A lack of succession planning by family-run Asian firms is a challenge but also a business opportunity for wealth managers.

As reported earlier this week by this publication, a recent study of Southeast Asia family-run-firms shows that succession planning – or rather the stark lack of it – is a cause for concern. On the other hand, the dearth of such arrangements means wealth managers are ideally placed to fill such a gap. Guest editor Titien Ahmad expands on the initial report by looking at the wider picture of this important issue, and drills down into more of this report’s detail.

Although the majority of companies in Asia are family-owned, one in five business families lack a succession plan nor have they sought external advice on succession issues. This is according to research recently commissioned by the Labuan International Business and Financial Centre.

Although nearly half of the respondents have sought external advice on estate planning and tax liabilities, a combination of factors contribute to this reticence around succession planning. According to the report published by the Economist Intelligence Unit, low awareness, denial, cultural sensitivity and the relative youth – most companies are still first- or second-generation – of these business families limit such discussions.

The research interviewed 250 majority family-owned businesses from Indonesia, Malaysia, the Philippines, Singapore and Thailand. 62 per cent of the respondents were from companies with global revenues of $150 million or less while 11 per cent made $1 billion or more.

The Southeast Asian region has one of the highest concentrations of family-owned businesses compared to other emerging markets – 85 per cent of companies here are family-run compared to 75 per cent of companies in Latin America, 67 per cent in India, 65 per cent in the Middle East and 40 per cent in China. According to Credit Suisse, Southeast Asian family businesses account for 62 per cent of the region’s stock market capitalisation.

Indonesian businesses most well-prepared
The research found that Asian business families place a premium on a succession plan due to its perceived importance in attracting investments. 71 per cent of the respondents felt that it was easier to attract investment with a formal succession plan while 66 per cent believe that customers and investors will have more trust and confidence when a succession plan is in place.

However, the picture starts to change when drilling down to specific countries in the region. Some 78 per cent of Indonesian family-owned companies surveyed have a succession plan in place while 74 per cent have a family council that deliberates on family business issues. In comparison, only 58 per cent of respondents from Singapore have a succession plan with 40 per cent having a family council.

Reality differs on the ground
Although the numbers look positive overall, some of it may still be wishful thinking.

According to the report’s editor Kevin Plumberg, “retaining control is paramount for these business families. Only 2 per cent of the respondents will choose someone outside the family as a successor.”

“Although 67 per cent of the respondents say they have a plan in place and 73 per cent say the plans have been reviewed by boards, we must remember that the boards are usually composed of family members,” he shared at the report’s launch in Kuala Lumpur.  

“As family business are relatively young in Southeast Asia, the owners still retain firm control – the division between management and ownership is still being explored,” he said.

The report findings illustrate this point. While 74 per cent of respondents said the most capable person should run the company regardless of gender or family links but the reality is that 97 per cent of companies surveyed are still led by family members and 92 per cent have sons as their successors.

“Most companies use family councils, an informal arrangement. Formal structures such as family offices, foundations and trusts have not been widely adopted,” said Plumberg.

Family councils are usually used to communicate roles and responsibilities and discuss areas of conflict but they have varying degrees of authority nd scope. Discussions are not limited to company issues and not legally binding nor a permanent structure.

Still a cultural taboo
Compared to other regions such as Europe and America, formal institutions such as trusts, family offices and foundations are a relatively new concept in Southeast Asia.

Plumberg attributes it to the lack of awareness and also resources as companies that have a formal succession plan in place tend to be larger in terms of annual revenue.

It is also a sensitive issue culturally. “When we conducted the research, we had to broadly talk about management strategy rather than succession planning with a number of the respondents. Talking about succession planning raises issues around the founder’s mortality and also the company’s growth strategy,” said Plumberg.

Saiful Bahari Baharom, chief executive of the Labuan International Business and Financial Centre, agreed with Plumberg. “We promote a more formal set-up of wealth preservation and succession planning through foundations and trusts. However, we remain cognizant that this topic can be a cultural taboo,” he said.

“The power of the patriarch is very strong in Asian families as most companies in the region started developing in the last 30 years – the founders are usually still around. Even though the reins may be transferred to the next generation, the patriarch will still have veto power.

When you amplify that power with money and influence at stake, the external party will have to gain the trust of the family before being able to advise them,” he said.

Winds of change
Looking forward, an increasing number of respondents believe that external advice will be sought. While 18 per cent of respondents say that the board of directors will be made of up family members five years from now, 30 per cent believe that will be the case 10 years from now. Similarly while 12 per cent believe that the business will need external advisors for governing family relationships in five years time, 35 per cent think that will happen in 10 years.

Some of the more progressive families surveyed are starting to open up, for very practical reasons. The report cited Eu Yang Sang, a 140-year-old family business run by cousins.

With the company in its fourth generation of leadership, the shareholder pool increases. It is thus even more important to clearly define the owners and operators of the business.  As a publicly listed company, the board of directors must also agree to succession arrangements.

Half of the Eu Yan Sang’s six board members are non-family members.  Richard Eu, the group’s chief executive officer, believes that with Singapore’s shrinking family size and ageing population, the likelihood of needing to look beyond direct male heirs increases.

Plumberg added that there is an increasing trend for future heirs to rise through the ranks in a different company before re-joining the family fold. This helps to relieve the pressure involved in passing the reins to the next generation.

For now, however, Plumberg believes that succession planning remains an issue on the horizon rather than one on the dashboard.