Family businesses are an important pillar of Asian economies, accounting for one third of total regional market capitalization. An emerging market study by Credit Suisse in later 2011 indicates that the Asian family businesses are concentrated in traditional sectors, and the market cap of family businesses there has increased over the past decade (currently comprises 60% or more of listed companies, with a market cap of more than US$50 million). Beyond that, it is interesting to mention that family businesses as a sector outperformed local benchmarks in seven out of ten markets over the period of analysis.
The two major objectives of family businesses are 1) to increase profitability of the business, and 2) to pass it on to the next generation. The observations of recent years have discovered some common characteristics shared among Asian family/trust businesses:
- Trusts are viewed as a product not a service, a way to gather assets under management (AUM) and grow revenues for firms’ investment division.
- Settlors keep the terms of the trust secret or little information, which is only disclosed to family members.
- Settlors make investment decisions, and generally maintain effective control of the trust.
- The providers make minimal efforts to facilitate effective family meetings for client families.
- Family governance structures are typically not well designed.
- Trust officers tend to have an accounting, legal, or company secretarial background.
- Private banks dominate the industry, and the level of investment in trust services businesses is relatively low.
The superiority of family businesses over other forms of organizations in that 1) family members have a high level of trust and respect for one another, whereas in other business models, such level takes a lot of time and effort to be cultivated; 2) there is a high level of commitment as it is more difficult to disassociate from family members with family businesses; 3) family businesses can make things happen quickly and effectively without the bureaucracy involved in non-family-related ventures. However, like all forms of businesses, Asian family businesses have a set of challenges and problems as well, especially beyond second and third generation.
Problems & Challenges in Family Businesses
- Liquidity problems – in this context is not a measure of a companies’ financial position, but cash or cash equivalents, in which 1) one or more family businesses shareholders, with a significant influence in the family business, demand the business to change its policy on providing liquidity for shareholders, or 2) the family business is unable to meet “outside” liquidity demand that are necessary to keep the business in the family. To prevent liquidity problems, it is important to provide a fair return and enough liquidity flexibility to shareholders, enough financial mobility to deal with financial emergencies, and above all, keep the family members involved.
- Relationship complexity – the key reason that family businesses can lead to complex relationship issues is due to inherently different interactions between members of a family and employees within a business. Roger King, Adjunct Professor of Finance and Director of the Center for Asian Family Businesses and the Center for Business Case Studies at the Hong Kong University of Science and Technology, pointed out that “family relationships tend to be based on emotions, subconscious behavior, and are usually averse to changes; businesses, however, are more planned and task oriented, and they welcome changes as it facilitates growth in the workplace.”
- The needs to hire non-relatives, as companies diversify and compete in a fast-changing global market
- The needs for greater transparency and accountability, i.e. family governance structure, especially for non-listed family companies
- Based on “The Three-Cycle Model” described below, too much attention and emphasis are put on the “business system” while too little on the “ownership system” and especially the “family system.”
The Three-Cycle Model
In the Summer of 1983, Davis (1983) and Lansberg (1983) introduced the most popular concept of family business to date; the family firm viewed as consisting of four basic constituencies, i.e. family, owners, managers, and people outside the firm.
*1, 2, 3: three fields; 4-7: subsystems
Each segment represents an important constituency of the family business; each constituency has different goals and expectations (Lansberg, 1983, 1988):
- Family System – health, prosperity, continuity, participation, community role, communication, education, values, goals, etc
- Ownership System – liquidity, capital allocation, assuring succession, strategic direction, performance, etc
- Business System – operations, finance, employees, supplier, customized relationships, etc
The Three-Cycle Model helps to understand more of the problems that occur from the family point of view, but it fails to explain much of companies’ financial structure or their ability to generate liquidity. Owners often have difficulties in exercising their ownership rights.
Family Governance Structure
Establishing a family governance structure is critically important, and facilitating communication in well-planned family meetings is a key activity for effective wealth management advisers, e.g., a family meeting of all members, which is designed to encourage participation and sharing, a family council, a family constitution, etc.
Many wealth management firms in Asia have realized the importance of family governance structure and therefore have run seminars and workshops on the technical aspects to facilitate actual and effective family meetings for client families.
Trends Affecting Asian Family Businesses
- Online and technology
- Global competition – Family businesses must compete with multinational corporations in the home markets
- Credit tightening – Family businesses face innovating and redesigning their models to improve competitiveness
- Grooming talent – If there is a gap in expertise and experience, they need to look outside the family to fill their businesses’ needs