KPMG addresses key challenges faced by family businesses in succession process

Given the importance of raising awareness and ensuring the success of our local family businesses, the Family Business and Board Advisory Division of KPMG in Sri Lanka organised a round table discussion to discuss key challenges faced by family businesses in the succession process, and ways to overcome such challenges in a practical way. The discussion included a presentation from subject matter expert, Richard Cooper, Family Business Advisor from KPMG in Australia. He is a Senior Manager and member of KPMG’s Private Enterprise, Advisory Group based in Brisbane. 

The presentation was followed by an interactive round table discussion moderated by Suren Rajakarier – Partner and Head of Audit and Board Advisory and Thamali Rodrigo – Partner and Head of Family Business at KPMG in Sri Lanka. The key messages are noted below:

Why have a succession plan? 

The needs and expectations of the business grows as it moves from a ‘simple’ business, with the owner in total control who makes all the decisions, to a more mature business, which requires greater/wider skills and capabilities. Meanwhile, as the family grows, it has increasing needs and expectations, such as, financial security for multiple generations and family branches and lifestyle. 

Irrespective of family dynamics, families find themselves dealing with issues such as:

• When to transition management? Who will lead?
• Differing views with respect to the direction of the business
• Differing views and values between generations and between siblings, as new family branches are formed and with the external influence of in-laws
• Competing with commitments and loyalty – between the birth family solidarity and the new nuclear family 

Division into branches reduces the sense of shared purpose.

If the family (and the business) has not planned for change, and things just evolve ‘organically’, then the needs of the business outgrows the skills and capabilities of the family. Richard pointed out that as a widening gap between the business and family paths, which is a major risk for smooth succession.

Everyone is thinking about succession but… 

Richard shared results from a recent KPMG survey conducted in Australia. The statistics show that more than half are thinking about succession globally. The statistics are shared below. Their experience is that even though everyone is thinking about a succession plan for a family member, only 14% of them are actually preparing and training a new successor before the real succession. 

Some families have a plan… 

So what is a succession plan? A typical comment is: “We have a succession plan in place……when I decide I have had enough, I will hand over the business to my daughter.” 

KPMG partners discussed the usual reluctance of the current generation, to sit down and have a timeline and a set of expectations. Members of the next generation rarely stay motivated, when the target is somewhere in the horizon. ‘What am I working towards? – It is all in Dad’s head’, is a concern. 

When are they ready? 

A good excuse that the current generation uses is – ‘I want to step away from the business, but the next generation is not ready’. Whilst the next generation feels taken for granted within the business – ‘I am running the business, but dad/mum makes all the decisions’. 

The current generation was asked the question – They are not ready – Were you ready? Richard said that often the issue is to ask the current generation the question “Are you ready?” The current generation very naturally goes through the fear of feeling redundant, and fear of the next generation not doing the same as how they did it. It was pointed out that, it is important for the current generation to understand and the way the next generation decides to go ahead is...not wrong….just different. This is not a state of mind. It is a process. 

A succession planning process helps with giving the current generation, the comfort to let go whilst developing the confidence of the next generation. The plan will also help build trust and respect of the whole family in the process and the successor. KPMG shared a guiding principle that shed light to the audience, on how to ensure the success of the succession process.

It was explained that KPMG’s succession process recognises the benefits arising from the following practices:

• It is best to have successors gain some outside experience
• Working under someone else, other than a family member to learn the ropes
• Further professional education, to ensure successors have the right skill 
• A Mentor – outside the business, outside the industry, to work on personal development.
• A Board of Directors to support the current leader and future leader.
• It is important to understand that it is a process and will take time….it is a process, not an event
• Communication does not mean ‘we talk often’. A structure and a plan needs to be in place
• Being prepared to change the plan

Richard discussed some critical considerations, based on his experience dealing with such succession plans. The requirement of strong governance to bridge the gap between the family needs and the business needs was also discussed further by Suren Rajakarier. 

The need for independent board members in family businesses was emphasised. Most business owners tend to ask a close friend or colleague, who in turn end up as ‘Yes men’. These independent board members essentially, do not challenge the business or the family members on the board. 

Several members of the roundtable voiced their concerns about finding the ideal independent board member, given that the Sri Lankan market is very small and very few human resources are available in this sphere, to ensure absolute independence of an individual. 

Imitiaz Esufally shared his experience in forming the business of Hemas Holdings PLC. He also touched on the initiative to introduce independent board members to the business. Even though this seemed challenging, he reiterated KPMG’s view on how the independent members bring discipline and broaden the thinking of the business. Dinesh Schaffter also shared a similar experience with their Janashakthi Group. 

Suren Rajakarier emphasised the importance of a Board that challenges numbers, irrespective of positive and negative performance. He cited some examples locally and globally on failures, where the Board and the Shareholders failed to question falsely reported profits. 

The next generation members of the roundtable discussion were keen to understand the practicalities in having an Advisory Board as a tool, to help with succession and any alternative methods other families in Sri Lanka have used, in the absence of a fully-fledged Advisory Board.  Asoka Hettigoda shared his experience taking over the family business, where in the old days there was no guidance. If you were interested in joining the family business, the only way was to start at the bottom and learn the business and progress at snail speed. KPMG added that it is considered best practice to start at ground level and progress, based on performance and merit. 

Most successions fail, when the next generation come in as directors, with no prior experience or understanding of the business. KPMG added that the Advisory Board can guide the successors in their entry to the business, in the absence of a competent and full-fledged Board. They would have the knowledge and experience of the business over the years that the successor will need to grasp, to effectively integrate into the business. 

Faris Fausz of the Rainco Group of Companies shared his experience and how they started working closely with the senior management team, to strengthen their own understanding of the business.

Suren explained the difference between a Family Board and a Business Board. A Family Board is mainly to govern family issues and family aspects. The Family Board/Council does not get involved in the business aspects. A Business Board is typically focused only on business issues, and does not get involved in family matters. Richard stated that the Family Council may include both family members who are working in the business, as well as those not actively involved in the business.

The Family Council promotes communication so that family members not working in the business retain an interest and connection to the family business. It is established as a forum, where matters that concern the family in relation to the business can be discussed. Some of the key roles of the Family Council are the creation of Family Rules, which set out the rules for how the family and the business interact, and developing family members, to be considered for roles in the business.

D.K. Rajapakse emphasised the need for a constitution in family businesses, and how their father set up some rules for the business, which they follow to this date. The rules have helped a smooth transition and respect towards these rules, which are critical for them to be effective. 

Thamali Rodrigo emphasised that as families grow into larger numbers, each individual holds a minor percentage of the shares. The resulting diminishing sense of ownership and emotional attachment to the family business, have triggered external parties entering the business and families losing control. Therefore, families should think about the ownership succession process very carefully. She also highlighted the importance of wealth preservation for the next generation. 

In concluding the session, Thamali highlighted that it is useful to view family and business as two different systems. The family system is based on emotion with members bound together by strong emotional ties, which will have both positive and negative implications. The business system is based on accomplishments or tasks. It is built around contractual relationships, and rationality applies in decision making not the emotions. 

In her experience, identifying these differences early and defining rules as to how to manage the two systems interacting with each other is important, to ensure that the business is sustainable and is perpetuated. She also said that KPMG is committed and will continue to organise knowledge forums and roundtable discussions which will focus on helping family businesses in Sri Lanka.