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20 Nov 2012

Asia's business dynasties face generational challenge

Bernard Rennell

by Bernard Rennell

CEO North Asia, Global Private Banking; Global Head of Private Wealth Solutions, Private Bank

An 80-year-old Chinese man in Zhenjiang, China

Cultural taboos and a generational values gap can complicate succession planning in Asia

An extraordinary generation of Asian entrepreneurs is entering its twilight, throwing up uncomfortable questions about succession and intergenerational wealth management.

All too often, the passing of a patriarch has been the starting gun for bitter internecine feuds that devastate the family fortune and drag once respected names into the unwelcome glare of tabloid TV.

Much has been made of the ways that cultural taboos and the generational values gap complicate succession planning in Asia. There has been less emphasis on how many of the strengths that made the region's corporate patriarchs such formidable businessmen can be turned to their advantage when it comes to working out a smooth transfer of wealth and control to the next generation.

Successful entrepreneurs are used to constructing innovative business structures strong and flexible enough to stand the test of time … but sometimes miss the value of applying the same discipline to their legacy

The saying "From rice paddy to rice paddy in three generations" has its corollary in almost every culture around the world, and managing succession is often tricky, but in Asia the typical trajectory of collapse tends to have certain recurrent cultural and environmental themes.

For many of Asia's mega-corporations, the roots of success lie in the founders' vision, drive and personal relationships. The pivotal role of a single decision maker makes them nimble, the bonds of personal trust can offset an uncertain business environment, and the unquestioned authority of the patriarch gives them uncommon focus. But both the centralisation of control and the lack of intergenerational debate can lead to bitter battles after their death.

Many observers have identified the root of the problem as being the reluctance of traditional Chinese culture to talk about death. But while there are some cultural issues around communication, the experience of HSBC's unique trust and succession planning arm, which has been focusing on assisting wealthy families in Asia for almost 70 years, is that most business leaders are willing to engage on the topic.

The key hurdle is not cultural, it is trust. Many of Asia's tycoons fled the cauldron of the immediate post-Second World War period in China to settle in nations with volatile politics. It was an environment that rewarded discretion and tight family control, a legacy that makes seeking advice more problematic.

HSBC has been involved in formal trust and succession planning in Asia since the 1940s, and is Asia's largest trustee. Our experience shows that part of the solution is to shift the terms of the debate. The discussion needs to be more around planning for the longer term: not the next 5 or 10 years, but 30, 40, 50 or 100 years and beyond.

Successful entrepreneurs are used to constructing innovative business structures strong and flexible enough to stand the test of time despite the region's history of unpredictable economic and political shifts, but sometimes miss the value of applying the same discipline to their legacy.

Any functional solution also needs to take into account the succeeding generation, many of whom were educated in the West and have subtly different aspirations and expectations to the generation of patriarchs who grew up amid the turbulence of 1940s China.

One solution is to develop holding structures that maintain the integrity of the commercial empire and then integrate governance systems and processes that facilitate decision making over the longer term and provide an effective mechanism for resolving differences of opinion.

This is a resolution with cross-generational appeal. The frameworks that the tycoons create will continue to mould and guide the family long after they are gone – itself a living legacy. The new frameworks are closer to the more system-based business models many younger family members have encountered in the West.

Such solutions take time, not least to build up the trust between the family and the professional managers needed to handle the complex legal and financial details of such structures.

But the cost of avoiding the problem is clear. Research by Professor Joseph Fan of the Chinese University in Hong Kong shows that the net worth of family corporations owned by ethnic Chinese in Asia declines by as much as 60 per cent in the five years preceding the departure of a family patriarch.

Asian entrepreneurs have overcome many formidable challenges in building some of the most successful businesses in the world. Succession planning is the final challenge – one that, with expert help, can be overcome just as successfully.

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