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Business and giving: the emerging wealth

Founded in 1974, Foxconn, a Taiwanese electronics empire, already has revenues of $131.8 billion (€104.4 billion). It’s not a consumer brand, but its electrical components power iPhones, Kindles and Playstations, among other gadgets. Still in the hands of its founder, Terry Gou, the company is an example of the way private business can exploit the skyrocketing economies of developing regions.

It’s not the only example – Asia-headquartered (and family-controlled) Samsung, Reliance Industries and Tata Group also clock in multi-billion dollar revenues. The way these companies are run and have grown has run-on effects for the face of private wealth in these countries.

Asia isn’t the only economy soaring. Emerging market economies now account for around half the world’s trade, states a new report conducted by Campden Research in partnership with Standard Chartered Private Bank. Business Before Wealth examines the business activities of high net worth entrepreneurs in Asia, as well as the Middle East and Africa.

Entrepreneurs in these regions are prioritising business over personal wealth, the report finds, returning capital back into their businesses, rather than their own pockets. While this was great for business growth, the research found professionalisation and wealth planning still need development. Entrepreneurs weren’t the only beneficiaries of business success, with wealthy business owners taking an active role in philanthropy, particularly within their local communities.

Business before wealth
Business owners across Asia, the Middle East and Africa are very involved in their enterprises, while growing personal wealth takes a backseat for high net worth entrepreneurs. Growth was the single most dominant business objective for the medium term. Financially, four-fifths of respondents consider themselves extremely involved in the business, with a further 16% describing themselves as moderately involved. Operationally, 93% of respondents consider themselves at least moderately involved in their business, with two-thirds describing themselves as extremely involved.

Michael Benz, global head of private banking clients, Standard Chartered Private Bank, says, “Those who become successful do tend to show this pattern of being hugely focused on their company and the well-being of the company, and everything else comes secondary, or even further subordinate.” Wealth is a by-product, not the motivation, for developing economy entrepreneurs’ commitment to their companies.

Andrew Porter, director of research at Campden Wealth, says one of the African billionaires interviewed for the report put it simply, but eloquently, when he said, “Build strong businesses. Wealth will come.”

There is some variance in the way regions are seeking to achieve business growth in the short term. The Middle East was the only region not to rank capital investment as the most important strategy for achieving its business strategies over the next one to two years – even ranking it below mergers, which were described of little importance by Asia and Africa. Business owners in Africa placed the most importance on capital investment and innovation/research and development (R&D).

While business owners seek ambitious growth, they do not seek growth opportunities at any cost. The report states: “They approach business financing conservatively, seeking credit where it is affordable and where there is a genuine need, all the while paying careful attention to financial liabilities.”

Almost three-quarters of business owners in the three regions surveyed preferred retained company earnings to fund their business goals. Only 20% sought funding through the bond or stock market. As Benz says, “They put so much emphasis on growing the business, but they don’t want to grow it at any price. These people are really keen to grow, but to grow in a really solid way – to build something robust.”

Benz adds the caveat that these business owners’ conservative approach to achieving growth is relative to the economic conditions they’re operating in, which far outperform some of the world’s largest developed economies that are still recovering from 2008’s economic downturn. “Speed is relative,” Benz says. “Of course, if you’re an entrepreneur that operates in an economy that sees high single digit percentage growth, then you can probably grow at 10, 15, 20%. But if the economic growth is 2% that’s a different environment.”

Securing the future of wealth across Africa, Asia and the Middle East
When respondents were questioned about the long-term goals for their companies, professionalisation grew significantly in importance. Benz says this shift in importance could be attributed the business owner reflecting on what life stage they will be at in 10 years’ time.

Benz says: “The professionalisation only really becomes an issue once the founder of the business, the first generation entrepreneur, reaches a certain, rather advanced, stage in their life or career. When they start thinking about what’s happening to their company once they’re not fit anymore or once they’re not around anymore.”

Though the next generation is often expected to take over a business, the report found 55% of business founders did not have a formal structure in place for the transfer of wealth. This had decreased to just a third when the business was in the next generation.

Porter says the research found business owners who were themselves successors were best prepared to transfer responsibility to the next generation. “They had already learned how difficult transfer can be; consequently, they’ve implemented business and family governance structures to ensure the next transfer goes smoothly,” Porter says, adding: “For those business owners who are founders, they’re still focused on growing their business, although many have begun seeking advice, speaking to successful colleagues and experienced advisers in searching out best practice for succession.”

Benz says entrepreneurs might choose to cash out, at least partially, from the business at a similar time to when they’re thinking about professionalisation. “Again I think it comes when they’re at an advanced stage in their careers, at a similar time when they’re thinking about professional management or thinking about succession plans, or professional governance.”

The rise of the new philanthropists
Despite lacking tax incentives, the report says that the developing economies surveyed, especially Asia and the Middle East, are catching up with the US in terms of philanthropic giving. It notes a “significant” increase in private foundations. Ninety-one per cent of survey respondents were currently involved with philanthropy, and all of those that weren’t intended to be in the future. As with their businesses, wealth holders want to be directly involved, preferring this to a one-off donation.

In particular, wealth holders want to get involved in “local philanthropy” – giving back to the communities where their businesses are operating. Benz explains the interpretation of local may be dependent on the size of the wealth holders’ operating business. “A smaller company tends to have a smaller geographical reach with its philanthropy than a larger company.”

Porter says local giving – often called “indigenous philanthropy” in industry parlance – expresses the deep connection and pride these business owners share in their local communities. “They haven’t moved their factories overseas, they haven’t outsourced specialist knowledge; likewise, they practice local giving, because they’re committed to improving their communities, which helps their businesses, in return,” Porter says. “In this way, philanthropy is more of an investment, rather than a form of consumption, which you often see in developed countries, where donors cut cheques, from a distance, to sleep better at night.”

The report found philanthropists in developing economies are approaching philanthropy in a business-like way. The report reads: “Choosing to become directly involved in the causes they support, over one-time donations and simple aid giving, they search for causes or programmes that deliver measureable social, economic and environmental impact.”

At the same time, developing economy philanthropists considered their emotional attachment to the community a strength that enables them to tailor their aid to the most pressing issues. The report states: “Many of these philanthropists believe that giving should not be outsourced, it is personal.”

Benz says emotion has the potential to impede rational decision-making, but believes these two approaches to philanthropy can be balanced. “To be passionate about something doesn’t mean you’re not rational or business-minded in the way you do it. These entrepreneurs would always show a certain business-mindedness even in a philanthropic capacity,” Benz says.

Education was the most important issue developing economies wanted to fund, often viewing it as more pressing than their counterparts in the developed world. Porter says: “Considering the business-centric mindset of these business owners makes education a natural fit for philanthropy. Education is a core component of human capital. Communities with strong education systems produce healthier, more productive, more reliable workforces.” Arts and culture, followed by gender equality, were ranked as the least important causes, especially by philanthropists in Asia. 

Conclusion: developing relationships in developing economies
More than a decade of strong economic growth has bolstered the high net worth populations of Africa, Asia and the Middle East. Forecasts suggest this growth is expected to continue – Asia is set to surpass North America by 2015, both in terms of high net worth population and total wealth. The Middle East is not far behind. When it comes to these countries’ economies, Africa is starting from a lower base, but is expected to show the strongest growth rates in the coming years.

High net worth business owners have the potential to give back to their communities through job creation, as well as local philanthropy. Porter says he hopes the issues brought to the fore in the report can inform those already working in these regions, and those who are looking to in the future. “As these business owners continue to expand production, market and trade, they’re focusing on an often-neglected aspect of business: relationships,” Porter says. “These high net worth business owners are strengthening the ties that will ensure their businesses succeed for years to come through multiple channels. This can range from fostering relationships within and across industries and seeking partners to create new trade corridors, to professionalising their businesses through the recruitment of external executives and specialists. Investing in the training and education of their current and future workforce is another great example of this.”

Who knows how many Foxconns are waiting in the wings.
 

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