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Family Businesses And Succession Management In Asia

Tom Burroughes

11 December 2023

Making sure that families are in shape for managing business transfer and all eventualties, even before a change of ownership, is important in a region such as Asia. So much wealth is family-owned, explaining why entities such as family offices, for example, are growing quickly. We recently spoke to Singapore-based Anupama Puranik, managing director at the consultancy, than get into the a family business which continues to be riddled with ownership conflict. I can fund their new age ventures.” Having said that, in most parts of the region, the next gen is also being groomed to take over from the previous generation, and are brought into strategic roles that can help them develop a strong perspective on the business very quickly.

How important is it to develop a timely and robust succession plan and pipeline?
Anu: Succession planning is always a sensitive topic, yet especially so for family enterprises. Nonetheless, a timely and robust succession plan is crucial as the stakes are high. Many family businesses fail at intergenerational transitions. Only 30 per cent of family businesses can be passed down to the second generation; 12 per cent can continue to the third generation; and only 3 per cent develop to the fourth generation or beyond.

Alvin: Fortune favours the prepared, as they say. And it is no different for family businesses. That few family businesses survive beyond three generations is often caused not so much by the lack of succession planning, but rather the robustness of it.

While it is important to acknowledge the sensitivities (especially with family in the picture), nonetheless there needs to be clarity about who should succeed (including the back-ups), what factors need to be considered for success, the developmental requirements of the identified individuals, as well as what feedback mechanisms are available for the current leadership to oversee the process. It is also important to engage and understand the desires of the next generation, and the role they see themselves playing in the business. If they express little interest in being part of it, then it becomes a business imperative for the current generation to start thinking about how external professionals can take this on.

Anu: The discussion, where perspectives might differ, often comes from the debate on what is critical going forward – is it about “preserving the core” or “building for the future,” with the former being typically associated with the previous generations. We see the reality somewhere in between the two, with both aspects needed to ensure continuity/sustainability of the business. It is thus critical that succession planning be done early rather than late in the process so that the older generation can prepare the new one with aspects of preserving and building to create a sustainably strong business model. 

This helps them to be clear about their vision for both the business and the family.

A successful family business requires an effective system that transcends traditional corporate governance; one that can address complex family relationships, as well family interactions with business and other non-family shareholders. This family governance system seeks to prioritise stability and harmony within the family construct before pursuing business growth. Preserving core values across generations also plays an integral part in ensuring the family business’ legacy and its role in society. In successful family businesses, these values are documented in a family charter. By incorporating structure into how the family enterprise operates, owners are helping future generations anticipate more effectively and react better to the inevitable conflicts that will arise as both family and business transition and grow.

As the business matures and becomes increasingly complex, the family needs to come to a consensus on their role in it. This topic has to be revisited from time to time as the family grows.

Do they still wish to be actively managing it? Or do they see themselves more as stewards, serving as a non-executive director on the board?
Anu: Interestingly, family businesses have grey, rather than black and white lines separating the business from the family. This can be more accentuated by the vision which can get tough if it is different for both. Aligning both early is crucial and the head of the family and/or the business plays a critical role in managing these. When business decisions are taken at the dinner table, it often blurs the lines between family and business. Similarly, when the goals of a family are not aligned with those of the business, its purpose and outcomes, there is a conflict that needs to be managed.

How can they professionalise the business beyond the family?
Anu: Families who have mastered leadership succession often start the process of professionalising their business by embedding formal governance structures, potentially involving leaders from outside the family. From our studies of family businesses enduring beyond third generation leadership, these successful family businesses have reached a point where the family must stop functioning as though the business is there to serve them, and instead allow the business to attract non-family talent and develop products and services that can compete in an increasingly global marketplace. For this to happen, families need to become comfortable with the notion that executive leadership need not come from their own ranks. They must ensure that family leaders and non-family executives are accountable.

Alvin: Many think that the solution is to simply bring professionals into the business, but that does not guarantee success. Organisational culture and mindset are just as important and should not be neglected. It is essential to understand that what created the business in its present form may not necessarily see it through to the future. Traditional practices might need to be changed. What used to be discussed over the dinner table now needs to be formally addressed through governance mechanisms such as board meetings, to consider conflicts of interest for example.

Anu: Often professionals are brought in to trigger change with the expectation that they will come in and start looking and behaving like "us." Anyone who doesn’t fit the mould is often seen as rigid and rejected by the system. The system, which in this case is the family’s rigidity, is never questioned. For the right fit, the individual and the environment both need to adjust. This is the same for corporates and families, but in the case of corporate organisations, there are enough processes and systems to support a greater leeway. However, in a family-owned business, if the trust is not built, it almost never works! Another important aspect that professionals need to be very clear on is their role, vis a vis the family.

Here, the family ties are extremely strong and unified against any outsiders and so professionals, unless they marry into the family, are typically seen as caretakers of the business for the next generation, no matter how close they get to the family. Knowing this, professionals also need to be extremely clear on where they stand and operate. This also translates into a very high EQ, low ego, and high humility profile for successful professionals in family businesses. Once the family business has crossed the third or fourth generation successfully, there is a big shift and professionals tend to work in a more corporate-like environment with strong governance, accountability, and meritocracy-based visibility.

How do you see banks, law firms and other advisors working to help families in this space?
Alvin: They all address different needs, though there could be some degree of overlap. Law firms for example help with legal documentation, while the banks act as financial intermediaries.

How do RRA see banks, law firms and other advisors working to help families in this space. How, for example, can a family know whether an institution is going to give them good advice for navigating these reefs and shoals around governance, wealth transfer, and the like?
Anu: This is not our area of expertise. Just like caveat emptor, the family also needs to understand that sometimes a certain amount of due diligence on their end may be required. When in doubt (such as with health matters), they should seek a second opinion.

There appears to be a wide number of firms putting themselves forward as advisors to family-run firms, family offices, etc, and this is potentially confusing. So how can a wealthy family/business owner make suitable choices? What should they be looking for?
Alvin: Families need to be clear about their needs. If it's somebody to manage their family wealth, then setting up a family office is the solution. If it's regarding leadership and talent relating to the business, succession planning, hiring professionals, etc., then a firm like ours is best placed to provide support.

What are the top concerns of families planning succession at the moment (fears of the younger generation that they aren't prepared to take over a family concern, handling potential intra family disputes, working with a patriarch/matriarch's advisors, other)?
Alvin: Preparedness and willingness are certainly concerns. On the flipside, the next gen are concerned about being micro-managed or second-guessed by the senior generation (what we typically term as the sticky-baton effect).

What sort of challenges and, more positively, opportunities are families/businesses asking RRA for help with?
Anu: Succession planning and transition, next generation coaching and development, and executive search.

All family businesses have various qualities in common, but do you notice different dynamics depending on the type of business sector that a family firm operates in, such as between tech, manufacturing, retail, real estate, agriculture, etc?
Alvin: It’s more to do with family background and culture, rather than industry sector. 

Anu: Families where the older generation is still in the driver’s seat are less inclined to put their hands into what they see as ‘new age’ i.e., tech startups for example where the product and/or service is unfamiliar or doesn’t exist. Younger family members are seen as more new business savvy and, as a result, that may or may not lead to different opinions on growth for the family.

Finally, how can a firm like yours help create a framework within which families decide what their succession goals are, make sure the next gen are financially educated, etc?
In a way it's similar to how we execute our engagements for leadership and succession. We work with the clients to identify and develop the next bench of leaders, be it within the family or not.

Anu: Depending on the talent gaps that need to be addressed, either a search is commissioned to find suitable candidates, or a diagnostic and development path is created for the leaders which often includes coaching on business and leadership. For effective teams, we could help with team alignment and effectiveness workshops, board evaluations, and hiring to create strong boards.

Alvin: From the governance angle, it's about embedding the best processes and structures to support the future growth of the business to ensure that it aligns with the family's vision and goals (for example the interactions between the family council and the company board).