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Bringing the family business community together

Examining Ownership Of The Asian Family Business...

6th February 2012 Christian Stewart

Christian Stewart examines the ownership role in a family owned business in Asia.

Here, Christian Stewart examines the ownership role in a family owned business in Asia – not the management or leadership role but the impact of ownership highlighting some of the ownership issues to consider, with the underlying assumption that there is a family objective of wanting to continue the business as a family business; and of keeping the business in the family across generations.
 
When Does Ownership Start To Matter?  
If there is a full overlap between ownership and management, for example because you have a sibling partnership and all siblings work and own shares, then does it make sense in practice to think about a separate ownership role?  It will probably make sense to think separately about the ownership role once you have future potential family member shareholders (e.g. the next gen) who are old enough to start participating in family meetings.  
 
The Patriarch Does Not Think About Ownership
In overseas Chinese families there is a tendency for the first generation founder (“the patriarch”) not to think about the question of ownership.  However at the same time there is a tendency to divide up ownership equally among the next generation.  The first generation patriarch has never experienced a split between the ownership role and the management role, so the impact of such a split in roles may not be an issue that the patriarch is aware of. 
 
The patriarch may assume that the child who is going to succeed him in running the business (the future business leader) will enjoy the same degree of control that the patriarch has had.  That the future business leader will have the support of the other family member shareholders is often something that is taken for granted.  It may be assumed that if, for example, the eldest child is appointed as the next business leader, they can simply rule over their younger siblings because of family hierarchy.  However in practice, after the death of the patriarch, younger siblings sometimes revolt!   The next generation business leader will not enjoy the same degree of control and authority as his father had.
 
Leadership Succession & Voting Control
When you are thinking about who is going to succeed in the second generation as the business leader, one common question would be whether that future business leader needs to be given a bigger share in the company if not a majority vote.  Another option to think through is whether to use voting and non-voting shares, apparently a common practice in the US.  
 
But You Can’t Ignore Relationship Issues
However, these legal mechanisms do not rule out the need to think about the relationship issues.  Even if you have a minority shareholder or a shareholder holding only non-voting shares, you can still have relationship problems that upset the ability of the business leader to lead the business.  Just think of the example of Sally Bingham. 
 
In addition, research shows that (i) emotional commitment from shareholders matters in a Chinese family firm and (ii) shareholders who do not participate in management will have a different perspective than those that do.  Maintaining the emotional commitment of the outside shareholders is an important concept here. 
 
If the goal is long term family business continuity it is clear you cannot afford to ignore the minority or the non voting shareholders.  
 
Stewards Or Inheritors In The Next Generation?
Family governance expert James E. Hughes Jr., author of Family Wealth: Keeping it in the Family (Bloomberg Press), says that there is a threshold question in a Chinese family firm of whether the second generation shareholders see themselves as Stewards or as Inheritors.  Stewards are happy to work together.  Inheritors do not want to.   Hughes says that you cannot convince an Inheritor to become a Steward.  These two different archetypes just cannot work together. 
 
Can The Shareholders Work Together As Partners?
The other way of expressing this is there is the important question that needs to be address of “Can the shareholders work together?”  “Do they want to work together?” If they cannot - or if some of them cannot, is there an exit plan so that people can sell out without having a dispute?
 
Redefining The Sibling Relationship
After the transition from first generation to second generation, the siblings will need to learn a new way of working together as shareholders.  There is a process of redefining the sibling relationship.  To be able to work together successfully after the transition to the second generation, the  siblings need to find a more participative, collaborative, decision making process.  In an Asian family you will likely need the eldest sibling to lead this change in family culture.    
 
Relationships With Family Shareholders Matter
Every family is different but at the very  minimum, the family members who are running the business (in particular the successor business leader) need to make an effort to maintain good relationships and good communication with their family member shareholders.  You might call this “family investor relations". 
 
If you keep it at that level, with there being an objective of managing relationships well, this might lead you to think about doing work as a family shareholders group on communication and relationship skills.  You could think of bringing in an outsider facilitator for training sessions.  
 
Family businesses after all are relationship businesses and relationships need to be maintained.  You may think that the current relationships are on a good footing and need no maintenance work; but wait until there is a time of crisis and then see what happens to those relationships.
 
Good Fences Make Good Neighbours  
If you want to have good relationships with the family member shareholders, how can you do this without having clarity around the rules of those relationships? How can you have a good relationship with a shareholder unless the role of the shareholder is clearly understood.  There must be role clarity. 
 
Institutionalizing Roles To Meet The Long Term Goals
If the goal is a longer term family business continuity, then this again points to the need to institutionalize the roles - which is what family governance is about in the context of a family owned business.  If you have a long term goal, how are you going to address that goal just by thinking of it in terms of your current relationships? 
 
Accordingly a key question is: “Do you think it is just about managing the relationships - or should you be thinking about governance structures and processes so you can institutionalize family control?”
 
If you have the goal of long term family business continuity, the conclusion is clear; you need proper family governance for your family business.
 
Creating A Family Council
The starting point for family governance would be to create a forum for owners to talk about ownership issues and to exercise their ultimate control.  In practice this could be called the family council.  
 
One of the goals of the family council is to build family commitment for the business and to have the family members “speak with one voice.”
 
In addition to the reasons given above concerning the need to have clarity around the role of the shareholder, the need to institutionalize that role, and the need to ensure that family shareholders remain emotionally committed, there is another good reason for establishing a family council.  If the owners do not have a proper forum where their interests and concerns can be raised, the result is normally that the interests and concerns of the owners will be voiced in the wrong forum (e.g. the Board room) and can lead to family conflict.
 
What Does The Family Council Do? 
One of the first tasks for the family council is to prepare a shareholders’ agreement, so that there is a clear exit plan.  Alternatively the key details of the exit plan can be documented in the family constitution or a family policy.
 
Another primary task for the family council will be to ensure that emotional commitment for the family business is maintained.  How do you ensure emotionally committed shareholders?  By involving them and educating and developing them - and by giving them a real voice.  If they are essentially powerless, they will not participate.  
 
Family Policies To Address Predictable Problems
In family business, here in Asia and elsewhere in the world, there are predictable problems.  It is predictable that there will be differences of opinions between “inside” and “outside” family shareholders.  (An inside shareholder is one who plays a management role. An outside shareholder is one who does not.) 
 
The simplest example of this is that inside shareholders may want to accumulate more profits for reinvestment while outside shareholders may want to maximize the dividend payout.  Outside shareholders often complain they lack clear information about what is going on inside the business.
 
Part of the ongoing role of the family council is talk about how you are going to deal with these predictable problems, and to find solutions (and document them in family policies or a family constitution) before they ever become actual problems.  This is the planning and policy making process of a family council.
 
How important is this planning and policy making?  A study of some 50 South East Asian family firms concluded that the majority of Asian family businesses fail because of internal family feuds and conflicts (and not as a result of external factors).  And most family business conflicts are role conflicts and are therefore predictable. 
 
What Is Involved In Forming A Family Council?
When you form a family council you have to think about what roles it will carry out – what is its purpose – what processes it will engage in and what policies it needs.
 
It involves a process of forming a group.  Often the formation of a family council can mean the need to change the way the family shareholders make decisions and communicate among each other.  It might also need to a need to change certain old practices.  In short, often you are talking about making a change in the family dynamics.  Accordingly the critical thing will be the implementation.  
 

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