Family Business Consulting in Asia: The Consultants Tool Kit

Christian Stewart*

Family Legacy Asia

Suite No. D, 17th Floor, Ritz Plaza,

122 Austin Road, Tsim Sha Tsui

Kowloon Hong Kong

Tel: + (852) 2369 3309

Email: info@familylegacyasia.com

*Managing director of Family Legacy Asia (HK) Limited, a process consulting firm based in

Hong Kong. Christian is also an associate of the Boston-based think tank and consultancy Wise

Counsel Research Associates. Mr. Stewart assists families around Asia with family governance

and succession.

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Family Business Consulting in Asia: The Consultants Tool Kit

Abstract

Recent research shows that succession planning and family governance while highly important to

Asian Families are issues that are relatively undeveloped in practice. There is an important role

for family advisors and consultants to assist families to preserve family harmony, values and

culture. This paper provides an examination of four culturally relevant frameworks or models

that can be used by advisors when working with Asian family firms.

.

Keywords: Estate Administration, Family Business, Consulting, Asia

Paper presented to The 2nd International Conference on Private Capital and Intergenerational

Wealth, Hong Kong 2016.

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Family Business Consulting in Asia: The Consultants Tool Kit

Introduction

In 2015 the Business Families Institute at Singapore Management University released a report

titled “Asian Business Families Governance: Crossing the Chasm for Intergenerational

Change”, based on a survey of 102 Asian families (Koh et al. 2015). The Report concluded that

while Asian families state that they are committed to business continuity they are not doing

anywhere near enough to address succession planning, family governance and engagement to

preserve family harmony, values and culture.

There is therefore an important role for advisors to family firms in Asia to help families address

the above matters. Following is an examination of four frameworks or tools that can be used by

advisors when working with Asian family firms. Asian family firms tend to like references to

studies that are specific to Asian families; they like to know about examples of other successful

Asian families. The first of these frameworks fit this requirement and is specifically relevant to

the overseas Chinese owned family firm. The second and third framework could be applied to

any family firm but the emphasis here is again on the overseas Chinese family firm.

The fourth framework is based on the book Cross Cultures: How Global Families Negotiate

Change Across Generations by Dennis T. Jaffe and James Grubman (Jaffe and Grubman 2016).

The authors of Cross Cultures label the three major cultures around the world today as

Individualist (Western, Anglo-Saxon countries); Collective Harmony (derived from

Confucianism); and Honor (found in places as diverse as Latin America, India, the Middle East

and Southern Europe) cultures.

In Collective Harmony culture, the family unit is more important than the individual, family

members have their roles to play in the family (which continues in their adult lives), there is

respect for elders, for family hierarchy and for ancestors. Asia’s Confucian wealth creators

attribute their success to having lived their lives in accordance with traditional Asian values

which they want to pass on to future generations. It is a hierarchical, patriarchal culture (though

there are also matriarchs).

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The fourth framework to be discussed is intended for use in any cross-cultural situation but is

particularly relevant to Asian family enterprises where the older generation has grown up with

traditional Confucian values; while the younger, rising generation of the same family has been

exposed to Western individualistic culture.

The Ownership Life Cycle Framework of Chinese Family Firms

The first framework is the Ownership Life Cycle Framework of Chinese Family Firms based on

a paper by Wong (1985). Under this framework there are four stages of ownership of an ethnic

Chinese family firm.

The first phase is the Emergent stage, essentially a start-up business. At this point, the

business might not have a single controlling shareholder and might not be properly

described as a “family business”; but if the business survives then it can move into the

second phase where ownership is Centralized, under a single controlling shareholder.

The controlling shareholder in the Centralized stage then becomes known as the

“business founder” or the family “patriarch”. This stage is referred to as Centralized

because the business founder unilaterally makes all ownership, management and often

family decisions.

The third stage of ownership is referred to as the Segmented stage, and refers to the time

when the shares become divided amongst the children of the business founder. The

framework assumes that the siblings often are forced to continue to own and operate the

business together if it is not easy to either liquidate the business or to divide up the

business interests between each sibling.

The fourth stage of ownership is referred to as the Disintegrative stage and this stage

starts once shares start to pass into the hands of cousins. Under this framework, the

Disintegrative stage usually marks the decline of the business and corresponds to the

Chinese saying that “family wealth does not survive three generations”.

This framework reflects the Chinese tradition, not of primogeniture, but rather the “Equal

Inheritance Rule”. Under the Equal Inheritance Rule, the father is expected to leave ownership of

his shares equally amongst his legitimate male heirs. Hence when the shares pass into the

ownership of the siblings the ownership is “segmented” as ownership is shared equally among

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each male sibling.1 At the same time, while ownership might be equally divided, there can still

be a hierarchical order within the family, with younger members expected to be respectful of

elder family members.2

The business moves into the Disintegrative stage when one of the siblings passes away and

leaves his shares equally amongst his own sons. Therefore the Disintegrative stage marks the

start of a period of ownership where the share ownership fragments, and there are multiple small

shareholders.

According to the Life Cycle Framework:

(1) The business will decline and fail in the Disintegrative stage because there will be too

many small shareholders, most of whom are not involved in the operations of the

business, who are unable to make effective ownership level decisions together;

(2) As each individual shareholding becomes too small to be meaningful, the emotional

commitment of family member shareholders who are not working in operations roles,

breaks down; they stop supporting the family members who are in operations roles; and

(3) On the other hand, the longevity of the business can be extended if one of the siblings or

cousins were to buy back a controlling ownership interest in the business, thereby

“recycling” ownership of the business back to the Centralized phase.

The Life Cycle Framework is comparable to the “Developmental Model” that describes the

ownership circle in the Tagiuri and Davis (1992) Three Circle Model as going through the stages

of Controlling Owner; Sibling Partnership; and Cousin Consortium, but it is helpful when

working with family firms in Asia to be able to refer to research specific to Asian /Chinese

families. The description of the breakdown of emotional commitment of the small cousin

shareholders and their lack of interest in supporting family members in operational roles is also

fully consistent with the Three Circle Model prediction that a stakeholder’s location within the

1 In a “traditional” family daughters might not receive any share ownership, or daughters might receive half the share of a male heir. It is not uncommon now to see daughters receive a share equal in size to sons. 2 It is interesting to think of this in terms of the Taguiri and Davis (1992) “Three Circle Model”; in the family circle there is a hierarchy, with elder siblings assuming a natural leadership role. In the ownership circle, the Equal Inheritance Rule might create an expectation that ownership should be equally divided. Expect trouble if in the management circle, the next generation business leader is a younger more competent sibling!

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Three Circles governs their perceptions; and that over time, the ownership circle starts to pull

away from the management circle.

Perhaps business founders the world over are similar in their focus on the management circle but

this is particularly so in the case of the overseas Chinese business founder. Anecdotally, it is

often said that in Chinese family firms, there are poor boundaries between ownership and

management. If you ask the founder of the Chinese family firm what are his thoughts with

respect to continuity of the firm, his response is that it will be critical to select at least one, if not

more of his children, who are capable managers. The founder typically has no concept that there

is an ownership role separate from the management role.3 The ownership role starts to matter

once there are going to be some family members who are owners but not operators.

The beauty of the Life Cycle Framework is that it clearly points to the importance of the

ownership role, not the management role, as driving Chinese family firm continuity. Therefore

“ownership is more important than management”. In advising the Chinese business founder, if

there will be a scenario where there will be some family members who are “owners and

operators” and some who will be “owners and not operators”, then the founder can be guided on

the importance of developing a separate ownership role in the business.

The Life Cycle Framework points out that family firm continuity requires an ownership group

that are able to make effective joint decisions together concerning the business (ownership level

decisions, not operational decisions) and that it is important to cultivate the emotional

commitment of those who are owners but not operators. To be able to make effective joint

decisions together implies that the owners are educated as to the ongoing performance and

strategy of the business.

How do you maintain emotional commitment to the business, especially by the owners who are

not involved in operations? Carlock and Ward (2001) in their book Strategic Planning for the

Family Business, Parallel Planning to Unify the Family and Business point to planning for

3 Indeed if the founder is succeeded by a sibling partnership in which all of his siblings have an equal shareholding and all of those siblings work in operational roles, then again those siblings are unlikely to perceive that “ownership is separate from management”.

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family participation as being the key to maintaining emotional commitment. Emotional

commitment can also be preserved if the family are aligned around a common, articulated set of

shared values, and there is a shared dream that is felt and real to the family members.

Paradoxically, having the option to participate is also a contributor to emotional commitment; in

other words, your participation is voluntary. Which comes to another point from the Life Cycle

Framework; that ownership fragmentation has predictable entropic consequences for the family

firm and, ownership consolidation contributes towards prolonging the life of the family firm. In

other words, if the business founder has a personal dream of business continuity, then it would

make sense for him to plan on breaking from the Equal Inheritance Rule and leaving share

ownership only to those family members who are truly interested in taking on the responsibility

of operating and continuing the business.

Alternatively, doesn’t it make sense to plan on a mechanism for facilitating the consolidation of

share ownership; a mechanism to allow for easy “pruning” of the ownership tree? Therefore, the

Life Cycle Framework can also be relied on to point to the importance of a family spending time

developing the terms of a shareholders agreement addressing the question of how a request to

sell shares in the family firm should be dealt with, including the critical question of share

valuation.

Can the Family Members Collaborate?

The second framework is to address the question of whether the next generation of business

owners have the capacity to collaborate – to share power – or not. Following on from the

conclusion that ownership is more important than management, and understanding the critical

importance of the owners being able to make effective joint decisions together concerning the

business, this points to the importance of the advisor to an Asian family asking them to reflect on

the question of: “can the owners – or future owners – collaborate?”

Just because a patriarch will follow the Equal Inheritance Rule does not imply that the siblings

can work together collaboratively. In some cases the patriarch plays the siblings off against each

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other so that he can retain power, but thereby destroying any chance of the siblings actually

working together once the patriarch is gone.

Implicit in the concept of “collaboration” should be factors such as the family members (i) have

a clear understanding of the ownership role; (ii) there is an acceptance of the common goals and

objectives of the group; (iii) members of the ownership group can treat each other as equal

adults; (iv) decisions can be made based on relationships are that are horizontal not hierarchical;

and (v) decisions can be made based on the best interests of the group and individual agendas

can be put aside.

When working with family owned businesses around questions of transition and continuity it is

suggested that an advisory style that focuses on advising on process issues, while leaving the

client family in charge of making its own decisions, is more effective than taking an expert

advisor role.4 Expert advice is less likely to be implemented by the entire family, when compared

to decisions that the family develop on their own.

Secondly, when working with family firms on these issues it is also suggested that a purely

“structural” approach is not sufficient; that there has to be a recognition that family culture has

the capacity to “eat structure for breakfast”.5 In his book Succeeding Generations (Lansberg

notes that family firms often have ownership tied up in trusts designed to prevent family

emotions from disrupting the management of the business. Lansberg notes that:

“No matter how strong the legal dam erected by the principal owner, it is likely to give

way under pressure from members of succeeding generations.”

If ownership of the business is going to be shared in the future, the question of whether the future

owners have a track record of being able to share power at the ownership level has to be

considered. It is suggested that even if there will be one single shareholder who has majority

voting control, or even if ownership is going to be entirely held in trust, the question of whether

the shareholders or the beneficiaries have the capacity to collaborate still has to be considered. If

4 For a discussion of different advisory models see Schein (1999). For a description in the family business context see Bork (1996). 5 See Wesley (2014)

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as a matter of family culture and expectations, each sibling has an expectation of having their

own ownership interest or stake, yet the legal structure gives one (or some) of the siblings voting

control that they then exercise to deprive the non-controlling siblings of any voice, there are two

predictable consequences:

The first is that there will be a break down in family relationships. Yet it is almost a

universal value in Asian families for the business founder to state that family harmony

and unity is one of the key things that he (or she) wishes to preserve.6

The second consequence is that the siblings with the minority stake could be forced to

resort to legal challenges such as claims of minority oppression or for breach of trust

against the siblings with ownership control; unless there is a mechanism for them to exit

by disposing of their ownership interest.

This leads to the following flow chart, which can be used as the basis for raising the topic of

level of collaborative skills with a client family.

Question Yes No NotesQuestion 1. Can the family members collaborate together?

If yes, then shared ownership of the family business is a feasible option.

If no then go to question 2.

This is not to say that there might not be one shareholder with a majority interest.

Question 2. Do all of the family members have traditional Asian values such that they would accept business leadership based on family hierarchy?

If yes, then shared ownership of the family business is a feasible option.

If no, then go to question 3.

In this scenario the family culture is such that family members may have equal or significant ownership stakes but will not exercise their ownership rights and will defer to leadership based on family hierarchy.7

Question 3. Is there If yes, then start If no, then go to 6 Professor Roger King from the Hong Kong University of Science and Technology refers to the “Three P’s” - three things that the older generation Chinese wish to preserve, being Legacy, Wealth and Family Harmony and Unity. 7 The trap to be careful of when considering Question 2 is the business founder who assesses that the answer to Question 2 is “Yes” but who does not see that his family will change once he is no longer around.

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time to develop collaborative skills amongst the family members?

working on developing collaborative skills amongst the future owners of the business so that in the future (when they have those skills) shared ownership will be a feasible option.

question 4.

Question 4. Is there an exit mechanism or is it possible for the business to be sold?

If yes, then even if there is no capacity to collaborate in making ownership level decisions, at least it is a possibility for a shareholder to sell his/her shares and exit from business ownership.

If no, then it is predictable that the family will not be able to make effective ownership level decisions together and that the business will decline based on the Life Cycle Framework of Chinese Family Firms.

There are limitations to this table. For example if an exit mechanism has been agreed in advance, in a private company context, typically there is still no guaranteed right to exit. On the other hand, if there is no agreed exit mechanism, this does not preclude an interested owner from negotiating with the disinterested owners to buy them out.

Traditional advisors who operate from the “expert advisor” model and may find themselves as

being constrained to identify their client as being the business founder (and not the wider family

enterprise system). If this is the advisory model, it is still going to be important to be able to

effectively advise the business founder on his or her options, for the advisor to get an accurate

picture of family relationships and skill sets. To obtain this accurate picture, the advisor might

request permission from their client to meet with the rest of the family members or to observe the

family members when they interact together in family meetings or in board or executive

meetings, to get a feel for their collaborative skill sets.

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Getting permission to consider the relationships and skill sets of the family members beyond the

business founder should be easier for an advisor following the process consulting model, who

could address the question of collaborative skills and family dynamics when first working with

the family as part of an assessment stage of their consulting process.

As the above table indicates, if future shared ownership of the family firm is likely to be the

preferred option but there is little evidence of current collaborative skills among the future

ownership group, then the advisor (regardless of advisory approach) can help the family to plan

ongoing experiential opportunities to develop their joint decision making skills together.

Stewards & Inheritors

The third framework relates to understanding the ownership philosophy of each shareholder or

future shareholder in the family firm.8 In practice, it is very common to find that the members of

the second generation in a Chinese family firm will either see themselves as an “Inheritor”, or as

a “Steward”.

The term “steward” refers to a member of the second generation who wants to work together

with his or her fellow siblings to see the family firm continue under family ownership. They see

themselves as being under an obligation to pass on the family firm as a legacy asset to the next

generation. To such a person, legacy is important. A Steward is likely to be emotionally

committed to the family firm.

On the other hand, an “Inheritor” sees their ownership in financial terms. Such a person is more

like an arm’s length investor. Importantly, they want to be their own person, and they may not

want to feel like they have to work together with their other siblings. They may lack emotional

commitment to the family firm.

8 The Stewards & Inheritors framework was developed by Hughes (2010) and Hughes, Massenzio and Whitaker (2012)A version of this material has previously been published online at http://www.campdenfb.com/article/next-gen-stewards-or-inheritors.

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The paradigm of a Steward is very different from the paradigm of an Inheritor. It is important to

note that:

Neither of these two paradigms is inherently right or wrong. There should be no question of

judgment or blame involved here;

You cannot convince an Inheritor to become a Steward;

It is vitally important that all the siblings who are owners in the family firm can have “adult-

adult” conversations about whether, as an individual, they see themselves as a Steward, or as

an Inheritor; and

It is often the relationship between the founder and the siblings that will determine where

each of the siblings comes out on this question.

The first scenario is that all the siblings see themselves as individual Inheritors. In this case there

may be little point in attempting to get them to work together as a family team. Family

teamwork and the skills this requires is not part of the Inheritor paradigm. If all of the second-

generation owners see themselves as Inheritors, they may still decide to keep their shares intact

together out of economic necessity, to pool their financial capital. However, in this event they

will be more like a group of unrelated investors. In this scenario, the family firm can be

continued if one of the siblings manages to buy out the shares of the others.

The second scenario is one where all of the second-generation owners see themselves as

Stewards. By our definition, this implies an intention, a motivation, to want to work together.

However, there could be a group of Stewards who feel very committed to the family legacy, but

who still struggle to work together because they lack the necessary skills for effective

communicating, decision making and conflict resolution, and because they don't know how to

overcome family dynamics that are inappropriate for the business system. Having good

intentions is one thing; having the rights skills is another thing. The good news is that a group of

Stewards is likely going to have the motivation to do the work necessary to improve their skills

at working together and to adopt good family business governance structures and processes.

This includes cultivating emotional commitment to the family firm.

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The third scenario is that some members of the second generation will see themselves as

Stewards, and some will see themselves as Inheritors. In practice this is likely to be the most

common scenario. The danger with this third scenario is that it has the potential to paralyze

things if the siblings are unable to discuss and reconcile their differing views. If some are

Inheritors, in an Asian family, the Stewards may not be comfortable to move ahead on their own

while leaving the inheritors out of it because they fear this will imply the family is not united.

Accordingly the group gets stuck.

Members of the second generation need to be able to have “adult - adult” conversations about

whether each individual regards themselves as a Steward or as an Inheritor. The ideal setting for

these important conversations is at a family meeting involving all of the siblings. Otherwise how

can you plan for the future if you are not able to talk about what each owner, as an adult, really

wants to do?

Another reason for having these conversations is to follow the principle that “form should follow

function”. For example, any trust structures or family agreements (such as a shareholders

agreement) should be drafted to take into account whether you are looking at the first scenario

(all Inheritors), the second scenario (all Stewards), or the third scenario (where there is a mix).

The way a group of Stewards would want a family trust structure set up, or for a family

shareholders agreement to be drafted, should be very different from the way a group of Inheritors

would do it. Finally, a group of siblings who are unable to have adult-adult conversations about

whether they are each Stewards or Inheritors could find themselves stuck and unable to make

plans for the future.

Scenario Implications Key TasksShareholders are all Inheritors

Like a group of arms-length investors

Develop a shareholders agreement

Shareholders are all Stewards

Good intentions are not the same as having good skills & clear roles

Work on relationship skills & develop a family constitution

Shareholders are a mix of Stewards and Inheritors

Critical to have adult – adult conversations to avoid becoming stuck

Develop a shareholders agreement and work on relationship skills & develop a family

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constitution

The Cross Cultural Framework

The fourth framework is the cross cultural framework based on the book Cross Culture which

has been referred to. A primary focus of Cross Cultures is on how to help the members of the

rising generation of a family from a Collective Harmony or Honor culture, who have been

exposed to Western Individualistic culture, negotiate across cultures with their elders.9

For example, imagine an ethnic Chinese business founder who arrives in Indonesia with nothing

but the “shirt on his back”, who through hard work, intuition and street smarts builds a successful

business empire in SE Asia. While the founder had no formal education, as his wealth grew, he

invested in the best western educations available for his children, who were encouraged upon

graduation to find work in the US. His eldest son finds a job in an investment bank and starts to

rise quickly up the ranks. After the son has worked in New York for 5 years, one day he gets the

call from his father to return home to Jakarta and help him to run the family conglomerate. The

son hesitates. He knows his father is authoritarian and that the family conglomerate, while

successful, is not professionalized and that it will be a long time before the son could put his own

mark on the group. To return home will involve giving up the successful career he has started to

build. Yet if he refuses his father’s call, he will be disloyal and betraying his proper role in the

family. If you were an advisor to the patriarch, what would you do to help in this situation?10

Jaffe and Grubman (2016) suggest that there is a cultural lens that can be applied to help families

like this example.

The approach for an advisor in this scenario is first consider your own national or ethnic culture

of origin and whether you bring any of your own biases to the situation. Second, consider the

9 Cross Cultures also points out that wealthy successful families also have an economic culture; the origin might be a culture of poverty or middle class wealth, but as the founder becomes successful the family “immigrate” to the economic culture of wealth. The next generation, if born after the family has already successful completed the economic migration are, “Natives to the land of wealth”.

10 Part of this section on Cross Cultures was first published as an online review of Cross Cultures in April 2016 at https://www.tharawat-magazine.com/family-business-articles/2409-cross-cultures.html

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culture of the patriarch – likely Collective Harmony. The dimensions of culture described in the

book can be explained to the patriarch and the patriarch can be asked to rate himself so that his

own unique culture map can be created. Then what about the culture of the son? Has he picked

up elements of Western Individualist culture? If so, then the potential conflict described between

father and son can be reframed as a cultural conflict and not as a result of the personalities

involved.

The role of the advisor is to respectfully point out to the patriarch that the son is thinking and

acting in a way consistent with the first class western education and work experience that his

father provided for him; that the son has a legitimate perspective. If the advisor is able, his or her

role then becomes that of a cultural mediator, helping father and son explore whether there are

solutions that can be negotiated that satisfy both the needs of the patriarch and the family

orientation, with the individual needs of the son. The book outlines the steps in this negotiation

process and the role of cultural mediator.

In terms of the role of the advisor, Grubman11 explains:

“You can’t force Western models on a Chinese family, from the outside.  However you can

assist a family in navigating (and negotiating) their way among the various family

branches/generations/cousins/siblings toward a blended solution that incorporates

multiple viewpoints, both Collective Harmony and Individualist, to achieve a particular

hybrid/blend that fits that unique family.  That’s what Dennis Jaffe and I have written

about and are advocating – listening to the family, assessing where each member is in

their cultural orientation, and using culturally-sensitive processes to help the family figure

out its own unique set of solutions that will probably blend aspects of each model in a

dynamic way.”

Collective Harmony families are naturally high on the orientation to the family and low on the

orientation to the individual. The authors of Cross Cultures write that to achieve optimal

functioning as a family enterprise, ideally the Collective Harmony family will (i) work to

11 Private communication with the author.

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strengthen the individual orientation and (ii) within the collective, work to develop more open

communication and shared decision making.

This points to advisors highlighting or promoting the importance of the individual in the Asian

family - to strengthen the importance of the individual family member and their own personal

aspirations, goals and purposes and their individual values - as a way to help to strengthen and

preserve the overall family glue. This is especially so as many of the rising generation in Asian

families have been exposed to Western Individualistic culture, through education, work or an

increasingly “ambicultural” high net worth world.

References

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Bork, D. (1996). Working with family businesses: A guide for professionals. Jossey-Bass.

Carlock, R., & Ward, J. (2001). Strategic planning for the family business: Parallel planning to unify the family and business. Springer.

Jaffe, D.T. & Grubman, J. (2016). Cross Cultures: How Global Families Negotiate Change Across Generations

Hughes Jr, J. E. (2010). Family Wealth: Keeping It in the Family--How Family Members and Their Advisers Preserve Human, Intellectual, and Financial Assets for Generations. John Wiley & Sons.

Koh, A., Liang, T.W., Kong, E. & Ejercito, J. (2015). Asian Business Families Governance: Crossing the Chasm for Inter-Generational Change, Singapore Management University, Business Families Institute http://bfi.smu.edu.sg/sites/default/files/bfi/BFI_SMU_Deloitte_Asian_Family_Governance_Report_2015.pdf

Lansberg, I. (1999). Succeeding generations: Realizing the dream of families in business. Harvard Business Press.

Schein, E. H. (1999). Process consultation revisited: Building the helping relationship. Reading, MA: Addison-Wesley.

Tagiuri, R., & Davis, J. A. (1992). On the goals of successful family companies. Family Business Review, 5(1), 43-62.

Wesley, M. (2014). Culture Does Indeed Eat Structure for Breakfast, The Wesley Group, http://www.thewesleygroup.com/blog/?p=609

Wong, S. L. (1985). The Chinese family firm: A model. British Journal of Sociology, 58-72.

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