HKUST Business School Magazine

Biz@HKUST Biz@HKUST 6 7 // Cover // Feature Family governance can be one key role for family offices Many family businesses in Mainland China are managed by first-generation entrepreneurs whose family consists of a spouse and one child. The composition of their family is simple. So there is no urgent need for family governance. This explains why most family offices in mainland China are set up for the sole purpose of wealth management. By contrast, family businesses in Hong Kong, which are often in their second or third generation, have complicated familial relationships. For example, some family members are shareholders or paid staff of their family-owned business, while some are not. Some are blood family members, while some like daughter in-laws or son in-laws are not. With different family members and different interests but with no appropriate family governance system in place, a family could be faced with different dilemmas, tussles, and even a breakup. Therefore, family offices need to strengthen their “soft skill” by supporting family members to establish a comprehensive system for family governance. As far as implementation is concerned, family offices can help set up a family council with members across generations elected. They can follow up all decisions made in the council and lay down a family constitution with rules for family members to follow. A family constitution can set for example, family values, responsibilities and remuneration policy for family members, define their rights or rules to sell family shares, etc. A family office can also assist to review and update the family constitution in time, including its policy and implementation status. Family gatherings and training for members can also be arranged by the family office. Family philanthropy can be another key role for family offices In addition to family governance, family philanthropy can play the role to keep the family together. Philanthropy can be divided into strategic philanthropy and traditional philanthropy. Although families can always start with traditional philanthropy, I suggest families to undertake strategic philanthropy when they are able to for two reasons: First, strategic philanthropy can better help to unite the family compared to a traditional charity. Traditional philanthropy often means monetary donations or “cheque writing”. For a traditional charity, philanthropy ends when the first-generation founder of a family business donates to name a building, a bridge or a road, with no involvement of the younger generation. For strategic philanthropy, all family members can take part in the discussion and decision on the solutions addressing a social issue, and will thus develop a deep understanding about the meaning of philanthropy with first-hand experience. These philanthropic projects can facilitate frequent communication and exchange Younger generations in the family are voicing their willingness to help address social and environmental issues, on top of meeting the bottom line. Having adopted the principles of sustainable finance, they focus on investment in companies with higher ESG (Environment, Social Responsibility, Corporate Governance) scores and impact investing. According to a 2018 UBS report on sustainable investing, nearly half (45%) of the one third (38%) of family offices that undertook sustainable investing had plans to increase ESG investing within the next 12 months. Meanwhile, in Hong Kong, sustainable finance is becoming increasingly popular among private investors who seek financial investments that offer social or environmental benefits. This trend will accelerate Asia’s transition towards a sustainable finance hub. Unlike matured family offices in the West, Asian family offices are often managed by family members. This approach has limitations when it comes to execution. Due to the rapid development of technology and organizational management, family offices need to source more professionals. The long-term development of a family office lies in trusting and retaining such talents. As highlighted in a report by PWMA and KPMG in 2019, the talent gap in Hong Kong’s private wealth management industry is growing. Within a year in 2018 alone, some 2800 professionals were needed in the wealth management market with the most demand from family offices. From a historical point of view, the concept of family offices originates from the West. In ancient China, eunuchs and eminent families did use “majordomos” who were asked to take care of everything about the family matters. Putting this in a modern context, a family office would, theoretically, also take charge of everything, including financial and non-financial matters for the family. A family office, if used properly, can become a powerful tool to implement a family succession plan. Along with taking care of financial matters to help pass on family wealth, family offices can take on non-financial roles such as family governance and family philanthropy, to support a harmonious coexistence within the family and its succession. With the aging first generation and the growing number of family members, more and more Asian family offices start to realize the importance of their non-financial roles. among family members, which allow them to better understand one another, creating a stronger family bond to be passed on. Second, strategic philanthropy is a better tool than a family business to preserve harmony among family members and preserve family legacy. In addition to subjecting all family members to potential conflicts of interest and disputes, a family business does not always allow participation for all members. In a traditional Chinese family business, those considered non-blood relatives are often excluded. A philanthropy project, on the other hand, invites all family members to participate in an undertaking, allowing the entire family to work towards the same goal of social benefits instead of fighting or competing for personal gains. It is noteworthy that people may criticize some new wealth for spending too much. However, these new wealth owners could be big philanthropists as well. In comparison, old wealth was accumulated through the hard work of several generations, and therefore the owners could more likely think twice before they spend or donate. With the emerging new wealth, we are likely to see more family offices in supporting their need to set up a charitable foundation. It is unnecessary for family offices to undertake family governance and family philanthropy simultaneously despite the growing attention they receive. Execution of philanthropy is not going to be impeded over factors such as the size of family wealth or the stage of business development. The earlier the family starts to engage in philanthropy, the sooner it can be united and be beneficial to the passing on of the family value and legacy. It is plausible for a family in its first generation (like family businesses in the Chinese mainland) with a few members to start planning for family governance, but there is no urgent need to make it a top priority. Family offices are increasingly valued by family businesses in Asia, who see them as a powerful tool to ensure a smooth family succession. In the future, the non-financial roles of family offices will come to play a more crucial part in managing a family’s wealth and ensuring that a family’s harmony and legacy can be preserved. Tanoto Centre for Asian Family Business and Entrepreneurship Studies The Center is committed to becoming a leading research center in the burgeoning field of Asian family business and entrepreneurship studies. In addition to conducting researches and studies, the Centre also organizes symposiums and provides related programs. Visit its website for more details. www.afbes.ust.hk Greater focus on social responsibility and sustainable development Asian family offices are moving towards specialization and professionalism Growing recognition of a family office’s non-financial role TREND 5 TREND 6 TREND 7 Insight