Chinese family dynasties – succession, inheritance and that difficult third generation

Thursday, October 27, 2011 | Posted by: Fiona Cullinan
Categories: China | Tags: business, China, succession, succession planning, inheritance, family, China, family, dynasty, succession, succession planning, business, inheritance, family constitution, business risks, dynasty, family constitution

Passing wealth and a business through generations of a family is the most delicate of operations that can tax the most successful entrepreneur. Gaythorne Silvester reports on two Chinese families facing succession and inheritance issues, while Eric Williams, Head of Private Client at Grant Thornton, looks at the potential solution of a family constitution.

The Chinese, as is so often the case, have a saying for it: “Wealth does not pass beyond three generations.” There’s a universal truth in here.

The first-generation founder of the empire has a vision and strives towards it with success. This is the generation that builds the fortune. The mill owner in countless Sunday TV sagas, say, who has dragged himself up from the shopfloor and now has a big house on the hill.

The second generation consolidates the empire and is close enough to the first generation to understand the vision and to share in it. The succession can be relatively simple – the original impulse has not yet been watered down.

By the third generation, the entrepreneurial DNA may have thinned out a bit. New ideas will be needed, a fresh surge of energy to combat the inevitable competition. Wealth may have meant a different kind of education, a familiarity of privilege. This is also the generation of cousins, rather than siblings, taking over the family business. It creates a very different dynamic.

Siblings grow up under one roof, while cousins do not. The original vision becomes harder to keep clear as the family stretches out and other influences come into play. And human nature being what it is, it is sometimes hard for parents in the second generation to judge impartially between their own offspring and their nephews and nieces.

When there is more than one marriage involved things can become still more difficult.

The Ho dynasty inheritance dispute
Take Stanley Ho, for instance. For 40 years he had the monopoly on gambling in the former Portuguese colony of Macau, creating a business that covers virtually every facet of Macau’s economy. Despite Las Vegas rivals now sharing the casino bonanza – Macau is the only area in China where gambling is legal – the Ho family still takes more than 50 cents of every dollar bet in the Chinese enclave.

Ho is Hong Kong’s 13th richest man, according to Forbes, with a net worth of $3.1 billion and huge investments in Macau’s international airport, its container port, property, construction, racecourse and tallest skyscraper. Unfortunately, as well as collecting a huge portfolio of wealth he has accrued four wives, who have given him 17 children between them.

Now 89 years old and ailing, Ho recently found himself in a family dispute over the future of the company that controls his many assets. Things went public after he accused two of the four wives, and some of their children, of trying to seize control of Lanceford, the company that holds his stake. He said that they went against his wishes that his fortune be shared equally among his 16 surviving children.

Bizarrely, his lawyer decided to upload a series of video interviews with the tycoon to YouTube for us all to share. In the videos, recorded in late January, Ho accused his relatives of ‘something like robbery’ and said he would fight to reverse the controversial transfer of his casino empire to his third wife and the five children from his second wife. [UPDATE: Macau tycoon Stanley Ho family row ‘resolved’ – BBC]

The Li dynasty’s succession question
Stanley Ho is astonishingly wealthy, but even he looks an also-ran compared with another Chinese billionaire, Li Ka-shing. At 83 years old Li is the world’s 11th richest man ($26 billion at time of writing) and arguably the most powerful man in Asia. His massive conglomerate employs more than 240,000 people worldwide in telecommunications, hotels, infrastructure, container terminals and retail.

Li was nicknamed ‘Superman’ in Hong Kong for his formidable talent for deal-making, which led in 1979 to him buying 23% of the trading company Hutchison Whampoa from Hongkong & Shanghai Bank, becoming the first Chinese to control one of the old British companies that had long dominated Hong Kong’s economy.

The billionaire has built strong economic and political ties to mainland China, a connection that proved personally vital when his son, Victor, was kidnapped in 1996. Rather than getting the Hong Kong police involved, Li paid $125 million in ransom and also reportedly asked the mainland government for help; in 1998 the kidnapper was captured and executed.

Victor has a flamboyant younger brother, Richard. The elder son has been the classic filial understudy. He shares a house with his dad, living with his wife and three daughters on one floor, while Li occupies the other. Richard is the other side of the coin – he left the family business 14 years ago to head up his own telecoms company, PCCW, and enjoys a glamorous lifestyle, living in Hong Kong’s chicest enclave and once famously flying Whitney Houston out to Hong Kong to sing at a party.

Can either of them duplicate their old man’s entrepreneurial flair? The sort of legendary instinct that prompted Li to offload mobile-phone operator Orange in 1999 for a $15 billion profit? Victor has been described as ‘enigmatic’ and ‘nondescript’, whereas Richard can be an inspired deal-maker.

When you’re as rich as Li, wealth has a problem passing two generations, let alone three. Which son will be taking over the family businesses? That is, for Li, as well as for the concerned investors in his publicly traded companies, the $82 billion question.

Is a family constitution the answer?
There is a way of managing the varying expectations of family members, irrespective of how deep their involvement is with the family business?

The Ho family business is not unique. Many strong-minded entrepreneurs build private companies and are succeeded by subsequent generations. As children have children, each of whom in turn have several children, it is easy to see how, four or five generations down the line, there may be more than 50 descendants of the original business founder. Many of those descendants may not be involved in the business and through the female line it could easily be three generations since anyone in a particular family even possessed the original family name. Even with a relatively small number of family members still involved in the business, there is no guarantee that any of them will have the capacity to successfully run and grow a large private company.

How then to look after the family’s inheritance while ensuring that the business is appropriately managed?

A family constitution can serve multiple purposes, providing a framework for the family business, guiding those members of the family that run it, those that merely work in it and the wider family who may not be involved in the day-to-day business, but may well still be shareholders.

A family constitution can provide balance by synthesising different family interests as fairly as possible so that, for instance, shareholders’ interests are not unfairly prejudiced by the behaviour of family directors and vice versa.

A family constitution can establish criteria, agreed by the whole family, for the recruitment of those who will run the business, such that appropriate commercial criteria are set out and only those family members who satisfy these requirements are able to be appointed as directors or senior managers in the business. In this way, if there are no family members able or willing to run the business it is easy within family constitution protocols to appoint competent external directors or managers without precluding future generations coming into the business to replace external appointees, should those future generations be capable of satisfying the family constitution criteria.

A family constitution reflecting the guiding principles and culture of the family can preserve family harmony and ensure that ownership of the business remains within the family, while protecting the family’s often significant investment in the business.

Although the constitution itself is not generally legally binding, important aspects of the constitution can be legally enforceable by reflecting those aspects in a shareholders’ agreement running in parallel with the constitution document.

Eric Williams is Partner and Head of Private Client at Grant Thornton. For further information and help on this subject, visit our Private Client and Wealth Management  page, or contact your local Grant Thornton adviser.

This feature was originally published in Bespoke magazine in Summer 2011. To receive future copies of Bespoke, please fill out the subscribe form – which also lists a number of other Grant Thornton publications and updates that might be of interest.

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