disputes are increasing at an alarming rate, with poor succession planning as the root cause of the problem.

In many cases, it almost always starts when a key business leader dies. The death of a founder can disrupt the very foundations of the business and the institutions where the lives of employees and the many stakeholders depend on. As I would emphatically share with my audience in speaking engagements, “When a business owner dies or becomes permanently disabled, the business itself may die or be permanently disabled not because something wrong was done but because nothing was done!” There lies the danger. When these business leaders are no longer around, the business suffers a hit, and most often than not, the damage can be irreversible.

In the book “Critical Generations – Out of the Succession Dilemma of Chinese Family Businesses,” author and The Chinese University of Hong Kong educator of family business governance Prof. Joseph P.H. Fan explained the reasons behind the shocking succession decline. First, intangible assets such as values, skills, and networks, although commonly found among 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 destroy or ruin families and their businesses.

To overcome these challenges, the book emphasizes three critical tasks: family governance, ownership design, and corporate governance. Chinese families need to install and enforce a system of governance that identifies shared values, consolidates family interests, and resolves conflict. The system should also regulate family members’ involvement in the family business as well as their exit. Fan added: “Effective tools should be consistent with Chinese cultural values, and any 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. But family members, however, expect to get a “fair” share of their inheritance, so after the founding generation passes away, family fights and court action inevitably follow.”

Another factor that Fan pointed out was 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.” Fan ends by highlighting the critical importance of having the proper accounting structure, “Chinese family firms must also implement more transparent accounting practices and greater checks and balances.”

To be continued…