The Hollywood movie has received its share of both rave reviews and detractors. Yet, amid the seemingly carefree lives of the rich and famous are real concerns of wealth preservation and transfer. Asia is, without a doubt, home to a fast-growing number of the world’s richest people. For the first time, Asian billionaires have outnumbered their US counterparts, on the back of the rise of China’s entrepreneurs. A new billionaire is created in Asia every other day, according to UBS and PwC in a joint report on the billionaire set. There were 162 new billionaires in Asia in 2016, compared with 39 in the US and 24 in Europe. However, while the US still commanded most of the wealth, Asia is likely to overtake it in four years, if the current trend of growth continues. TD Mukesh Ambani, chairman of conglomerate Reliance Industries, is Asia’s richest man. He is worth US$44.3 billion ($60.7 billion), according to some estimates. Following close behind is Alibaba Group Holding founder Jack Ma, who is reportedly worth US$44 billion.
Many of the region’s richest families can be found in Southeast Asia. Malaysia’s Kuok family, led by patriarch Robert Kuok, is worth US$14.8 billion, according to Forbes Asia. The Kuok family derived much of its wealth from its commodities trading business in the 20th century, and has now expanded into other businesses such as property and hospitality. Indonesia’s Widjaja family, helmed by Eka Tjipta Widjaja, is worth US$9.1 billion, according to Forbes Asia. The Widjaja family gained much of its wealth from a variety of businesses, such as paper, real estate, financial services, agribusiness and telecoms.
In Singapore, the list of 50 richest people is led by brothers Robert and Philip Ng, who control private landlord and property developer Far East Organization. They are reportedly worth $11.9 billion, according to Forbes Asia. Others on the list include property tycoon Kwek Leng Beng of Hong Leong Group and City Developments, who is worth $7.6 billion; and banking magnate Wee Cho Yaw of United Overseas Bank (UOB), who is worth $6.4 billion. Peter Lim, who was formerly a stockbroker and now invests in property, healthcare and sports, is worth $2.5 billion. He derived much of his wealth from cashing out of palm oil giant Wilmar International several years ago.
Many of these high-net-worth individuals (HNWIs) are the creators of their own wealth. The UBS/PwC report also observed that the proportion of self-made billionaires has been increasing over time, and now accounts for some 60% of the current billionaire cohort. Their riches were obtained through successful businesses founded in the last century, and the latest surge in wealth is driven in part by the synchronised global economic growth over the past year, coupled with the boom in equity markets.
Today, many of the first generation HNWIs are in their twilight years. Some have retired, while others have taken more of a backseat at the businesses they control, though they still exert some influence. Given this backdrop, a rush in wealth transfer from one generation to the next is expected. “We foresee a significant wealth transfer of US$2.1 trillion in the next 20 years globally. With the rise of Asia-Pacific, we will be witnessing one of the largest wealth transfers, as 45% of wealth will be transferred in the next five years and around 70% in the next 10 years,” Anurag Mahesh, Asia-Pacific head of the global family office group at UBS Global Wealth Management, tells The Edge Singapore via email.
Young Jin Yee, managing director and market group head for Singapore at Credit Suisse, concurs. “In Asia, a lot of wealth is now in the transition phase. We do have new sectors such as technology where people are creating new wealth. Most of our clients are actually from the first generation and now into the second generation; a few of them are from the second generation now into the third,” she tells The Edge Singapore in a recent interview. Along with wealth transfers, planning is another key area of focus for wealthy families. According to the 2017 UBS Global Family Office Report, nearly half of family offices in Asia-Pacific say they are in the process of developing a succession plan. In Singapore, 67% of family offices in Singapore are in the process of developing a succession plan. This compares with 29% of Hong Kong family offices. “Based on our discussion with family offices, succession planning has always been a key priority for our clients,” says Mahesh.
Lee Wong, head of Asia’s family services at Lombard Odier, agrees. She says this is a potential point of conflict within a family and the business, especially if the process of picking a successor is conducted in an ad-hoc manner. “If succession planning is not discussed explicitly, it is a disruption from within,” Wong tells The Edge Singapore in a recent interview.
So, how are wealthy families in Asia transferring their wealth to their posterity and selecting the successor of their businesses?
In the West, a trust i s usually the preferred vehicle used by wealthy families to pass on their wealth to the next generation. This is because a trust has advantages over a will, says Young of Credit Suisse. In particular, a trust can distribute wealth over multiple generations under certain terms set out by the trustor. For example, a child gets only $1 million each year upon reaching 21 years of age, instead of getting the entire share of wealth. “Parents are
[mindful] of this fact. They want to give it slowly,” she says.
In Asia, however, this has yet to catch on, though there are some early adopters, says Young. This is because wealth is still growing in Asia. “In Europe, wealth was created some time ago; it is now about preservation and distribution. In Asia, typically, it is in the midst of creation. We are still in the growth mode,” she says. Tan Kuan Ern, head of Singapore coverage for investment banking and capital markets at Credit Suisse, says most of the founders of businesses in Southeast Asia tend to still stay in the business. He says he has seen a minority of cases in which the patriarch or matriarch sells the business and passes the proceeds to the next generation. “The wealth is ultimately not passed on until there is a share transfer to the kid. The only exception is the patriarch or matriarch chooses to sell the company and distribute the proceeds. Or, they hand down the shares to the next generation. But not that often,” he says.
Still, some families have gone down the acquisition route. Young recalls one of the bank’s clients, where the son decided to buy out his father’s controlling share of the company. This enables the son to have full control of the company and the ability to dictate the future direction of the company. On the other hand, the father receives the proceeds from the sale of his stake. This can then be distributed to his other children, through a trust or will.
More often than not, however, the parents tend to encourage their children to join the family business. As such, a big chunk of wealth is also usually transferred to the successor of the family business. And, the children are given senior positions and at an increasingly younger age, says Tan. “In the past 10 years, there has been a transition where more offspring are coming into the business earlier than we have ever seen before. But the patriarch or matriarch is still the decision maker. It is still very traditional — they run it as a paternalistic or maternalistic type of structure.”
This can be seen in conglomerates, of which “a different piece of the empire” is given to a son or daughter-in-law to lead, says Tan. Those who are in their late 30s or early 40s are usually appointed as heads of divisions or a subsidiary, he explains. However, only 20% of children join the family business, says Lombard Odier’s Wong. The majority either prefer to start their own business or pursue a high-flying career at a prestigious company, she says. “[The main reason] they want to branch out is because they are bored with the family business. It doesn’t engage them. The inability to express their autonomy and control of [what] the future brings are other reasons,” she says.
Indeed, one in four heirs to the world’s biggest family fortunes is pursuing his own venture, independent of the family business, according to the Next Generation Study by PwC consultants, released late last year. The study, which surveyed 100 scions from across the world, suggests that many find work within the family business stifling, especially if they are the youngest individual bearing the family name.
Other observers estimate the number of next-generation members who start their own business could be as high as 40%. They may not be able to implement changes or shape the future of the business, says Lombard Odier’s Wong. And they may not even be earmarked for key positions. Among those surveyed by PwC, many are also inspired by their family’s enterprising spirit to start their own venture.
Indeed, more businesses are being started than ever before, especially in Asia. According to UBS’ Billionaire Insights 2017, most billionaires in Asia and the US are self-made men. There has been a rapid growth in the number of billionaires in this region, with wealth creation driven by technology. Spurred by this trend, entrepreneurs, even from the richest families, are starting more businesses than ever.
“Entrepreneurs will continue to benefit from megatrends such as accelerating technological change, Asian urbanisation and ongoing financialisation,” says the UBS report. Meanwhile, most family firms are transitioning from the second generation to the third. “As business families grow beyond the second generation, it is only natural that not every member of the much larger group of cousins joins the family firm. [A similar case is] half-siblings in hybrid families: The larger and more diverse the group, the more likely it is that not everyone joins the family firm, so we will naturally see more family members starting their own businesses as business families grow larger,” says Marleen Dieleman, an expert on strategy and governance in Asian family business groups at the National University of Singapore.
Interestingly, venturing outside the family stable is — very often — encouraged by families. “Many of the entrepreneurial next gens find their own funding to start their new ventures, but some have been given family cash to get them off the ground, though this is usually personal money, not an investment from the family firm,” notes the PwC study. Some families, PwC found, believe the younger generation who have worked outside the family
business can bring new approaches to solve challenges in the family business.
One of the most prominent examples of a “next generation” starting their own venture comes from the Kuok family, Asia’s 15th richest family on the Forbes 2018 list. Kuok Meng Ru, son of Kuok Khoon Hong, the nephew of Malaysian tycoon Robert Kuok and founder and CEO of agribusiness giant Wilmar, channelled his interest in music into a business. He is the co-founder of BandLab Technologies, a music making start-up, and the managing director of music gear retailer Swee Lee. Meng Ru also bought a 49% stake in global music brand Rolling Stone. His brother, Meng Han, is the founder of Camtech Management, which incubates biotech, diagnostics and technology start-ups.
Meanwhile, Wee Teng Wen, son of UOB CEO Wee Ee Chong, is running a hospitality and restaurant business. The Lo & Behold Group started in 2005 with a capital of US$400,000. The group operates upscale restaurants and bars. Last year, it opened The Warehouse Hotel.
In Malaysia, Rachel Lau, daughter of the late real estate magnate Lau Boon Ann, is now running her own venture capital firm, RHL Ventures. She started the firm in 2016 with two other heirs of prominent Southeast Asian families: Raja Hamzah Abidin, son of a former Malaysian minister, and Lionel Leong, son of Leong Hoy Kum, who leads the Mah Sing Group. RHL Ventures champions Asean growth stories by taking a 10% to 30% stake in businesses that want to operate in Southeast Asia. It has made three investments so far, comprising a healthcare platform, a sports chatbot and a concert mobile application. “My mum is a big believer in charting your destiny,” says Lau. “As the world becomes increasingly global, we have seen more people falling behind. RHL aims to create a platform that fosters real innovation [that has scale] and leaves no one behind.”
In Thailand, Korawad Chearavanont, grandson of the head of the Charoen Pokphand conglomerate, has gone on his own path as well. He founded a mobile messaging platform for large companies called Eko Communications. It serves clients, including Charoen Pokphand Foods and Thanachart Bank, and is backed by prominent venture capitalists, including 500 Startups and Gobi Partners. It has raised more than US$9 million. Korawad’s family business has one of the world’s biggest animal feed and livestock operations, and his father, Suphachai Chearavanont, and his siblings are worth US$30 billion.
Another descendant of one of the richest families in Southeast Asia to step outside of the family stable is Howard Sy. His grandfather, Henry Sy, is worth more than US$20 billion and controls SM Investments with businesses that range from malls to banks and mining. Howard started StorageMart, a self-storage company based in Makati, Philippines. That is a move, he claims, that was inspired by watching American reality TV series Storage Wars.
The inclination of the younger generations to strike out on their own could be a future problem for the continued success of the family business. The sibling who exhibits entrepreneurial qualities and attitude — suitable to lead the family business — usually wants to start his own business. “I wouldn’t say that those who venture out are the suitable ones to be a successor. But there is a danger that that might be the case,” says Wong of Lombard Odier.
So, how do you solve the problem of children not wanting to join the family business?
One way is to set up venture capital arms under the family business, says Wong. This is to allow the next generation the freedom to start their own business. Yet, at the same time, they are not totally out of the family business because their business is tied to the VC. Wong says if the start-up thrives, it could be reoriented to become the new core family business.
Sometimes, it is inevitable to pick the less suitable successor. But this does not mean that it will jeopardise the long-term success of the family business, says Wong. She says this can be circumvented by putting in place good advisers to support the successor and compensate for his weaknesses. Ultimately, clear and transparent communication among all family members is required in succession planning. Wong recalls a client who had groomed his eldest child to eventually succeed him in leading the family business. However, upon his retirement, he felt that the younger sibling was a more suitable candidate. Wong says this led to confusion and embarrassment for the eldest child. This impacts not just relationships within the family but also the business, because the child had been working in the family business and had built relationships with clients. Wong says families need to understand what their priorities and objectives are in life. Is it to preserve the family or the business? “If you are prepared for the business not to do as well without a hungry, aggressive leader, sure. For some families, it may be more important to preserve relationships. There is no right or wrong decision. They really need to understand what thrives within the family. There isn’t a best answer. There is only an answer suitable for each family [on a case-by-case basis]. That can only come out if they are ready to express, listen and decide,” she says.
Randel S Carlock, the Berghmans Lhoist chaired professor in entrepreneurial leadership at INSEAD; and Loh Keng-Fun, managing partner at Family and Business Learning; are in full agreement. The two are co-authors of a family business planning book entitled A Family Business on the Moon that was launched recently. “The ultimate aim is to make the family’s implicit expectations and aspirations explicit. For example, what types of returns does the family expect from the business and what types of financial investments is the family willing to make. If there is not a clear meeting of the minds by the family, then every investment or financial decision becomes a potential conflict,” they say.
While it would appear that in Europe, the home of “old money”, the focus is on wealth preservation, that and growing wealth are not mutually exclusive, wealth managers say. “You need to be able to grow wealth in a systematic and sustainable fashion. In that same breath, you’re actually preserving,” says Lombard Odier’s Wong. “The core investment is meant to be sustainable. It has to grow steadily over time at a rate that doesn’t fluctuate that much.”
Indeed, today’s globalised economy presents challenges that were not necessarily so prevalent in the earlier generations. This means new considerations for the family’s decision makers. They need to think broader, says Wong. She describes a client of considerable means who is known as the Warren Buffet of Thailand. After this person met Wong, he became aware that his assets, which largely comprised Thai stocks and real estate, have a high home bias. This meant that his portfolio has much of its risk profile concentrated in Thailand. “He realised [that] he needed to diversify out of Thailand,” says Wong.
At the end of the day, the great wealth transfer may be debunked as a myth in some quarters, as the baby boomers, current custodians of this wealth, are said to be likely to want to retire in luxury and are expected to spend considerable amounts of money doing so. But there is no denying that the richest generation in history, who rode decades of strong economic growth and development, are ageing and are likely going to have to seek successors
for their enterprises and fortunes. And, just as their forefathers have been responsible for much of that growth and development, the next generation that takes over is inheriting the responsibility for progress. — With additional reporting by Trinity Chua
For family firms, plotting ambitious futures is like planning a space venture.
Bata Shoes is the largest shoe retailer on earth. Around since 1894, its current family members recently attended the INSEAD Family Enterprise Challenge. When they were completing an exercise exploring their family values and vision, one of the next-generation family members called out “why not a shoe store on the moon?”
His aspiration was logical. After all, where else should the world’s biggest shoe seller set its sights, but outer space? While audacious, it also stuck in our minds as a powerful metaphor of how successful family firms think about and plan for the future.
The more we explored it, the more we came to realise that long-term family business planning is the same as planning a trip into space. It demands effective communication, shared values and vision, sound planning, a significant investment of talent and money and accountability. No family could fly into space without a commitment to a shared purpose, the reason they are all in their space shuttle together.
But many families avoid the critical family planning process and therefore remain stuck on the launch pad. Even if they do launch, without an adequate plan for the family, the flight is troubled, misses its trajectory or altitude and in the worst cases, their space shuttle crashes. The most common reason for a crash is when families fail to plan for life after the founder's death. Siblings commonly squabble over control and either split the family businesses or drive them into the ground during lengthy battles for control.
Many business families believe that they should protect family harmony by avoiding difficult topics like succession, ownership or governance. The reality is just the opposite. We’ve seen many families with well-thought-out business plans and strategy end up in turmoil because the family side of family business has not been adequately planned for.
“A Family Business on the Moon”
For this reason, we set about creating a fieldbook to help families shoot for the moon, together.
“A Family Business on the Moon” is the culmination of our decades of research and working with family businesses. It is built on tried and tested frameworks for getting families aligned on their collective futures.
In our book, we detail how families can implement the Parallel Planning Process, an eight-step framework that gets families to answer crucial questions about their future.
A good family business will address questions head on, such as:
Values: What is important to our family? Great business families have shared values that drive the family and management’s decisions.
Vision: What is a desirable future based on our values? When you commit to the vision as a family, you’ll come up with goals and strategies that are rational and achievable.
Strategy (Business and Family): How will we achieve our business and family visions? With a family involved in a business, things get more personal. It’s crucial that the business strategy includes the family strategy. For example, if your family’s vision is long-term business ownership then your family strategy should include qualified family members’ participation in business activities and active career planning for the next generation.
Investment (Human capital and financial capital): What human and financial resources will we contribute? Decisions about financial investment are a challenge for even the most capable and active families. Such decisions involve competing demands with various potential knock-on effects on the family’s wealth. Also, determining who will work in the business, who won’t and the sort of vehicles available to those who want to get off of the spaceship mid-flight will also be crucial decisions to account for.
Governance (Family and Business): How do we make decisions and ensure accountability? Family businesses need boards of directors even more than non-family businesses. The most professional family enterprises have independent directors from outside the family and the business. This ensures accountability and alignment of the family and business interests. Family governance is equally important to ensure this alignment. Regular family meetings or a family council can help to cement important decisions. Formal family agreement on policies around employment and careers can reduce conflict.
In our book, we give families material to plot these action steps, such as a set of values cards and fun activities at each step. But what really supports the Parallel Planning Process is when families agree to sit down together and commit to working out the answers to these questions which will eventually culminate in determining their shared purpose. This is the foundation for planning the business and family strategy, which can start with a SWOT competitive analysis for the business and a commitment assessment for the family. Ultimately, none of these steps takes place without communication based on respect, listening, ensuring nobody is left behind (even though it’s possible that not everyone will want to be involved right away), matching skills to roles and agreeing on how to invest the family’s financial capital and, more importantly, its human capital.
Neither can any of these steps be accomplished in an hour-long meeting. They should be considered at length and not in isolation. Creating a flight plan for a trip to the moon is not easy and neither should it be. The space flight analogy also applies critically to the next generation. We’ve talked about ideas such as planning for the trip and launching into space because family entrepreneurs are trailblazers, going places nobody has been before. This is just as relevant to the next generation as it was for the founders of family enterprises. Successful family firms are those that prepare each generation to embark on its own entrepreneurial journey to sustain their family’s legacy.
Dr Randel S. Carlock is a business professor at INSEAD, coach, family therapist, entrepreneur, and former CEO and Chairman of a NASDAQ listed company.