Improving governance for Asian family firms

From the massive Tata conglomerate in India to the Li dynasty in Hong Kong, family run firms have becomes pillars of Asian economies.

A recent report by Credit Suisse showed family enterprises account for half the listed companies and 32 percent of total market capitalisation in 10 Asian economies. But rising globalisation and generational shifts are throwing up new challenges to these family owned enterprises.

“Governance is important. And some of the problems is if some of the conflicts from the families spills into the business or the conflict from the business spills into the family and then you need governance structures probably not just for the business but also for the family,” Prof. Marleen Dieleman told at a recent roundtable organised by NUS Business School’s Centre for Governance, Institutions and Organisations.

Governance has always posed a challenge to family run enterprises in the past. With a large number of stakeholders hailing from the same family, the lines between the personal and the professional often get blurred.

One thing that needs to change moving forward is that there can only be one captain in the ship

Shinta Widjaja Kamdani,
CEO Sintesa Group

Shinta Widjaja Kamdani, CEO of Indonesia’s Sintesa Group, faced this challenge head-on when she joined her father’s company in 1999. “Back then, I came in a picture where businesses were running quite well, they were doing okay. We are expanding, there is fast growth but there is really no governance or system,” she recalled, speaking at the NUS roundtable.

“But then I came up with a proposal. On the corporate side, I decided to club the businesses under 4 different pillars. And then of course I put in place very systematically a holding company to monitor the operating businesses. So when you talk about governance that’s the first time we had governance in the family business.”

This idea to rearrange her family’s business led to the present day form of the Sintesa group: one of Indonesia’s biggest and most successful companies – and which she now proudly leads.

Major employers

In Asia, more than 70 per cent of firms are family-owned – defined by Credit Suisse as those where a family or individual within the family controls at least 20 per cent of cash-flow rights.

ThinkAloud4These firms are also major employers, accounting for 57 per cent and 32 per cent of staff at listed companies in South Asia and North Asia, respectively.

This makes their survival crucial to the region’s emerging economies.

But as many Asian family firms make transitions from one generation to the next, another extremely challenging issue, perhaps much more than corporate and family governance structures, is that of succession

With an increasing number of family feuds playing out in the public domain, such as the Ambani brothers very public fight over their fathers companies in India, some other firms prefer to take a less combative approach

One such firm is Singapore and Malaysia based agri-business, Mewah International Inc, headed by CEO Michelle Cheo.

Her family founded the group nearly three generations ago and Cheo told the roundtable she puts a strong emphasis on managing and building family relationships as key to a firm’s success

“We have also recently started talking in our family on how to build relationships in our family so the idea that the family has to meet up at least once a year,” she said.

“Previously we had thought if you held shares in a trust structure you are already communicating certain rules. We’ve recently also decided that maybe that’s not good enough. So you also have to come up with the idea of a family constitution.”

Reluctant to retire

According to a 2012 Deloite report, 81 per cent of family firms founders prefer their children take over their business. Yet they are only likely to accede control whilst well into their 70’s.

Chen Tien Yue, Executive Director of One such firm family-owned Malaysian pewter maker Royal Selangor told the forum this reluctance to retire is another challenge which family firms, especially those operating in Asia, contend with.

“The previous challenges we have faced are the personal decisions and the personal challenges that have happened in transitions of retirement,” he said.

“And it’s the most challenging aspect of a family business. How do you go through the process of retirement?”

Apart from retirement, the first generation in a family firm is generally also less open to changes in decision-making or management.

Sintesa Group’s Shinta Widjaja Kamdani recalled her father’s own example: “The biggest challenge when we look at a founder that started the business as an entrepreneur, they always believe that the way they do things is the right thing.

“f I talk to my father today and ask him, he probably will still say the same thing. But one thing that needs to change moving forward is that there can only be one captain in the ship. And that is really the biggest problem in a family business.”

Prof. Chung Chi-Nien from NUS Business School says finding talented leaders to push the business to the next stage of growth is yet another challenge family firms face.

“If all the family members go out together then they will have similar views,” he said at the forum.

“Will the firm get loyalty? Yes, of course. But if you only stick to loyal, motivated members you may suffer from a lack of innovation. You may also not get the best talent that you could have from the market.”

What is clear is that in order to succeed, family firms need to innovate, yet, keep those core family values intact which helped propel their business in the first place.

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