Legal News & Analysis – Asia Pacific – Hong Kong – Corporate/M&A 

What do Manchester United FC and some of Hong Kong’s wealthiest family companies have in common? At first glance, perhaps not much. Although Manchester United became a privately owned family company in 2005 following the successful takeover by the Glazer family, in many ways it does not look or feel like a traditional family business. The answer lies in succession planning.

End Of An Era

Following their takeover in 2005, the Glazers took the sensible approach of leaving the football side of the business to the experts, ie the manager and coaching staff. Instead of interfering with the day-to-day running of the club (eg player selection), they focused their efforts on keeping the current manager in place and supporting him with cash to secure new contracts and attract new players. United’s success on the pitch, however, was led by a certain Sir Alex Ferguson – arguably the most successful manager in the history of the game. Under his watch (beginning in 1986), he transformed a languishing giant into one of the most formidable teams in the world – winning 38 trophies in the process.

So when Ferguson announced his retirement after 27 years in charge, the sporting world’s attention quickly turned to the question of a successor. Cue the arrival of Everton manager and fellow Scot, David Moyes. Although well regarded for his time at Everton where he managed to get the best out of a small group of less fashionable players with constrained finances, he had no previous connection with United and had never actually won any major trophies. As it turned out, Moyes struggled and United ended their season in the lowest league position since the English Premier League began in 1992. Moyes was sacked in April 2014 and Dutch veteran, Louis van Gaal, has been handed the reins for the upcoming season.

Succession planning is an equally live and concerning issue for Hong Kong family companies. According to the 2011 World Wealth Report, 88% of HNWIs (high net worth individuals) in Asia are of the view that the next generation is not able to manage inherited wealth. Statistics on succession planning in Asia substantiate those fears, as only 30% of family businesses survive into the second generation and as little as 10% into the third generation. There has also been an alarming rise in the number of disputes in the Hong Kong courts relating to family businesses, with poor succession planning often seen as a root cause of the problem.

The Rise And Fall Of David Moyes

So what can Hong Kong family companies take from the Manchester United saga?

• Succession planning is difficult and requires long term forward planning. Many have highlighted the fact that Ferguson managed to get the best out of a squad of players in decline and have conjectured that, perhaps knowing his tenure was coming to an end, he thought less about the need to plan for the future of the team. Family companies can be no different. The patriarch can extract from his workforce, as a result of the strength of his own character, expertise and knowledge, results which others cannot.
• Independent selection process. Many have criticised Ferguson’s judgement for bringing in someone with little trophy success to a club with such a big reputation and such high expectations. The skills required to identify a suitable successor may well be different to those required for doing the job itself.
• Adapting to change (internal) and winning confidence. New football managers need to have the strength of character to be able to deal with players who are very used to a particular way of working and impose a new regime on them. Moyes is said to have come unstuck here and was simply unable to win the support of the dressing room. When a patriarch moves on from a business they founded and ran successfully for many decades, the challenges are no different.
• Cultural fit. There is always the need to strike a balance between finding a successor who “speaks his/her own mind” and one who shares the same culture or philosophy as the patriarch. Manchester United famously pride themselves on their quick, dynamic and attacking style of football; Moyes instilled a more cautious approach and lost the confidence of the fans when the results did not match their expectations. So, whilst the successor must impose his/her own style, it can be equally important to find someone who demonstrates the right cultural “fit” – someone who shares the values of the institution they are taking over.
• Not all about the patriarch. As is common when football managers move from club to club, Moyes took his Everton backroom coaching staff with him to Manchester United. But in doing so, a number of key United coaching staff who possessed unrivalled knowledge of the inner workings of the club were replaced and left the club. Ferguson’s retirement also coincided with the departure of David Gill who had been United’s CEO for the previous 10 years. Although Ferguson spearheaded the United revolution and drew all the public plaudits, he certainly could not have achieved such success without the assistance of key personnel and trusted advisers. The same is true with family companies. Wholesale change can back fire and there can be real benefit in considering how to get the most out of those around the patriarch who probably know the business inside-out.
• Adapting to change (external). Not only is there a new man at the helm, the world around is changing too. In Manchester United’s case, the standard of other teams in the Premier League has been increasing exponentially to create what many now regard as the most competitive league in the world. For family businesses (especially, for example, in the manufacturing sector) the parallels are striking where technology develops rapidly and other companies try hard to attract new business.
• Time is precious. Any successor is unlikely to be given an unlimited amount of time to make an impact. Ferguson famously did not win a trophy during his first four years at United, but such luxuries of time are no longer available to managers given the financial downside of a failure to maintain a place at the very top of English football. Any successor of a prosperous family company is also likely to face scrutiny from day one and much will depend on how s/he reacts to pressure when things are not going well.

Lessons Learned: Look Within?

Hindsight is said to be 20:20, but what can we learn from the Ferguson / Moyes succession?

Perhaps the most successful transitions in football clubs have almost always come from training and promoting from within. Indeed, United trialled this approach at the end of last season. Following Moyes’ sacking, playing legend and fans’ favourite, Ryan Giggs, was handed the managerial reins for the last few games. Giggs is the most decorated player in English football history, having spent his entire career at United and a product of United’s prestigious youth development programme. His appointment was well received by fans and media alike, and brought some stability to the club prior to van Gaal’s arrival.

During Liverpool’s most successful years the club operated a policy of promoting from within which famously became known as the “Liverpool Way”. Future managers were chosen from a group of coaches who were educated in the ways of the “Boot Room” – a tiny room next to the changing rooms used to store the players’ boots, where the coaches would meet over a glass of whisky to discuss the team and its tactics. This ensured that any future manager was already instilled with the culture, philosophy and expectations of the club.

Family companies, of course, are known for not just promoting from within (and rewarding loyalty), but also handing the baton to family members. This approach is also not without risk. Patriarchs often overestimate the ability and inclination of family members to carry on the family business successfully. There is also the challenge of being able to train others for the job whilst avoiding a coup d’état. Fortunately, however, family patriarchs are almost uniquely placed in this regard, as familial ties of piety, love and respect can help keep other ambitions in check.

Perhaps, then, the real challenge is planning for a smooth transition rather than an abrupt change. For a start, that means having a succession plan in place to begin with. The appointment of a successor is simply a matter of time, so much better to have a plan already in place than to sign up for a crash course in crisis management when the time comes.

If the right candidate can be found, it seems to make sense to promote from within. The successor is more likely to be in tune with the cultural values of the company and best placed to leverage off the knowledge of the incumbents who spent decades surrounding the patriarch. However, care should be taken to instil a degree of objectivity in the selection process; blood should not necessarily trump merit and/or experience. At the very least, it is unwise to let the patriarch alone choose his own successor; decisions should instead be taken by a panel of senior figures and trusted advisers.

Family companies often face a double challenge: succession of ownership as well as management. The current Manchester United story only deals with the latter, but the former is also all too often overlooked. Trusts and charitable structures are commonly used to ensure a smooth transition and stability, but the details of these types of structures are often what determine their success or failure. In particular, if exit mechanisms and dispute resolution provisions do not anticipate and provide for orderly ways for family members to step out of the business having been properly compensated for their endeavours, disputes are a not uncommon result.

For Manchester United and its management issues, only time will tell if van Gaal is the right man, and whether the Moyes reign will be seen as a blip in the club’s fortunes or the start of its decline.

For further information, please contact:

 
Mark Johnson, Partner, Herbert Smith Freehills

[email protected]

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