Embracing change: Future-proofing family businesses in S-E Asia

FAMILY businesses are a dominant form of organisation across South-east Asia, comprising over 60 per cent of the publicly listed companies in most countries in the region, and an even larger share of private companies. These businesses, often spanning multiple generations, play a crucial role in driving economic dynamism in the region. However, as family businesses transition to the second or third generation, it becomes imperative to establish effective family governance to prevent conflicts among family members. South-east Asian family businesses need to overcome the challenges and implement strategies for maintaining family harmony so that they can ensure the long-term success of their businesses.

Challenges faced by multi-generational family businesses

As family businesses progress to subsequent generations, they encounter various challenges that can have an impact on their continuity and growth. The focus of family leaders is often on monitoring the market environment, but it is more often internal trouble that leads to the end of the family legacy. One common issue arises from the presence of numerous heirs, each with their individual abilities and passions. The differing perspectives and aspirations of these family members can give rise to disagreements and hinder effective decision-making. For example, a family member may want to invest business assets into a new sector that they are personally passionate about, or another member may block the sale of a business unit to preserve the “family legacy”. Interpersonal tensions or disagreements over remuneration and leadership roles can also cloud rational decision-making and spell danger.

To mitigate this, a rules-based system, encompassing both corporate governance for the business and family governance for the family, proves invaluable in regulating interactions and minimising emotional interference in business decisions. Although business families are often aware of corporate governance best practices, they may not adhere to best practices when it comes to family governance. Without a well-defined family governance foundation, these businesses face a higher risk of internal feuds that can disrupt generational changes and renewal.

Role of family governance

To address the challenges faced by multi-generational family businesses, the establishment of effective family governance is essential. Developing a set of rules, often in the form of a family constitution, provides a framework for decision-making, conflict resolution and succession planning. These rules help maintain a clear line of communication and define the roles and responsibilities of family members within the business.

Some may wonder whether constitutions are an import from the West that are alien to Asian families. The opposite is true: there is a long tradition in both Japan and China of laying down rules for business families that help uphold the family’s reputation, facilitate succession, and continue the spirit of entrepreneurship. Mitsui Takahira, for instance, laid down detailed instructions in his will in 1722 for the appointment of successors in the Mitsui family business group while also setting principles for remuneration and the behaviour of family members. The Miu lineage group in China articulated the family values for future generations of land owners during the Ming dynasty, complete with punishments for youngsters who ignored them.

However, it is important to note that family governance goes beyond the creation of principles and rules. It also involves soft investments in family harmony, values and legacy. While business families often perceive this as a waste of time, investing in bonding will build the necessary trust and go a long way to stave off family conflicts.

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When families grow in number over subsequent generations, it is also worth articulating and investing in the family legacy. Family legacies are not just about recounting the past; they are equally about positioning the family in an aspirational manner for the future – a future that the next generations can embrace. In fact, the next generations play a crucial role in rejuvenating the family business, emphasising and instilling entrepreneurship to ensure that the family remains ready to leverage future opportunities.

Strategies for successful family governance

To establish effective family governance, business families can implement several strategies. Creating and defining a formal family governance structure is the first step towards promoting unity and effective decision-making. This structure should clearly define the rights, roles and responsibilities of family members, establish communication channels, define the rules around decision-making, and outline the process for conflict resolution. It creates a guideline for family involvement in business, succession planning and wealth management.

Commonly, this process results in a mutually agreed family constitution as well as a family council that can take decisions on behalf of the family. Family meetings and forums can serve as platforms for open discussions for a broader group of family members, enabling them to express their opinions and concerns, and in some cases to vote on major decisions.

Family constitutions also articulate the values, and goals of the business family. The constitution should be regularly reviewed and updated to ensure its relevance and alignment with the evolving dynamics of the family and the business.

For instance, one family in the region started to experience tension when siblings in the second generation followed the example of their parents and charged most of their expenses to the family business. Some hard-working members spent considerably less than those with fewer responsibilities, and those with more children drew more from the business than those without. To avoid conflict arising from a situation like this, a constitution can help by creating a mutually agreed upon framework of remuneration that takes into account one’s shareholding, role in the business, and performance in that role.

In another instance, a family faced the problem that the third generation was not interested in the business in its current form and had embarked on their own individual paths. Their parents were worried about the future of the business group.

In this case, a concerted effort to articulate the legacy of the family and outline clear pathways for involvement opened up opportunities for the following generations. Some were encouraged to develop entrepreneurial ventures in promising new industries, while others worked in the existing business. Another became involved in the family’s charitable activities. Some opted to pursue careers elsewhere, but still felt connected to the family’s purpose and participated in the annual family assembly.

It may seem counter-intuitive to introduce formalised rules into a family structure, but having well-defined and effective family governance plays a vital role in ensuring the sustained success of multi-generational family businesses.

As many South-east Asian business families are now in the second or third generation, it is particularly critical to start doing so as soon as possible. By establishing a robust governance structure, defining clear rules, fostering effective communication and embracing professionalism, family businesses can navigate the challenges that arise during the transition from one generation to the next. Future-proofing the family business today can unlock more opportunities tomorrow.

The writer, a professor of family business at IMD Business School, leads IMD’s family business activities in Asia. She is the author of the Handbook of Business Families.