Legacy Academy coaches businesses on how to keep it in the family
There's a lot of truth to the old Chinese proverb that "wealth rarely lasts three generations", says Chan Yue-kwong, the Café de Coral chairman.
"According to a 2010 study by the Chinese Academy of Sciences [CAS], 90 per cent of people running family businesses want to pass them on to their children, but 95 per cent of the second generation don't want to take them up," he says.
"The CAS found that three million private enterprises in China will face succession issues within five years.
"It's three decades after China launched market reforms, and those who became entrepreneurs in their 30s are 60 years old now. It's time for them to pass the baton."
While talk about succession in family businesses has mostly focused on big conglomerates so far, Chan says it is a pressing issue for small and medium enterprises, too.
"I have a friend who operates 10 factories on the mainland employing 50,000 staff. His son is 26 years old. One day this friend took his son on a visit to three of the factories. The son, who was getting to know the operations, was silent throughout the trip.
"When the visit ended, the son told my friend that he wouldn't be able to do better than him. The son made up his mind that day he would not take up the family business, as he didn't want to sully his father's name.
"My friend was heartbroken. The Chinese always want their family business to remain in the hands of subsequent generations, like it's a continuation of the bloodline."
Even when there is an heir to take up the reins, it's a challenge to keep the enterprise going.
That is why Chan set up Legacy Academy, an institution dedicated to studying how family firms can be sustained. Launched last month, it is run by Amen Lee Chi-shing, an expert on family businesses.
Besides research work, the academy provides consultation for family businesses, and will organise courses for professionals working in family business in collaboration with universities.
Lee's clients include Law Wai-keung, who inherited a dried seafood business from his father three decades ago.
Law began thinking about preparations to hand over the business to his children after he turned 50. So it was on Lee's advice that the retailer started giving his 29-year-old son, Alex Law Ming-kai, the leeway to modernise their business. More recently, father and son also set up a foundation to run activities that would bring family members together.
The younger Law had worked as a financial consultant for five years before joining the family firm in 2012. Before long he identified one item among their catalogue of luxury foodstuffs - pearl powder - as having greater potential, and last year set up a company, Pearl Culture Growth, to develop new products and build a brand.
"If I simply follow what my dad does and don't introduce any innovation, the family business will end up on life support in the face of rapid social changes," he says.
The eldest of three children, Alex Law feels he has a responsibility to head the business after his father retires.
"My dad never forces me to do anything. I grew up playing among the dried foodstuffs in our Sheung Wan shop so I have some affinity for the trade. But the company is run in a traditional way. We only sell the pearl powder as a raw material, not as end product.
"We don't have any branding. And there are so many types of dried foodstuffs, like abalone and shark's fin, it would take me at least 20 years to master the intricacies of selling all of them.
"So I decided to focus on one product and use new technology to grind the pearls into a powder finer than nano-particles for easier absorption into the human body."
An ongoing study led by Professor Roger King, director of the Tanoto Centre for Asian Family Business and Entrepreneurship Studies at the University of Science and Technology, shows a dearth of long-standing Chinese family businesses, compared to Japanese and European enterprises.
Although researchers scoured the world, they found it difficult to identify more than 10 Chinese family businesses that were at least 100 years old and earned annual revenues of more than US$100 million.
This situation can largely be attributed to the family values and mentality of Chinese entrepreneurs, King says.
They tend to divide their empires between their children, leading to fragmented ownership. Moreover, most are reluctant to bring in professionals. Trusting only family members greatly limits the talent pool.
Lee says this approach often leads to a nepotism that can cripple an enterprise in the long term. At the very least, potential heirs should first get experience working in other firms, rather than go directly into the family business, where they would be mollycoddled by colleagues.
"Many people do not know much about succession planning. They think everything is fine as long as the sons join the business to help them out," says Lee.
Business owners, he says, should start preparing 10 years before their retirement.
When two siblings don't have close ties, for instance, it would be better to give full ownership to the one most suited to running the firm, and give the other his share in properties, stocks and cash.
"Meritocracy is the key to business success."
The patriarch of the Law clan has been taking Lee's words to heart.
"My generation usually defers to our elders. I did whatever my dad told me to. He taught me to value business integrity and hard work since I was a child and taking up his business was a very natural thing to me. But I cannot use the same approach with my son," Law Wai-keung says.
"I have seen so many of my peers being plagued by succession problems. Either the second generation refuses to take it up and the business is sold; or the son mucks around after reluctantly joining the family firm.
"I was worried about my own succession, so I sought advice. I know I can't be an authority figure who calls all the shots. I need to let my son contribute to the business in his own way so that he can gain confidence in the process."
To nurture stronger ties and family harmony, father and son recently set up a foundation with several hundred thousand dollars to run activities that would bring the clan together - philanthropic projects, overseas trips and even an education fund for the younger generation.
"I proposed the idea and my dad agreed to serve as consultant," Law says. "I chair the board. My four sisters and their families also help in the business. So a representative from each of our families serves on the board.
"We meet once every two months to decide how the foundation money should be used, mainly in investments like stocks to ensure the fund's sustainability. Other uses include scholarship for descendants and family trips."
Their scheme has worked well so far. "Family matters are more organised this way," Law says. "In big families, people often grow apart after the central figure, the matriarch or patriarch, dies and the source of family cohesion is lost.
"By setting up the foundation, I can get family members to build a relationship from a young age.
"Otherwise, they will likely become alienated from each other and conflicts will arise later. The central figure in the Law clan is my dad, and later me. In future, the central figure will be the foundation, which involves every family member."
In planning succession, Legacy Academy founder Chan encourages more thought to be put into handling family relations, which are trickier than business considerations.
"Family is a place where reason does not always hold sway. But a corporation is a rational entity.
"The business side mostly involves transfer of wealth and company ownership. Writing a will, documents for financial instruments and trusts can be handled by outside professionals.
"However, there are many emotional elements involved in a family. Poor handling of family relations can affect wealth planning. That's why it's important for the family to set up a council and hold monthly meetings.
"They should set out a charter listing the rules regarding family matters. I hold monthly meetings in my own family. There's an agenda and we write a report after each meeting."
Parents should instil family values in children from an early age to minimise future conflict, he says.
"Education funds and venture capital funds for descendants who want to start their own businesses should be set up early. And more families turn to philanthropy instead of just donating money.
"But the family must come to a consensus on what kinds of charitable projects to get involved in. This can draw the family closer together."
For all the effort that they've put into carving out thriving businesses, King finds that the founders' greatest wish is usually to have a united family.
"At the end of the day, they don't create a world just so that their children can fight over it," King says.
"They want to preserve their wealth, legacy but also keep harmony in the family.
He says family values come before business.
"Parents need to groom the children properly so they enjoy a good relationship."