Managing succession in Asian family firms
Reseach shows such firms have had significant wealth loss during their succession processes
By KATHRYN YAP
FAMILY businesses in Singapore command a prominent role in the domestic economy and capital market.
They account for 63 per cent of listed companies in Singapore and a combined total market capitalisation that is 140 per cent of the country's nominal GDP, according to the Asian Family Businesses Report 2011 by the Credit Suisse Emerging Markets Research Institute. And as employers, family businesses account for 57 per cent and 32 per cent of all employees hired by listed companies in South Asia and North Asia respectively.
While it is admirable that family businesses have been the backbone of growth in the Asia-Pacific region, their prevalence should also inspire Asia's bourses and shareholders to ensure that succession planning is managed well.
Research conducted by Joseph Fan, a professor at the Chinese University of Hong Kong, shows that publicly listed family-controlled Asian companies have had significant wealth loss during their succession processes. As much as 60 per cent has been lost in accumulated stock returns from five years before succession to the three years after succession at 250 family firms in Singapore, Hong Kong and Taiwan.
The ability to manage wealth transfer (and succession planning) is more challenging in the Asia-Pacific where many founders are still actively involved in their businesses, than in the US, Europe or even the Middle East, where businesses may have gone through the test of surviving two or more generations.
Moreover, lingering cultural and patriarchal sensitivities make discussions of death, handover and succession planning a taboo subject for many Asian families and professional executives within Asian family-controlled companies. Sibling conflicts over inter-generational wealth or management control, complex corporate structures, as well as unique networks belonging to the founders only complicate the handover process.
While most would prefer to 'keep things within the family', listed family businesses in Singapore may be hard pressed to convince shareholders that the founder's son, daughter or relative will be as successful a CEO or chairman as the original founder. This doubt may even exist within the family circle itself.
In a separate study from Merrill Lynch Global Wealth Management and Capgemini, the 2011 Asia-Pacific Wealth Report, a majority of Asia-Pacific's wealthy families excluding Japan (88 per cent) doubt the ability of the next generation to manage their family's wealth.
Many large and listed family firms in the West, such as Wal-Mart Stores, Inc (NYSE), Ford Motor Company (NYSE), The Gap, Inc (NYSE), The New York Times Company (NYSE), BMW (FWB), Hermès International SA (Euronext) and Salvatore Ferragamo SpA (Milan Stock Exchange), have all tackled succession planning in spite of wars, natural catastrophes, family tragedies and other challenges. Often, this has been through the input of both professional managers as well as family members, though research seems to suggest that professional managers may be more effective.
The study by Prof Fan showed that wealth loss during succession was least in Singapore's family firms and most acute among Hong Kong family firms. This could be due to the fact that significantly more Singaporean company founders have been inclined to bring in outsiders as their next generation CEOs.
Choosing a CEO is not a simple, straightforward exercise for any company. On top of the usual considerations are some distinctive success factors for listed family controlled companies.
Firstly, a structured and business focused approach to succession planning needs to be set in place by the board of directors, in order to prevent confusion, misdirection and limited or poor choices for next generation CEOs. Directors may be intimidated by founding family members who hold the management reins tightly but they cannot ignore the risks of poor succession planning. Board discussions should focus on the company's major sources of long-term growth and value creation, optimal timing for the next leadership transition, and meaningful criteria with which to evaluate potential candidates and define future CEO success. Often it helps to bring in external consultants, so that the process can be made more impartial and less emotionally charged.
Secondly, it is important to identify what has been and will continue to be the leadership qualities that make Asia's listed family businesses great. Many times, family businesses in Asia have been built on the unique qualities, connections and skills of their founders, and it is important to ensure that such 'corporate value' is not lost during the transition to new leaders.
Thirdly, founding members need to accept that not all their children will inherit the genes for success. Some are more driven and keen to succeed than others. The succession planning procedure should include a formal process to identify those who are most likely to succeed as leaders, and encourage open transparency and accountability throughout. Should a search for an external or an internal (non-family) candidate be needed, it will be critical that potential successors understand the company itself, its corporate culture, as well as the founding values that have made the company great in the first place. The professional assessment methods used by experienced executive search consultants can come in very useful here.
Where family members are ambitious and want to continue to be involved with the corporation, it will be helpful to divide the businesses clearly with subsets of the overall profit and loss accounts. That way, different family members can manage and grow the different business divisions and be directly answerable to shareholders.
This ensures 'ownership' is not only retained by means of equity but also by means of having a personal vested interest in the success of the business.
