Eastern empires: evolution of Asian family enterprises across generations

Sunday, 01 November 2015
Seow Chee Goh analyses a recent survey of Asian family businesses and provides an overview of the key findings.

 

Key points

What is the issue? Asian family enterprises have grown rapidly over the past 20 years.

What does it mean for me? As Asian family enterprises grow and become more successful, a more proactive planning strategy needs to be adopted.

What can I take away? A deeper understanding of the evolution of Asian family enterprises across generations, specifically in the areas of succession, business practices and governance.

The past two decades have seen huge growth in Asian wealth. As Asian family enterprises grow and become more successful, a more proactive planning strategy must be adopted, especially as succession is not an issue that is well understood. To help meet this challenge, a recent study aimed to understand how family businesses in Asia differ from those in developed western economies.1 Some key findings are discussed here.

Succession: the current climate

Of the Asian families surveyed, 91 per cent were seeking to keep the business in the family. However, 88 per cent of families were either not prepared at all or only somewhat prepared for succession.

Succession is a long and complex process and thus families are often reluctant to plan for it. Succession must address the dual needs of the business and the family; support business strategy and innovation; and provide development for the new generation of leaders, aligning the individual’s aspirations with their assigned role.

Traditionally, the patriarch and/or matriarch would hand-pick the family member who would succeed them. Today, there is an increasing focus on who is most capable and interested in taking a leadership role. There is also greater concern about the new generation knowing how to work together as a team. In addition, the new generation often holds views, perspectives and even values that differ from those of senior family members.

For Asian families, the most highly valued leadership attribute a successor can have is the ability to lead innovation and change. Other prized capabilities include knowing how to help the family develop a shared vision and how to achieve it; respecting traditional values and the need to preserve them; and honouring the goal of shared decision-making. Ensuring these capabilities work together seamlessly is an additional challenge. On top of that, navigating business complexities and being mindful of keeping the family together are arts in themselves.

Who should take the reins?

The survey results show that, of those intending to keep the business within the family, more than 80 per cent plan to pass the management reins to other family members (the rest expect to pass control to a non-family executive). In such cases, it is important how the family selects a leader.

The senior generation in Asia has traditionally assumed that only one or two members of the new generation will succeed them in the family enterprise. However, the research shows that those in the second or third generation expect twice as many family members to be successors. Heirs within the family enterprise will have to develop important leadership skills even if they are not selected as the primary successor: succession is not a case of winner takes all.

Given the above, family business owners in Asia must shift from what has been an ad hoc system of bringing the new generation into the business to a clear statement of expectations: a family employment policy. Through such a policy, families can clearly define the qualifications needed to enter the business, when new family members can enter the business, and how they can develop their skills to move into leadership positions. While such a policy is good for the family, only a very small number of families make the effort to design one.

The study found Asian families focus on these attributes in potential successors:

  • Passion for the family enterprise. Families value the passing on of their history and traditions, and the fostering of a shared appreciation of the family’s roots. The founder’s values and vision are also key, and will guide discussions about the future.
  • Knowledge and experience. Each family member, especially those who will eventually lead the business, must be highly self-confident, and knowledgeable about the family enterprise. 
  • Leadership skills. Families recognise the diverse leadership qualities needed to guide a large and complex family enterprise. For example, to resolve conflicts and differences, the successor to the leader needs to be able to win the support of other family members.

Establishing good governance

As the new generation takes over, at a time when the business environment is more challenging and competitive, getting the governance system right is increasingly important. Family governance, in a nutshell, is about how family members are linked to each other, and how their wealth is passed on. Establishing good governance begins with consideration of the areas below.

Board size

Succession to the board is a key element of a generational transition strategy. Normally, in the first and second generations of a family enterprise, the number of persons on the board will be small. Even as the new generation steps up, the ideal board size will be about five members. There is also a trend of having non-family board members.

Conflict resolution

In Asian family enterprises, there may be a greater tendency for family leaders to make significant decisions unilaterally, without consulting other family members, even when families gather and share ideas in advance of decision-making.

There is a global trend among family enterprises in the second or third generation to set up mechanisms for meeting regularly and discussing concerns. Some Asian family enterprises are beginning to implement these practices. These regular meetings, sometimes called ‘family councils’, are not the same as meetings of the board of directors. The family council focuses on the family’s relationship to the business. It may also define how the values of the family relate to the business, and may actively work towards keeping family members connected across countries and borders.

To manage governance issues, resolve conflicts and plan for the future, many families seek out an external advisor with expertise in these areas, or rely on a long-time trusted advisor. The advisor can act as a buffer, mentor and neutral party, helping to navigate discussions on potentially contentious topics.

Exit strategy

Situations may arise where a family member decides not to pursue a role in the business and/or seeks to liquidate their share. A member of the new generation may have different goals and want to pursue private entrepreneurial ventures. Only half of the families surveyed had some sort of exit plan.

Family philanthropy

Philanthropy is often especially important to members of the new generation. They may wish to ensure the family, while successful, is also seen as caring in the community. Some also see in family philanthropy a path for their own career, focus and identity beyond the family business.

Succession: tradition and innovation

Harmony is important to Asian families. The ability to work together in managing the business and maintaining the family relationship is highly prized.

The perspective of the millennial generation in Asia often differs from that of older family members. They have been raised with family wealth, are well educated, and often gain work experience abroad. While they respect their parents’ values, and appreciate the opportunities their families give them, their views on challenges, opportunities and the need to adapt may differ from those of their parents. The complexity of succession lies in finding a positive way to negotiate these differences, while maintaining harmony and respecting the prerogatives of the elder generation.

In Asia, the passing of the business to the new generation is often characterised by a desire to maintain family harmony; a high level of involvement in the lives and life choices of children and family members; a respect for family status and hierarchy (the eldest children come first); a typically ambiguous communication style; and a deep desire for family privacy.

From the study, we identified six basic principles for successful family succession:

  • Dedicate time and energy to developing a succession plan.
  • Shift the focus from ‘family first’ to ‘business first’.
  • Balance values with business realities.
  • Actively involve both older and younger generations.
  • Learn from the experience of other families.
  • Actively develop the new generation.

In light of the current regulatory and challenging business environment, the succession process has become more complex and difficult. The founding generation is naturally concerned about the challenges ahead, and leaving the business to the new generation is an exercise characterised by trust, consideration of family values and business realities.

  • 1. 1 JP Morgan Private Bank, Asia Family Enterprise Study (2014)
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Seow Chee Goh

Seow Chee Goh TEP is Managing Director and Head of Wealth Advisory South East Asia at JP Morgan Private Bank.

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