For first-generation wealthy entrepreneurs with businesses they plan to pass on to their descendants, there can be some enormous challenges to be overcome. Succession planning and preparation is critical for a proper handover, as is keeping the enterprise growing at a sufficient rate to support a growing family, and wise long term wealth management.

Increasingly, smart families around the globe are realising more formalised frameworks, policies and processes are the key to successful inter-generational business and wealth planning. After all, only 30% of family-owned businesses survive to the second generation, less than 12% to the third, and only 3% to the fourth, according to the UK's Institute for Family Business.

Dr Steen Ehlern, managing partner of the private family office Ferguson Partners in London and Zurich, says that despite the numbers, still fewer than one in three family businesses worldwide has any formalised family governance in place: "It is really very important to have a formal family (business) governance structure, which is as strong on the corporate level as it is on the family level," he says.

Vision and objectives

Such a structure clarifies the roles, responsibilities and interests of the three interdependent groups in a family-owned business, namely the family, the ownership, and the business. Family governance, like corporate governance, typically starts off with a family constitution or charter, which documents a whole raft of protocols around the family's vision and objectives for the business.

"You have to have a family vision," says Dr Ehlern, "to basically set out what the business is there for. It is not simply a money machine, but a means to support the family and future generations financially, as well as a shared endeavour to keep the family together. This charter will also include key policies relating to family members' employment, management succession, and the ownership and transfer of shares."

The constitution, not normally legally binding but is instead a flexible, living framework outlining the rules of the game, which might also include a code of conduct on how different family members should treat each other, and it may empower family governance bodies and committees to make decisions.

These bodies should in turn include a family assembly, open to all family members, and a family council, formed of elected representatives of the family and tasked with making decisions on its behalf. The family council is effectively the board of directors of the family, reporting to the whole family and potentially creating committees to deal with things like education or philanthropy.

Dr Ehlern suggests all these governance structures should be put in place as early as possible in the life cycle of a family business, before any disputes have had an opportunity to arise (although conflict resolution guidelines are also a vital component of all the frameworks). He also recommends family meetings take place periodically - at least annually and preferably more frequently – to keep all interested parties fully up to speed on the finances, business and family matters.

Enduring family wealth

Li Lee Tan is counsel and the head of the private client and trusts practice at Appleby in Hong Kong. She says Chinese and Asian families have often focused far more on the growth of their businesses rather than the growth of their wealth, but are waking up to the idea of enduring family wealth and the business of managing a family.

She says: "In the first place, families, and especially the founders, need to recognise that while they are very good at setting up corporate structures for their business, with various companies and fund structures, running the business of the family itself also needs proper structuring in a way that allows the family to remain successful for future generations. That starts by setting out the vision, mission and values of the family, which perhaps stretches beyond the family to society and the wider community. Many Asian families have a tradition of supporting philanthropy – education or alleviating poverty in their poorer home towns, for example."

In Asia, family businesses are still very often in the hands of the first generation, in contrast to the often more sophisticated multi-generational family businesses in Europe and North America. A particular challenge arises when families look to involve the second generation in the business – individuals who may have studied and worked abroad, and have frequently returned with a mix of Asian and Western values.

Succession planning

Dr Ehlern does a lot of work with clients in the Middle East, where modern families can sometimes use offshore vehicles to hold or segregate assets in order to be more flexible with regard to forced heirship under Shari'ah law. But still he says many families in the region are conservative and pass the business on to the eldest son, which may or may not prove successful, or there is a delay in succession as a result of family feuds resulting in a possible disruption to the business. "Many family businesses in the Middle East face pressure to transition to the next generation within the next few years," he says. "So succession planning is a highly sensitive and very emotional issue in the region. More family businesses now seek advice and support from outside experts and consultants."

When family businesses fail, it is often because there is no qualified successor, or because transition is handled badly. Preventing that happening requires careful career planning for the next generation, as well as education, training and mentoring to raise their understanding and increase their interest. Often the answer to keeping the family and business together lies in creating shared visions and values, communicated openly, discussed frequently, and making use of clear dispute resolution procedures", Dr Ehlern says.

Li Lee Tan says: "The running of a family business often involves different branches of a family, with some active and some not, and there may be cultural differences between generations because of the opportunities the younger generations had over their parents. Each generation can have really quite different focuses, and the question is whether they are able to come up with common family visions and values that can be translated into effective succession plans. Typically that works best with the use of more formalised frameworks."

Originally published in Wealth Structuring 20:20, 2015.

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