23 October 2016
The 128-year-old Lee Kum Kee set up a family council, which became a platform for family members to discuss and communicate with each other.  Photo: Xinhua
The 128-year-old Lee Kum Kee set up a family council, which became a platform for family members to discuss and communicate with each other. Photo: Xinhua

Family constitution is key for family succession

Cementing family values is so important in family succession. Family culture is a key element of family values, which also include core values, ideas and life wisdom.

These family values should be presented through family motto, history, logo, books, etc.

Family values can be formalized into the family constitution, which will become an essential part of family succession planning and family governance implementation.

It would help family members build trust and foster family ties.

In reality, not too many families have succession plans yet.

According to a survey of global family business conducted by PwC Taiwan in 2014, only 16 percent of 2,378 family leaders in 40 nations have family constitution.

Only 5 percent of family businesses in Taiwan, where family business plays a dominant role, have made succession plans, far below the global average.

Meanwhile, only 4 percent of family businesses in Hong Kong have made such plans.

It’s critical to make plans for family succession as early as possible and draft a family constitution if one wants a smooth transition in family business and sustain it forever.

A family constitution documents the values and principles that will underpin the conduct of the family business, defines the strategic objectives of the business in the short and long term.

It sets out the way in which the family will make decisions affecting the ownership and management of the business.

Each family member will play a different role in the family business.

It’s important to create a family governance structure, including family council, family management committee and family fund committee.

For example, a family council is a mechanism that could effectively resolve various issues among family members.

The 128-year-old Lee Kum Kee set up a family council, which is subordinate to the family committee.

It became a platform that enables all family members to discuss and communicate with each other. The family has a tradition of organizing a family trip each year.

In terms of family business, the distribution of family ownership, company management and ownership have to be clearly defined.

It should cover the succession mechanism, operation process, supervision mechanism, company share and assets succession as well as shareholding structure of family members, distribution method, timing, exit and buy-back mechanism.

Business management and ownership can be separated. The family constitution should define the responsibility, power and supervision mechanism on how to hand over management responsibility to professional managers.

If any family member wants to join the family business, there has to be a hiring policy for family members, including education, working experience requirements, application procedure, etc.

If family members are incompetent for the job or violate family rules, there should be a set of rules to deal with such situations.

Also, it should set up a family member retirement policy, including retirement age, pension fund arrangement, etc.

The family constitution should also set guidelines for family members’ behavior, such as marriage and divorce arrangements, as well as their behavior in family and business.

The third generation of the Lee Kum Kee family has achieved a “Three Nos” rule with the fourth generation: no late marriage, no divorce, no affairs.

Anyone will be eliminated from the board if they violate the last two rules, and they will not be allowed to make comments or decisions in family or business decisions.

Allan Lee Ka-fai is the writer of this article, which appeared in the Hong Kong Economic Journal on June 24.

Translation by Julie Zhu

[Chinese version 中文版]

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