The Courage to Choose Wisely Why the Succession Decision May Be a Defining Moment in Your Family Business

The courage to choose wisely Why the succession decision may be a defining moment in your family business

November 2020

home.kpmg/privateenterprise thestepproject.org The 01 courage to choose wisely

About the 2019 01 Global Family Business Survey

21 Acknowledgements

Family 21 Business Leaders

STEP Project 21 Global Consortium

22 Case study Table of authors KPMG Private 23 Enterprise contents member firms About the Successful Transgenerational Entrepreneurship 24 Practices (STEP) Project Global Consortium

About the KPMG Global Center of 24 Excellence for Family Business

About 24 KPMG Private Enterprise

Editorial 25 board

25 Contact us

hrough a strategic alliance between the STEP Project Global Consortium and KPMG Private Enterprise, we are privileged to he Successful have this opportunity to share with you the trends that we see T Transgenerational affecting the practices of business families around the world and what a model for the future might look like in the new reality we are now T Entrepreneurship Practices confronting. (STEP) Project Global Consortium and KPMG Private Enterprise More than 1,800 family business leaders from all over the world have entered into a strategic alliance shared their views with us on the impact of increasing demographic to conduct research to develop a and societal changes that were revealed in the STEP 2019 Global Family Business Survey. The survey was followed by 33 in-depth interviews deeper understanding of the impact with family business leaders from every major region prior to – and after of changing demographics on – the onset of COVID-19. We asked them how changing demographics succession and governance practices affect the ways in which they are addressing an array of issues ranging for business families. from family business governance and succession to societal impact, entrepreneurial orientation and performance. The 2019 STEP Project Global Family Business report surveyed We are grateful to these accomplished family business leaders who contributed to the study and openly shared their insights with us. more than 1,800 family business While we have included direct quotes from some to illustrate this leaders from 33 countries across article, be assured each of these 33 family business leaders provided Europe, Central Asia, North America, us with unique insights about their businesses and their families. Latin America, the Caribbean, We are pleased to have this opportunity to share their observations Asia, the Pacific, the Middle East and our own through a series of four co-authored articles that span and Africa. The survey provided an issues ranging from succession, the role of women in family business, governance and the entrepreneurial legacy. The first article in the opportunity for the participants to series begins with succession planning and the courage to choose the provide their views on how changing right successor at this critical turning point in every family business. demographics affect family business governance, succession, societal impact, entrepreneurial orientation and performance. A summary of the survey report can be found here.

As a follow-up to the survey, more than 33 personal interviews were Andrea Calabrò Tom McGinness conducted with family business STEP Global Academic Director, Global Leader, leaders prior to COVID-19 and Director, Family Business, IPAG Entrepreneurship & Family KPMG Private Enterprise, following its onset beginning in Business Center, Partner, March 2020 until the publication IPAG Business School KPMG Private Enterprise in the UK date. The insights gathered from these interviews helped to deepen Throughout this document ‘We/Us/Our’ means KPMG and the Successful Transgenerational Entrepreneurship Practices (STEP) Project Global Consortium. our understanding of the context ‘KPMG’ refers to the global organization or to one or more of the member firms of KPMG International Limited behind the survey results and (“KPMG International”), each of which is a separate legal entity. KPMG International Limited is a private English company limited by guarantee and does not provide services to clients. For more detail about our structure please allowed us to explore these insights visit home.kpmg/governance. further in this article, the first in our © 2020 Copyright owned by one or more of the KPMG International entities. KPMG International entities provide no services to clients. All rights reserved. The KPMG name and logo are trademarks used under license by the four-part series. independent member firms of the KPMG global organization. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. About the 2019 Global Family Business Survey 1

n the midst of the hyper- There is an indisputable power that accelerated reality we now face, lies within family businesses: an I planning for succession may not entrepreneurial mindset combined be top of mind. However, as you with the ability to master the speed of consider all the options for sustaining change. Rarely have these capabilities your business today and in the future, been more crucial than they are today, the succession process itself may be as the reality of COVID-19 makes it instrumental in sustaining the family necessary to continue to expect the business model for generations to unexpected – to anticipate and prepare come. It could, in fact, be one of the for the changes that undoubtedly lie defining moments in the history of your ahead. family business.

• Is your business fit for the future? • Do you have a successor in mind and at the ready? • Who could step in if needed? • And do they have the capabilities and interest in leading the way forward?

2 The power behind the family business

revious research has shown Many family business leaders we The company that the transfer of ownership spoke with echoed this view. As Mr. functioned perfectly P and management control from Alfonso Urrea Martin, General Director one generation to another is one of of the Tools Division of Mexico’s during my absence due the most important factors in the Grupo Urrea told us, he was unable “to COVID-19, thanks continuity of the family business and to manage his business at the most for preserving its family identity.1 The critical moment during the onset of to the structures and family business leaders we spoke with COVID-19. Thanks to the company’s confirmed that conclusion. They told well-established governance structure governing bodies us that choosing the right leader at and continuity plan, the right people we had already put the right time will be one of the most were already identified to step into his critical decisions they can make to role, if it should become necessary, in place at the board secure the continued success of their and the systems were in place to make level and among business. it happen. the management

Rarely has contingency and continuity “The company functioned perfectly committees. It is not

planning been more important and during my absence due to COVID-19, family businesses have an enviable thanks to the structures and governing clear that we would advantage based on a history of agility, bodies we had already put in place have been able “ to invention and resilience. Given the at the board level and among the uncertainty every business is facing management committees. It is not continue so smoothly today, we would suggest that this is clear that we would have been able to otherwise. precisely the right time to step back continue so smoothly otherwise.” and consider all the options for the Alfonso Urrea Martin, Grupo Urrea, future leadership and ownership of Mexico. Alfonso Urrea Martin your family business and how those General Director, questions can be embedded directly Grupo Urrea, into your contingency plans. Mexico

1 Kandade, K., Samara, G., Parada, M. J., & Dawson, A. (2020). From family successors to successful business leaders: A qualitative study of how high-quality relationships develop in family businesses. Journal of Family Business

Choosing the right leader – at the right time 3

hether it is created through There are certain situations in which contingency planning the norms of national cultures W or other succession can make continuity planning and methods, a succession roadmap is considerations for an emergency an essential guide for dealing with succession difficult, however. In the unexpected. One family CEO told many Eastern societies, for example, us, for example, that a dormant trust it isn’t acceptable to talk about foundation has been established in unexpected events that are related to his family firm as an umbrella over the health of the elderly. Since those I didn’t have a all the operational entities. In the topics are taboo, it is very difficult for choice. I had to run event that the family business leader family businesses to consider what becomes incapacitated or passes will happen should an emergency the business. away, the foundation will be activated. succession be necessary. “ The members of the foundation I mean Sunday was fully understand that they will be The insights we gained from family the funeral and responsible for ensuring that a new leaders we spoke with made it clear, literally Monday Chairman is appointed immediately to however, that it only requires one case lead the business forward. of an unexpected succession such morning I was at as this for the family to make sure it work… we could Too often, however, family businesses is prepared to respond quickly in the don’t have detailed contingency plans, future. have been out with specific guidance as to who will of business in a take control and keep the business That is not to say, however, that the

running. In fact, only 47 percent of choices are always easy or obvious in

month if I wouldn’t the family leaders who took part Eastern or Western societies. have taken on the in our study had such plans. As a “ consequence, the next generation As Mr. George Vestey, CEO of the business. There often feels morally obligated to take up UK’s 125 year-old Vestey Holdings was really nobody the business reins, even if they don’t described it, “Regardless of our intent, want to or don’t have the skills and succession to the next generation is else to run it. experience they may need, they have not a given. They have many choices no other choice but to be successful. outside the family enterprise and Family Business CEO One family business leader described if they choose to succeed us, they Scrap metal processing his own unexpected succession will have to be as interested and business, situation poignantly. “I didn’t have passionate about the business United States a choice. I had to run the business. as the four generations that have I mean Sunday was the funeral and preceded them. More than ever, literally Monday morning I was at however, we must make sure that we work… we could have been out of let our successors write their own business in a month if I wouldn’t have generational chapter if we want the taken on the business. There was really family business legacy to survive.” nobody else to run it.” Family business CEO, United States.

4 Preparing for the unexpected

and passionate about the business as the four

generations that have preceded them. More than ever, however, we must make sure that we let our“ successors write their own generational chapter if we want the family business legacy to survive.

George Vestey CEO, Vestey Holdings, United Kingdom

Preparing for the unexpected 5

any family CEOs concurred Saudi Arabia described his view of with Mr. Vestey’s the Millennial perspective in this way, M comments, noting that “The generations coming behind us Millennial generation leaders are have a different mindset – a different having an increasingly important ecosystem – that isn’t right or wrong, voice in the future direction of their it’s just different. They are inspired by family businesses and the choice of different things, they are fast, machine a successor. They are being given orientated and deeply involved in social more space at the management table media. To engage their interest in the to address increasingly complex family business and subsequently in issues and opportunities, such as the leadership succession, there has to accelerated digitization of business be a psychological attachment. It’s processes that are emerging globally. important for them to see that this is And when the intention is to keep the a business with a social impact and business in the family, in some cases purpose and that’s what will continue next generation family members may to motivate them.” be invited to join the business at an early age to begin grooming them for a As well, it is beginning to be recognized future leadership role. that the emotional attachment to the business may not be as deep for next- But many from the Millennial generation successors as it is with generation also come with a different first-generation entrepreneurs whose outlook and business philosophy life and business have often been from their predecessors, as they seek deeply intertwined. greater personal freedom and a better balance between life and work. In the view of Mr. Andy Wates, Director of Wates Group in the UK, Mr. Khalid Abunayyan, Chairman the worst-case scenario would of Abunayyan Holding Company in be for a family member to join the

6 A new generational outlook for the road ahead

As one Hong Kong (SAR), China, family and deeply involved business leader put it, the difference in social media. To between the generations in terms of the environment in which they are engage their interest growing up and their education, values, in the family business ways of thinking and understanding the world cannot be underestimated. and subsequently in leadership As an example, we heard from many first-generation entrepreneurs in succession, there has China who created their companies to be a psychological as a means of survival and eventually for profit. As their second-generation attachment. It’s successors begin to take over, important for them however, they are focusing increasingly on a broader mission to create value to see that this is a

through social responsibility and the business with a social

sustainability of their enterprises. impact and purpose and that’s what“ will continue to motivate them.

Khalid Abunayyan Chairman, Abunayyan Holding Company, Saudi Arabia

A new generational outlook for the road ahead 7

hese next generation cultures. However, previous research successors can bring a fresh shows that family firms experience T perspective that may transform higher post-succession performance some aspects of the family business when they have the courage to and potentially uncover previously disregard primogeniture and make unexplored opportunities that may their succession choices based on redefine the identity of family business meritocracy. This is particularly true down the road. It takes courage, then, when the business grows beyond the to choose wisely and remain receptive second generation.2 It takes courage to to new ways of thinking about the make a different choice and we would business – innovative ideas that could suggest that this is due primarily to be transformational and integrate the second- or later-born family leaders business mission with broader societal being less conformist and less inclined issues. to follow their parents’ business model of being more open to new The policies and practices of different experiences and tolerant of risk. nations can also play a major role in the selection process and, again, it takes Even when family businesses break courage to consider non-traditional away from automatic primogeniture alternatives. succession, it doesn’t necessarily mean that firstborn children aren’t able We were interested in hearing about to compete for leadership positions. some of the cultural differences It does suggest, however, that family described by our study participants decision-makers may need to create a in that regard. The use of the constructive competitive environment “primogeniture” rule for succession – a ‘horse race succession’ – among – choosing the first-born child to lead their potential successors on the path the family business – was one of to identifying the best fit for the family particular interest. In non-Western business’ needs and the successors’ collectivist cultures, such as that in personal needs. Peru, family CEOs confirmed that the primogeniture rule still holds. In the case of Chinese family businesses, many face a unique succession challenge In Western and individualist cultures, with only a daughter or a son to inherit meritocracy is typically the main criteria the business as a result of the one-child for choosing a successor. Where does policy programs. As ZHU Xuehao, the nepotism end and protecting the family founder of Hawk Filtration Technology legacy begin when primogeniture is (Shanghai) Co. Ltd. in China has stated, the guiding principle? he is fortunate since his only child is both willing and able to take over the family The survey results don’t conclude business. If that had not been the case, whether or not primogeniture is he would have been faced with having good practice and it continues to to train a non-family member to succeed be adopted in many non-Western him or to sell the business outright.

2 Calabrò, A., Minichilli, A., Amore, M. D., & Brogi, M. (2018). The courage to choose! Primogeniture and leadership succession in family firms. Strategic Management Journal, 39(7), 2014-2035.

8 What is the wise choice?

We heard interesting points of view from family leaders regarding the factors that influence their succession intention and their choice of a successor, such as:

The potential lack of trust of parents in the childrens capacity to lead the family business may decrease their intention to pass the business to future generations.

The next generation’s emotional attachment to the business and their own personal values and goals will likely determine their desire to be successors.

While primogeniture is not necessarily the best practice, it is still widely In still other situations, there are family adopted in non-Western CEOs who are not confident that their cultures and less so in next generation family members have Western cultures. the capabilities or passion to drive the business forward, despite the ideas and energy they can offer. For example, Andrea Calabrò a family business leader in Canada who STEP Global Academic Director, is currently preparing for his retirement Director, told us he does not believe he will be IPAG Entrepreneurship & Family succeeded by either of his sons. The Business Center, youngest is actively pursuing a different IPAG Business School career, while the eldest does not have, in his view, the ability to handle the pressures of a management role. “I think at the end of the day,” he said, “the family succession will probably end with me.”

What is the wise choice? 9

hile transgenerational succession intention may W be present within the older generation’s plans, it might not necessarily coincide with the plans or abilities of the incoming generation. In that case, current leaders may choose a non-family successor to manage the business, while continuing to maintain the family’s involvement through ownership.

As highlighted in a recent Wall Street Journal article, which cited the STEP Project research,3 involving family members in the business from one The company generation to the next is not always

is bigger than us. We a given. For any number of reasons,

don’t want to stifle children may not be as interested as their predecessors in picking the company, so“ up the reins. Both family business “there will probably be leaders and their potential successors more outside people have important choices to make. coming in. For Michael and Gabriel Hoey, the Michael Hoey current fourth generation co-owners Co-owner and Managing and leaders of Ireland’s Country Crest, Director, these choices lie ahead for them and Country Crest, for their successors. Country Crest is Ireland a leader in sustainable food production and the brothers would like to maintain ownership and management within the family, if that is the choice of their next-generation family members. While precise roles have not yet been defined, formal structures are already in place to ensure the continuity of the family’s sustainable farming practices. Those practices, combined with the family’s strong intergenerational values, are deeply embedded in the business and they will continue to be the foundation for Country Crest’s success for those who choose to lead it forward.

3 Wall Street Journal, ht t p s: / / w w w. wsj . co m/ art icle s/h ow-to-get-children-interested-in-the-family-business-11588986481

10 The freedom to choose

The family business leaders we met told us candidly about their own succession experiences and how the succession process can be improved for the next generation:

Next generation family members are learning from the past and are now setting up governance mechanisms to manage the succession process.

The use of trust funds is found to facilitate the succession process and to lead to more wealth accumulation.

Relying on an external party to manage the succession process is found to mitigate intra- family conflict in times of succession and to lead to a smooth succession process.

Tom McGinness Global Leader, Family Business, KPMG Private Enterprise, Partner, KPMG Private Enterprise in the UK

3 Wall Street Journal, ht t p s: / / w w w. wsj . co m/ art icle s/h ow-to-get-children-interested-in-the-family-business-11588986481

The freedom to choose 11

anding the family business over to a new in India, told us that his family adopted a family leader, new management or a new owner is constitution in December 2015. The following H all-encompassing. It isn’t exclusively about March, the Kuttukaran Family Trust was registered the selection and development of successors. It as part of the succession plan to bring all the is equally about protecting the business brand and company shares under the trust. “In that way”, reputation, and retaining knowledge to make sure Mr. Paul said, “no individual family member holds that the business is sustainable for years to come. shares that can be transferred at will. The intent is It is also one of the most challenging experiences to help to bolster trust within the family and enable facing any leader, and most particularly an future generations to develop an affinity for the entrepreneur who has built a family business from Group and maintain the Kuttukaran family legacy.” the ground up. Families generally understand the importance of Family businesses with well-established starting the succession planning process early to contingency and succession plans take into account get it right, and to view a good succession plan as the readiness and developmental needs of family the first step in maintaining the business’ strength members who are the most likely successors. and the family’s prosperity for generations to come.4 Often this includes an educational foundation, complemented by direct business experience However, while this type of disciplined planning is gained at various ages and stages in the family generally accepted, we gained a surprising insight members’ lives. from our CEO conversations. It appears that, even when the selection of a successor is considered To facilitate this process and minimize the intra- to be important, family businesses that are led by family conflicts that sometimes arise during members of the silent generation (born between succession planning deliberations, family 1925-1945) or the baby boomer generation (born businesses are turning increasingly to external between 1946-1964) have not yet devised a parties to guide and manage the process and succession plan. help to minimize potential intra-family conflicts. External parties provide an independent point of This is concerning. It is not only a potential view to facilitate productive discussions among impediment to the smooth transition and continuity family members and guide them through well- of the business; it is also a disservice to the tested frameworks and processes to produce a successor who is ultimately required to assume the personalized succession solution. leadership role.

For example, in order to keep up with the demands As the current CEO of a family business in the of the business as well as the family, Mr. John K. Netherlands explained to us, his grandfather had Paul, Managing Director of the Kuttukaran Group difficulty giving up control and preparing another

4 KPMG, Succession in family business: start early. https://home.kpmg/au/en/home/insights/2017/02/succession-planning-family-business-start-early.html

12 The discipline of succession

To get succession right, we believe there are a few important considerations for transferring management, control, ownership and equity from one generation to the next, all of which are in the best interests of the business and the family.

Know what the business needs

Many family business owners assume family member to assume the leadership of the succession planning centres on who will run business. This led to ongoing confusion throughout the business when they step down, but a the family – as well as the business – as the structure broader perspective is necessary. The founder of responsibility and decision-making remained and the board or advisors need to consider unclear for several years. “When my father and his where the business is in its lifecycle and what brother succeeded by grandfather, he says, “they kind of leader or leaders it needs to progress. really went through a terrible time together. My grandfather could never completely let go of control. Protect the brand It really held back the growth of the firm, but also the personal development of the successors in that period. My father told me that he didn’t want me to Many family businesses are built around a have the same experience and that he needed to personal brand and may even be named after give me an opportunity to take a position as a senior the founder. It’s important to retain the brand’s business leader and make room for me to develop essence and evaluate how well it fits with the myself.” current business model. Many current-generation successors have learned Maintain financial confidence important lessons from experiences such as this, and they are making every effort to make sure that When planning for the future, family enterprises proper succession processes are in place for the next must decide who will be in charge from a generation in order to avoid repeating the mistakes of financial perspective, as many investors and the past. banks consider the individual behind a family business to be a critical factor when making Mr. Andy Wates, Director of Wates Group in the decisions on current and future funding. They UK, explained the succession process in his family need to have confidence that there continues to business. The Group retained external family be strength in the business. governance advisers to assist in planning the succession process from the third generation to the fourth. The plan was implemented 12 years ago, Retain legacy knowledge and third-generation family members continue to be active in the business. For future successors, The continuation of knowledge is as important Mr. Wates suggested that it will be important for as leadership and financial succession. That his business to establish a firm end-date for the knowledge is often one of the business’s transition to his own successor. key competitive advantages and should be documented and communicated throughout the business and the family.

Document the plan

Finally, when a succession plan is developed and agreed, it must be explicitly articulated and formally documented among family.

The discipline of succession 13

he succession plan is in place. more hours in the office than in my How, then, do family leaders house. I’m conscious of the fact that T decide when it’s the right time to we all have to prepare for that day and retire fully – or partially – or to assume a the worst-case scenario would be to Deciding when new role in the family business? have that decision forced upon you. For it is time for me to me, it is important to understand that We were somewhat surprised to retire is a very difficult my role will change from the day-to-day learn that 53 percent of the family running of the business to becoming “question. The family business leaders in our study do not a coach to the next generation of our business has been my have a formal retirement plan, making family leaders who will keep alive the life, it’s my passion and the path uncertain for their potential legacy that was built by my father and I have likely spent more successors and for the future of the later by my generation.” hours in the office family business. One cautionary note with regarding than in my house. I’m For those who do have a retirement advisory roles, however. In some conscious of the fact plan, the research tells us that family cases, although parents claim to have that we all have to business leaders whose primary advisory roles and consider themselves prepare for that day objective is to enjoy life and achieve to be only marginally involved in the and the worst-case financial security for the family business, next generation successors plan to retire fully from business scenario would be may not see it that way. They might management. Some even consider perceive their parents’ involvement as to have that decision selling their businesses outright.5 This controlling behavior and a lack of trust forced upon you. For insight is surprising, because it is in in their ability to run the business. The me, it is important to stark contrast to the traditional thinking previous generation’s unwillingness understand that my that family business founders rarely to retire without leaving the company role will change from leave their businesses because they business completely often makes it derive so much fulfillment and personal the day-to-day running difficult to truly delegate authority to identity from it. the next leader and for new leaders of the business to to escape from their predecessor’s becoming a coach to From the same research, we find shadow.

the next generation that leaders who continue to be

of our family leaders passionate about their work rarely think As a family CEO in France pointed of retirement and look for alternative out, “I am starting to realize that my who will keep alive the“ ways to stay involved in the family presence in the company can be legacy that was built by business. Some don’t have a planned detrimental to my sons’ ability to make my father and later by retirement age at all or they remain their own names. They surely must my generation. partially involved in the business think that, given that father is in place, through board membership or an we should not contradict him.” advisory role. Khalid Abunayyan Indeed, having little or no autonomy Chairman, As Mr. Khalid Abunayyan, Chairman to make strategic decisions for the Abunayyan Holding of Abunayyan Holding Company says company, they may be concerned Company, “Deciding when it is time for me to about not being able to escape their Saudi Arabia retire is a very difficult question. The father’s shadow. family business has been my life, it’s my passion and I have likely spent

5 Akhter, N., Sieger, P., & Chirico, F. (2016). If we can’t have it, then no one should: Shutting down versus selling in family business portfolios. Strategic Entrepreneurship Journal, 10(4), 371-394.

14 When is it time to pass the baton?

© 2021 KPMG Huazhen LLP, a People’s Republic of China partnership and a member firm of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. As we look down the road and consider the retirement plans of millennial leaders, we may uncover a different picture of retirement altogether. NextGen business leaders are Key insights highly educated and they’re motivated to deliver, however, they are not likely going to lead in the same way as their predecessors. They are more focused on achieving work/life Family business leaders balance, for one thing, and they plan to retire discussed their retirement prior to their 50th birthday – not their 70th, 80th or 90th. plans and told us their decision would be influenced by several One of our family business leaders explained personal and family factors. this well: “I am not going to work until I am 90 years old just as my father did. I think about These are some of the themes taking a Sabbatical year, in opening my mind that are behind their decisions: towards other things, other investments, because being all day in the company does not Leaders who continue to let you see the world. One has to go out and see what is happening with other companies. be passionate about their I want to let the new generation do the day-to- work in the family business day work here. They are very good at it.” Mr. often aren’t actively making José Manuel Suso Dominguez, CEO, Arrocera la Esmeralda, Colombia. retirement plans.

We even encountered a 33-year old family Family business leaders business owner who is already contemplating whose primary objective his retirement. It has nothing to do with his age, but by the amount of stress he is to enjoy life and achieve experiences in his work and a desire to pursue financial security for the a personal dream away from the business. family are more likely to When considering the future leadership of retire from their business the family business, understanding the likely completely and may timespan for this next generation of leaders even consider selling will be as important as their needs and expectations. If millennial leaders are planning the business outright if it to retire much earlier than those before them, provides the family with early succession planning will become even the financial support they more critical. may need.

Millennials may plan to retire much earlier than previous generations if they perceive that their work in the family business is stressful or is making them miss out on life.

Andrea Calabrò STEP Global Academic Director, Director, IPAG Entrepreneurship & Family Business Center, IPAG Business School

When is it time to pass the baton? 15

he research literature defines the business and enjoy the financial an exit as the process by which rewards of their exit. This may be a T the founders of family firms reflection of the principle that having leave the business that they have children can increase a leader’s desire established by giving up some or all of to pursue ‘socioemotional wealth’ for their ownership and decision-making the family – the emotional value that power.6 the family derives from owning and managing a business.9 The theory of self-determination7 suggests that a leader’s underlying A decision to sell the business is motivation will affect their willingness also affected by the expectation of to continue working and remain the potential conflicts that might committed to the business. According occur among family members when to this theory, the level of trust in the the business moves to the cousin next generation’s capacity to lead consortium stage. In cases when the the business is essential for their business reins could be handed to a leadership development8 and whether third generation that includes several or not they are motivated to assume cousins who are responsible for the control. management and operations of the business, a “pruning of the family tree” The next generation’s interest and might be necessary. In cases such as capability also has a direct effect on this, the business is often bought out the current leader’s decision to keep and owned by a single nuclear family or sell the business. Family business – as opposed to the extended family leaders recognize the significance and of cousins – or it’s sold to an external importance of the next generation’s party. willingness to take the business forward and to be committed to its Without children, the desire for success. Many have stood in those socioemotional wealth is diminished same shoes earlier in life. They also and the current leader is generally less recognize that an exit strategy may committed and attached to maintaining be the best option if willingness and the family ownership of the business. commitment are missing. Whether forced or planned, family Our research suggests that the desire businesses are not always able to to keep the business within the pass the leadership or ownership of family is highest when the current their business from one generation to leader has offspring. Without children, the next or to other members of the family CEOs are more inclined to sell family. Succession planning presents

6 DeTienne, D. R. (2010). Entrepreneurial exit as a critical component of the entrepreneurial process: Theoretical development. Journal of Business Venturing, 25(2), 203-215. 7 Deci, E. L., Olafsen, A. H., & Ryan, R. M. (2017). Self-determination theory in work organizations: The state of a science. Annual Review of Organizational Psychology and Organizational Behavior, 4, 19-43. 8 Kandade, K., Samara, G., Parada, M. J., & Dawson, A. (2020). From family successors to successful business leaders: A qualitative study of how high-quality relationships develop in family businesses. Journal of Family Business Strategy. 9 Gómez-Mejía, L. R., Haynes, K. T., Núñez-Nickel, M., Jacobson, K. J., & Moyano-Fuentes, J. (2007). Socioemotional wealth and business risks in family-controlled firms: Evidence from Spanish olive oil mills. Administrative Science Quarterly, 52(1), 106-137.

16 Knowing when to exit

The business leaders we met told us that it is not always possible to achieve a transgenerational succession and other options – even exit strategies in some cases – have to be explored. Here are some of the reasons why:

The desire to exit the business tends to increase when current family business leaders do not have children.

Lack of trust in the capacity of the offspring to lead the family business or the willingness and motivation of the next generation to continue to take it forward.

The anticipated conflict a different array of choices for the transition in between family members these cases, including: at the time of succession • Remaining as the owner but giving when the family business leadership and management roles to a reaches the cousin non-family member. consortium stage will be • Relinquishing ownership through a positively associated with third-party trade sale or private equity the decision to exit the investment or buyout. business. • Raising capital through an IPO.

• Relinquishing all or partial ownership Tom McGinness through a management buyout. Global Leader, Family Business, Family business CEOs who choose any of KPMG Private Enterprise, these exit strategies do not do so lightly. Partner, KPMG Private Enterprise in the UK

Knowing when to exit 17

In the ‘old days’, beyond the the successor got a tap on the shoulder. family “Today’s generation, and the next, won’t hen a family business leader fails to buy into that. If engage successfully with the next upcoming generations W generation, or if the right successor cannot be found, or if the family council is unable are impressed by our to be organized effectively, a pragmatic decision family businesses, is often made to recruit the best non-family executive possible, while maintaining the interactive if they see a role connections between the business and the family. where they can have This might require strengthening the capability and participation of the ownership group to reflect the an impact and get ‘familiness’ of the business alongside a non-family personal satisfaction executive who shares the family’s values. and enjoyment from the work we do, THEN they will be able to see themselves playing

a role in its future. Who will

The approach for getting them to that “ succeed you? destination won’t be a tap on the shoulder. he family business leaders in our study told us that choosing the right successor will, indeed, George Vestey T be their most important legacy and a moment CEO, of personal pride. It will be built upon an important Vestey Holdings, historical foundation, deep family values, a passion United Kingdom for what the business does and what it stands for and the impact it has on people and society.

The continuity of the family business and preserving its family identity depends on it.

18 Looking beyond the family - Who will succeed you?

e learned a great deal from the family business are becoming our CEO conversations. We increasingly diverse. From the family’s W believe there is an evolution role in managing the core business, taking place in the world of succession to ownership of company shares, that is aligning the overall purpose of membership on the board and active the family business with the motivation roles in the philanthropic activities of a and beliefs of NextGen leaders. family foundation – all are meaningful considerations for succession Wates Group Director, Mr. Andy planning. Perhaps this the beginning of Wates, described it this way: “Our a newly defined reality of what “family business is a process-driven machine. business succession” looks like? For the next generation, different platforms will be required to give We hope you have enjoyed this first them as many options as possible, article in our series, focusing on family especially for those who have a business succession. In what could strong entrepreneurial orientation. become a defining moment for your Next generation family members family business, we hope we have are being encouraged to be involved reinforced and provoked your thinking in the activities of the Wates Family regarding succession questions you Enterprise Trust, for example, which may be contemplating: provides an opportunity for them to get their feet under the family business • Being prepared to expect table and become directly involved in the unexpected by weaving deciding how, as “good owners”, the succession plans into the money from the Trust is allocated for fabric of your business societal impact.” contingency planning.

A similar view was echoed by Mr. Filipe • Understanding that the next de Botton, Chairman of Logoplaste in generation’s outlook may not Portugal, who described the family’s be the same as yours – not progression from a family enterprise to good, or bad, just different. a high-functioning enterprising family. He described family members who • Recognizing that future are engaged in the firm’s philanthropic generations may be looking projects, running the Family Office, for an enhanced of purpose board membership and diversification in the work of the family in business endeavors that are and of the business. well outside the parameters of the • Having the courage to choose company’s original core business. wisely by selecting the right This suggests that efforts to engage successor at the next-generation family members in right time.

The evolution of the family enterprise 19

the family business table and

become directly involved in deciding how, as “good owners”, “ the money from the Trust is allocated for societal impact.

Andy Wates Director, Wates Group, United Kingdom

• Considering succession The next three articles in our series options beyond the family. will take a close-up look at the impact of changing demographics on societal • Applying the same discipline impact, professionalization of the to succession planning as you business, including entrepreneurial do in your business planning. orientation and finally, legacy. We invite you to contact us at familybusiness@ • Knowing when it’s time to pass kpmg.com to receive the next article in the baton to a new leader. the series as soon as it’s available. And, as always, we welcome your feedback Family businesses have a wealth of on this information and invite you to experience and unique insights to share your own perspectives and share and we encourage you to learn experiences with us and for the benefit more about some of the families who of family businesses across the globe. contributed to our study and helped to bring these insights to life. You can explore the stories behind the families on the KPMG Private Enterprise website.

20 The evolution of the family enterprise

Our sincere thanks to the 1,834 family business owners and managers who generously gave their time to participate in the STEP Project survey, the 33 family business leaders who participated in personal follow-up discussions and contributed to the creation of their family business profiles.

We would also like to thank our Project Manager’s Arpita Vyas (The STEP Project Global Consortium) and Chelsey Byng (KPMG Private Enterprise), the STEP research affiliates and the STEP & KPMG Private Enterprise editorial board, who generously contributed their knowledge and insights to the STEP 2019 Global Family Business survey and the preparation of the article series.

Family Business leaders

Khalid Abunayyan Gabriel Hoey and Michael John K. Paul George Vestey Abunayyan Holding Hoey Kuttukaran Group, Vestey Holdings, Company, Country Crest, India United Kingdom Saudi Arabia Ireland Filipe de Botton Andy Wates José Manuel Suso Alfonso Urrea Martin Logoplaste, Wates Group, Dominguez Grupo Urrea, Portugal United Kingdom Arrocera la Esmeralda, Mexico Colombia Chaiwat Luangamornlert ZHU Xuehao Siam Amazing Park, Petter Wagner Hawk Filtration Technology Thailand Avila Wagner, (Shanghai) Co. Ltd., Colombia China Jack Hou Universal Cement, Ferenc Lévai Claudia Visani Taiwan (jurisdiction) BioTech USA, Inversora Lockey C.A, Hungary Venezuela

STEP Project Global Consortium

Asian Institute of Dublin City University Nova School of Business and Universidad Francisco Management Ireland Economics Marroquín Philippines Portugal Guatemala Grand Valley State University Audencia Business School United States Princess Nourah Bint Universidad Icesi France Abdulrahman University Colombia HSBA Hamburg School of Saudi Arabia Babson College Business Administration University of Bergamo United States Germany Tecnologico de Monterrey Italy Mexico Bangkok University Instituto de Estudios Windesheim University of Thailand Superiores de Administración The Chinese University of Applied Sciences Venezuela Hong Kong Netherlands Bogazici University Hong Kong (SAR), China Turkey Indian School of Business India Universidad de Jaén Budapest Business School Spain Hungary I-Shou University Taiwan (jurisdiction) Universidad de los Andes China Europe International Colombia Business School National Research University China Higher School of Economics Universidad de Piura Russia Peru Dalhousie University Canada

Acknowledgments 21

Dr. Hanoof Abohodair Alexandre Dias da Cunha Louise Lu Kavil Ramachandran Saudi Arabia Portugal Taiwan (jurisdiction) India

Daniël Agterhuis Luis Díaz-Matajira Bharagavi Mantravadi Yeny Rodríguez Netherlands Colombia India Colombia

Dalal Alrubaishi Irmak Erdogan Antonio Martinez Valdez Elena Rozhdestvenskaya Saudi Arabia Turkey Peru Russia

Kevin Au Keeva Farrelly Tom McGinness Fernando Sandoval-Arzaga Hong Kong (SAR), China Ireland United Kingdom Mexico

Nunzia Auletta Steve Gaklis Kenneth Metrado Allanne Mae Tiongco Venezuela United States Philippines Philippines

Alan Barr Ana C. Gonzalez L Tommaso Minola Daniel Trimarchi South Africa United States Italy Canada

Ameline Bordas Mario A. Gonzalez Patricia Monteferrante Suchart Tripopsakul France Mexico Venezuela Thailand

Mara Brumana María Hernández Ágnes Mosolygó-Kiss Manuel Carlos Vallejo Italy Spain Hungary Spain

César Cáceres Dagnino Remedios Hernández-Linares Carmen Pachas Orihuela Julian van den Akker Peru Spain Peru Netherlands

Myriam Cano-Rubio Albert James Francisca Panades Diego Vélez Montes Spain Canada Spain Colombia

Fuad Chapra Marshall Jen Nupur Pavan Bang Jaly Vibeth Chea Menéndez Saudi Arabia Hong Kong (SAR), China India Guatemala

Helmuth Chávez Asturias Brittany Kraus Luckxawan Pimsawadi You-fong Wu Guatemala Canada Thailand Taiwan (jurisdiction)

Jeremy Cheng Nyeste László Stefan Prigge Özlem Yildirim Öktem Hong Kong (SAR), China Hungary Germany Turkey

Hsi-Mei Chung Kg Lobo Miruna Radu-Lefebvre Hua Zhao Taiwan (jurisdiction) Philippines France China

22 Case study authors

We would like to thank all of the KPMG Private Enterprise member firms that participated in the development of the article series, in particular, those that contributed to the interviews and case studies.

Australia Ireland Singapore Robyn Langsford Olivia Lynch Jonathan Ho Partner, Partner, Partner, Private Clients & Family Business, KPMG Private Enterprise in Ireland KPMG in Singapore KPMG Australia T: +353 1 410 1735 T: +27 833886404 T: +61 2 9455 9760 E: [email protected] E: [email protected] E: [email protected] Israel South Africa Brazil Jonathan Lavender Alan Barr Jubran P P Coelho Global Head, National Private Enterprise Leader, Private Enterprise Leader for the South KPMG Private Enterprise, Partner, Americas Region and Brazil, KPMG International Services Limited, KPMG in South Africa KPMG in Brazil Partner, T: +27 833886404 T: +55 1139403221 KPMG in Israel E: [email protected] E: [email protected] T: +972 3 684 8716 E: [email protected] Spain Canada Miguel Angel Faura Borruey Mary Jo Fedy Italy National Private Enterprise Leader, National Private Enterprise Leader, Silvia Rimoldi Partner, Partner, National Private Enterprise Leader, KPMG in Spain KPMG in Canada Partner, T: +34 914563868 T: +1 519 747 8875 KPMG in Italy E: [email protected] E: [email protected] T: +39 011 8395144 E: [email protected] Switzerland Daniel Trimarchi Hugues Salome Director, Mexico Partner, Family Business Global Network, Jesus Luna KPMG in Switzerland KPMG Private Enterprise, National Private Enterprise Leader, T: +41 58 249 37 75 KPMG International Services Limited Partner, E: [email protected] T: +1 416 777 3816 KPMG in Mexico E: [email protected] T: +52 55 5246 8899 United Kingdom E: [email protected] Tom McGinness China Global Leader, Karmen Yeung Netherlands Family Business, National Private Enterprise Leader, Olaf Leurs KPMG Private Enterprise, Partner, Head of Private Enterprise, Tax Partner, KPMG China Tax Partner, KPMG Private Enterprise in the UK T: +86 755 2547 1038 KPMG Meijburg & Co, T: +44 207 694 5453 E: [email protected] KPMG in the Netherlands E: [email protected] T: +31 88 909 3414 France E: [email protected] United States Alpha Niang Conor Moore Senior Manager, Portugal National Private Enterprise Leader, KPMG Private Enterprise Luis Silva Partner, KPMG in France National Private Enterprise Leader KPMG in the US T: +33 155686189 Partner, T: +1 415 963 7559 E: [email protected] KPMG in Portugal E: [email protected] T: +351 220102329 Germany E: [email protected] Bradley Sprong Vera-Carina Elter Partner, KPMG Private Enterprise Head of People and KPMG Private Saudi Arabia KPMG in the US Enterprise in Germany, Fuad Chapra T: +1 816 802 5270 KPMG in Germany National Private Enterprise Leader E: [email protected] T: +49 211 475 7505 Partner, E: [email protected] KPMG in Saudi Arabia T: +966 503660370 India Kalpesh Desai Dr. Hanoof Abokhodair Partner, Associate Director, KPMG Private Enterprise in India KPMG Private Enterprise & T: +91 98193 73637 Family Business, E: [email protected] KPMG in Saudi Arabia T: +966 504684064 E: [email protected]

KPMG Private Enterprise member firms 23

Karmen Yeung Sylvene Fong National Head of Private Enterprise Head of Private Enterprise, HK KPMG China KPMG China +852 2143 8818/+86 (755) 2547 1038 +852 2978 8227 [email protected] [email protected]

William Guo Edward Yu Head of Private Enterprise, NCN Head of Private Enterprise, EWCN KPMG China KPMG China +86 (10) 8508 5626 +86 (21) 2212 2988 [email protected] [email protected]

Jackey Tse Koko Tang Director, Family Office Consulting Head of Private Enterprise, SCN Private Enterprise KPMG China KPMG China +86 (755) 2547 4180 +852 2140 2263 [email protected] [email protected]

About KPMG China Private Enterprise

Passion, it’s what drives entrepreneurs, it’s also what inspires KPMG Private Enterprise advisers to help you maximize success. You know KPMG, you might not know KPMG Private Enterprise. KPMG Private Enterprise advisers in member firms around the world are dedicated to working with you and your business, no matter where you are in your growth journey — whether you’re looking to reach new heights, embrace technology, plan for an exit, or manage the transition of wealth or your business to the next generation. Working with KPMG Private Enterprise, you’ll gain access to a trusted advisor — a single point of contact who shares your entrepreneurial mindset. With access to KPMG’s global resources and alliance network, we’ll help you drive your business forward and meet your goals. Your success is our legacy.

Visit: https://home.kpmg/cn/en/home/services/private-enterprise.html

24 Contact

The STEP Project Global Consortium is a global applied research initiative that explores family and business practices within business families and generates solutions that have immediate application for family business leaders. STEP aims to be a leading global family business research project with an international reputation. The research insights are specifically drawn to be of relevance to developing new theoretical insights that can offer novel and valuable best practices recommendations to the business stakeholders and the practice community at large. Having a global worldwide orientation, STEP offers networking opportunities for researchers, family business owners and consultants coming from five continents.

Visit: thestepproject.org

About the KPMG Global Center of Excellence for Family Business

As with your family, your business doesn’t stand still — it evolves. Family businesses are unique and KPMG Private Enterprise Family Business advisers understand the dynamics of a successful family business and work with you to provide tailored advice and experienced guidance to help you succeed.

To support the unique needs of family businesses, KPMG Private Enterprise coordinates with a global organization dedicated to offering relevant information and advice to family‑owned companies. We understand that the nature of a family business is inherently different from a non‑family business and requires an approach that considers the family component.

Visit: home.kpmg/familybusiness

About 25

KPMG China is based in 27 offices across 25 cities with around 12,000 partners and staff in Beijing, Changsha, Chengdu, Chongqing, Foshan, Fuzhou, Guangzhou, Haikou, Hangzhou, Hefei, Jinan, Nanjing, Ningbo, Qingdao, Shanghai, Shenyang, Shenzhen, Suzhou, Tianjin, Wuhan, Xiamen, Xi’an, Zhengzhou, Hong Kong SAR and Macau SAR. Working collaboratively across all these offices, KPMG China can deploy experienced professionals efficiently, wherever our client is located.

KPMG is a global organisation of independent professional services firms providing Audit, Tax and Advisory services. We operate in 146 countries and territories and in FY20 had close to 227,000 people working in member firms around the world. Each KPMG firm is a legally distinct and separate entity and describes itself as such. KPMG International Limited is a private English company limited by guarantee. KPMG International Limited and its related entities do not provide services to clients.

In 1992, KPMG became the first international accounting network to be granted a joint venture licence in mainland China. KPMG was also the first among the Big Four in mainland China to convert from a joint venture to a special general partnership, as of 1 August 2012. Additionally, the Hong Kong firm can trace its origins to 1945. This early commitment to this market, together with an unwavering focus on quality, has been the foundation for accumulated industry experience, and is reflected in KPMG’s appointment for multi-disciplinary services (including audit, tax and advisory) by some of China’s most prestigious companies.

26 About KPMG Private Enterprise member firms 26

STEP Project Global KPMG Private Enterprise Consortium Center of Excellence for

Andrea Calabrò Family Business STEP Global Academic Director, Director, Jonathan Lavender IPAG Entrepreneurship & Family Business Center, Global Head, IPAG Business School KPMG Private Enterprise, KPMG International Services Limited, Rodrigo Basco Partner, Associate Professor, KPMG in Israel Sheikh Saoud bin Khalid bin Khalid Al-Qassimi Chair in Family Business, Tom McGinness American University of Sharjah Global Leader, Family Business, Georges Samara KPMG Private Enterprise, Global Research Champion, Partner, STEP Project, KPMG Private Enterprise in the UK Editor in Chief for Business Ethics: A European Review Daniel Trimarchi Director, Family Business Global Network, KPMG Private Enterprise, KPMG International Services Limited Melany Eli Managing Director, Strategy, Marketing and Communications, KPMG Private Enterprise, KPMG International Services Limited Contact us

Andrea Calabrò Tom McGinness

STEP Global Academic Director, Global Leader, Director, Family Business, IPAG Entrepreneurship & Family KPMG Private Enterprise, Business Center, Partner, IPAG Business School KPMG Private Enterprise in the UK E: [email protected] E: [email protected]

Editorial board - Contact us 27

For a list of KPMG China offices, please scan the QR code or visit our website: https://home.kpmg.com/cn/en/home/about/offices.html

Throughout this document ‘We/Us/Our’ means KPMG and the Successful Transgenerational Entrepreneurship Practices (STEP) Project Global Consortium. ‘KPMG’ refers to the global organization or to one or more of the member firms of KPMG International Limited (“KPMG International”), each of which is a separate legal entity. KPMG International Limited is a private English company limited by guarantee and does not provide services to clients. For more detail about our structure please visit home.kpmg/governance. © 2021 KPMG Huazhen LLP, a People’s Republic of China partnership and a member firm of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. Printed in Hong Kong, China.

The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organisation. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. Designed by Evalueserve. Publication name: The courage to choose wisely | Publication number: 137125-G | Publication date: November 2020