Family businesses are the bedrock of emerging markets economies accounting for approx. 60% of private-sector companies having revenues of USD 1 billion or more. 85% of businesses with revenues of over USD 1 billion in South East Asia are family-run, Latin America coming in second at 75% and Middle East with 67%. China, with its socialist market economy, has family businesses accounting for 40% of private firms. With government spending slowing down, these private businesses are stoking the fires in the growth engines as conglomerates in China, India and South Korea are entering new businesses at a startling pace, entering one new business every 18 months on average.
Global Top 5 Family Businesses
Source: The Economist
Family Business is Big Business
Family businesses, also known as diversified business groups, continue to thrive in the face of criticism by western management gurus. Despite the recent global economic slowdown, sales rose rapidly during the past decade: by over 23% annually in China and India, and 11% in South Korea. Business groups accounted for 45, 40, and 20 of the 50 biggest companies (excluding State Owned Enterprises) in India, South Korea, and China, respectively, according to a recent McKinsey study. In India, they have delivered above-average performance: companies belonging to the largest Indian business groups generated higher Returns on Assets (RoA) than the rest of the companies listed on the Bombay Stock Exchange during the period from 1997 to 2011. It is even more interesting to note that more than 60% of those business groups generated higher returns than a comparable portfolio of standalone companies.
The Succession Challenge
A universal key challenge for these family businesses, however, is succession - where on average many businesses falter at the first transition (founder to second generation) and only 13% survive to the third generation.
In Asia, historically succession in the family business has been very patriarchal, with the entrepreneurial founder expecting his children to succeed him in the family business. The induction into the business was made through an apprenticeship model, preparing the next generation on the basis on observation of and direct learning from their father. A case in point is of Francis Yeoh of Malaysia’s YTL, who upon his return to Malaysia in 1978 armed with a civil engineering degree in England, was given responsibility for day-to-day management of the firm - at the age of 24. He has overseen the growth of YTL into a major conglomerate with significant business in six core areas: construction contracting, power generation, cement manufacturing, property development, hotel development and management, and IT and e-commerce. Successful business founders saw the transfer of their expertise as the best mechanism to train the next generation of leaders. Despite the strengths of the apprenticeship model, studies show that successions on average reduce the performance of the family business during the transition years compared to handing the reigns to professional managers. Research also finds that family successors who do better compared to their peers are ones who have had a chance to attain outside business experience, benefited from advanced education in a top business school, had international business exposure, and were engaged in board level responsibilities prior to taking the helm of the family business.
The Evolution of Succession
Today, succession is no longer taken for granted by business leaders and a rigorous and persuasive approach is adopted to plant the idea of succession in their children, as the concept of taking over the helm of the family business may not be as attractive for the younger generation compared to finding their own independent career paths.
Based on our studies of best practices from successful Asian conglomerates, the evolution of Asian business conglomerates requires the following strategies:
- Succession planning is critical to the company’s survival; and, as a matter of strong governance, it is the responsibility of the board to ensure that a plan is in place. Develop a plan for the next generation to gain experience and perspective needed to contribute to the board through experience in either the family business, external businesses or mentoring by independent directors. This will groom the next generation as they rise to the family mantle. Family members on the board as well as independent directors can serve as mentors in any capacity including helping to define constructive alternatives for the next generation of business owners who do not want to, or should not, become future leaders of the company.
- Embracing fresh external talent is a move that can sometimes prove beneficial as once the family role has been defined and in place – specific external skills must be identified and introduced to compliment and support the corporate strategy. This can be done by developing a skills matrix taking into full consideration the future direction of the business, expectations of stakeholders and experience/skill gaps within the existing structure. It would also be key for the board not to limit oversight just to the planning stage. By ensuring talent and relevant resources are aligned to the strategy, and monitoring implementation and the changes that affect key assumptions will help management perform adjustments efficiently as the business environment changes. A research conducted by McKinsey & Company of 700 manufacturing family businesses found that family-controlled business run by outsiders have, on average, fared better in management practices but the right cultural fit relative to the stage of the family business’ growth is also important.
- A professional approach to compensation and oversight of performance is vital to ensure a culture of performance without favouritism. By aligning incentives to strategy, the business can then hold management accountable and link pay to performance. The issue of attracting and retaining top talent can be a challenge for family controlled businesses as executives may worry that their status as outsiders will limit their career potential. This is especially relevant to large family businesses as they start bringing in external managers and the process of talent professionalization begins. A retention strategy and platform that encourages inclusiveness by fostering a strong sense of loyalty and personal attachment prevents top talent from feeling like an outsider to the family – as in the case of Samsung’s Global Strategy Group, which provides direct access to high potential executives to the Chairman’s on special projects and new ideas.
- Prioritise the long-term interests of the family; ensuring shortsighted and influential family members do not compromise the business with only their self-interests in mind with rogue activities like unjustified M&A activities, excessive dividends and dynastic practices. Clear governance structures and preventing direct conflicts of interest by empowering the same individuals via excessive shareholder rights and executive decision making abilities, will be key to preventing power abuse and encourage value-creation practices in the business.
- The value of experience can be priceless; hence, smoothening the transition by establishing a role that enables prior leadership to offer perspective without hampering the ability of the new generation to drive necessary change is vital. This can be done for instance, by including on the board a director who is able to bridge the current board with the prior leader and provide guidance in strategy and relationship management whist remaining independent with the best interest of the business in mind. This maintains a connection for the company to the prior generation in a non-disruptive manner and allows the business to benefit from the wealth of experience available in the best long-term interest of the business.
Boards do play an important role in issues related to strategic talent management as described above. In family businesses, these areas are often exceptionally challenging due to family dynamics/emotional considerations, however, it is also an area where directors can add enormous value if they remain objective and maintain the family’s respect and trust. The role of the family when it comes to board dynamics is equally as important in crafting a focused talent management approach which directly contributes to bottom line growth, preserving culture and promotes its values at a global scale. With emerging markets family businesses leading the charge with winning organisational structures like the creation of business groups that are led by dynamic group centers - it is imperative that the right succession plan is in place.
Find out how Taipan Talent Solutions can help you achieve succession using our suite of business solutions.
Taipan Partners is a boutique advisory firm specialising in integrated business solutions providing M&A advisory & research, talent management and business incubation services to high-growth, emerging and multi-national corporates, financial services firms and disruptive innovation startups with a focus on Asia.