CSj talks to Michael Chan Yun Kwong, Chairman of fast-food group Café de Coral, and co-founder of the Legacy Academy which coaches families to pass on their businesses to the next generation in a sustainable way.
The easiest way to lose a friend, an old saying goes, is to start a business together. The same is true within a family. That’s partly why passing on a business to the next generation is anything but simple and may open painful wounds. Indeed, HSBC said in a report earlier this year that next to divorce and bereavement, transition of a family business can be the most stressful time in your life. But done properly, a successful ownership succession is the reward of a lifetime; a legacy passed on to the very people you love and trust the most.
Michael Chan Yun Kwong, Chairman of fast-food group Café de Coral, knows this better than most. For almost three decades, he’s been running the company his father-in-law founded, and headed by his brother-in-law as CEO. He also co-founded the Legacy Academy, which is dedicated to raising awareness of the importance of succession planning.
‘Succession planning can be like a psychological tug-of-war’, Mr Chan said in an interview with CSj. ‘That’s why it’s so important to start the planning and preparation many years ahead of the transition. Most family business owners in Hong Kong want to pass on their business and legacy to the next generation, but very few have a plan for it’.
Family businesses are the backbone of most societies and account for about 80% of the global economy. Still, the diversely-held and professionally-managed listed company is often taken to be the ‘ideal’ company. How do you think family businesses can be role models?
‘Family businesses are a driving power of the global economy and should get more credit. I think they could be very good role models. You have family members who have continuity and long-term vision. There’s a saying: “professional managers look at business on annual perspective, family managers on a generational perspective”. So family members are more concerned about the values and principles of running a business. And in terms of transitions, there’s a consistency among management. Even if you hire an outside professional manager, he or she will align with family dynamics. I believe it’s a good model for sustainability in the long term, both for listed and non-listed companies.
Having said that, I believe the reputation of family businesses might sometimes be unfavourable because many are not prepared for succession. They fail because they don’t plan, and instead have to sell out or close down. That’s why many family businesses don’t get over to the next or the third generation. But if you plan and have corporate governance and consider all intangible values, I think family businesses should not have this reputation.’
Café de Coral – which also operates Oliver’s Super Sandwiches, Spaghetti House and Super Congee & Noodles – has achieved 27-fold sales and profit since it listed on the stock exchange in 1986. In your annual report, you say the company is ‘undaunted by short-term ups and downs’. How has this long-term perspective helped you grow, and do you think this is typical for Hong Kong family businesses?
‘From a family business perspective, you always want to provide opportunities for future generations and make use of the business platform to develop their potential. This is the major reason for a business enterprise to exist, especially for a family business. This is also the main motivation for some of the world’s most successful family businesses, like Rothschild, JP Morgan and Rockefeller’.
Your father-in-law, Victor Lo, started the restaurant chain in 1969. Recently you handed over the baton to your brother-in-law, Sunny Lo. How did you handle this process?
‘It took a four-year transition period. He is doing well. But at the end of the day, I don’t want to comment too much on existing management. I have this philosophy – when you’ve withdrawn from management, don’t intervene. Give them a free hand to do whatever they want.’
How does it feel to pass on such responsibility?
‘When you go through a succession, you have to let go of power. You might have had that power for say 30 or 40 years, so letting go is quite a psychological challenge – it’s like letting go of your life. Power is like opium; once you get the taste for it, you want more. Even for a father to pass on power to a son, there will often be a lot of reluctance on the part of the father. I’ve seen many cases where the succession did not succeed because the father hung on to power.
The other psychological burden is that the successor himself wants to make a difference and doesn’t want to have any part with the old guys of the previous generations. He or she often wants to start over fresh. However, one should remember that a succession usually isn’t just one person handing over power to another person; it’s a whole group of people handing over to another group, that’s how I perceive it.’
Rivalry between siblings and family members might also be a factor, how should one deal with that?
‘In fact, my personal philosophy of succession planning is to first look at the family. Family always comes first, then the business. Families are by nature irrational, so we’re not always talking about reason. Look at all intangibles, like harmony, consensus and relationship between siblings and parents. Family traditions and relationships are much more important than just writing a cheque and transferring the wealth. Governance of a family business is an art as well as a science.’
Your son runs a chain of bakeries in China and your daughter an interior design company. They are not actively involved in the Café de Coral family business. Would you say passing on a legacy is more than just passing on a business?
‘Precisely. When you talk about legacy, you don’t need to talk just about business, it’s more a question of the DNA and the personality. I often use the analogy of a soya bean: if you are a soya bean, this doesn’t have to mean that your son or daughter will become a soya bean, they might prefer to become bean sprouts. So even if you enjoy running your own business, it doesn’t have to mean that your son or daughter will enjoy running it. They will inherit other values from the family legacy.’
Today, many of the new generation are reluctant to take over family businesses. A 2010 study by the Chinese Academy of Sciences said that 90% of people running family businesses want to pass them on to their children, but 95% of the second generation don’t want to take them up. Why is that?
‘In China, where the children have received a more liberal education abroad, they are often reluctant to accept the operational methods of their parents when they come back to the family enterprise. They may feel that they no longer share the same value system as their parents and disagree with how they operate the business. Many young people want to have a more democratic and transparent structure. In addition, many of the second generation are very rich but want to make a difference to society as a whole. They may prefer to find work in an NGO to exert their influence.
Another reason is that, whatever the children do, they may feel that they will never be able to outshine their parents. They fear they will always live under the shadow of the ones who created the wealth. There is a saying that goes: parents are the black hole that sucks the dream out of the younger generation. You often pursue the dreams of your parents, and not your own. Today, many of the second generation prefer to create their own dreams.
I read in a Chinese newspaper that a young guy who wanted to prove his determination not to take over his parents’ business chopped off four of his fingers.’
Two years ago you co-founded the Legacy Academy, which coaches businesses to pass on their legacies in a sustainable way. Why did you start it?
‘There were reasons both on a personal level and a societal level. I had personally gone through a succession process and had come to appreciate that planning for succession is not something that can be done overnight. Many people think the chairman can just sit down with his son and say: “Tomorrow you’ll take over”. But that doesn’t happen. Succession needs time; five to 10 years of planning, but few make the effort to plan their succession with that kind of timeline. In China and even in Hong Kong, 90% of businesses want to have succession eventually, but a JP Morgan survey suggests that 88% have not done any planning.’
Why do so few companies plan their succession?
‘Human nature. We tend not to do any planning until we are confronted by a critical situation, especially on subject matters like this. We don’t want to face the fact of death or illness – if you don’t talk about it, it won’t happen, right?
If you look at the Corporate Governance Code in the listing rules, there’s almost nothing about succession planning, but if a succession process fails it can be disastrous both for the family and the shareholders. The business might have to be sold or closed down. That’s why I’m so curious and have done so much research.
That’s why I want to raise awareness in Hong Kong.’
What has the reaction been to the Legacy Academy?
‘There’s a lot of interest from private bankers, insurance companies and academics who want to understand the dynamics of succession planning. There’s also big interest from professional bodies, like the Hong Kong Institute of Directors and the Hong Kong Institute of Certified Public Accountants.’
Having many family members as senior executives in a listed company, could that potentially be a source of conflict of interest, and how would you deal with that?
‘It all depends on whether the family group perceive the company as a “private club” or in true sense as a public company. In my perspective, most families in Hong Kong that run public companies take it very seriously. They have independent directors and strong corporate governance to make sure family interests as well as other shareholders’ interests are taken care of.’
In a company, who should be responsible for the succession planning, and what role does the company secretary play?
‘Of course, the responsibility has to come from the top. No one will go to the chairman and tell him it’s time to retire. Having said that, I think company secretaries play a pivotal role to institute measures to ensure proper succession planning, such as a correct planning process, instructions, policies and procedures. They will need to ensure the plan is incorporated into the company charter in a consistent way. Family businesses, especially with many members, need structure. So the company secretary has a very important role.’
What advice would you give to a company secretary in terms of succession planning?
‘In the planning process, company secretaries are important for transparency. They can lay it down in black and white so everybody will realise that the process in not just for a closed group. They will also overlook vital policies and procedures, like employment policies, how you set salaries for incoming and exiting CEOs, or what happens if someone wants to sell shares.’
What are the first things you need to think about when planning a family succession?
‘First, family assessment. You make an inventory of your family members, their talents, ages, and so on. Then you have family meetings. Some family members might just want to be shareholders and collect their dividend, others might want to be part of management. The meetings have to be transparent. This is very important. The meetings are not casual. You need an agenda and facilitators.
Third, make a family charter. Even among families you need a charter that establishes policies and procedures. It’s not just about wealth, but values and traditions. In fact, one Hong Kong company said in its charter that members should “try their best to have early marriages”, because they want more offspring so the family would grow larger.’
You talk a lot about non-monetary values, what does it mean to you to pass on a legacy?
‘When we talk about a successor, it’s not just a business successor we are looking for but a family successor. A successor has three roles: as business leader, family leader and mentor for the next generation. In some cases, the same person can perform all three roles, or it might be three different people. Ideally, it’s the same person.
A common mistake when family businesses talk about legacy and succession is to talk solely about wealth. It’s more important to think about governance, traditions and intangibles like family values and relationships.’
Investors and business academics often talk about profit maximisation. Do you think we need to raise other intangible values in the debate?
‘Definitely. The idea of profit maximisation has been quite popular for the last few decades, but I think since the turn of the century, especially after the financial crisis, people have come to realise that profit maximisation might not be sustainable. People today look more at what are the real reasons behind wealth creation and they start questioning the whole idea. The rising generation has a lifestyle of health and sustainability. They are concerned about human rights, environmental issues, the underprivileged and social justice more than profit maximisation.’
You’ve said that Japanese families are the best in the world at passing on businesses, could you talk a little more about that and also about what Hong Kong businesses can learn from Japan?
‘In Japan there are 3,146 businesses that have existed more than 200 years. It has to do with culture and how the Japanese view legacy. It’s quite different from most other countries. The Japanese have a very high respect for traditions and heritage. This mindset is a key ingredient. They look at the intangibles more than the tangibles of wealth transfer.
Many capitalist countries, including Hong Kong, have been taught and trained to look at legacy or succession planning only from the wealth perspective. That is one of the reasons we have the common saying that “wealth cannot be transferred to three generations”. If you just look at wealth, you will keep diluting from generation to generation, so you have to look at family values, relationships and history.’
You’ve also said that China is in the midst of the greatest inter-generational transfer of wealth ever – why is that?
‘In China entrepreneurs have no experience in succession planning at all. The opening up of the economy was only some 30 years ago. So many of those early entrepreneurs are now over 60 years old. This is in fact the first time they have had to address succession planning challenges. In China, the number of businesses that have existed for more than 200 years, you can count on less than 10 fingers.
In Hong Kong it’s a little bit better. We’ve been more stable as a capitalist economy for the last 40-50 years. We’ve already seen some successful families who have sustained the business over past two or three generations.’
How does the Confucian tradition affect successions here?
‘On one hand, Confucian culture is beneficial in terms of its emphasis on respect and hierarchy, but this can also be a heavy burden. Confucianism talks about seniority over ability, and male domination over female. If you only have one daughter, some people feel they don’t want to hand over ownership to a woman. Even in Hong Kong some businessmen have this sentiment.’
What’s your view on that?
‘It’s very dangerous. In terms of business sustainability you have to look at ability more than seniority, and you have to go beyond the male and female differences. For family businesses, women sometimes play a more important part in terms of sustainability. I’ve seen many women successful in running family business.’
Johan Nylander, Journalist