Chapter 11
Suggestions for Developing Chinese Family Businesses
Values such as strong family relationships, trustworthiness, hard work, and frugality have been the foundation of success for many Chinese family businesses. However, that will not be enough. Like any other business, Chinese family businesses need to implement the right management techniques and principles, particularly as the business grows and develops. Therefore, modernization is inevitable. Succession plans should be developed. Estate planning should be developed. Conflict management and resolution must be implemented. However, modernization, succession plans, conflict management, and conflict resolution will not succeed without good corporate governance, the right business paradigm, strategy, structure, and system, as well as competent family members, qualified professional managers, fair remuneration, equal treatment, the right leadership, strong commitment, and strategy renewal. Ethical behavior and corporate social responsibility should also be promoted.
Implementing Corporate Governance
Successful overseas Chinese family businesses (OCFBs) implement good corporate governance. Corporate governance directs the company’s attention toward the improvement of performance through supervision and monitoring. It also ensures the accountability of management to the company’s stakeholders. Corporate governance can also motivate management to enhance its effectiveness and control the behavior of managers so that they always put the stakeholders’ interest ahead of their own. Corporate governance includes fairness, transparency, accountability, and responsibility. Company leaders have to be fair when distributing money to the shareholders. There should be openness and transparency regarding the company’s policies and who should be accountable for the policies. Executives should be given greater authority to develop the business.
Family firms can start their corporate governance by defining the family and business goals, and then combining the goals with accountability, which is the focus of corporate governance. Corporate governance structure in a family business usually consists of the family and its institutions, such as family assembly, family council, shareholders’ committee, board of directors, and executive committee. The family, as the owner of the business, should be responsible for handling corporate governance issues.
There are still not many OCFBs implementing corporate governance. However, it is needed as the company grows and more family members and non-family professionals join the business.
One’s tasks and responsibilities in a family business are usually based on the appointment by family members or advice regarding the company’s basic structure.
Usually, there are three basic structures needed in a family business, namely Family Council, Audit Committee, and Advisory Council, as shown in Figure 11.1. A family council is usually run by a management consultant acting as the advisor, conflict mediator, and training and counseling provider. Family council is needed to change the organizational structure of the family business, which usually hasn’t met the common standard, and also to resolve any conflict. An audit committee is needed to audit the family business. The audit comittee examines weaknesess in the family business. An advisory council will provide the family business with legal assistance. It also provides assistance related to agreements, share distribution, and succession.
Figure 11.1 Family business governance structure
To achieve a successful corporate government, a family business must address six issues. First, the selection of managers: The company should select the right managers, ones who must be able to lead and serve as role models for their subordinates. Second, integrity of management: Managing a family business requires a common understanding about the vision and mission and what the family and employees should do to achieve them. High commitment from family members is important to unite the perspectives and goals. Third, responsibility of management: The family members and non-family managers should be accountable for every action they take. Therefore, they must think carefuly before making any decision regarding company policy. Fourth, accountability of the audit committee: Without accountability, the audit result will not be valid, since it is not in accordance with the applied standard. Fifth, transparency on accounting reports: This emphasizes the importance of transparent financial reporting in managing a company. Transparency and honesty is the basic foundation for success. Without transparency and honesty, a company cannot earn trust. And sixth, adherence to commitment and agreements made: Any commitment or agreement should be fulfilled so that trust and integrity can be earned.
One OCFB that states its belief in corporate governance is Charoen Pokphand (CP). Dhanin Chearavanont, the current CEO, as quoted by Vorabandhit (2004), said, “The smaller the business, the more it belongs to the family. The larger the business, the more it belongs to society. Therefore, large business should be very transparent. For example, if accounting is not transparent, no one will dare give a loan to that business.”
Creating a New Business Paradigm, Strategy, Structure, and System
Along with growth and development, a Chinese family business must change the paradigm and way of thinking. It is wrong to think that a family business can naturally grow and develop without having to implement modern management techniques and principles. After changing toward the right paradigm, the family business needs to improve its strategy, as well as its structure and system, to accomplish its vision and mission. The right structure and system will clarify the responsibility, authority, rights, and obligations of each family member and employee. If not designed properly, it would be difficult for the company to handle many activities, such as recruiting competent employees, serving its customers, managing inventories, maintaining the company’s assets, and handling customer complaints. As a result, the image of the family business could be tarnished since it is considered unable to serve its customers well, employee’ morale will weaken, and customers will prefer to buy the competitor’s product.
According to Daft (2004), organizational structure must provide a framework of responsibilities, reporting relationships, and groups, and it must provide mechanisms for linking and coordinating organizational elements into a coherent whole. He also says that managers can choose whether to orient toward a traditional organization designed for efficiency, which emphasizes vertical linkages such as hierarchy, rules and plans, and formal information systems, or toward a contemporary learning organization, which emphasizes horizontal communication and coordination.
Whichever is chosen, there is no one-size-fits-all organizational structure. Instead, a structure must be aligned with a strategy. In other words, structure must follow strategy. Such alignment enables an organization to make adjustments, to set clearer and more understandable goals and objectives, promote employee participation in decision making, and improve communication.
Unfortunately, an organizational structure has often already existed even before the strategy is set. This could create lack of alignment in the company. Lack of alignment could potentially delay decision making, undermine the decision quality, and cause failure to adjust to environmental change. It also could create doubt among employees regarding company direction, and waste the company’s resources.
Michael Widjaja from Sinarmas Land said that in order to thrive, strong organization is needed so that expertise and product excellence can be developed. Systems and processes should be optimized so that the company will be more effective and efficient. Sinarmas Land created a new organization that merges two publicly listed companies, namely PT Bumi Serpong Damai Tbk and PT Duta Pertiwi Tbk. Sinarmas Land improves the work process, restructures operating systems, and harmonizes the business process. Michael Widjaja created a new organizational structure for Sinarmas Land based on the similarity in business units and core competence so that cooperation among departments or functions can be enhanced. The value chain process will start from Strategic Land Bank (SLB). Its main duty is to propose development concepts to the executive committee and to create a master plan. In creating a master plan, SLB receives input from Residential, Commercial, Asset Management, and Corporate Strategy and Services. SLB is responsible for external relations, legal, permits, and certificates, as well as estate management.
To support the transformation, a new division called Project Management Office (PMO) is set up to help the organization maximize its performance. Corporate Strategy and Services is responsible for marketing communications, business development, procurement and general services reengineering, information technology, and so forth.
Sinarmas Land will become an integrated company that grows with various products and segments. Sinarmas Land has a vision: to become the most trusted real estate developer in Indonesia. Sinarmas Land gives each of its business units a way to focus on being the best. Strategic Land Bank will focus its attention on creating long-term value-added products and services. Residential, Commercial, and Asset management business units will focus their attention on achieving current financial results. Project Support Services will ensure the quality of the products. Other corporate functions such as finance and human resources will also add value to Sinarmas Land as a whole.
Enhancing Education and Competence for Family Members
One factor impeding the success of a family business is the lack of professionals among family members. The company must anticipate this by providing the best education for the next generations so that they will have better skills and knowledge. Fortunately, senior generations in many Chinese family businesses are aware of this. They send their children to the world’s best universities and higher education institutions. This is in stark contrast with the first generation, many of whom never went to a university. There are so many examples we can mention here: Joshua Yeoh, the son of Francis Yeoh from YTL, graduated from Cambridge University with a master’s degree in civil engineering. His sister, Ruth Yeoh, graduated from the University of Nottingham, which consistently ranks among the top ten schools in the UK in the most highly regarded world and national rankings. Currently, she is the executive director of YTL Singapore Pte. Ltd.
Another example is Chartsiri Sophonpanich, the first son of Chatri Sophonpanich and grandson of Chin Sophonpanich, the founder of Bangkok Bank. Chartsiri was educated in the United States at the Massachusetts Institute of Technology, where he obtained an MS in chemical engineering and an MS in management from the MIT Sloan School of Management. After working at Citibank in New York, he returned to Thailand to join Bangkok Bank on February 1, 1986. He gained extensive experience at both operational and managerial levels in various departments at Bangkok Bank, including Foreign Exchange Trading, Marketing, Treasury, Investment Banking Group, and International Banking Group, before being appointed president on December 1, 1994.
Lance Gokongwei, the son of John Gokongwei, the founder of JG Summit Holdings, holds a bachelor of science in finance and Applied science from the University of Pennsylvania, Wharton School. He attended the Management and Technology Program at the University of Pennsylvania.
Rayvin Tan, the son of Vincent Tan from Berjaya, Malaysia, graduated with a bachelor of science (First Class Honors) degree in accounting and finance from the London School of Economics (LSE), United Kingdom, in 2000. LSE is one of the most prestigious schools in the world.
Suphachai Chearavanont, the son of Dhanin Chearavanont from CP, holds a bachelor of science in business administration, majoring in financial management, from Boston University.
Recruiting Non-Family Executive Professional Managers
Every family business must have managers or professionals from outside the family to avoid bias and subjectivity. In addition, professional managers could promote professionalism.
Non-family professionals provide new information, expertise, and experience. They support accountability in management. They can help evaluate ideas and strategies. They can give clear, honest, and objective views. They can create image and professional relationships within the external environment.
In many family businesses, leaders and employees still work long hours although the productivity does not improve significantly. Non-family professionals could help family members change work-hard principles into work-smart principles, where leaders and employees work normal hours while at the same time improving productivity significantly.
Many Chinese family businesses even recruit outside directors or executives. Competent outside directors are valuable resources for a family business. They can help the family business to improve its strategy and ensure the continuity of business operations.
Many transitions would not be successful without the help of outside directors. Outside directors can help family members and employees in eliminating the fear of a rough transition by inspiring commitment and providing momentum for the older generation to step down and for the younger one to start taking over the control.
When the second, third, or even the fourth generations own and manage the business together, outside directors can help each family member in finding continuous consensus. When some family members work in the company and some don’t, an outside director could give objective views regarding dividends, compensation, and performance.
Recruiting outside directors to work in the family business brings the following advantages:
Nowadays, more and more Chinese family businesses have appointed non-family members as directors or CEOs. YTL is one of them. In November 2011, Kemmy Tan Peck Mun was appointed as CEO of YTL Land and Development Berhad. Kemmy leads the group’s property portfolio in the region while strategizing new avenues for the group’s future growth and development. Prior to joining the YTL Group, Kemmy was general manager of Sentosa Cove, Singapore’s pioneer and only integrated marina residential development, responsible for the marketing, development, and estate management of the 117-hectare development. She previously held senior marketing and business positions in listed and private entities, including CapitaLand Ltd., Tuan Sing Holdings, and Far East Organization, with wide-ranging experience across the residential, commercial, retail, and industrial property sectors. Kemmy graduated from National University of Singapore in 1991, where she obtained a bachelor of science (with honors) in estate management, and also holds a graduate diploma in marketing. She is a council member of the Real Estate Developers’ Association of Singapore (REDAS) Management Committee and is the chairwoman of its seminar committee.
If non-family professionals are recruited to the company, particularly for the top-level position, they always want to know everything about the business and the company. Therefore, transparency becomes important. These non-family professionals should also be motivated through good incentives, good career development planning, clear and fair performance measures, and a favorable climate.
On the other hand, it is also important for non-family professionals to understand the family point of view so that change can be easier and smoother. Non-family professionals need to show a certain degree of tolerance. This means that they should not insist on their ideas being implemented immediately.
Analyzing Corporate Life Cycle
By analyzing corporate life cycle, a family business can identify its strengths and weaknesses. It can also help the business in anticipating unexpected events, as well as managing continuity in the future.
Generally, a corporate life cycle begins with the creation stage and continues with the growth, maturity, and declining stages. At the creation stage, a company introduces its products and services for the first time. There are still no organizational structures, systems, and procedures. The number of employees is relatively small. The company focuses on survival.
In the growth stage, income increases, as well as the number of employees. More products and services are introduced. At this stage, the company must create organizational structure, system, and procedure. For a family business, this is the stage where younger generations and extended family start to join and play an active role, as well as non-family professionals. The key success factor in this stage is to have a coordinated and harmonized team in the top management structure. Professionals need to be competent in administration, system development, control, and risk management; in other words, they need to complement the family entrepeneurial spirit.
In the maturity stage, the growth rate is relatively stable. The structure, system, and procedure are steady. The company’s priority is to maintain market share. This stage can last for a long time, even without time limits. However, the loss of a leading product, the rise of substitute products, big debt, and resistance to change can lead the business toward the declining stage or even its demise if the decline fails to stop. To prevent such things from happening, the declining trends should be reversed. Strategy, structure, system, and procedure should be reviewed.
In the maturity stage, a family business must be aware of the decline in innovation and lack of new ideas, as well as excessive formalities and rituals. The company focuses itself on internal problems and loses touch with its customers. It is also very proud of its past success, without realizing that the environment has changed.
Promoting Fair Remuneration and Equal Treatment among Members
Remuneration should be tied to performance, which should be applied to both family members and non-family employees. Equal treatment should be applied regardless of seniority, relationships with the family, and so on. Fair remuneration and equal treatment will minimize potential conflict in the family business.
Henry Sy, Jr. from SM Prime Holdings, Inc. once said, “We believe in treating people fair and square, so that our efforts would be rewarded with our customers’ loyalty.” He also argues that being good is not limited to their interaction with clients. It’s also the central pillar on which the corporate culture is founded. “We have to internalize how to be good from within. After all, you can only be creative and service-oriented when you feel good about your company,” he says.
In Panda Express, Andrew Cherng pays his starting employees at least 50 cents more than the minimum wage and promotes people within the company. Almost three quarters of Panda Express managers were originally hired for a lower position. Such opportunity allows Cherng to select from the cream of the crop and reduce training costs by retaining valued and experienced workers. This policy is a contradiction to the popular belief that the Chinese entrepreneur is stingy and is a slave-driver.
Chreng requires his managers to be able to encourage followers under their supervision so that they will have a strong commitment to the company. He also wants his top managers to adjust their behaviors so that they are in line with the company’s culture. To ensure this, he is not reluctant to give feedback by talking directly to them. For Cherng, top managers must not only focus on their work, but also other activities outside the office. These top managers must never stop learning. Employees who do not have good attitudes should be dismissed, although they may have strong skills and knowledge.
There is a unique story from Unilab, Philippines. Its huge labor force has never had a labor union similar to other huge industrial firms in the Philippines or Southeast Asia. Unilab is fair and generous to its workers and even to its retirees.
Influencing with the Right Leadership
A family business needs leadership that can help ensure its stability, continuity, and successful change. Change is not easy for a family business. To overcome this difficulty, a family business could build consensus regarding the importance of developing leadership; determine rights, obligations, and leadership processes; manage governance for effective decision making and fair dispute resolution; and implement a strategic plan.
As the family business grows and develops, it is impossible to depend only on one figure. Collective leadership will help family members to get more involved. Many Chinese family businesses have collective leadership. It is not unusual to see the founder’s children hold the top leadership positions in the family business, such as in Lippo (Indonesia), YTL (Malaysia), and SM Investments Corporation (Philippines). Collectiveness in the family should be maintained.
A successful family business usually appreciates any approach. It also accommodates informal groups through greater understanding and involvement. Informal groups emerge naturally due to the response and common interests of the members of an organization who can easily identify with the goals or independent activities of the group.
Disputes and conflicts often happen in a family business. Therefore, leaders of family businesses should develop a mechanism for dispute resolution to avoid bigger and more bitter conflicts. Conflict threatens family harmony and the company’s existence. Many family businesses collapse because of bitter conflicts.
Leaders of family businesses should know the strengths and weaknesses of themselves, family members, and the other people working in the company so that they can put everyone in the right position and the right job. A fair recruitment, selection, and compensation policy is a must to avoid jealousy among family members.
Reformulating Strategy and Renewing Business
Only by reformulating strategy and renewing the business can the family business maintain its competitiveness. Leaders must support every change initiative toward greater progress and prosperity. Charoen Pokphand is a good example. CP has learned its lessons from the economic crisis that hit Southeast Asian countries in 1997, since the agribusiness company was badly affected by the falling of Southeast Asian currencies. CP realized that it had been involved in too many businesses. Therefore, it decided to restructure them to improve its performance. CP abandoned some of its businesses such as Lotus Supercenter (which was sold to Tesco in Britain), Ek Chor Motorcycle subsidiary in Shanghai, China, and some of TelecomAsia (TA)’s subsidiaries. It also strived to improve its financial position and condition, and aimed to reduce its debt to a manageable level. CP also decided to concentrate its resources towards agribusiness. It has made efforts to enhance efficiency by merging 11 of its agribusiness subsidiaries.
Today, CP has become a world-class company. It is one of the world’s largest producers in animal feeds, shrimp-related products, and poultry. For his achievements in making CP an admired company, Dhanin Chearavanont, the company’s CEO, was awarded Forbes Asia’s 2011 “Businessman of the Year.”
Ciputra has decided to focus on the property sector and to develop his business to big cities outside the Java island, Indonesia. This means he no longer diversifies his business to unrelated sectors. He wants to build commercial property projects in many cities and countries, including Asia and the Middle East. He actively gives direction regarding vision, mission, and strategies in his businesses. Currently, Ciputra serves as president commissioner in three groups, namely Ciputra Group, Metropolitan Group, and Jaya Group.
Promoting Ethical Behavior
When making business decisions, ethical behavior must not be ignored. Basically, ethics is moral standards about right and wrong, good and bad. For a company, promoting ethical behavior means avoiding breaking the law, avoiding actions and activities causing a lawsuit from any stakeholder, and avoiding actions and activities that could tarnish the company’s image. Promoting ethical behavior is extremely important for Chinese family businesses that want to enhance their glory and reputation.
Ignoring ethical behavior will bring negative consequences. Employees’ morale will deteriorate since they have to carry the psychological burden of working for a company that has a bad reputation. Employees can also feel uncomfortable and experience mental fatigue since they have to answer questions and complaints. The company must also spend a huge amount of money to regain its reputation, which surely reduces efficiency. The public might no longer trust a company exhibiting unethical behavior. History has shown that ignoring ethical behavior destroys a company much faster than when it develops and implements a wrong strategy but still adheres to ethical behavior.
Ethical behavior consists of corporate ethics, work ethics, and individual ethics. Corporate ethics address the relationship between a company and its larger environment. Work ethics address the relationship between a company and its employees. And individual ethics address the relationship among employees.
Ethical behavior will promote trust between a company and its stakeholder. This in turn enables a company to enhance its financial and non-financial performance in the long term. The existence of the company can also be maintained.
Paying serious attention to ethical behavior will create the impression that the company supports such a thing. Company policy is usually documented in a code of conduct. Today, as the world becomes more globalized and the demand for transparency is increasing, a code of conduct becomes more important.
Ethical behavior will thrive when there are agreements and understandings regarding behaviors that are considered right or wrong, as well as ways to help resolve ethical problems. There are three factors enabling ethical behavior to thrive in a company. First is a strong company culture. A company’s culture is a set of values and norms guiding employees’ actions. A company’s culture significantly contributes to ethical behavior. Second is the trust among the organization’s members and between the company and its stakeholders. And third is the promotion of employee relationship management.
In promoting ethical behavior, internalization is needed. The internalization process consists of five steps: awareness, understanding, assessment, acceptance, and implementation. These five steps must be done in sequence.
A leader in a company must become a role model for the employees. If a leader pays special attention to the needs and interests of stakeholders in an effort to fulfill her responsibility to customers, suppliers, and other stakeholders, it will promote loyalty, honesty, and productivity.
There is a link between business activities and activities outside the workplace that influence not only employees, but friends, family, and society as well. Business decisions often have impact beyond work boundaries. Therefore, we can say that ethical behavior in doing business is part of not only corporate norms, but societal norms as well.
Promoting Corporate Social Responsibility
Corporate social responsibility (CSR) has been a topic of discussion over the last few decades. There are increasing demands from various stakeholders such as customers, employees, suppliers, communities, governments, and nongovernmental organizations. They expect companies not only to care about financial performance, but also to contribute to the well-being of society and the protection of the environment.
The European Commission defines CSR as “a concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis.” CSR is directed inside and outside of the company. Inside the company, CSR is directed to the shareholders and employees. To the shareholders, a company should strive to maximize shareholder value. A company should also address the well-being of its employees. Thanks to their hard work, dedication, and sacrifice, the company is able to perform many activities and succeed. Outside the company, CSR relates to the company’s contribution in paying taxes, creating employment opportunities, improving the well-being and competence of society, and preserving the environment for future generations.
Andrew Tan in one interview with the Philippine Daily Inquirer on April 13, 2008, said that it was not enough to know your market and your customers. You must also gain the same mastery and understanding of your employees, suppliers, partners, associates, and even your banker and underwriter.
For companies, CSR brings various benefits. First, support from communities: Companies that carry out their social responsibilities consistently win the public’s support. Should there be accusations of any wrongdoings, the public will most likely show their support. Second, CSR will help companies in minimizing the risk of any crises. Tsoutsoura (2004) suggests three kinds of risks related to CSR, namely corporate governance, environmental aspects, and social aspects. Companies that adopt the CSR principles are more transparent and have less risk of bribery and corruption. They will also implement stricter quality and environmental controls. Therefore, they run less risk of having to recall defective product lines and pay heavy fines for pollution. CSR also helps companies in reducing social risks. Third, employee engagement and pride: Employees will be proud of working for a reputable company that consistently helps societies in improving their quality of life. Employees will feel more motivated to work harder for the company’s success. Socially responsible companies will also be able to attract and retain best talents more easily, reduce turnover rate, and lower the cost of recruiting new people. Fourth, CSR will strengthen the relationship between a company and its stakeholders, since it shows the stakeholders that the company cares about those things that contribute to its ability to operate and be successful. All of these benefits will in turn enhance the company reputation in the long term. This is despite the fact that CSR does not always have positive and direct impact on a company’s financial performance.
The good news is that many Chinese family businesses are already aware of the importance of CSR. One example is IOI Corporation Berhad. Environmentally friendly practices are taken seriously by IOI Corporation. One example is its practice of returning empty fruit bunches and palm fronds to the land (Mason, 2011). This reduces the need for fertilizer by 40 to 50 percent and provides compost to enrich the soil naturally and to reduce erosion caused by rain. Another practice is the extensive use of kernel shells and fiber to provide renewable energy to produce the steam needed to extract the palm oil from the fruit. Nearly 98 percent of IOI’s fuel consumption for steam generation at its mills is from these renewable resources.
Supporting and promoting education is an important area of IOI’s CSR initiatives. These initiatives are mainly organized by Yayasan Tan Sri Dato’ Lee Shin Cheng, a charitable foundation fully sponsored by the IOI Group of Companies, which was established in 1998. Through Yayasan Tan Sri Dato’ Lee Shin Cheng, many social causes and initiatives are supported. IOI provides scholarships, gives out Young Achievers’ Awards to outstanding and bright students to motivate them to excel in both academics and extracurricular activities, has a student adoption program that provides financial assistance to help underprivileged children, and sponsors schools under its School Adoption Programs.
Panda Restaurant Group is another example. In 1999, it established Panda Cares, a community involvement program. Since its inception, Panda Cares has given millions of dollars of in-kind donations to numerous nonprofit organizations, schools, and hospitals. Panda Cares’ purpose is to promote the spirit of giving and establish a caring presence in communities where Panda Restaurant Group’s guests and associates live and work.
Developing Estate Planning
Estate planning is the accumulation and disposition of an estate, typically to minimize taxes and maximize the transfer of wealth to the intended estate beneficiary. Estate planning is an important step to maximize one’s wealth during one’s lifetime. Estate planning must be well planned to anticipate unexpected events.
Since estate planning will involve many important decisions, not only ownership transfer but personal relationships as well, the best way to start the estate planning process is to determine the purposes for individuals, the family, and the business.
Estate planning has some purposes. First is to ensure that assets will generate income for those left behind. Second, to ensure that asset ownership will be transferred to the right parties. Third is to minimize taxes and other expenses. Fourth is to ensure that personal and family goals can be accomplished. Things that should be addressed in estate planning include equal treatment for all the heirs, ownership transfer of the business, tax minimization, and reduction of administration expenses. Change in life cycle should be considered as well.
For a family business, estate planning is an ideal way to maintain the continuation of the business after the owner is no longer with the company, as well as to maintain a harmonious relationship among family members. Estate planning should be addressed early because it will enable a family firm to identify which family members or outsiders have the potential to continue the business, to identify the training and development needs for the potential successor, and to develop plans for the transfer of power and management.
In estate planning, the first thing that must be done is to review the company’s structure and ownership. As business grows and more family members are involved, organizational structure as well as clear job descriptions should be formalized. The role and authorities of the new owner or leader should be emphasized. Many transfers of ownership are often done without considering whether certain family members actively participate in the business or not. This could create dissatisfaction from active family members.
The next step in estate planning is to collect important data regarding the company. This includes examining personal wealth or capital used for business purposes, as is often found in many family businesses. Wealth that should be managed includes financial capital, human capital, intellectual capital, and social capital. Financial capital refers to the identification and understanding of responsibilities regarding wealth management, and also preserving family prosperity. Human capital refers to shared vision and values in the family. Intellectual capital refers to activities such as training and educating family members. And social capital refers to family values derived from society.
Next, prepare the financial statements, which include income statements, balance sheets, and cash flow statements, to check the financial position and condition. Asset liquidity to make transactions easier should also be addressed, as well as options to minimize the tax payment without breaking the law.
A common issue among heirs regarding estate planning is about profit sharing. How should profit be divided? To answer this question, there are some other issues that need to be clarified. Who will take over control of the company? Is he or she a qualified person? What if he or she gets divorced or dies?
In eastern society, which includes China, drafting written contracts or agreements to anticipate unwanted events such as death, incapacitation, and irreversible illness is still considered taboo or inappropriate. However, absence of such contracts and agreements often sparks conflict among family members, should any unwanted events occur.
In Chinese society, in which many still adhere to Confucian teachings, even though older brothers and younger brothers are not equal in their relationship, they all have an equal right to inherit the family property or assets. According to Yan and Sorenson (2006), one reason for this equal distribution is because the family requires that the entire family work together. All make contributions and all should be rewarded. Traditionally, it is assumed that daughters will marry and share their rewards with their husbands. Those inheriting family properties are expected to work together and cooperate.
However, we must recognize the fact that each family member doesn’t make equal contributions. Some actively participate in the business; some do not. The needs of each family member related to his or her workload and responsibility should also be considered. Greater workload and greater responsibility require more money. Therefore, during estate planning is the time for Chinese family businesses to examine the contributions, needs, and responsibilities of each family member. The development of external factors should also be addressed since these will influence the business and individual wealth, directly or indirectly.