This article is published in the SME Magazine Sept/Oct 2013 issue
|Family businesses are major growth drivers in many national economies around the world. Take for instance, Walmart, Ford and Mars. All three are well-known global brands founded in the early to mid 1900s that have grown over the years and continue to be family companies today. In Asia, family companies like Eu Yan Sang International, Genting Group and YTL Corporation, are among leaders in their respective industries.
In Singapore, family businesses are the backbone of the country's economy. Many of these businesses are small and medium-sized enterprises (SMEs) and according to Singapore’s enterprise development agency, SPRING Singapore, 99 percent of all enterprises in Singapore are SMEs.
With change as the only constant in today's business world, family companies will be edged out if they have no clear plans for preserving cash, growth, governance, succession and sustainability of the business.
For many family businesses, maintaining the value of the business for future generations is paramount. To achieve this, family businesses will have to invest in the right people, put in place a living governance structure, and plan for a sustainable business.
Managing it right
Putting in place a living governance structure is the first step to ensuring consistency in management of the business. Policies and processes that seek to protect the family, the business and shareholders will have to be put in place, and company values and business principles will have to be aligned and clearly communicated. Having a clear chain of command and established decision-making process will ensure the company stays true to the founder’s vision and evolving business plans. Setting up a family council can help in this regard.
While many family companies have governance practices in place and are subscribing to benchmarks used by corporate counterparts, the desire to keep the business within the family limits external influence and raises questions as to whether family businesses in Singapore are:
Handing over the reins
- allowing for rigour in their governance practices by having such limited external
- allowing for added value, different perspectives of expertise of non-family
Preparing and training a successor remains one of the most important and challenging task for family businesses.
A survey1 of family businesses in Singapore revealed that many do not have a clear succession planning strategy and it is not formalised. It tends to occur naturally unless there is a conflict. Further, it is observed that in the Singapore context, the father tends to hand the reins to the son, revealing a clear gender bias.
In planning for succession, families will have to consider the following:
Thus, if the plan is to keep it within the family, it is essential to start the succession process early. This ensures a suitable pool of family members with the right skills set is groomed and given opportunities to cut their teeth before assuming bigger roles and greater responsibilities. Starting early also ensures more senior family members are around to guide the younger members in managing the needs, expectations and conflicts among family members.
- The best person for the job may not be from the "right generation"
- Choice of successor and potential conflicts among family members
- Younger family members may have no interest in joining the business
- There are no suitable successors from within
As the business grows, the need to hire based on competence rather than family ties is vital. Families may have to consider bringing on board executives from outside of the family – professionals with the experience and expertise to take the business to the next level and grow its geographical footprint.
Maintaining an edge
While family companies lack the resource of larger public-listed companies, they make up for it in through the entrepreneurial flair of their leader(s) and a passion for innovation. They are constantly pushing the envelope when it comes to implementing new ideas, making better products and providing better services despite limited resources. This is an advantage and a notable promising development is that a growing number of family companies are setting aside funds for innovation as well as research and development activities.
From family business to family enterprise
As markets evolve so will business plans and strategies, and in a similar vein, family businesses as a whole. In a paper published in the May 2012 Family Business Review2, the authors suggested family businesses should focus on identifying new business avenues over time and create opportunities that would engage the next generation, from launching new businesses, to setting up new subsidiaries of existing businesses, creating internal venture funds, or developing a philanthropic arm for impact investments. This approach offers a more optimistic view of the potential of families for creating value in society across generations. Perhaps this will dispel the notion among the Chinese that wealth will not be sustained beyond three generations.
This article is contributed by Mr Chiu Wu Hong, Tax Partner at KPMG in Singapore. The views expressed are his own.
1 Source: Family business in Singapore by KPMG in Singapore and CPA Australia2 Source: From Longevity of Firms to Transgenerational Entrepreneurship of Families: Introducing Family Entrepreneurial Orientation” Family Business Review 2012, 25: p.136 by Thomas M. Zellweger, Robert S.Nason and Mattias Nordgvist