TheStar
The Chinese have a saying: “Wealth never survives three generations.” The West has something similar: “From shirtsleeves to shirtsleeves in three generations.” As with most proverbs, there may be more than a grain of truth to these. To kick off this two-part series, CIMB Private Banking and CIMB Trustee Services look at the dynamics behind this popular notion.
THE wealth cycle comprises wealth creation, enhancement, protection and distribution. However, we at CIMB Private Banking believe that many of the family-owned businesses and the rich in the country often neglect the last two aspects.
CIMB Investment Bank director and head of securities and trustee services Yap Huey Hoong, who oversees matters relating to trustee services such as succession and distribution, concurs with this view.
“Even if family business owners and the affluent pay attention to wealth preservation, it is usually only through traditional methods such as fixed deposits, savings accounts, properties, unit trust funds and life insurance. Unfortunately, this does not optimise the growth potential of their wealth,” she says.
Ignoring the protection and distribution of wealth may lead to a realisation of the popular notion that stems from the Chinese proverb, “Wealth never survives three generations.”
The saying reflects our forefathers’ observation that many wealthy families have seen their fortune dissipate as it is handed down over the course of three generations. It starts with the founder of the company who has worked hard and has lived frugally to build his business.
He sends his children – the second generation – to tertiary institutions to ensure that they are better equipped in life than he was. Accustomed to a life surrounded by wealth, the founder's grandchildren – the third generation – tend to fritter away the family fortune.
So, is this saying really just a myth? Is this rags-to-riches-and-back cycle in three generations inevitable or can it be overcome? Can families hold on to their wealth and businesses beyond three generations?
Yap points out that the proverb has been proven true very often as there are many real-life examples from around the world.
She says, “In Asia, the bulk of high net worth individuals are generally what is considered as ‘new wealth’. Many affluent Asian families are only beginning to progress from second to third generation. We have seen high-profile cases, ranging from family disputes to lawsuits, whereby family wealth has dissipated due to family differences.”
She, however, adds that there are also a handful of families who have broken through the third generation 'barrier' through proper estate and succession plans.
“The estate and succession plans are put in place well in advance to ensure that the family wealth and the reins of the family business are handed over to the following generations in an orderly manner,” she explains.
“Many family businesses and wealth do not survive due to two primary reasons – the lack of proper succession planning and the lack of a united family holding structure. As a family grows, this can lead to discord between the needs and interests of the business, and the expectations and requirements of family members.”
Survival of family wealth
Yap advocates the creation of a family holding structure, paired with a succession plan, as the key to the longevity of family wealth and business.
Imagine a founder with five children, who each has a spouse (or in some cases, several divorced spouses) and at least three children. We are thus looking at a family with more than 25 members, each with his own needs and family requirements, and who are all shareholders of the family business.
The different needs of these individuals and families are frequently at odds with the demands of the family business and wealth.
Says Yap, “Unless a proper succession plan is put in place, there will be too many fingers in the pie, with the family wealth being run by five siblings, or worse, a consortium of cousins and uncles.”
This disarray, she adds, may lead to family disputes that cause disharmony and eventually lead to the dissolution of the family business or even the dissipation of the wealth.
When family-run business continues to grow, one is likely to see more founder-children type of partnerships and even cousin consortiums. As the family expands, more people become involved, even if they have not worked directly in the business.
Hence, says Yap, their expectations are different and clashes erupt. The relatives who are silent partners or shareholders may only be concerned with their narrow interests when judging capital expenditure, growth or other major matters.
Those who are engaged in the daily operations will judge matters differently because they have a broader picture to consider. Furthermore, when the owner of the family business grows older, he may become more risk-averse and thus often hinders the growth of the business; this too may cause a rift among family members.
In addition, the second or third generation family members who run the business may not be as united or as driven as the founder. For example, cousins who are shareholders may want to cash out or may not have faith in the new management.
Sometimes, the founder will find himself in a dilemma when his daughter or maybe his niece has better business acumen than his oldest son. Who then should take over the business?
Hence, without any proper succession planning, says Yap, family businesses are unlikely to last past the third generation, as family members’ ownership and individual needs are so fragmented that it will be impossible to find consensus among family members.
Disclaimer: Reading materials in this site are obtained from its respective website and it is for information purposes only. It is not Malaysia Unit Trusts - administrator view and it is not to be used against Malaysia Unit Trusts - administrator.
