This article first appeared in Wealth, The Edge Malaysia Weekly on August 26, 2024 - September 1, 2024

There is a Chinese saying that wealth does not last beyond three generations, and the reality is that sustaining family businesses is a significant concern across Southeast Asia. This concern is justified as succession is extraordinarily hard, especially when transitioning from the second to third generation.

I often come across patriarchs who ask me to provide an honest assessment of the capabilities of their children and recommend who can succeed them. One key problem is that the succession process is often viewed through a narrow lens, with the focus primarily on only identifying family members who can be the future leader(s) of the business, as the question by these patriarchs (matriarchs are rare) illustrates. While this is a valid topic, many more hidden dimensions require attention. To truly create a family business that spans multiple generations, a far more comprehensive approach to transgenerational succession is needed.

The Lotus model of succession was developed to highlight these “hidden” dimensions of succession that require investment and attention, especially for families operating in high-growth emerging markets. It advocates a holistic approach that includes a comprehensive understanding of the incumbent leader’s role, ownership distribution choice, organisational fortification, family unity and robust governance. By embracing this model, family businesses can navigate succession with foresight, ensuring a seamless transition and laying the groundwork for sustained prosperity across generations.

There are five petals of the “Lotus” model, all of which are crucial for the continuity of Southeast Asian family businesses.

The first petal of the model, represented by the letter “L”, emphasises the significance of leadership succession. While choosing the next leader(s) is pivotal, it’s equally important to address the incumbent leader’s potential resistance to relinquishing power.

Those patriarchs who express their doubts about their children’s capabilities and motivation to work hard often do not realise that they themselves may stand in the way of successful succession. The reluctance to cede control — a very human characteristic — can impede the smooth transition of leadership.

Understanding and managing the behavioural shift of the incumbent leader is essential to ensuring a seamless succession process. The best way to go about this is for the patriarchs to gradually shift to a mentorship role and develop other activities in the time that is freed up, for instance, to focus on a new project or to impact the community or the country positively.

The “O” highlights ownership succession as a critical component intertwined with leadership succession. Distributing shares among the next generation requires strategic deliberation to prevent power imbalances that could hinder effective leadership.

Before Chang Yung-fa, the founder of Evergreen Group, passed away in 2016 at age 88, he designated his youngest son as his successor. However, having already handed over a significant part of the group’s ownership, this appointed successor was quickly overruled by his elder brothers, who used their formal voting power to kick him out. Choosing a leader without thinking about formal power may be a recipe for feuds. Moreover, equal distribution of shares may not always be the optimal solution.

There are fair ways of distributing an inheritance without equally distributing the voting shares in the business, but doing so requires planning as well as careful communication in the family — something that was apparently lacking in the Evergreen case.

Families are advised to explore alternative options such as share allocation based on managerial involvement — which is more common in Japan — establishing independent entities like trusts or splitting a business group up and providing different children with their own business to run, such as the founders of Far East Organization in Singapore, Cheung Kong Holdings in Hong Kong and IOI Group in Malaysia did.

A common European model, where many family members own small stakes but generally do not get involved in the day-to-day running of the business, is another option, although this is rarely considered by Southeast Asian families. The important lesson is to decide on the model that works for the family and to plan ahead while communicating choices made with the entire family.

The transformation of the organisation, denoted by the letter “T”, underscores the need for robust organisational structures and systems. Fast-growing family businesses often exhibit entrepreneurial leadership, but may lack mature organisational foundations such as management information systems, independent internal audit or a structured approach to talent development.

In contrast to organisations in places such as Germany or Japan, where economic growth is more modest, fast-growing family businesses in Southeast Asia tend to race ahead while having little time to build up talent management, to organise internal and external communications functions, or to implement strong IT systems to optimise organisational processes. While this may work in the first and second generations, who often are involved in all the details of the business, it may no longer work for next generations who find it impossible to run a large business by taking all decisions personally. Even more worryingly, emerging market families may find that inventory starts disappearing and profitability drops when they hand over to a next generation.

It is no surprise that successors are unable to maintain discipline in the sprawling empire, and employees do not feel the same moral obligations to a next-generation member. Thus, prior to succession, it becomes imperative to assess and fortify the organisation, ensuring its viability beyond the practical and moral oversight of a single dominant leader.

Attention to internal controls, systems, managerial talent, a healthy organisational culture and internal transparency is crucial, especially in regions where issues like employee misconduct and corruption pose significant challenges.

The “U” emphasises the importance of uniting the family during the succession process. While much attention is typically placed on the successor, chances are that internal tensions come from the periphery. There may be other family members who become unhappy as the balance of power is changing. In the succession phase, actively engaging and garnering support from other family members is vital, including those not directly involved in the business.

Consider those ambitious family members who did not become successors and their supporters: How will they fit in? When I work with families, it is often these family members who call me to proactively voice their concerns. Left unaddressed, such concerns may develop into tension.

Investing in uniting the family serves as a preventive measure against potential conflicts that may arise during or after the succession process, ensuring that everyone understands what is expected of them at each step of the journey and nurturing a cohesive and supportive family dynamic.

The final petal, “S”, signifies the strengthening of governance — in particular, family governance. Establishing clear rules and expectations through a family constitution or charter, along with entities like family councils and assemblies, lays the groundwork for effective family governance. Without a rules-based framework, extended business families may find it difficult to work together as there is no sense of “procedural fairness” — decisions that are not supported by all quickly become personal.

I often encounter business leaders who try to maintain an internal “book of fairness” in their minds, but they often end up pleasing nobody and spending their time firefighting between family members with vastly different expectations, talents or motivations. Clarity about responsibilities and decision-making procedures shapes the expectations of family members, thus reducing misunderstandings and making decisions less personal.

While some Southeast Asian family businesses are only now reaching the point where more sophisticated governance mechanisms make sense, older ones are leading the way. For instance, Royal Selangor from Malaysia, now in its fourth-generation leadership, is a good example of a business family that has developed a constitution, invests in disciplined decision-making and in family harmony, resulting in a strong family business legacy. Strong governance fosters a structured approach to decision-making and engagement, contributing to the long-term sustainability of the family business.

The Lotus model helps Southeast Asian family businesses recognise that the legacy of a family business is intricately woven into the fabric of leadership, ownership, organisation, family unity and governance. Embracing this holistic approach is key to navigating the complexities of succession and nurturing the enduring legacy of family businesses.

Marleen Dieleman is a professor of family business at the International Institute for Management Development (IMD) and leads IMD’s family business activities in Asia

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