Family as a business actor, the challenges of wealth and business succession, how values are passed on from generation to generation within families, and philanthropy as a possible scenario in managing excessive wealth – these are the main themes of Russia’s Wealth Possessors Study 2015, carried out by Ivan Klimov and Roman Abramov (HSE Faculty of Social Sciences), and Veronica Misuitina and Ruslan Yusufov (Skolkovo Wealth Transformation Centre).
This study is the first of its kind, and designed to fill the gap in research data on the personal and family values of wealthy Russians. It is also the first in-depth analysis of approaches to business succession in Russia, even though the level of detail revealed in the interviews was limited to what the respondents were willing to disclose about an issue as sensitive as the succession of their business and wealth. The study also presents a snapshot of the current business environment in Russia. In fact, 53% of the respondents described the state of their affairs in the shortest possible way by saying "business is developing."
The study has produced what can be described as a 3D image, presenting business owners from different angles, such as their education and experience, vision for their business and market, their role as parents and spouses, and their perspectives on philanthropy.
The field studies conducted between July and December 2014 included a questionnaire survey and personal interviews with 39 Russian business owners whose self-reported assets ranged between 100 million rubles and being in the Forbes Top 100 Wealthiest Ranking (five Russians from the ranking participated in the study). The scale of their wealth served as an indicator suggesting that these business owners may be considering a succession strategy, according to Klimov and Abramov.
The first and most obvious conclusion from the study is that an infrastructure has yet to be created in Russia to facilitate business succession by supporting the proper education of future successors and providing the essential institutional framework.
According to more than half of the respondents (55%), major Russian businesses today are not likely to develop into family dynasties, and just 29%* of those interviewed have a more optimistic outlook on the issue. In fact, business succession is a relatively new topic in Russia, and only about a third of the respondents (30%) have a detailed business succession plan, and 39% have a wealth succession plan.
In addition to this, 19% of the respondents have come up with a more general business succession plan and 16% have a general wealth succession plan; 25% and 29% respectively, have just started business and wealth succession planning, while 30% have not yet considered business succession and 16% have not thought about wealth succession.
The challenge of business succession planning in Russia is that it involves four major aspects that need to be considered.
The first aspect is family, including considerations such as the age of children (succession planning may not be perceived as urgent while they are still young), their interests in life (and whether they are likely to follow in their parent's footsteps), and whether the family is small or extended.
Second, the type of business, its strategy and core principles.
Third, business partners, their attitudes, family and biographies.
And the fourth aspect is to what extent business owners are willing to involve family members in their business – a challenge for many who view the issue as entrepreneurs and employers, as well as parents, and thus have to consider the competence and capabilities of their potential successors.
The respondents’ characteristics include an average age of 48, typically a degree in engineering or physics (60%) or, less frequently, in economics or finance (28%), in their first and only marriage (77%) and a big family of up to six children. They started their businesses between 1989 and 1994, and about a third (31%) now hold a second degree in economics, banking or finance.
These characteristics influence their outlook on succession, in particular the fact that most are young enough to anticipate at least ten more years of active involvement in their business; according to most respondents, they expect "to remain the owner of my business in the future" or "to run my own business for as long as possible."
Their personal qualities are quite predictable and include individualism at a level more pronounced than in Russia’s general population (57% vs. 27%). Their dominant value orientations – using Shalom H. Schwartz's theory of basic values – are, first, self-enhancement and achievement (supported by power and wealth), and second, openness to change (including novelty, risk-taking and stimulation).
That said, their willingness to take risks should not be exaggerated, as they clearly use caution and prudence in approaching business succession and consider it from different perspectives, including an ethical one.
Generally, when business owners contemplate the future of their wealth, "they are facing an ethical rather than financial choice and are largely guided by their family values," according to Abramov. While they consider wealth preservation as a complex task that requires education, experience and business skills, many respondents emphasize that "proper upbringing" of children takes priority.
In other words, they appreciate that wealth as such can either serve as an educational resource or pose a threat. "The respondents ask themselves how much money they should give to their children," the researchers note. "As the saying goes, if you want to help your son, give him a million; if you want to hurt him, give him a billion. Judging by the interviews, the respondents make a clear distinction between 'normal' and 'excessive' consumption, regarding the latter as harmful for the family and children."
Generally, the respondents tend to see the value of money as a tool for self-fulfillment and associate it with passion and achievement, according to the researchers.
As to managing 'excess money' which they are not planning to leave to the family, the respondents like the idea of philanthropy. However, rather than approach it as simply giving, they treat philanthropy as yet another business project which needs to be effective, well planned and targeted, operated by professionals, and supervised.
More than half of the respondents do not expect Russia's major businesses of today to be transformed into family dynasties – thus suggesting that business succession as an institution has yet to emerge in Russia, where the history of the free market is still relatively short.
Thus, on the one hand, Russia has not yet developed a culture of long-term effective management of large private assets, and on the other hand, notes Klimov, the controversial history of Russian businesses cannot but affect approaches to succession. Perhaps some owners will not – and some simply cannot – hand down a business with this type of history. According to one respondent, "Today's big businesses carry a family curse from fraudulent capital acquisition ... And on the other hand, the owner of any big business – even honestly acquired – fears for its fate. Today, business owners feel a lack of stability. Just a few will be prepared to pass down [their companies], and only if their heirs can stand up for themselves."
Some respondents refer to international findings that "most businesses are lost by the third generation, even in countries with well-developed legislation and institutions."
Yet another argument against family dynasties is that it is impossible to make someone happy against their will. In fact, this argument calls into question the very idea of handing down one's business to heirs. "No one can be forced to engage in your business, and it is not a given that your children, your heirs will be willing to engage in it," according to one respondent. According to another, "We should not force our children to be happy ... There are two basic business models. One is a family business focusing on quality and a personal approach to each customer ... Another is a business offering impersonal products to broader public ... The former [business] will never grow to be really big, and the latter will not necessarily make your children happy if you force it on them."
Some assets are difficult to monetise and hand down to one's heirs, such as social connections – an intangible, yet very significant form of capital. The fact that heirs do not have such connections can be a barrier to effective business succession. Based on the responses, big businesses often thrive on informal agreements with various 'centres of power'. Many such agreements are private and cannot be disclosed, let alone handed down, to anyone.
The respondents were asked to assess on a scale of one to five their knowledge of various instruments used for wealth hand-down. They showed good knowledge of instruments such as foreign trusts, wills and life insurance – 74%, 73%, and 73% of the respondents, respectively, rated their knowledge of these instruments as 'good' or 'excellent'. They are also aware of other options, such as managing the share ownership structure, using foreign funds, or entering a shareholder agreement under the Russian law, with 61% to 68% ranking their knowledge of these options as 'good' or 'excellent'.
It would seem that, with all this knowledge, making a choice would be easy. However, using these instruments is problematic due to the poor performance of public institutions in Russia, indicated as the main barrier by 52% of the respondents. According to the study's authors, "business owners resent the state's inability to properly enforce laws, contractual obligations and agreements." The responses also clearly indicate the overall distrust attributable to the current unpredictability of the country's economic situation.
When asked about the key factors of their business success, respondents mentioned the human resources (80%), their own involvement in the company management (57%) and having reliable and competent business partners (40%).
Given the above, it is hardly surprising that they are reluctant to let go of control and half of them have chosen the option "I will remain the owner of my business in the future" when asked about their future business strategy, and many others have selected a milder yet similar option "I will retain a share in my business."
However, a fairly large proportion of the respondents were undecided either because the issue did not have any urgency for them at the moment (16%) or because they had not yet formulated any position on the matter (13%). "My main objective is not to lose money. But I have only recently started planning for the next five to ten years," was one of the most illustrative statements reflecting their outlook on business succession.
*The authors admit that indicating percentages for a small sample of some forty interviews may be inappropriate and have used percentages in their analysis only to illustrate how common or unusual certain attitudes are. The researchers find it even more valuable to consider the arguments given in favour or against certain positions and how a respondent's position on certain issues is linked to other aspects revealed in the interview – e.g. their core business, family status and business succession plans. To facilitate such analysis, responses were 'coded' as in a structured survey.