2017 has certainly been a momentous year with unpredictable and turbulent events shaping the global economy and the course of history. These outcomes have undoubtedly altered our norm and as such, businesses across the globe are entering uncharted territory. To assist businesses dealing with these challenging times, we would like to wrap up 2017 sharing the top insights from our colleagues across Asia.
What you will find in this report is a collection of our hottest reads revolving around insights, observations and trends which are impacting Asian businesses and economic landscapes. The articles are written by our leading experts across FTI Consulting, and are intended to inform and help our clients. Organisations looking to protect value and capture opportunities in this dynamic environment can look to these articles for practical, workable solutions, and to assist in gaining an understanding on the range of complexities facing businesses today.
As a collective firm of experts, FTI Consulting offers a comprehensive suite of services designed to assist clients across the business cycle. From managing change, mitigating risk and resolving disputes, we help organisations across the globe transform the way they anticipate and respond to events, both at critical moments and for the long haul. Providing expertise on financial, operational, political & regulatory, reputational and transactional matters, individually, each practice is a leader in its specific field, staffed with professionals recognised for the depth of their knowledge and a track record of making an impact.
Family-run businesses in China constitute an incredibly important part of the national economy. Private enterprises accounted for about 86 percent of the Chinese market in 2015, with most of these firms being classified as family-run businesses, this group dominates the country’s corporate landscape, playing a huge role in employment, job creation and the generation of gross domestic product.
Economic liberalisation in the late-1970s provided the catalyst for China’s entrepreneurs to grasp new opportunities. Many leveraged this era of market reforms and rapid growth in the Chinese market to start-up and grow their own businesses. However, as China’s first-generation of entrepreneurs now hit their 50s and 60s and look to retire, questions around leadership transition and succession have raised many new challenges.
Succession planning for Chinese family businesses has always been a contentious matter. Having worked incredibly hard to build their own business, first-generation entrepreneurs in China express an overwhelming desire to maintain control within the family — even as concerns on whether their successors have the willingness and experience to manage the business begin to dominate the conversation. This reluctance to hand over management to outside professional managers saw a high-profile turn after Wang Jianlin, founder and chairman of Dalian Wanda Group (and currently China’s wealthiest individual), declared his intentions to pass over the reins of his business empire to an external professional manager. Dalian Wanda Group is China’s most prominent real estate developer as well as the world’s largest movie theatre operator.
In a recent address to his company, Wang was quoted saying: “I have asked my son about the succession plan, and he said he does not want to live a life like mine,” He then went on to say: “Perhaps young people have their own quests and priorities. Probably it will be better to hand over to professional managers and have us sit on the board and see them run the company.”
While this statement from Wang is quite out of the ordinary and does not conform to the traditionalists’ Chinese view that the family business shall remain within the family, it could be a sign of things to come as we expect to see many more Chinese families breaking tradition and relinquishing control of their businesses to let outsiders or professional management firms run their company.
Over the next 10 years, a number of self-made Chinese billionaires such as Wang are expected to address questions around succession. Family-run businesses across China will be entering into a new phase marked with a number of leadership transitions from founders to their children. As a result, succession planning (or lack thereof) has visibly become a concern.
While times of leadership transition always bring about uncertainty, this is much more pronounced in family businesses where the changeover can result in the loss of personal business connections and insider knowledge. In line with this, the track record for generational transitions has not been very favourable with one study (conducted by Professor Joseph Fan of the Chinese University of Hong Kong) showing that companies lose nearly 60 percent of their value during the transition from one generation to another.
The challenges of succession planning tend to be more acute in Asia where cultural sensitivities around the matter of retirement make it difficult to then broach the subject of transition. As a result, many families do not spend time carefully planning the transfer of management from one generation to another and consequently expose their businesses to more risk.
Traditionally, the Chinese family philosophy is to divide ownership of its business equally amongst its family members when the founder moves on or retires. Unwritten rules pertaining to governance and control of the family business are based on intimate histories, complex cultures and family values. Very often nothing is formally documented.
When a business is primarily under sole ownership and then divided and transferred to several owners, the likelihood of conflict is high. The goals and interests of one family member may not align with the others, making it very difficult for family members to work in harmony for the family name, particularly when interfamily clashes take place or if certain family members take advantage of the situation in order to reap more benefits than others. The scenario often results in disputes amongst family members that end up spilling into complex, drawn out and expensive legal proceedings. One does not need to look any further than the highly-publicised Yung Kee feud which unfolded in Hong Kong.
The founder of the Yung Kee business created his wealth and empire by selling BBQ goose. When he passed away, he amassed a fortune valued in excess of HK$1 billion.
The founder had perceived that Yung Kee would be managed by his two eldest sons. Accordingly, both sons received an equal share of 35 percent each in the business. The remainder of the Yung Kee business was equally divided amongst the founder’s wife, daughter and his third son, each receiving a 10 percent share. In unfortunate circumstances, the third son died and passed his 10 percent share to the second eldest son. A few years later, the founder’s wife transferred her 10 percent share to the eldest son, making both sons equal owners of the business. The genesis of the family dispute took place when the daughter decided to transfer her 10 percent share to the second son, thus making him the majority owner of the Yung Kee business. The second brother allegedly then shunned the elder brother from managing the business in any way which resulted in the elder brother launching legal action against his younger brother in order to either buy his shares out or wind-up the entire business.
One may argue that it was traditional thinking of equally dividing shares that then became the catalyst for the ensuing family feud. In the past, disputes were settled internally within the family and this was successful because the sole founder was always the dominant decision maker. As soon as you have multiple stakeholders in the fold, the rules of engagement must be clearly documented. Otherwise the room for disputes remains large and the chance of business value being destroyed is greater. This can be a foreign concept for Chinese families thoroughly embedded in their traditions who strongly feel that this is “not how we do things.” Accordingly, professional advisors are often called in too late, and are left to clean up the mess or manage the crisis, as opposed to assisting the family in preparing for the inevitable.
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