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10 BUSINESS A.M. FEBRUARY, MONDAY 05 - SUNDAY 11, 2018 EXECUTIVE KNOWLEDGE SERIES They continue to thrive because they have ensured smooth successions from one generation to the next Five challenges that could derail a succession plan Morten Bennedsen & Brian Henry Chinese family firms are a force for change in China, bringing a renewed interest in family entrepreneurship to the forefront. Notwithstanding the rapid changes taking place at the very core of Chinese family businesses, founders share five common challenges when it comes to succession. By reflecting on the simple principles below, owner-managers can advance the succession process in their firms without the disruption that often characterises poorly prepared transitions. Family-owned businesses that have survived the five great succession challenges have lived to be hundreds of years old, some more than a thousand years. They continue to thrive because they have ensured smooth successions from one generation to the next, as have the following examples of family-owned companies from around the world: • Peugeot – The famous French automobile company was controlled and managed by the same family from 1810 to 2014, when they sold off its controlling share to a Chinese carmaker and the French state. • Jardine Matheson – One of the original Hong Kong trading houses or Hongs, Jardine Matheson Holdings has been controlled by the Keswick family throughout its 185-year existence. • Tata Group – Owned and managed by the Tata family since 1868, the conglomerate has contributed much to India’s transformation into one of the most dynamic emerging countries in the world. • Ford Motor Company – One of the most recognisable names in the United States, the automaker dates back to 1903 when Henry Ford introduced mass manufacturing of cars. Chinese founders can learn many lessons from these tried and tested winners. To ensure their own longevity they should master the five challenges below. Understanding the culture of succession All successions are a product of the cultural norms that prevail in the particular country or region. Succession is shaped by the formal and informal rules of the specific environment in which families live and run their businesses. Influenced by Confucianism, Taoism and Buddhism, China’s culture transcends the individual, favouring collective or group initiatives instead. In this cultural setting, family members who are interested in joining the family business may not think their voice is being heard by the founders. If these key individuals are overlooked in favour of group recognition, the generational transfer of ownership and management of their family-run firms may not happen as planned. Hence, owner-managers should play a unifying role to prevent next gens from looking outside their family businesses for recognition. Transferring family assets to the next generation Family assets are unique value-creating resources – they include the name, reputation, legacy, networks, cultural traditions and values of the family. While successful founders have proven that they can contribute assets to their firms, a key challenge is how to transfer these assets to the next generations and how to institutionalise entrepreneurial spirit. Owner-managers can act as role models, spending more time with next gens, taking them to business meetings, working out the governance structures, etc. Founders must find relevant knowledgetransfer measures if they want to maintain the momentum of the business in the transition to the next generation. Developing competent children Today’s Chinese family businesses often have members of two or three generations working side-by-side on the shop floor. In this situation, founders face the challenge of overcoming educational differences. Next gens often want to develop their CVs, while elders are proud of their knowledge acquired from years of experience. While showing tolerance and respect, founders should not neglect higher educational opportunities for next gens, encouraging them to enrol in business schools abroad. They should also encourage next gens to obtain solid management experience outside the family firm. Having solid management skills and business experience, next gens will be in a better position to qualify for top roles in their family firms. Communicating across the generation gap In traditional Chinese culture, first-borns see themselves as junior in relation to their parents or elders, but senior in relation to younger siblings. This dual identity can inhibit personal and professional development if ideas from below are treated as less valuable than those from above. Fixed patterns can become etched in stone and resistance to change endemic. When Chinese families send their children overseas to be educated, the learning they bring back may be ‘lost in translation’. Hence tools for communication must be developed within the family and the firm to manage the expectations of heirs, while ensuring that the older generation does not lose face. This suggests a counter-intuitive style of communication that emphasises risk-taking where innovation and new ideas are fostered, and which reflects the entrepreneurial spirit that founders seek to pass on. Engaging in long-term planning For many founders and owner-managers there’s scarcely time enough in the day to look after their own short-term needs, much less the long-term needs of their heirs. Most will start planning for succession far too late in the game or not at all. But what if a founder suddenly comes face-to-face with a health shock? The family is then thrown into a succession crisis with no long-term planning to guide them. Research shows that only 22 percent of Chinese founders have succession plans in place. Without a plan, next gens lack the guidance they need to manage a successful transition. Founders who have not developed a plan for the future often look amateurish and unprofessional in the eyes of their next gens. Disillusioned by the confusing signals coming from above, heirs may pursue other career options available and often commit to alternatives outside the family business, leaving no successors to take over the firm. If founders respond to these five simple challenges of succession, the likelihood will be greatly increased that their families and firms will run smoothly for generations to come. By building a solid foundation upon which their firms will prosper and grow, they will bring longevity within reach. Morten Bennedsen is the André and Rosalie Hoffmann Chaired Professor of Family Enterprise at INSEAD and Academic Director of the Wendel International Centre for Family Enterprise. He is also a contributing faculty member to the INSEAD Corporate Governance Initiative and is co-author of the book The Family Business Map: Assets and Roadblocks in Long-Term Planning. Brian Henry is an INSEAD Research Fellow.
BUSINESS A.M. FEBRUARY, MONDAY 05 - SUNDAY 11, 2018 EXECUTIVE KNOWLEDGE SERIES 11 Wealth management: Why you should be your own CEO Wall Street veteran Charlotte B e y e r knows investing can be an intimidating experience. At Wharton, she created the first private wealth management curriculum in the country and dedicated part of her career to helping demystify wealth management for all. She spoke with Knowledge@Wharton recently to talk about the newest edition of her book, Wealth Management Unwrapped, which offers advice on good investment practices. Her goal is for everyone to take charge of their wealth, no matter how lavish or modest, to become the “CEO of my wealth.” The following is an edited transcript of the conversation. Knowledge@Wharton: We last spoke about Wealth Management Unwrapped in 2014. You have released an updated version of your book for 2017. How is wealth management today different than it was three years ago? Charlotte Beyer: It’s very different on at least two or three fronts. First, we’re now seeing an increasingly active investor who is much more knowledgeable about what they want and what they fear. Second, the advisor community now recognizes wealth management is really about the individual and not just the investments. On the third front, there’s the whole issue of fiduciary, and that’s become the word that everybody says. … It really means trust. Those three areas of change, just in three years, are staggering to me. Knowledge@Wharton: We keep hearing a lot these days about the emergence of wealth tech or the digitization of wealth management as a specialized area of fintech. Based on your more than 40 years of experience on Wall Street and then with the Institute for Private Investors, how do you think digitization has impacted investors and advisors? Beyer: Enormously. The term that is often used in my industry of wealth management is robo-advisers. We see the big firms in the advisor world offering automatic investment allocation and so on, but it’s much bigger than that. That’s going to happen in all of the registered investment advisory firms, and it’s going to happen with the big firms. But what’s more meaningful to me is to see the increased use of artificial intelligence, machine learning, and even going beyond that where an individual can find out what they need to be looking at almost automatically. “The adviser community now recognizes wealth management is really about the individual and not just the investments.” There would be prompts and so on. Just like the internet of things, you walk down the street and your phone lights up and says, “Oh, you were looking for this, and it’s right in this store, and it’s on sale.” I see the same thing happening in wealth management. It’s going to happen much sooner than we think, and it’s going to be driven by the enormous interest by millennials in a more meaningful way to use their money. Knowledge@Wharton: Which robo-advisor should high-net-worth investors and advisors be paying attention to? Also, do you believe that robo-advisors will be as disruptive as Google and Facebook have been to the media and advertising industries? Or will they be absorbed and acquired by traditional wealth management companies? Beyer: I wish I knew the definitive answer to that. I think it could be the latter, but I believe that the spirit of innovation will mean that it’s going to be incredibly disruptive. The old-line firms may acquire a Betterment or a Wealthfront. They have acquired some of the smaller ones, but there will be a new innovator or a new idea coming up, and if the culture in the old-line firm doesn’t change and really know how to use it and keep advancing it, then the value won’t be realized. Just like when I pay my bills, I wouldn’t think of writing a check. I do it online. Everybody does. I think that’s the basis for my feeling that the roboadvisors, in the larger definition, are not only disruptive, but they are here to stay and will be continually enhanced. Knowledge@Wharton: The earlier edition of your book had a lot of useful advice on how to evaluate and select human advisors. Do you have any advice on how investors should evaluate robo-advisors? Beyer: I do. In the early days of hedge funds, a hedge fund manager would say, “Well, we have this great black box, and you can’t see inside it because you wouldn’t understand it. But look at our record.” I’m afraid that in the robo-world, investors can be similarly fooled if they’re not careful. In my book, I have a list of questions to ask: Where are your algorithms coming from? What are your sources for the machine learning or the AI you’re using to tell me what I should be doing? When an automatic rebalancing takes place, what if it’s wrong? Because we all know that predicting markets is not a science. This will be an interesting evolution to see when the next market dip comes, what happens if your robo was a little bit wrong. Knowledge@Wharton: What advantages do robo-advisors have over human advisors and vice versa? As there seems to be a shift from active to passive investment strategies, who do you think will perform better in this environment? Beyer: The active versus passive debate is the overlay on all of it, as you so rightly point out. For most investors, it makes much better sense to have some combination of passive. It’s ETFs, and it’s index, and I’m sure there will be yet another product that will take it even further. In my mind, the advantages of the robo are the same advantages of technology in any area. I can turn the air conditioner on in my home when I’m 50 miles from home. That’s an advantage. It’s the same thing with the robo. I can alter my investment goals as life changes for me. In the robo-world, that will be known and anticipated and asked about. In the world of humans, humans are busy doing other things. They may forget to ask me something that the robos will. Knowledge@Wharton: One advantage that the digital wealth management platforms offer is their appeal to millennials. My impression is that advisors often focused on baby boomers, who are either retired or close to retirement, because they have more money than millennials. How should older advisors engage with tech-savvy millennials? How can registered investment advisers (RIAs) become better informed about technology and innovation? Beyer: I’m not going to be very optimistic on that one. As a baby boomer myself and a technophile, it’s not easy to learn new tricks. The millennials do it intuitively. They’ve grown up with this. The other major challenge is the baby boomer RIA is much more comfortable with the norms and the culture, the language, the method of communication of their cohort, so to speak. Millennials, I believe, want something different. They always want to do something different from their parents, right? But it’s even more pronounced today because they see the efficiency of different ways of communicating. You wouldn’t ever dare send an email to a millennial. They don’t read their emails. You wouldn’t dare have a threehour meeting with them. It’s too long. “Many children who’ve grown up with … substantial wealth haven’t learned the joy of struggle.” The millennials will be the p. 12 The adviser community now recognizes wealth management is really about the individual and not just the investments
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