Securing the future of family business

  • Business
  • Saturday, 30 May 2015

The tough conversations need to happen now

THERE is a common saying that the first generation makes it, the second generation spends it, and the third generation blows it.

This happens too in Malaysian family businesses despite being relatively “young” compared to their counterparts in North America and Europe who have endured for five generations or more. You will probably recall reading of a high profile family feud or two, which have made it to the international and local headlines.

This begs the question, are successful and harmonious multi-generational family businesses the exception to the rule?

There is more to it than meets the eye though. We ran a survey recently of Malaysian family business owners and found that quite a few family firms have no formal succession plans in place. Local family firms are largely still in their first generation, run by patriarchal founders. In some cases, the management of the business is handed over to the next generation in theory but in practice the founders or the previous generation are still involved in the decision making or even the day-to-day operations of the family business.

For the most part, Malaysian family firms acknowledge the challenges they need to deal with in order to compete effectively in today’s volatile business landscape. This includes succession planning and family politics and conflict, which are more predominant among Malaysian family firms compared to their global counterparts. Local family businesses also have a tendency to struggle with the softer issues which are often sensitive and confrontational.

Succession planning in many ways dictates the direction and future of the business, yet it is typically ignored by local family firms, often due to the sensitive nature of the topic, especially while the patriarch is still involved in the business. Such issues are rarely discussed until succession planning potentially becomes a threat to the longevity of the business. Even so, local family firms are open to the idea of passing on ownership both to the next generation and/or to professional managers from outside the family. On the other end of the spectrum, there are also family firms who will not discount the option of selling and exiting the business if the need arises.

From my experience advising family firms, when business objectives and family interests collide, I find that the owners often struggle to make a decision on balancing these commercial, family and personal priorities. This is what I like to refer to as “the head and heart of the matter” which is often the subject of much contention among family businesses, causing much neglect over succession planning.

As the popular saying goes “businesses often do not fail for business reasons, businesses fail for family reasons”.

I find the story of the break-up of the Pritzker family empire, which established the Hyatt Hotels, particularly relevant to the times. The owners ceased to have a shared vision of the business as it diversified. Thomas Pritzker, the executive chairman and appointed successor back in 1995, in particular, did not share his father’s intuitive approach to business. He also acknowledged that the business lacked transparency in both family governance and corporate governance matters, which were the key factors triggering the break-up.

In my view, a two-pronged strategy is necessary to ensure the growth and continuity of a business:

> Professionalise both the business AND the family – this means applying a more structured approach to the management of the business and the management of the family. This will hopefully reduce (not eliminate) the conflicting emotional elements that may be present when making decisions, especially on the family front. Some businesses may bring in professionals to assist where required and needed.

> In the case where the family is no longer involved in managing the business, encourage family members to be effective owners, which means striking the right balance of power and influence with the current management

I find it encouraging that Malaysian family firms acknowledge that there is a greater need to professionalise especially in relation to processes, governance and skills. However, professionalising both the business and the family has to be done strategically as there are many complexities involved when dealing with the softer side of the business. This includes changing mindsets, learning to trust the next generation and learning to let go when the time is right, and applying the principle of fairness in developing a succession plan based on merit.

In my opinion, professionalising the business and the family starts by first acknowledging that not all issues can be resolved within the family. Often, this calls for a measure of both courage and humility to bring in professionals to help run the family business especially when the business reaches a certain critical scale. External trusted professionals can offer an independent voice in inter-family business discussions while contributing to diversity in skills, thinking and ideas.

Passing on the business to the next generation too comes with its own set of challenges. There are three commons gaps that often complicate the process – the generation gap between the current generation and the one in waiting; the credibility gap, where the next generation feels that they have to work harder than others in the family firm to prove themselves, both with colleagues and customers; and the communication gap between the parents and children which can often lead to misunderstanding.

One way to address these gaps is by making it a point to have regular conversations around succession with family members who are involved in the business. Also, establish a formal infrastructure for decision-making that will see you through both the good times and the difficult times. Some of the best practices I’ve seen adopted by successful family businesses include setting up a family constitution, a shareholders assembly and staying transparent in communication between the family members to ensure that everyone feels they have been listened to.

Equally important is the need to empower the children or the next generation of family members to take on leadership positions when the time is right, giving them the necessary structure and parameters to do so. Essentially, nominating a successor has to be done in a clear and transparent manner, and it is usually more effective to kickstart this process while the patriarch is still around. Getting the delicate mix of professionalising both the business and the family right may very well be a competitive differentiator for those who are able to rise to the challenge.

So, are successful and harmonious multi-generational family businesses few and far in between in Malaysia? I beg to differ. Succession planning may be an issue fraught with potential conflict but Malaysian family firms are certainly wising up to the issues of corporate governance and family governance. With the will and the discipline to take the business to greater heights in an emerging economy, I’m sure our local family firms could turn this notion of the survival of the fittest, on its head.

Fung Mei Lin is a senior executive director and the entrepreneurial & private clients leader at PwC Malaysia.

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