In this time of economic turmoil, some people are questioning the Anglo-Saxon model of capitalism, which emphasises shareholder value. In searching for an alternative model, others have extolled the virtues of family capitalism. At the same time, the economic climate has imposed a stress test on some families and their businesses, which has fractured family unity.
Asian family businesses learned their lesson a decade ago during the Asian financial crisis. As a result, they entered this current storm with stronger balance sheets and less debt.
Further, while a number of Asian family businesses have business models that are based on exports to the West, they benefit from being located in a region whose macroeconomic fundamentals and governments' finances are relatively sound. That said they have had to focus extra time and resources to shore up their businesses, which may cause some to take their eye off the ball with regard to generational transition.
Over two thirds of Asia's largest corporations are family owned. Except those in China, most of them were founded post-World War II by patriarchs who are now in their 70s and 80s. Consequently, the issue of generational transition and succession is more pressing than ever. With this is mind, Asian family businesses should consider the following:
Generational transition may necessitate confronting family issues which have been lurking for years. These issues are more difficult to surface and discuss openly in Asia for cultural reasons. It is encouraging to see some Asian families engaging family therapists and family business consultants to intervene and facilitate dialogue. Families must address these soft issues before they can draw up the "hard stuff" such as family constitutions. An aligned family is important to show unity and commitment to other stakeholders of the family business like employees, customers, suppliers and bankers.
Preparing the next generation
Many of the next generation were afforded an opportunity to have the best higher education in the West. While they are much better educated, they have to deal with an issue that their parents did not – a large amount of wealth. Its effect will vary from individual to individual but common outcomes include a lack of motivation, feelings of guilt and social
Bill Gates and Warren Buffet have dealt with this by publicly proclaiming they will leave the bulk of their wealth to charity. For those in the next generation who have older children, they may be considering if they want them to join the business and if so whether, where and for how long they should receive outside working experience.
Partitioning the family and the business
Asia is still in the beginning stages of establishing family offices to manage the affairs of the family. Thus, family matters are quite often handled by employees of the business on top of their corporate responsibilities.
While this makes sense from the point of view of efficient use of resources and convenience to the family, the co-mingling of family and business matters, which was acceptable to long time staff, may impede the recruitment and retention of new employees. Once a family reaches a sufficient level of wealth, they should have dedicated and segregated resources, whether called a family office or not, to deal with the family's matters.
Asian family businesses must attract, integrate and retain non-family professionals as their businesses become larger and more diversified in terms of geography and scope. This is even more urgent for families without a next generation who are interested, motivated, capable and ready to take over the business.
The gap between corporate and family business cultures needs to be closed from both sides. Professionals should have longer-term thinking, treat sensitively long time staff and tradition and understand the family's values, goals and dynamics. Meanwhile families must ensure promotion is based on merit rather than loyalty.
A founder's values often engenders loyalty and gives the company a "soul" as opposed to more faceless corporate company. As the enterprise grows in scale, locations, and new employees, it is important to perpetuate those values by embedding them into the corporate culture.
This can be done in multiple ways from story telling, screening a video interview with the founder or orientation for new employees that covers the businesses' history and heritage.
The current environment is forcing Asian family businesses to reassess the competitiveness of their various businesses and their access to funding from banks and capital markets.
Once they decide how they need to adapt their business models, Asian family businesses are likely to realise they need new competencies and funds. Partnering may be the fastest and most realistic solution. It is key to weigh the pro and con's of different types of partners; private equity, corporates or other family businesses, to find the best
Institutionalise the values of the founder into the corporate values. Secure their legacy through, for example, philanthropy and ensure family unity and continuity by putting in place proper family governance to address any simmering family issues and prepare the next generation.
In addition, make sure the business has implemented succession planning. If the family will no longer be in day-to-day management, the family needs educating about how to be a responsible shareholder.
Preservation of wealth and capital
With trust in financial assets and advisors at a nadir, discussions around asset allocation will give rise to many questions: Is it time to fall back on "real" assets such as real estate and commodities? If the business is viewed as a private equity holding, is the portfolio overweight in illiquid assets? Should a family office be formed to perform these functions? Does cash need to be set aside as a contingency for the business?
Philanthropy is a relatively new concept in Asia, partly because there are generally no tax incentives. Many founders are starting to involve themselves in philanthropy as they think ahead to the legacy they want to leave. In particular, some wish to help address the increasing gap between the rich and poor in Asia. Philanthropy can also be a "common cause" for the next generation that helps family unity.
As the saying goes, "time does not stop" and generational transition within Asian family businesses will happen in the next few years. So in addition to the nine Ps outlined above, there is a tenth - plan!