Family Governance as a Tool of Next Gen Wealth Planning in Asia - Patricia Boon writes for Thought Leaders 4

Private Client Partner, Patricia Boon, has authored an article for Thought Leaders 4 on next gen wealth planning in Asia.

The article was first published in Thought Leaders 4 Private Client Magazine ‘Next Gen Wealth’ in August 2022 and can be read in full below.

It is well-documented that a good number of high-net worth Asian families are on the cusp of a very significant inter-generational transfer of wealth as, over the course of the next decade, we will see the ownership and stewardship of family wealth and family businesses pass from the hands of the wealth generators/creators of Generation 1 to Generations 2 and 3.

The families standing at the precipice of this change will, in some cases, not yet have considered the implications of this inter-generational wealth transfer or, if they have, may be uncertain as to how to deal with them. Family businesses are at their most vulnerable at the point of this transition, particularly when the business founder/wealth creator is still the person at the helm. For such families, family governance planning can enable them to meet the challenges that this transition to the next generation poses.

The main challenges facing families in this position are:

• to ensure that the value that has been generated by Generation 1 can be preserved, grown, and perpetuated for the benefit of future generations and/or for philanthropic purposes; and
• to equip the next generations to deal with the businesses, assets, or structures that have been passed on to them so as to avoid a diminution in the value of the business or dissipation of the wealth.

There are further sub-sets of challenges within these categories, including the risk of inter-generational and cross-generational conflict, risks to family harmony as the number of family members grows and becomes more disparate, and the risk of divorce.

If these challenges are to be navigated successfully, it is essential for Generation 1 to look carefully at how to involve Generations 2 and 3 in their succession planning and to obtain the next generation’s contribution and buy-in to the philosophy that will shape the family’s management of their businesses and assets for the medium to long-term. However, it is often difficult for Generation 1 to let go of the reins; of the respondents to the PwC Global NextGen Survey 2022, 45% said that they found it difficult to prove themselves as a new leader or board member in the business. In this context, family governance planning has an important role to play, as the implementation of a governance framework for families to manage succession to the business and/or control of family assets is a key way to involve the next gen today and to minimise the risk of dispute and wealth dissipation tomorrow.

Using a Family Governance framework to involve the next gen

The aim of any family governance strategy should be to ensure that there is a robust and flexible succession plan in place for Generations 2 and 3 (and beyond) to play their part as stewards of the family wealth and assets.

Good communication is essential to mitigating the risk of disputes and conflict, as it encourages transparency, minimises suspicion, and offers the opportunity for the stakeholders to have their say.

Where the family is at the start of the governance exercise, it may be helpful to have a third-party, such as the family’s trusted advisor, to co-ordinate the discussion process, meeting together and individually with Generation 1 and members of Generations 2 and 3. This is an important step to flush out areas of frustration, that are ripe to develop into points of conflict between the generations, so that these can be discussed and addressed openly at the outset. It is noteworthy that, in the studies looking at the difficulties inherent in inter-generational wealth transition, many next gens of business families who are surveyed cite their frustration that they are unable to have a voice. Consequently, open dialogue is a crucial part of allowing the next generation to feel involved and engaged.

The creation of a family council can ensure that each family branch has a voice and representation. Where there are family trusts, the family council can act as an interface with the trustees, ensuring a regular flow of information to the family members. The family council can also act as a ‘training ground’ for the next gen, making clear the expectations there will be of any family member who wishes to work in the family business, any requirement to have undertaken particular work experience within or without the family business, and/or setting out criteria that must be met for a family member to be considered eligible to work in the business.

A family council may also allow the next gen to:

• observe the workings of the family council before assuming a formal role;
• receive training in understanding the family business, responsibilities and duties of office-holders and shareholders, and financial statements.

Such training can help to identify at an early stage the leaders of the future who have the relevant qualities and skills to contribute to the business.

Where there are multiple shareholders, shareholders’ agreements are a valuable tool which can be used to educate the next generation in relation to shareholder co-operation. They are also useful for focusing the attention of Generation 1 as to whom shares should be transferred.

The involvement of experienced and trusted non-family management and advisors has a role to play, as these individuals can offer objectivity and can act as a sounding board to the different generations, as well as assisting in the transition of Generation 1 out of day-today control into an ‘oversight’/advisory role.

There is no ‘one size fits all’ solution to sorting out the myriad issues that business and wealth transfer will bring to the fore between family members.

However, what is self-evident is that a failure to consider succession planning and the involvement of the next generation (and beyond) in a timely fashion will increase the risks of family conflict and fragmentation of wealth to the detriment of all of the family members.

This makes it vital for wealth creators to recognise the value of involving the next generation in their succession plans early on, and to understand the means available to them to achieve this.