The critical issues facing family businesses and how family owners can ensure their businesses remain successful were on the agenda of a seminar last month hosted by Kim Lalli, senior partner of Wedlake Bell and founder of the firm's India practice and Sonu Bhasin, founder of Families and Business. Rosalyn Breedy, corporate and financial services partner at Wedlake Bell, reports.
Leading the Family Business in Challenging Times opened on 19 June with a discussion of the importance and nature of family businesses' contribution to world GDP.
Vladislava Ryabota, of the International Finance Corporation (IFC), part of the World Bank, demonstrated that family businesses are a crucial source of wealth for Asia and an important pillar of the region's economies. Across the 10 Asian markets of China, Hong Kong, Indonesia, India, South Korea, Malaysia, Philippines, Singapore, Thailand, and Taiwan, family businesses accounted for 50% of all listed companies, 32% of total market capitalisation and 57% of all listed companies' employees in China, Hong Kong, South Korea and Taiwan.
The first panel: Alignment of the Family Strategy with the Business Strategy, was moderated by Sonu Bhasin and included Gaurav Mehta (Dharma Life), Vladislava Ryabot (IFC) and Richard Belsey*. It focused on the central challenge for family business management to grow and develop the family and business simultaneously in a manner that was planned, aligned and able to deliver successful succession.
In particular, governance was identified as a critical issue and five key concerns for investors were highlighted:
· An inability of family businesses to demonstrate commitment to high quality corporate governance and family governance policies and practices;
· A failure of board directors to oversee strategy, management and performance of the business;
· A lack of company risk management and controls to ensure sound stewardship of the company's assets and compliance with regulations;
· Financial disclosures which are not seen as a relevant, faithful and timely representation of the company's economic transactions and resources; and
· The potential for a company's minority shareholder rights to be inadequate or abused.
The panel concluded that success depended on high quality governance, professionalism, loyalty to common values, a clear understanding of the owner's role and clarity regarding the business purpose and objectives for future generations.
The second panel focused on Professionalising the Family Business and was moderated by me, with panellists Arvind Uppal (Whirlpool India), Smita Bajoria (Heritage Insurance Brokers) and Richard Isham*.
Here the key challenge was to hire, retain and incentivise the best talent viewed through the prism of intellectual and emotional intelligence as well as relevant expertise, while ensuring that it harnessed family talent and entrepreneurialism appropriately without falling prey to nepotistic practices.
Failure to organise the affairs of a family business can deter external talent from applying and can also result in high turnover if employees feel that the business is suffering because of family dysfunction.
Through the use of objective criteria to decide on and reward the next generation of leaders, it is possible to retain family ownership and control provided the business is successful and other investors and top talent are fairly rewarded. The family leaders need to decide whether the business is to be grown or sold.
Transparency, strategy, autonomy and alignment of remuneration are essential for success and may mean that the family transitions from owner managers to a shared ownership model. The advantage will be access to greater capital to facilitate growth, thereby increasing the wealth of the family.
The next panel, which took the form of a role play, emphasised the need to Manage and Minimise the Impact of Divorce on a Family Business.Sonu Bhasin moderated the panel, with Sharad Somany (private investor) and Conrad Adam* sitting as panellists. Juggi Bhasin, Adrian Heath-Saunders*, Tayne Rankin* and Richard Stebbing* performed the role play. The discussion explored the appropriate use of the pre-nuptial agreement as a tool for protecting family business and assets, whether it affected the nature and quality of a marriage, fairness, culture and trust.
The panel concluded that it was a critical component of good governance but that sensitivity was required, and the future spouse should be properly advised, at cost of the family if necessary.
Finally Justin McGilloway*, Julia Jackson*, Clare Armitage* and Charlotte Barker* discussed the use of various Legal Tools such as shareholder agreements, family funds (OEICS and investment companies), appointment of independent directors and the institution of a proper board of governance separate from the family, employee option schemes, investor and entrepreneur visas.
* Lawyers from Wedlake Bell