By Boo Kok Chuon and Chan Mei Lee
Family-owned businesses often come with unique challenges when it comes to passing the baton from the older generation owners to the next. It involves years of planning, failure of which can lead to conflicts. Local Chinese newspaper, Lianhe Zaobao’s report of the recent legal dispute involving Fasten Enterprises, a Singapore-based family business, highlights the importance of robust succession planning and governance. By examining the details of this case and understanding its implications, we can explore how a structured, staged approach can prevent such disputes and ensure a smooth transition of leadership.
The Fasten Enterprises Case: A Cautionary Tale
Fasten Enterprises, a family business specialises in construction materials. The parents who originally controlled the company, invested heavily in their son’s education, grooming him as their successor. However, tensions arose after their son took over the reign, and subsequently, unilaterally announced their retirement without consulting them. This decision resulted in the son’s removal from the company and the recall of their daughter from overseas to take over leadership.
The unfortunate conflict escalated into a legal battle, with the son suing for unpaid director fees and the parents counterclaiming that he misused company funds for personal expenses, including lavish weddings. While the court partially ruled in favour of the son, acknowledging that some expenses were company-approved, the case left the family and the business in turmoil.
This case highlights the pitfalls of inadequate succession planning and the dangers of mixing personal and professional roles without clear guidelines. A structured, staged approach to succession can help family businesses avoid such outcomes.
Management Trainee Phase: Building Competency from the Ground Up
The foundation of any succession plan lies in preparing the next generation for leadership. Successors should begin their journey as management trainees, working across various departments to gain a holistic understanding of the business. This phase is not just about familiarizing them with operations but also about instilling the values and culture of the company.
During this phase, performance-based evaluations and mentorship programs can play a pivotal role. Assigning experienced professionals or the founders themselves as mentors ensures that successors are guided through real-world challenges. Additionally, introducing performance-linked rewards, such as small equity stakes through an Employee Stock Ownership Plan (ESOP), fosters a sense of ownership and accountability early on.
Mentorship Phase: Bridging Knowledge and Leadership
Once successors have gained operational experience, they should move into a mentorship phase, where they take on more significant responsibilities under the guidance of the founders or senior leaders. This phase allows them to develop strategic thinking and decision-making skills while still benefiting from oversight.
Structured training programs, leadership workshops, and exposure to high-level decision-making can further prepare them for executive roles. Gradual equity allocation tied to milestones reinforces their commitment and incentivizes performance.
Transition of Management Power: A Gradual Handover
The transition of management power should be carefully staged to minimize disruptions and conflicts. Successors can be appointed to senior roles, such as CEO or COO, while founders retain oversight as advisors or board members. Trust and/or family office structures can be considered to be adopted as tools to facilitate the gradual transfer of shareholding rights, ensuring successors gain ownership incrementally based on predefined criteria, such as achieving profitability targets or maintaining growth.
During this phase, it is essential to retain founders’ rights through constitutional safeguards. Provisions such as golden shares allow founders to veto major decisions, ensuring their influence on the company’s direction during the transition.
Executive Powers Phase: Empowering the Next Generation
The final stage involves transferring full executive and ownership powers to the successors. At this point, they should have demonstrated their capability to lead and sustain the business’s success. Trusts can release the remaining shares, completing the ownership transition.
Governance frameworks are critical at this stage to maintain objectivity and professional management. Introducing independent directors to the board and establishing clear roles for family members can prevent personal conflicts from spilling into the business. Regular audits and transparent reporting further enhance accountability.
The distribution of shareholding powers should be clearly considered based on their respective powers:
- 5% Ownership: Grants the right to audit accounts and call for general meetings.
- >30% Ownership: Provides the ability to block special resolutions.
- >50% Ownership: Ensures simple majority control for day-to-day decision-making.
Balancing Family Dynamics and Business Goals
Family disputes often arise from misaligned expectations and communication breakdowns. Establishing a family charter can help align everyone on roles, responsibilities, and dispute resolution mechanisms. Regular family meetings create a platform for open dialogue, addressing concerns before they escalate.
Mediation protocols can be invaluable, offering a structured process for resolving disagreements. These measures ensure that the business remains focused on growth while preserving family harmony.
Conclusion: Securing the Future of Family Businesses
The Fasten Enterprises case serves as a stark reminder of the risks associated with poor succession planning. By adopting a staged approach, family businesses can ensure a seamless transition of leadership while safeguarding the founders’ legacy and the company’s stability.
If your family business is navigating the complexities of succession planning or governance, we are here to help. Contact us to explore tailored solutions that align with your unique needs and aspirations. Together, we can build a roadmap for long-term success and family unity.
About the Authors: Boo Kok Chuon and Chan Mei Lee are the co-founders of the Iconomy Group of Companies. They jointly wrote the books “Corporate Directions: A Comprehensive Guide for Directors of SMEs in Singapore” and currently serves as the Group CEO and CFO, respectively, of Iconomy Group of Companies. Mr. Boo brings a diverse background in law, finance, and entrepreneurship, while Ms. Chan is an experienced auditor, IPO issue manager, and a seasoned property investor. Together, they specialize in providing strategic advisory services to businesses, particularly in governance, succession planning, and corporate structuring.