Martin Graham says the most important consideration for family succession remains education of the next generation. Cecily Liu / China Daily

UK expert urges Chinese private companies to modernize some of the age-old traditions of passing on their business to the next generation

One of the UK's top family-business advisers is suggesting that as some of China's pioneering entrepreneurs of the 1970s reach retirement, they would do well to consider a more modern approach to their succession planning.

Martin Graham, chairman of the London-based Oracle Capital Group, says that in the West, the vast majority of family businesses are small or medium size enterprises who accept that as they grow larger and more successful, they will have to consider bringing in external talent and fresh ideas.

But he says many Chinese entrepreneurs are still rejecting any notion of that, and remain firmly set in their traditional ways of simply passing the business onto the next generation.

"There is a stronger sense of family values in China than in the West, because in the West the family has less cohesion and family members are more diverse," Graham says.

As the Chinese economy continues to develop, however, he says that the older model of simple family succession is starting to come under a variety of pressures, especially for larger private companies.

Privately-owned Oracle calls itself a "multi-family" operation, a relatively new term meaning it supports families and their members manage their entire wealth.

Before becoming chairman in 2012, the London School of Economics and Stanford University graduate was director of markets and chairman of AIM (alternative investment market), the London Stock Exchange's international market for smaller growing companies. Graham also still sits on number of boards, including the Moscow Stock Exchange, where he is chairman of the Board Risk Management Committee.

He admits the Chinese practice of simply passing control to the next generation might be considered beneficial to some in the West, where the most common problem is often frictions between children in a family business, after an older member retires.

For this reason, there are still relatively few really large-sized family businesses in the West, Graham adds, the most obvious exception being media mogul Rupert Murdoch and his family.

Murdoch, 83, inherited Australia's News Limited from his father, and later founded the media conglomerate News Corporation, which split into News Corp and 21st Century Fox in 2013.

As a part of his succession planning, Murdoch has also managed to place his two sons in key positions. Lachlan Murdoch (43) is now co-chairman with his father of both News Corp and 21st Century Fox, while James Murdoch (41) is co-chief operating officer of 21st Century Fox.

Family succession is becoming a growing issue in China, because the founders of many of the country's largest private companies are now nearing retirement.

He cites Liu Chuanzhi, Lenovo's chairman, for instance, who is 70; and Ren Zhengfei, the founder and president of telecom solutions provider Huawei Group, who is 69.

Zhang Ruimin, founder, chairman and CEO of Haier Group, a consumer electronics producer, meanwhile, is 65, and Zong Qinghou, founder, chairman and CEO of Hangzhou Wahaha Group, a leading beverage maker, is 69.

Graham says it is believed that none of the above have convincing succession plans in place, or at least none they can announce.

Many other family-owned businesses, much further down the pecking order than those private giants, are also faced with another problem - because of the effects of the one-child policy, many of the single heirs are often not interested or qualified to take over.

Graham says the most important consideration for family succession remains education of the next generation - corporate heir-apparents must understand not just how to run a company, but have an understanding of their business and the markets.

Oracle's services cover a host of areas - those might extend from creating a simple business succession plan, right down to finding the most appropriate schools and internship opportunities for the younger members of the family, in preparation of them taking control.

A crucial component might also be identifying the most tax efficient structure for the succession, to ensure a smooth transition of wealth at the least cost.

Graham says that in his experience, Chinese businesses can often be affected by succession, because it can come upon them suddenly.

Entrepreneurs have often been so overwhelmed with opportunities to make money, that they simply forget to plan succession, he explains.

The importance of succession has often been overlooked, too, because many of China's first generation entrepreneurs are the first to actually experience the challenge, after China's reform and opening up.

Many family owners also simply trust handing over the reins of the business to their own, he says. Many of China's next generation of potential entrepreneurs, too, favor a straight transfer of family power, because starting their own businesses is much harder than in the West, Graham says.

"Keeping it in the family does allow you to go to certain places - but to achieve the next level, you need fresh blood.

"I actually think proper governance is what Chinese companies need if they want to grow," Graham says.

By governance, he means companies need to bring more transparency to their business, and that could mean a board of external directors handling key decisions.

"They'll be lucky if they have enough good members in a single family - bringing in others can supplement their work," he says.

Graham says he fully appreciates that culturally it can be considered bad luck even to talk about succession before older members actually die.

"But still, all good family business should identify key staff, who could conceivably take over is an older CEO retires," he says.

He says such superstitions are not unique. In Russia, for example, it is also considered potentially bad luck to talk about succession, and inheritance tax, but growing numbers are realizing it is potentially too dangerous not to plan such matters ahead.

He advices that a succession plan should ideally be drawn when a CEO is 60 or above, but still everyone has to be thinking at least 10-20 years ahead, "and this may mean bringing in outside help" preferably well before succession.

A lack of planning, he adds, can create too "big a risk and inevitably could destroy value in a company".

His company offers what he calls an "all-encompassing strategy" that can require a lot of work and preparation.

For a lot of his emerging market clients, Oracle's services involves looking after all aspects of their welfare to help them preserve wealth, and pass it down to the next generation.

For example, his team could help clients who have made money in one market to diversify into another.

Or they arrange for their children to receive Western education, so they are ready to help take the family business to the next level should they wish to go global.

"It is important for the children to not just sit in the family business, but go to other companies in the industry or go to a business school, so they can bring fresh ideas into the family business," Graham adds.

"They need to understand that they are not running an asset that is theirs - they are preserving wealth that can be passed down to future generations."

cecily.liu@chinadaily.com.cn

(China Daily European Weekly 09/26/2014 page32)