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Professor Roger King
Senior Advisor and Founding Director of the Roger King Center for Asian Family Business and Family Offices
Hong Kong University of Science and Technology Business School
In 2017, when the Hong Kong-based Tung family sold their 69% stake in Orient Overseas (International) to COSCO Shipping and Shanghai International Port (Group) for HK$34 billion (US$4.3 billion), it seemed like the story of a family business that dates back to founder Tung Chao-yung in 1969 and includes Hong Kong's former CEO Tung Chee-hwa1 had ended. Three generations of the Tung family built OOIL into the world's seventh-largest container shipping company, with 3.2% of the global market. But from an Asian family business perspective, this was a natural progression. It is said that a typical Asian family business does not last more than three generations. But for the Tung family, as with many other family-run businesses, the exit from the original family business represents both liberation and challenge. The liberation is appealing to the third and fourth generations, who are now able to pursue their own interests outside the family business. The challenge is how to continue to protect the family values and wealth. This is where the family office comes in.
Hong Kong and Singapore are currently engaged in a tug of war over family offices, as they try to attract Asia’s ultra-high net worth individuals (UHNW, generally defined as individuals with assets of more than $30 billion) to their countries. At last count, Singapore had 700 family offices, up from 400 at the end of 2020, while Hong Kong had 400, with 14 established in the past year and another 50 in the pipeline, according to the South China Morning Post.3 While the race for family offices is primarily about wealth management, these family offices can continue to represent the family legacy well beyond the founders. Whether they do so may be the biggest challenge facing Asian family businesses that have exited their original businesses, like the Tong family and many others.
Establish a governance framework
Investment bank UBS conducted the poll of 230 clients globally, with an average net worth of $2.2 billion, between January and March 2023.4 Only 42% of family offices surveyed have a succession plan or governance framework. Even among larger family offices with assets of over $1 billion, only 43% have a succession plan and 66% have a governance framework. Only 21% offer family education, development and mentoring sessions hosted by the family office.5
While there are significant regional differences in the investment styles of family offices and how they approach generational succession, Asian family business models contribute to the unique importance of the family office beyond investment management. Though the family office is a distinctly Western framework, it can provide the ties and bonds that bind families together and support long-term wealth preservation. Deeply rooted in Confucian values and attitudes, first-generation wealth creators in Asia place great importance not only on wealth preservation, but also on the preservation of legacy and family harmony and unity.
While these three “Ps” may not be all that different from values in other societies, particularly in Chinese-speaking countries such as China, Hong Kong, Singapore, and to some extent Japan, Vietnam, and Korea, family offices often engage in philanthropy and respect family traditions. One Hong Kong family, now in its third and fourth generations, uses the family office to organize social gatherings to coincide with special events in the Chinese calendar, such as tomb-sweeping. Hong Kong recently acknowledged the importance of philanthropy to family offices by allowing charities to hold up to a 25% stake in family office investments.6 This allows families to have the equivalent of an endowment fund for certain charities, such as a foundation, that will carry out the family’s philanthropic activities over time.
Family businesses in Asia have a special experience because of the incredibly fast economic growth, especially in China. Hong Kong experienced the boom in the 1960s and 1970s, when many of the famous Hong Kong businessmen started their businesses, while China has experienced the boom since the 1990s. Business cycles are extremely short, and families experience the same kind of transition between the founding generation and the successor that is common in Hong Kong and other parts of the Chinese world between the third and fourth generations. According to a recent survey by Shanghai Jiao Tong University, 80% of the “rich second generation” do not want to take over the management of the family business, partly because they have advanced degrees and hold special positions within the company. According to Professor Yu Mingyang, their circle of friends is outside the family business, and they have little interest in the details of running the business. Instead, they want to jump right into the financial business, using their assets to invest in funds and private equity.
Use a professional manager
Professor Yu believes that mainland China's “second generation” entrepreneurs are in crisis because the professional management system is not yet functioning and the influence of founders is overwhelming. He argues that the government should support a smooth transition of business succession and not leave the issue to chance. “Only professionalization, that is, the proposal of professional managers, can make second generation succession a given,” he says.
Family offices can be a resource for the particular transitions facing family businesses in mainland China, but more broadly, it is also true that business cycles are speeding up and human lifespans are becoming longer and longer. This means that the growth period for family businesses in Asia will be similar to the experience in mainland China, given the greater ambition of their founders. While the second generation may have different experiences in other parts of greater China and be more committed to the business, the longer lifespan of each generation puts additional pressure on family offices to come up with solutions that go beyond the original business that held the family together.
So what solutions can a family office, or a multi-family office, offer to look to the future across generations? Of course, some people may not see much benefit in maintaining family ties, whether it be to honor their parents or grandparents or to have a family member manage their assets. One possibility is to use the family office as a council to oversee the financing of projects by family members. Instead of simply seeking the highest return in material terms, at least a portion of the family wealth could be spent on promising members of the younger generation. In other words, the family office could provide seed capital to young, entrepreneurial family members.
This requires a matrix or other structure to evaluate projects, but unlike the quantitative analysis typically applied to investments, the Family Council considers other values. These can be summarized as Commitment, Confidence, Knowledge, and Passion (CCKP). Individuals within the family must demonstrate these characteristics to be considered worthy of seed funding. The basic logic is that to preserve wealth, the family must have an entrepreneurial spirit. To protect the legacy, the family must spend part of its resources on promising family members. To maintain harmony and unity, this must be an effort involving family members as well as professional managers.
Reduce potential conflicts
A family office can also be a platform for family governance, whether the founder's business survives or not. China has a proverb about the “curse” of three-generation family wealth, based on longstanding patriarchal experience that creates conflict as families grow. Siblings each have their own emotional dynamics, but ideally the family office can mitigate the potential for conflict by helping to assign roles, including running existing businesses.
Philanthropy is another means of spreading heritage and family harmony and cohesion, if not wealth preservation. But, of course, there is no philanthropy without wealth. In Hong Kong, as well as other Chinese-speaking countries, including mainland China, millennials are enthusiastic about impact investing, a form of philanthropy in which philanthropists remain deeply involved in project management and the results become social capital. Millennials are also much more likely to be convinced that ESG investments in environmental, social and governance support returns in macroeconomic terms, even if they are typically a corporate cost. But if philanthropy unites families around a good cause, it has the secondary effect of uniting them at a time when economic forces tend to cause conflict.
Vision, Commitment and Purpose
Family offices in Asia are undoubtedly shaped by the businesses their founders set up and the values they hold. The extent to which these values are reflected in the family office's structure and goals will depend on the foresight, commitment and sense of purpose, as well as the office's fundamental purpose as a vehicle for managing wealth. In Singapore, the Wealth Management Institute offers certified courses for family office professionals on legacy and influence on the family, inheritance and wealth transfer, and investment principles for families, with similar courses planned for Hong Kong.7
Our ongoing efforts at HKUST complement these developments. The Roger King Asian Family Business and Family Office Centre8 provides the intellectual foundation to bridge the knowledge gap among academics, practitioners and policymakers through workshops and seminars on a wide range of topics and case studies of Asian family businesses. As the landscape for family businesses in Asia-Pacific changes under China's influence, so too do the needs and objectives of family offices in the region. We hope that our efforts will support the development of both in this highly vibrant and productive region, which has been the centre and driving force of the global economy over the past few decades.
References
- Dominique Gui, “Tong family sells shipping company for $34 billion,” The Standard, July 10, 2017; https://wwwthestandard.com.hk/section-news/section/11/184902/ Tung-family-sells-shipping-firm-for-$34b, accessed July 19, 2023
- Tong See Kit, “More and more ultra-rich people are setting up offices in Singapore, but they’re not just from Asia,” Channel News Asia, 12 January 2023, https:// www.channelnewsasia.com/singapore/family-offices– ultra-rich-set-singapore-financial-sector-3182131, accessed July 19, 2023
- SCMP Editorial, “Hong Kong an ideal location for family offices,” South China Morning Post, November 23, 2022, https://www.scmp.com/comment/ opinion/article/3200628/hong-kong-ideally-placed-be- family-office-hub, accessed July 19, 2023
- Mia Castagnone and Iris Ouyang, “Asia-Pacific family offices continue 'strategic shift', increase asset allocation to stocks, developed market bonds: UBS,” South China Morning Post, June 1, 2023, https://wwwscmp.com/business/banking-finance/article/3222591/ asia-pacific-family-offices-continue-strategic-shift-increase-equities-and-developed-market-fixed, accessed July 19, 2023
- UBS Switzerland AG, “Global Family Office Report 2023” (Zurich, Switzerland) reference: content/dam/assets/wm/static/noindex/gfo/docs/ubs- gfo-report-2023.pdf, accessed July 19, 2023
- Vivian Teow, Partner, Dentons Hong Kong, “Hong Kong Tax Incentives Facilitate Family Office Establishments,” May 23, 2023, Hong Kong en/insights/articles/2023/may/23/hong-kong-tax-concessions-to-welcome-family-offices-set-up, accessed July 19, 2023
- “Family Offices”, Wealth Management Institute, Singapore; https://wmi.edu.sg/programmes/family-office/, accessed July 19, 2023
- https://afbfo.hkust.edu.hk/FrontPageaccessed July 19, 2023