How to avoid squabbles in family-run firms

ST ILLUSTRATION: ADAM LEE
ST ILLUSTRATION: ADAM LEE
ST ILLUSTRATION: ADAM LEE
Mr Sandeep Sharma, co-head of HSBC global private bank for South-east Asia, says a family Constitution should steer family members in business-related decisions.
Mr Sandeep Sharma, co-head of HSBC global private bank for South-east Asia, says a family Constitution should steer family members in business-related decisions. PHOTO: HSBC
Ms Stefanie Yuen Thio, joint managing director at law firm TSMP Law Corporation, says handing assets to a trustee is an option for families that have a potential for in-fighting.
Ms Stefanie Yuen Thio, joint managing director at law firm TSMP Law Corporation, says handing assets to a trustee is an option for families that have a potential for in-fighting. PHOTO: TSMP LAW CORPORATION
Mr Lee Woon Shiu, head of wealth planning at Bank of Singapore, says there are strong benefits in giving the next leader of the business a majority stake.
Mr Lee Woon Shiu, head of wealth planning at Bank of Singapore, says there are strong benefits in giving the next leader of the business a majority stake. PHOTO: BANK OF SINGAPORE
Ms Michelle Lau, head of wealth planning for Asia at HSBC Private Bank, says a constituted set of values becomes more important as family structures get more complex in future generations.
Ms Michelle Lau, head of wealth planning for Asia at HSBC Private Bank, says a constituted set of values becomes more important as family structures get more complex in future generations. PHOTO: HSBC

In the second of a two-part series on ensuring a smooth succession in a family business, Jeremy Koh looks at how firms can limit the impact of conflicts.

Rows can severely undermine the profitability of a company and wreak havoc on the lives of the family members involved.

These sorts of squabbles can quickly turn nasty with once-loving family members suddenly at each other's throats - with the fallout often spread all over the daily paper.

One famous case involves food and beverage business Yung Kee Restaurant. The patriarch left some sons, his wife and a daughter stakes in the business.

Where there are operational businesses involved, the patriarch could hire amanagement team to managethe assets, while leaving the assets themselves in the hands of the trustee.

Shortly after the patriarch died, his daughter transferred her stake to one of her brothers, making him the biggest shareholder.

A power struggle then broke out at the business.

Soon thereafter, the oldest brother died. Eventually the oldest brother's family left the business, and it felt the effects of the upheaval.

Dividend policies can also trigger conflict, says Mr Sandeep Sharma, co-head of HSBC global private bank for South-east Asia.


ST ILLUSTRATION: ADAM LEE

Family members running the business may want a prudent approach so they can re-invest earnings into the business.

They may also think a liberal dividend policy will mean passive family shareholders get an easy ride.

These shareholders may, in turn, view family members working in the business as being favoured by perks and salaries.


ST ILLUSTRATION: ADAM LEE

 

A formal system can resolve conflicts

HAVING A FAMILY CONSTITUTION

Defining a family Constitution is one way families might resolve conflicts or at least restrict their impact on the business.

A Constitution normally states the values and principles that should steer family members in business-related decisions, says HSBC's Mr Sharma.

It would also stipulate how differences of opinion on the strategy of the business are to be resolved, adds head of wealth planning at Bank of Singapore, Mr Lee Woon Shiu.

Patriarchs may ask adult family members to agree to be legally bound by the Constitution, Mr Lee says.

When a Constitution is not legally binding, however, it still functions as an effective means of guiding the family on how to resolve conflicts.

If a family member suffers an illness requiring hefty medical expenses, for example, a Constitution can guide how the business should be involved, says Mr Sharma.

"If the value and spirit is that each member of the family should be looked after irrespective of business outcomes, that's a very different principle from saying that irrespective of any one individual's well-being the business has to continue - these are two different values," he adds.

Some second-generation families may not consider such a Constitution necessary as they believe they are sufficiently close and agree on most issues, and they may be right, Mr Sharma says.

However, a constituted set of values will become more important in future generations where family structures become more complex.

Ms Michelle Lau, head of wealth planning for Asia at HSBC Private Bank, adds: "It's easier at the sibling consortium level, but once you go to the cousins consortium areas, human relations get a little bit more complex.

"Then, who owns it, who gets the right to run it; these are the questions that will arise."

FAMILY COUNCIL

Along with a Constitution, many families also have a family council to ensure that people resolve differences and make decisions in line with the Constitution, says Bank of Singapore's Mr Lee.

Disagreements are most often settled by a council vote.

Family Constitutions may stipulate that some decisions can be resolved by a simple majority while more crucial decisions require a 75 per cent majority, he adds.

A family council can vote on who the next family leader should be, says Dr Henry Hirzel, managing director for the Family Service Group and senior adviser for family, business and wealth at UBS.

Decisions concerning distributions from the family trust can also be decided by the council, adds Mr Peter Triggs, managing director of regional wealth planning at DBS Private Bank .

Most family Constitutions also define how a council is set up as well as the conditions that apply to its operation.

ALLOCATING MORE SHARES TO PRIMARY SUCCESSOR

Bank of Singapore's Mr Lee thinks there are strong benefits in giving the next leader of the business a majority stake. This would ensure he has the clout required to lead the company.

The other family members can be compensated for receiving a lower share by being given other assets.

Alternatively, the patriarch could invest in universal or jumbo life insurance policies that would pay out to these siblings, he said.

These policies essentially work like regular life insurance plans except that they involve different terms, including larger premiums, and pay out higher amounts on the death of the insured, says Mr Lee.

Distributing shares to the children for the sake of being fair is "perhaps not the wisest way to ensure sustainable business growth and development across several generations", he adds.

This is because it is difficult to know if everyone will cooperate.

Also, Mr Lee says, "it's even more difficult for someone to say, 'this is the way' without a controlling stake and with more and more parties involved (when the next generation has children of their own).

"Once the person designated to drive the business is empowered to do so, even if the minority shareholders are unhappy, they cannot adversely impact the management and growth of the company."

Mr Lee adds: "You can do two things - you do nothing, leave everything to chance, and retain little control over how things work out, or you proactively come up with a structured plan.

"We have seen cases where family relationships are irrevocably damaged once financial disputes are involved… these are just our observations of human nature at work".

Deciding who controls what

GOLDEN VOTES FOR THE PATRIARCH

Another contentious issue concerns the timing of the succession, says Mr Tam Chee Chong, regional managing partner of financial advisory services, Deloitte South-east Asia.

A way to resolve this is to allow the patriarch to retain a deciding say on key aspects of the business while giving the next generation a strong role in running day-to-day operations, says Mr Lee.


ST ILLUSTRATION: ADAM LEE

"The patriarch can hold on to shares that have 'golden votes', so if it comes to major decisions, such as selling the entire business, then the patriarch retains the veto rights to such decisions," he notes. Majority shareholders would still have primary control over daily business operations.

HANDING ASSETS TO A TRUSTEE

Families with the potential for in-fighting can hand their assets to a trustee, says Ms Stefanie Yuen Thio, joint managing director at law firm TSMP Law Corporation.

The trustee, a corporation or an individual, can hold the assets for long periods although the law does not allow things to be held indefinitely, adds Ms Yuen Thio.

Although family members might still be involved in running the business, there is less reason for conflict as the assets are with the trustee and out of their reach.

Families may also place assets with trustees when they are afraid the next generation could squander them. This could be a risk when the entrepreneur has young children or grandchildren.

The trustee would agree to hold the assets and manage them according to the terms of a trust deed, Ms Yuen Thio says.

The rights and entitlements of the family will depend on what the trust deed says.

A typical deed would normally state that the capital of the asset in the trust cannot be touched, but that the income from that asset can be used to provide for the family's living, medical and home expenses.

Professional trust companies may, however, believe they are not equipped to make strategic business decisions.

For this reason, some are willing to administer only assets like real estate and listed securities that do not involve operational management of an underlying business.

Where there are operational businesses involved, the patriarch could hire a management team to manage the assets, while leaving the assets themselves in the hands of the trustee.

Ms Yuen Thio says she knows of some tycoons who have private bankers they trust with all their secrets and wealth.

"That tycoon may hire that adviser to work exclusively for him to manage the business."

Trusts can also be used to retain control over a family business, adds Mr David Chong, president and founder of the Portcullis Group. This is because company shares can be consolidated in the hands of a trustee as opposed to spread out across the next generation.

A version of this article appeared in the print edition of The Sunday Times on October 11, 2015, with the headline 'How to avoid squabbles in family-run firms'. Print Edition | Subscribe