Family business in Asia - Hay Group · PDF fileFamily business in Asia 2012 Hay Group. ......

Can Asian family businesses break the jinx by balancing warm hearts with deep pockets?

Breaking the third-generation curse

in AsiaFamily business

Contents

Building blocks of Asia’s economies

Professionalizing: Blessing or curse?

2

4

6

8

Running in the family

Ties that bind

10 Negotiating the impasse

13 Avoiding the drama

14 Removing the guesswork

15 The Asian advantage

19 The DNA of success

Family business in Asia

©2012 Hay Group. All rights reserved

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More than 70 per cent of Asian firms are family-owned1. Across 10 Asian markets, FOBs account for nearly half of all listed companies, 32 per cent of total market capitalization, and 57 per cent and 32 per cent of all listed companies’ employees in South Asia and North Asia respectively2.

Building blocks of Asia’s economies

Most of us are familiar with the adage that family businesses seldom survive the third generation. This is an unfortunate state of events. Intrigues aside, the substantial output and wealth generated by family-owned businesses (FOBs) have made them a dominant force in major economies, including Asia’s.

However, globalization, generation shifts and fierce competition have created a sobering reality. From mom-and-pop shop to powerful chaebols in South Korea and influential dynasties in Hong Kong, sustaining family enterprises has never been more difficult.

1 “Asia’s family businesses face new challenges”, AFP, 2nd January 2012. (http://www.abs-cbnnews.com/business/02/01/12/asias-family-businesses-face-new-challenges)

2 “Asian Family Businesses Report 2011: Key Trends, Economic Contribution and Performance”, Credit Suisse, 30th September 2012. (https://www.credit-suisse.com/news/en/media_release.jsp?ns=41862)

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In Asia, where family loyalty is intrinsic to culture, breaking a cherished tradition by putting a non-family member in top jobs has been the subject of many FOB dilemmas. After all, the founder can choose his business partners but not his family members. Furthermore, when a loved one is unable to perform in a key management role, the emotional pain and repercussions of removing a relative is far costlier than firing an incompetent manager.

Although the family has a controlling interest and expects to continue exercising a meaningful influence over the business into future generations, separating the perception of ownership from the competency of management remains crucial for many Asian FOBs. How can Asian FOBs keep their family owners in the equity section while letting the best people manage the balance sheet?



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While family business owners would like to transfer their companies to the next generation, it is estimated that 70 per cent will not survive into the second generation and 90 per cent will not make it to the third generation.

In fact, a Hay Group analysis of data from various sources shows that the average lifespan of family businesses has decreased from 50-60 years (about two to three generations) in 1990s to 24 years (about one-and-a-half generation) now3. A third-generation successor is now unlikely to take over, let alone be accused of destroying the business.

3 “Shirt sleeves to shirt sleeves”, by John L. Ward, Craig E. Aronoff , Nation’s Business, September 1992 (http://findarticles.com/p/articles/mi_m1154/is_n9_v80/ai_12518138/) & Conway Centre for Family Business (http://www.familybusinesscenter.com/resources/family-business-facts/)

Professionalizing: Blessing or curse?

Today, many FOBs professionalize in order to enjoy continued success. By expert standards, companies are considered “professionalized” when a performance culture is fully mapped-out. This includes goal setting, enforcing fairness and consistency through structured rewards, and formalizing processes for hiring, appraisal and promotion based on performance metrics.

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The truth is family enterprises are vested with high levels of what we term as emotional or family capital. Unlike non-FOBs, the maintenance of strong, gratifying and supportive relationships among family members forms a complex web in unifying and moving the firm forward – perplexing, but essential for long-term sustainability.

Hence, superficially, the professionalizing of FOBs is a good thing. In reality, it is both a blessing and a curse – providing family enterprises with the necessary tools for business evolution while driving their eventual demise when emotions are neglected.



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Running in the family

A more measured approach to FOB professionalization would be to balance financial priorities with family capital, a term encompassing family relations, traditions, values, rights and obligations. This is particularly relevant in paternalistic Asian companies.

Based on an extensive client database and a global survey involving 160 family businesses (including 35 Asian firms) with Exevo (the research arm of Moody Corporation), Hay Group has developed a Happiness Index, which provides business owners with an indicator of the robustness of family capital, and hence the strength of the business as a going concern.

As an arbitrary value that can be measured and monitored over time, the Happiness Index tracks the interplay between professionalization and the key drivers of family capital, namely: heritage, kin interaction and civic structure.

By revealing the inter-relating trends and underlying causes of family capital, the Happiness Index helps family owners to target the right issues, increase chances for long-term sustainability and examine how their companies can be more effective without comprising family happiness (Figure 1).

The threats of professionalizing are agency costs and integrity costs. Agency costs are expenses paid to external professional managers to work in the business. This includes management performance bonuses paid to encourage agents to act in the family’s interest.

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Integrity cost involves corporate taboos and whether they are openly addressed by the management team. Although this is a reality rampant in all boardrooms, it gets particularly tricky in FOBs in Asia due to the concept of “saving face” and blood-ties.

So, an effective FOB is one where family capital outweighs the cost of professionalization. In fact, we’ve observed that the older an FOB gets, the higher its agency and integrity costs become. Therefore, it is crucial for growing FOBs to keep these in check by increasing family capital – and ensuring that it always outweighs the threats of professionalization.

Agency Cost

IntegrityCost

Heritage

KinInteraction

Civic

Threats ofProfessionalising

In�uence offamily capital

Threats ofProfessionalising

In�uence offamily capital

Positive e�ect on FOBs Negative e�ect on FOBs

Agency Cost

IntegrityCost

Heritage

KinInteraction

Civic

Figure1: Building happy family business



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As a unifying force guiding decision-making, family heritage defines the strength and cohesiveness of corporate cultures, steering FOBs towards a unanimous goal. However, when the resulting culture is steeped in groupthink or xenophobia, it can create a toxic corporate environment that is intolerant of change. Our research suggests that culture accounts for up to 50 per cent of heritage capital (the remaining 50 per cent being FOB networks and FOB business knowledge). As the most influential driver of family capital, heritage issues are often the precursor to FOB failure.

Common accusations such as “you are departing from our founding principles”, or “that is not who we are” stems from different opinions of a shared heritage. Thus, if family values are incongruent with corporate values, family employees will experience a degree of cognitive dissonance when they are expected to uphold family traditions in the professional work environment. Philippines’ Ayala Corporation is an example of the power of heritage (see box story, facing page).

Ties that bind

The driver that we term as “heritage” refers to the legacy created through multiple generations and passed down to subsequent owners. This encompasses different forms of resources, such as inherent knowledge, unique skills, relationship networks and family identity.

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Ayala Corporation: Good governance begins at home

Jaime Augusto and Fernando Zobel de Ayala are brothers and eighth-generation successors of the Ayala Corporation – Philippines’ largest property company and a multi-billion dollar conglomerate with investments in the country’s banking, telecommunication and utility sectors.

When it comes to sustaining the 178-year-old business, the Ayala brothers maintain that the corporation seeks alignment at two levels. Firstly, the company is aligned to national goals. While the family stays out of Filipino politics, it is firmly committed to civic structure – embracing broader social goals and engaging in civil and social development projects as well as non-profit organizations. “That has made Ayala intrinsically part of the social fabric – never static, but always adjusting with the times,” reiterated Mr Jaime Augusto.

As explained Mr Fernando Zobel, the secret to mixing family and business lies in the way the Ayala children have been brought up, “with enormous amount of fairness and equal opportunities.” As a family, the two leaders are very close to their five sisters, “and that has served us very well in this generation,” he added.

They added that “we are custodians of the family brand and stewards for the next generation, but our focus will always be on legacy, history and making sure that we pass the baton in the same way that it has been passed onto us.”

Source: “Interview with Brothers Running the Philippines’ Ayala Corporation, Jaime Augusto Zobel de Ayala, Fernando Zobel de Ayala”, CNN News, aired April 27, 2012 - 05:30:00 ET (http://transcripts.cnn.com/TRANSCRIPTS/1204/27/ta.01.html)



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Negotiating the impasse

The second driver, kin-interaction, encompasses obligations, rights and social norms created through relationships and interactions among family members. It directs family employees to act in ways that maintain family harmony, encourages reciprocity guided by family expectations, and sets boundaries of acceptable behaviors within the family microcosm.

Although an FOB family employee’s rights in decision-making are typically derived from being in a position of power, there is often a tacit obligation to ensure the financial and emotional wellbeing of fellow family members.

Decision-makers in non-FOBs, on the other hand, have the right to exert power but not the obligation to care for their subordinates.

In professionalizing FOBs, such obligations may now be ignored by those in power, causing dissatisfaction among family members who are subordinates.

In Asia, it is not uncommon for dissent to arise from the perception that the patriarch is not acting in a way that protects family wealth or ensures fairness to everyone.

4 Lesson from Stanley Ho’s Family Feud: How to Spot A Time Bomb, Forbes, 21 March 2011 (http://www.forbes.com/sites/russellflannery/2011/03/21/lesson-from-stanley-hos-family- feud-how-to-spot-a-time-bomb/)

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The long-standing feud over Macau casino tycoon Stanley Ho’s multi-billion dollar empire, and his accusation that his four wives and 17 children4 are forcing him to relinquish power, is a good example of the impasse when decision-making involves kin-interaction.

In the case of healthcare company, Eu Yan Sang, it took an organized buyout for business to be transferred uccessfully into the hands of the fourth generation (box story, page 12).

This begs the question whether Asian FOBs be free from suspicion, favouritism, and accusations of nepotism when kin-interaction requires family members be more accommodating towards one another.



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Eu Yan Sang: Healing the family business

When Mr Richard Eu joined his family’s business Eu Yan Sang in 1989, it was certainly not the international establishment it is today. The single store in Singapore, at the time, represented an illustrious heritage belonging to the Eu family, whose patriarchs included Eu Tong Sen.

According to Mr Eu, fourth-generation owner and current Group CEO, there was great interest to replicate the success of that store, and to expand Eu Yan Sang into regional and Western markets. The hardest part, as he would find out, was persuading family members to agree on strategy, vision and culture.

After politicking on “who should and should not take over the business”, Mr Eu convinced the board to appoint him as general manager. His first job was to untangle a web of domestic strife. Although Mr Eu’s family was the single largest shareholder, his relatives, which included over 70 cousins, five uncles and five aunts, resisted his vision and sold their shares to Lum Chang, a construction and property firm, behind Mr Eu’s back.

It had taken an organized buyout and a merger with the Hong Kong and Malaysian operations in 1996 before Mr Eu finally formalized his management team. In Mr Eu’s case, preserving the family’s legacy, which included reputation and quality, was paramount. Despite modernizing and moving Eu Yan Sang into retail businesses, older staff was retained past retirement age because their knowledge was valued.

Success, Mr Eu realized, depended on buy-in for his vision, a feat he accomplished by engaging employees in brainstorming ideas to grow the company together. He also made it a point to be an approachable leader so that the company culture was always open and united. “My proposition for Eu Yan Sang is this: that the leaders may change, but the culture would remain.”

Since its tumultuous beginnings, Eu Yan Sang has not only gone public, it has also grown into a thriving corporation with over 200 regional retail stores, over 300 products under its brand name and over 1,000 different types of Chinese herbs and medicines in its distribution network. Eu Yan Sang International, as the listed entity is called, has a market capitalization of more than S$300 million.

Sources: 1. “The modern face of TCM”, Business Times, 4 September 2010.2. “Manager@Work: Medicine Man”, The Edge Malaysia, 28 July 2008.3. Eu Yan Sang corporate website

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Avoiding the drama

The final driver, civic structure, refers to the moral rules governing the family’s code of conduct. However, when blood is thicker than water, it is easy for business objectivity to be clouded by family ethics of trustworthiness and governance styles (i.e. the processes, customs, policies, laws and institutions affecting the way a FOB is managed).

The problem lies in that, unlike corporate business management, there is no formal education to teach family members on their obligations and rights.

Civic structures become more imperative as FOBs expand in physical and financial numbers. An FOB that has grown from 20 employees to a workforce of 100, for instance, would expect greater performance and governance challenges. So the rules of engagement must change.

The family harmony and corporate excellence experienced by the founding family of Royal Selangor, a fourth-generation pewter maker from Malaysia, is a good example of civic structure in operation. In this fourth

generation company, a family charter has been in place since 2003, formalizing the succession process and governing the way members interact with the business, and vice versa5.

In contrast, let us look at Singapore’s famous F&B brand, Yeo’s. Started in 1901 as a FOB, none of the owners today are from the Yeo family that gives the brand its name. By the 1990s, squabbles over investment and business management decisions caused tensions among the third Yeo generation, leading to an acrimonious dissolution of the business.

Here we see the importance of civic structure as a keystone to helping resolve management and governance decisions.

5 “Royal Selangor continues to thrive as a family business, The Edge Financial Daily, 12th September 2011 (http://findarticles.com/p/articles/mi_m1154/is_n9_v80/ai_12518138/)



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Removing the guesswork

More interestingly, our analysis also revealed significant positive co-relations between family capital, consistent sales & EBITDA growth and FOB sustainability. Statistically, family capital is the strongest underlying factor for longevity. Hence it has become more critical to focus on family capital, a factor that is within the FOB’s span of control.

By exposing the drivers responsible for family-business sustainability and performance, FOB owners now have a way to analyze inherent organizational weaknesses, review likely pitfalls and remedy potentially disastrous outcomes with more calculated and specific intervention strategies.

Is there any driver that is more important than the other two? Statistical trends derived from our global survey suggest that FOBs should focus on family capital in the following order of priority:

• Heritage: the sum total of inherent family resources (i.e. network, knowledge and family identity).

• Kin-interaction: the conditions (i.e. obligations and norms) that enable the resources to be fully utilized.

• Civic structure: the guiding principles (i.e. moral and governance codes) for optimal deployment and allocation of resources.

As an analogy to illustrate the family capital model, Dr Raharso observes, “Heritage capital is the car you’ve been given, while kin interaction is the fuel that you put into the car. Last but not least, you must pick the right road for travel – and that’s where civic structure comes in.”

And this is why the transfer of power from Ratan Tata to a non-family member will be watched with interest for years to come (see box story, page 16).

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The Asian advantage

As a tool for business success, the Happiness Index brings Asian FOBs one step closer to their collective and professional objectives. “Oddly enough, in Asia, where Confucianistic values like loyalty and filial piety are deep-rooted, it is curious to note that large Chinese FOBs that thrive beyond three generations are rare,” observed Dr Raharso.

However, by showing families how professionalism can work hand-in-glove with intrinsic values, business principles and culture, we believe that Asian families can even predict their specific areas required for sustainable success.

Furthermore, in a 2010 global survey on Best Companies for Leadership, Hay Group found that what distinguished Asian enterprises was openness – to new

ideas, different cultures and best practices, wherever they can find it. Asians FOBs would do well to adopt this as key management strength.

We see the need for harmony and consensus-building as another highly distinctive competency for Asian FOB owners. Negotiations and business improvements are usually carried out with a view towards win-win situations – and this can be beneficial for family and non-family employees in the drive towards professionalization.



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Tata Group: Separating family legacy from business succession

Public interest in the next successor of Tata Group had been rife – not because the family-owned multibillion-dollar conglomerate is a tour de force in India’s economy, but because its retiring chairman, Ratan Tata, is a bachelor with no children.

For over two decades, the 75-year-old supremo is credited for creating the largest and most influential business group in India. He oversaw international forays that included the acquisition of British luxury marques Jaguar and Land Rover, as well as European steel giant Corus. Back home, he also made headlines with his ventures on the world’s cheapest car – the Tata Nano.

Today, the Tata Group employs half a million people in operations across 80 countries. It comprises over 100 companies in extraordinarily diverse sectors ranging from defense to pharmaceuticals. Despite the global headhunting and Mr Tata’s efforts at modernizing the company, there was intense speculation over his successor – preferably Parsi, from the extended Tata family, etc.

Although the selection criteria cast the spotlight on Noel Tata, Ratan Tata felt that his younger half-brother had yet to master the skills and exposure required to lead the group. In fact, the Tata chief was emphatic that his successor need not be a Tata, Parsi or even Indian. “The successor should be the right person,” he said.

The eventual appointment of 43-year-old Cyrus Mistry, a non-family member, as Mr Tata’s successor demonstrated a resolve at separating issues of family ownership from professional business management. It was the second time the company has broken away from a deep-seated tradition in 150 years.

While Mr Mistry does not bear the Tata surname (he is linked by his sister’s marriage to Noel Tata), he is no newcomer to the Tata Group. The Mistry family is the largest single shareholder of the Tata Group, while Mr Mistry has served on the Tata Sons board since 2006.

However, Ratan Tata remains true to his family legacy. He said he had chosen Mr Mistry based on “long-term perspectives” – building sustainable entities with ethics and values that “continued what our ancestors left behind.” Mr Mistry too, is keen to honor that vision, saying that he would “legally dissociate” himself from the management of his family businesses “to avoid any issue of conflict of interest.”

To ensure his successor receives the necessary mentorship to perform in his role, Mr Tata is coaching Mr Mistry for one year before he takes over as the sixth Tata Chairman in December 2012.

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Source: 1. “India’s Tata Group names Ratan Tata’s successor”, CNN, 24 November 2011.2. “Search committee strikes out in quest to find successor for Tata”, The Vancouver Sun, 18 April 2011.3. “Next Tata head is a Mistry”, Mail Today, 24 November 2011.4. “Incoming Tata leader faces many challenges”, Nikkei, 5 December 20115. “Incoming Tata leader faces numerous challenges”, Nikkei, 25 November 2011.6. “The Tatas without Ratan”, Feature, 16 October 2010.



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Heritage

� Train family members to be effective in FOB management.

� Mentor family members who are potential successors before they take over management roles.

� Establish business processes to induct family members into their FOB networks.

� Identify clear values to be perpetuated in their family and business.

Best practices for family capital investments

Kin-interaction

� Hold regular family meetings to share views and perspectives on non-FOB issues.

� Engage family members in FOB-related conversations.

� Align the behaviors of the younger generation with expectations of the older generations in the family.

Civic structure

� Develop strict ethical standards for FOB processes.

� Establish mutually agreeable processes that maintain the family’s continued ownership and control.

� Set-up rules or regulations to strengthen interpersonal relationships among family members.

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The DNA of success

In Asia, where economic success rides on the achievements of its many multinational conglomerates that were once modest family-owned businesses, the question is not “whether to professionalize”, but “how to professionalize”.

In order to safeguard success in transiting from generation to generation, it is time for Asian FOBs to re-think long-term priorities – and how to achieve their professionalization goals without losing their spirit and values.

By creating the right expectations and using the right analytical tools, managing FOBs professionally is both an art and a science. And by keeping the levers of family capital in check, FOBs may discover that blood is truly thicker than water, and what they can do to turn family heritage, kinship and civic structures into business advantage.



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AuthorsDr Andreas Raharso Director, Global research centre for strategy execution Hay Group E| [email protected]

About Hay Group’s global research centre for strategy execution

Hay Group’s global research centre for strategy execution researches best practices in strategy execution globally. Based in Singapore, the centre provides a unique East-West perspective for business leaders all over the world.

Our research helps provide insightful advice to executives looking to build effective organizations for the future. More information can be found on www.haygroup.com/sg/globalrdcentre.

Ms Minsi Goh Applied Research Analyst, Global research centre for strategy execution Hay Group E| [email protected]

Disclaimer: The content in this report is provided solely for informational purposes. This report does not establish any client, advisory, fiduciary or professional relationship between Hay Group and you. Neither Hay Group nor any other person is, in connection with this report, engaged in rendering accounting, advisory, auditing, consulting, legal, tax or other professional services or advice.

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