Brunswick’s Susan Ho and Sunitha Chalam say that as new leaders take the reins of family businesses, Asia is poised for one of the biggest transfers of power and wealth it has ever witnessed
The Chinese proverb “fu bu guo san dai (富不过三代),” which translates as “Wealth never survives three generations,” sums up a widely shared belief in Asia: the first generation builds the family fortune, the second reaps the benefits, and the third squanders the wealth. This saying is a timely and cautionary reminder for many of Asia’s family businesses today, as the patriarchs who built Asian capitalism after World War II retire and a new generation assumes control. These young leaders will face the difficult task of leading the business into the future, while also preserving the knowledge, cultural insights and rich tapestry of relationships that paved the way for the success of their forefathers.
It is difficult to overstate the importance of the longevity and stability of Asian family businesses for the region – around 85 percent of businesses in Southeast Asia valued at $1 billion or more are founder- or family-run; in India, that figure stands at 67 percent, while in China, it is 40 percent. The 15 wealthiest families in Hong Kong control assets worth 84 percent of Hong Kong’s GDP; in Malaysia, they control 76 percent, and in Singapore, just under 50 percent.
Yet many of these families aren’t as prepared for succession as they should be. Joseph Fan of the Chinese University of Hong Kong studied succession in 250 publicly listed family businesses run by ethnic Chinese in Hong Kong, Taiwan and Singapore, and found succession carried enormous costs. On average, over an eight-year period (five years before and three years after a succession), companies lost 60 percent of their value.
Fan’s best theory for this decline is that much of the value in an Asian family business is intangible. Investors look at who is running a company, what their values are, and the owner’s connections and reputation in society – different from the fundamental analysis of revenue and earnings that would drive investment decisions in the West.
At such a critical juncture, these intangible perceptions, and protecting the company’s reputation, become even more important. Businesses must work even harder to earn the trust and confidence of key stakeholders. To ensure future success, they need to be able to attract talented non-family managers and be perceived as a fair place for professionals to build their careers. They need to communicate more effectively with investors, many of whom do not have a favorable view of asset-heavy business models or conglomerate structures. And in a climate of higher customer and shareholder expectations, they also need to be able to demonstrate the value they bring to society and commitment to international standards of corporate governance and transparency.
There are signs of change. While family businesses have traditionally been associated with paternalism and risk aversion, younger leaders are ushering in a wave of innovation and creativity.
Adrian Cheng, grandson of the late Cheng Yu-tung, the founder of New World Development, is modernizing Chow Tai Fook, a leading jeweller in mainland China, Hong Kong and Macau, to make it more accessible to a diverse range of customers. He also founded K11 Art Mall, combining his passions for art and entrepreneurship.
Technology has been another disruptive force to the traditional family business model, and under the guidance of new leadership, some firms are making big bets and taking risks to stay ahead. John Riady, grandson of Mochtar Riady, founder of the Lippo Group in Indonesia, is leading the company’s charge into e-commerce through MatahariMall.com, the online version of one of Indonesia’s biggest mid-priced department stores.
Many of Asia’s young business leaders have been trained at top international business schools and cut their teeth at renowned management consultancies before returning home to run the family business.
This has helped to introduce a higher level of professionalism within management structures, though it remains a delicate balance to maintain family ownership while also instilling professional and effective governance to attract more funding.
While their education and willingness to embrace change and innovation are encouraging, these up-and-comers face many challenges, principally the need to prepare the business to compete on a global stage while maintaining the entrepreneurial culture and the personal networks of the founder.
Navigating these challenges in such a rapidly changing economic and business environment will require the new wave of family businesses leaders to emulate the entrepreneurialism of their forebears, charting their own course for the business against a pole star of established family values.
Susan Ho is a Partner and the Head of Brunswick’s Hong Kong office. Sunitha Chalam is a Director in the Hong Kong office.