June 2017

WEALTH: The last full stop

Chinese_incensesTo talk of death is a taboo in some Asian countries, which makes succession planning for family businesses all the more difficult. Indrajit Basu reports. To safeguard their legacies and ensure continuity of their businesses, the founders of Asian family firms have begun to do what few relish: discuss what happens when they die. The idea is not only to safeguard the shareholding rights of the next generation. It is also to install a protection mechanism in the absence of the founder. “There is more interest in family governance and succession planning in Asia than any time before,” says Zac Lucas, the Singapore-based partner of Gowling WLG, a law firm that advises family offices. He says the emphasis is to ensure the succeeding generation manage assets effectively. “It is a fact that the founding generation [in Asia] is now in their 80s and there is no time left, so it has become urgent,” says Lucas. “However, it is also the fact the market perception of a family business that does not have a succession plan is not favourable, so they are having to manage that pressure.” Not just money
Asian families are in the midst of what is expected to be the largest ever inter-generational wealth transfer, worth trillions of dollars according to a recent Deloitte study. They are realising that they can no longer just depend on a leap of faith that inheritors will continue to prosper in the absence of the founder. The business environment has changed too, with technological change threatening the survival of businesses that cling to conventional systems and methods. Yet succession planning in Asia has a different flavour than in the West. While most founders in Western countries look at their businesses as investments that can be sold, to Asian founders, a business is a legacy. “There is generally no real feeling in this region that the family business is an asset. It is seen as a legacy and that means the prospect of the founding member to cash out before retirement is almost unheard of. In Western countries, it is generally seen as an investment rather than a legacy,” says Lucas. There are good reasons for that difference in outlook. Most often the family business is the only source of wealth for an Asian family. These firms have often been created in difficult circumstances through years of toil. Besides, to an Asian founder it is extremely important that their family name continues, says Cheong Wing Kiat, founder of Singapore-based Business Concept, which advises family firms. “My clients include business families in Singapore, Hong Kong, Malaysia and Indonesia, and many believe in the dictum: when a leopard dies, it just leaves behind his skin, but when a person dies, he leaves behind his name. They want their family name to remain glorious.” Family values
Succession planning has become all the more important because of the significant swelling of wealth in Asia due to economic growth. India is a case in point. “The scorching economic growth in India over the last 15 years has resulted in a phenomenal spike of wealth for many rich Indians and business families,” says Ketan Dalal, founder of Katalyst Advisors, a Mumbai-based family office advisory firm. These growing fortunes have raised concerns among founding members to set up management structures for effective governance and to ensure wealth is passed on to the next generation. Such wealth has also attracted the attention of outside investors, lenders, government agencies, shareholding activist bodies and even the media, who have sought to expose the succession plans of
well-known firms. “Indian business founders are very worried about their reputation, public glare, destruction of wealth and unsolicited takeover attempts,” says Dalal. According to Dileep Choksi of Universal Trustees, a family office adviser, Indians are compelled by the urge to retain family values and the joint family system. They may have personal rules governing the rights of the members and ownership of businesses. Unlike elsewhere in Asia, then, succession planning in India is following an evolutionary trend rather than an adoptive trend, as the way of life changes from a joint family system to being more nuclear. “Ninety per cent of the businesses in India are still owned by business families and that is why ensuring family harmony – and that ownership remains within the family – is becoming very important,” Choksi said. “In this change, Indian founders are trying to retain family values and incorporate them into the nature of business which still remains traditional in terms of being family-owned.” Hands on
Yet, succession planning in the region is fraught with challenges that not only deter business founders and wealthy families from planning their succession, but also present hurdles for wealth managers for offering sound advice. The biggest challenge is the fear of losing control. Unlike their counterparts in the Western world, the desire of founders to wield absolute control over their businesses and families is obsessive and deeply ingrained. “Getting family members to accept the fact that a change in status quo is needed and getting them to initiate the changes is a huge problem,” says Dalal. This is why most businesses continue to follow the owner-manager model in the transition, where the founding owners or their family members continue to remain as managers in the succession. They may, at best, be hands-off managers. This means that installing professional management becomes almost impossible. Multiplicity and complexity of laws are the other hurdles that wealth managers have to deal with while handling succession planning. The complexities may seem bizarre. In some cases, a different set of inheritance laws applies to a successor whose parents had a civil marriage than one whose parents were married in a religious ceremony. A grave matter
There are emotional issues as well. Indian families sometimes shun the practice of leaving behind a will because they find it uncomfortable to discuss dying. According to one expert, who asked not to be named: “In my practice I have encountered families who said they did not want to create a will and a consequent succession plan because it talks about the taboo word, death. Many don’t want to talk about death and that is a big issue.” There is also a relative lack, in India at least, of experts who understand succession planning. “It has come down to the question of credibility,” says Choksi, of Universal Trustees. “Succession planning is a specialised issue and requires special capabilities and knowledge to handle.” But the heartening fact is that Asian founders and their families are committed to the family and to their businesses. Choksi says, “One has to wait for the right moment to come because an average Asian is intelligent enough to know that one needs to plan for the inevitable.” 2017 funds global asia

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