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Family business gains from next generation’s focus on digital transformation and sustainability

Family business stands to gain from next generation’s focus on digital transformation and sustainability: PwC report

PwC Hong Kong’s released its Global NextGen Survey 2022 – China Report on November 10. The report reveals the key priorities and challenges of the next generation (NextGen) leaders in family businesses. In the face of the prevailing COVID-19 pandemic, geopolitical tensions, economic disruption and climate change, the breadth and depth of responsibilities that the NextGen have never been more complex and challenging. Meanwhile, the growing importance of family businesses to the Chinese economy cannot be overlooked.

With the NextGens looking to take up the mantle of leading the family business from the current generation, different trends emerge among Hong Kong and Mainland Chinese family businesses when compared to their more mature global counterparts. While majority of the NextGens in both Hong Kong and Mainland Chinese family businesses are from the second generation (Mainland China: 94%; Hong Kong: 61%; Global: 51%), there are more leaders from the third generation and beyond globally (Mainland China: 6%; Hong Kong: 39%; Global: 43%). Furthermore, with generational wealth transfer at the forefront for more mature family businesses, 42% of global family businesses have a family office. Hong Kong, ranking 6th in Forbes’ list of regions with the most billionaires in 2022, unsurprisingly has a much higher proportion of family businesses with a family office at 60%, 29 percentage points higher than Mainland China at 31%.

With many first-generation entrepreneurs now in their late 60’s and expected to pass on the mantle of leadership, it has become clear that as future leaders of their businesses, NextGens cannot afford to sit on the sidelines. While 54% of NextGens are currently involved in a leadership role in Hong Kong, at present, PwC can see fewer Mainland Chinese NextGens (46%) holding such positions (Global: 53%). However, Mainland Chinese and Hong Kong NextGens tend to have more of an entrepreneurial mindset than their global counterparts as more set up their own entrepreneurial venture outside of their family businesses (Mainland China: 29%; Hong Kong: 20%; Global: 12%). Moreover, given the relative maturity of Mainland Chinese family businesses, Mainland Chinese NextGens are expected to have more involvement in the future as the second generation. Looking into the future, a much higher proportion of Mainland Chinese NextGens (69%) aspire to hold a leadership role compared to their global counterparts (Global: 51%; Hong Kong: 61%).

Amidst the ongoing pandemic and geopolitical tensions, business survival has never been more precarious. To ensure survival, achieving sustainable growth in the new normal is imperative, with business priorities determining the trajectory of the family business. 72% of Chinese NextGens believe that achieving business growth should be their company’s priority over the next two years (Global: 65%) followed by adopting new technologies (China: 52%; Global: 44%). For NextGens, most believe that achieving business growth (China: 58%; Global: 44%) and expanding into new sectors (China: 23%; Global: 25%) would be their top two priorities. Only 16% (Global: 11%) and 14% (Global: 13%) of Chinese NextGens would prioritise investing in innovation and R&D and adopting new technologies respectively. In order to ensure long-term growth, family businesses should embrace digital transformation as it is the preferred experience for a third of customers. The NextGens need to take initiative to reconcile business priorities and their other priorities as future business leaders. When given sufficient time and resources, they should focus on enhancing their digital proficiency and ability to innovate in order to transform the existing family business or set up new ventures with or without family support.

NextGens see the potential for family businesses to lead the path to sustainability with their influence in the business world. More than half of those surveyed in China (51%; Global: 64%) believe family business can lead the way in sustainable business practices. They also feel the urge to do so with 62% in China saying they ensure sustainability is at the heart of everything they do (Global: 55%). This trend aligns with China’s determination to achieve carbon neutrality before 2060 and a surge of activity surrounding ESG reporting – from regulators, exchanges and investors. Among other initiatives, Hong Kong will require listed companies to publish Task Force on Climate-related Financial Disclosures-aligned climate-related reporting by 2025. Chinese NextGens, especially those in Hong Kong, can leverage this opportunity to promote long-term value creation in their family business by spearheading ESG reporting and advancing their ESG ratings. The favourable policy environment and the expanding market size make it an opportunity too important to miss.

PwC Hong Kong’s Entrepreneurial & Private Business Regional Lead Partner – Hong Kong, Benson Wong, said, “To win the trust of the current generation and the wider company, NextGens need to demonstrate that they have the skills and vision to lead the business to success. With their strength in digital culture and their passion for technology, working on innovative areas such as digital transformation can be a good starting point. Meanwhile, ESG is no longer just for regulatory compliance. It has increasingly become an integral part of business strategy and an engine for long-term business growth. While NextGens feel the urgency to do more for a sustainable future, they need to gain additional knowledge to ensure they are making the right moves and incorporate ESG considerations into their decision-making process from day one of their leadership.”

With the pandemic still running its course, NextGens see the need to shift from status quo. Transparency is of utmost importance to enable family businesses to stay agile and act with speed amid the precarious and fast changing environment. 30% of the NextGens in China say that the pandemic resulted in stronger communication with the current generation of leadership (Global: 36%). As the pandemic continues to disrupt everyday life and business operations, it also alerts family firms about the importance of having a robust succession plan in times of uncertainty. More than half of NextGens in China (59%; Global: 61%) report the readiness of a succession plan within the family. When PwC asked the current generation the same question in Family Business Survey 2021, the figure was only 19% in Mainland China and 20% in Hong Kong. The COVID-19 pandemic and the resulting uncertainties around business continuity was likely the driving force for this change, especially as Hong Kong and Mainland China saw high mortality rates from the rest of the world at the beginning of the pandemic.

PwC Mainland China and Hong Kong’s Family Business & Private Client Services Leader, Partner, John Wong, said, “While NextGens are feeling positive about their future within the family business, they need to further align their thoughts and expectations with other family members by actively seeking their feedback. The lack of transparency can create a mismatch of expectations. It is essential to acknowledge that succession requires the agreements and efforts from both the current generation and NextGens. NextGens can assist the current generation in reviewing family values and protocols, and provide inputs with their own observations and insights from a different perspective. With strengthened communication during the pandemic, it is time for NextGens to initiate timely and transparent conversations with other stakeholders to learn and grow within the family business.”

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