Passing on of family control

By Yun Dahui, Hylands Law Firm
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The majority of private enterprises in China are family controlled. The family and the family business affect one another and depend on one another for their existence. Family control is the heart of the family governance mechanism. The passing on of Chinese family control is subject to its profound background effect and has its own particular features consisting broadly of the following three aspects: reestablishment or improvement of the family governance mechanism, creation of the core family spirit and values, and formulation and implementation of a successor grooming plan.

云大慧 YUN DAHUI 浩天信和律师事务所高级合伙人 Senior Partner Hylands Law Firm
YUN DAHUI
Senior Partner
Hylands Law Firm

The background. In addition to the nexus of blood relationships, the formation and development of the majority of Chinese families follow closely the growth of the family business. Most family businesses are started by the first generation founder or family members, and as the size of the business continually increases, the members who enter the business continually increase from the original nuclear family to encompass such family members as uncles, nephews, etc. Thus the family gradually takes shape and develops. In the course of the development, most families are busily focusing their efforts on the domain of the enterprise, overlooking the grooming and succession of the family successors. On the other hand, the family spirit and culture have yet to take shape and there is a major difference in the intergenerational thinking of the family members, resulting in its being pulled and roiled by various lines of thinking and competing ideas.

The crystallization of Chinese family control generally follows the successful founding of the family business by the founder and the accumulation of wealth by the core family members. Family wealth is usually inseparable from the property of the family business, material family matters are decided by the core family members that created the wealth and family control strictly relies on the personal attributes of the core family members, such as their authority, experience, etc., which are not reproducible and are difficult to transmit. When the first generation family leader, namely the founder of the family business, gets on in years, the question of succession becomes urgent.

Family governance mechanism. With the development of the family, an increasing number of families begin to move from natural growth to planned and orderly development. The establishment of a sound family governance mechanism is not only an objective and effective medium for the exercise and passing on of family control, but also the development direction for the long-term development and intergenerational succession of the entire family.

The family governance mechanism usually includes the assembly, constitution, council, supervisory board, family affairs office and such specialized committees as the education committee, occupational planning committee, advisory committee, etc. Through the grind and operation of the family governance mechanism, family affairs are handled in a manner that is rules based and succession to control is also brought under the governance of the family governance structure. With the continuous improvement of the family governance mechanism, the passing on of family control will become smoother, more orderly and effective. Numerous families, both ancient and modern, Chinese and foreign, have had or have governance structures that they themselves created. Of course, Chinese family governance mechanisms require a long process of establishment and improvement, requiring the joint efforts of a generation or even multiple generations of persons.

Establishment of core family spirit and values. While the governance mechanism is the medium for the passing on of family control, the family’s core spirit and values are the soul of the passing on of family control.

Successful families will necessarily have an intrinsic system of core values and code of conduct, and tacit rules for dealing with the various relationships within the family, which will reduce the various conflicts that family members could encounter when making decisions and lower communication costs. During the formation of these tacit rules, family members will be exchanging ideas and communicating one with another, increasing the solidarity of the family and solidifying the harmonious interaction among them. The family members will cause such values and code of conduct to influence and be passed on to subsequent generations.

A clear and predictable joint set of values can have a major impact on the establishment of marriage ties and the spousal relationships of family members, stable marriages being a factor of utmost importance to the stability and harmony of a family, and has direct bearing on the family’s capacity to sustain its development. Many cases of families being harmed by the breakup of a marriage relationship provide lessons to learn from for the development and succession of a family.

Successor grooming plan. With the security provided by the family governance mechanism and the establishment of the core system of values, the successor grooming plan has a good basic environment. However, the successor grooming process which follows closely the process of the successors growing up is a long-term process. Not only are a reasonable family education and training plan, successor selection system, professional planning scheme, etc., necessary, but even more necessary is the family having an organized polished and practical arrangement for the next generation that commences when they are small. Particularly important is the teaching by example by elders in the household and parents, which has a long-term and profound impact on the grooming of the successors.

For families in whom the successors have reached adulthood, the proper handling in practice of children’s marriage relationships, stepchild relationships, foster child relationships and relationship of children born out of wedlock are factors that are key to the passing on of family control and to family harmony.

In short, the passing on of family control is dependent on the application of the wisdom of the present family and family leaders, and is also the historical mission of the present family leaders. “Direct one’s knowledge to the study of things, and once things have been studied, knowledge will reach its fullest”, says the famous line in the Great Learning chapter of the Book of Rites. The passing on of family control is intimately related to the family’s prosperity and development. The family leaders shoulder a heavy responsibility and need to divert more of their energy from creation of the family’s fortune to the enhancement of the individuals’ life situations and transmission of the family’s spirit, as this is the only way to ensure the family’s fortune will be succeeded in perpetuity and every generation of the family will prosper and develop.

Yun Dahui is a senior partner at Hylands Law Firm. She can be contacted on +86 10 6502 8868 or by email at yundahui@hylandslaw.com