The role of family in business development in Southeast Asia PDF

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Role of family in business development in Southeast Asia...

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The role of family in business development in Southeast Asia

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Introduction

Culture is one of the major drivers of business and social environments. For many decades and centuries, academic and business analysts attempted to examine and “framework” the concepts, business models and formal organizational structures into comprehensive categories. Evidently, cultural influence on the formation of enterprises continues building on significant challenges in exploring and shaping the standardizes framework of organizational studies.

One of the

interesting fields, which allows understanding the influence of informal organization on business context is the concept of Family Business dynamics as they exist in Southeast Asia and the contribution of this form of enterprises on the economy, political and cultural landscape of the region.

According to Dr John Davis of the Harvard University, family-run firms account for up to twothirds of the world’s economy (Family Firm Institute, 2016). While the precise proportion of family businesses in global economies is still debatable, this view is in line with earlier findings (eg Gersick, Davis, Hampton and Lansberg 1997; Christian, Chua and Litz 2004). Nevertheless, it is in emerging and developing regions, including the Southeast Asia, where family-operated businesses are most significant. Credit Suisse (2011) report1 indicates out of the 3,568 publicly listed Asian firms surveyed, at least 55.3% are family owned.

This paper endeavours to

highlight the economic importance of Asian listed family firms and discuss the role of family in business development in Southeast Asia. Against this backdrop, the essay will specifically discuss why business families take a prominent role in controlling and managing firms listed on 1

The report covers 3,568 publicly listed family businesses with over USD 50 million market capitalization in 10 Asian countries.

3 stock exchanges in Southeast Asia and assess whether such a situation is likely to change anytime soon.

Evolution of family businesses and their importance in Asia

Yeung (2006) notes that over the past centuries, millions of individuals in China and other Southeast Asia regions are engaging in a distinctive form of business through an informal network of family members, building on entrepreneurs, traders and financiers. The point that should be made here is that while initiated as a form of cultural and social organizations, such firms and enterprises have evolved into a unique institutional context, which has a dramatic impact on the formation of the definition of Chinese Capitalism and specific to Southeast Asia form of economic organization.

Researcher predicts that by 2025, the number of firms in Asia with revenue exceeding USD 1 billion will be nearly equivalent to that of developed economies globally and family businesses will represent approximately 75 % - 80% of these Asian entities (Wooldbridge, 2015 cited in CFA, 2017, p.1).

Family-run businesses in Southeast Asia are significantly allied to the contemporary dynasties and have made momentous contributions to the region’s economic growth and development. The Economist Intelligence Unit (EIU) report (2014) which researched more specifically on family businesses from Indonesia, Malaysia, the Philippines, Singapore and Thailand contends that family businesses account for more than 60% of all listed companies in Southeast Asia and forecasts the region will experience growth exceeding Greater China by 2017.

4 According to the Credit Suisse (2011) Report, the proportion of family businesses market capitalization to total market capitalization in Asian economies further supports their economic importance, namely, Indonesia (49.1%), Malaysia (39%), Philippines (83.2%), Singapore (54%), Thailand (48.4%). Similarly, a study by Dieleman, Shim and Ibrahim (2013) reports that publicly listed family firms in Singapore dominate several sectors including the construction (81%), hotels and restaurants (72.2%), real estate (70.7%), manufacturing (64.3%), services (59.8%) and commerce (58.2%). The same study finds that listed family businesses perform better than non-family firms in terms of ROA with 3.9% for listed family firms against 0.9% for non-family firms.

Factors leading to business families taking a prominent role in managing publicly listed firms in Southeast Asia

It has been observed that keeping it in the family has some innate advantages, including some considerable inherent commitment to the business, consistency of purpose, mission and business objective, as well as a long-term perspective with regard to business operations and profitability (EIU report 2014).

One factor that has contributed to the capacity of business families to take a prominent role in controlling and managing publicly listed companies in Southeast Asia is their strong arrangements for ensuring business continuity.

The children of the founder are usually trained and assimilated into the business first by working as junior employees and going up the ladder up to senior management positions when they understand most aspects of business and operation. This form of training equips them with the

5 skills to help them integrate every aspect of the business when they are left to manage without the parents in subsequent successions. It is one of the strategies employed to ensure that the control is retained in the family.

76% of the family firms surveyed (EIU report 2014) have family members acting as CEO. The companies, in a bid to retain the control within the family setting, rarely take people from outside to manage the business. As a matter of fact, only 2% would choose successors from outside the family setting. The owners often prefer to nurture their own members to assume the control positions rather than appoint trustees or other officials to assume control. In this respect, once the succession point is about to be reached, the different family members are groomed to take the different C-level executive positions to have a firm grip on all the operational aspects of the company. The company leader, who will be the chairman or the CEO will be selected as per the agreement in the family setting so that the company operations can be spearheaded. In most instances, the men in the families have had the leading positions but as families continue to be smaller, the ladies have had the chance to be the key leaders and successors.

In this regard, most of the Southeast Asian family-run companies try as much as possible not to adopt formal governance structures such as family offices, foundations, and trusts, which may significantly hinder leadership succession. Most of the family-run firms have also limited the use of external advisors.

This is in consideration that involving external influences may

adversely affect leadership transition and negatively impact business prominence in the control and management of publicly listed companies. Instead, most family-owned businesses rely on informal channels for conflict resolution.

6 Business families’ commitment and their consistent business objective may also contribute to the prominent role in managing public listed companies (positive aspect of the Agency Theory). It is supported that agency costs are significantly reduced because of closer alignment of principalagent objectives as well as greater sharing of values between family members. Business in the family setting is not seen as a mere source of living as one would work as an employee in an entity. The family members see their business as their entire livelihood and the livelihood of their generations and do anything possible to ensure sustainability, continuity, and success. The family members are very committed to ensuring that all the activities operate with utmost efficiency and the skills are passed on to the succeeding generation so that they can understand the management of each of the functions and how the activities integrate to a successful operation. One of the most important aspects of running a family business is the motivation to see the company successful, this explains why most of these companies are listed and outperform non-family owned listed companies. They have greater motivation to see their companies grow and have higher returns from the resources employed (ASEAN UP, 2016). The family has to come up with ways to assess progress and reward for the achievement so that the members and executives can continue with the singleness of purpose and unity of mind.

The uniformity of purpose is shared between the preceding generation and the succeeding generation, therefore the long-term perspectives are passed on to the succeeding generations. They can better communicate the history and the plans for the future so that there can be improved continuity and flow of operations over the years that succeed. As such, there is the uniform purpose that is understood and upheld by the family members and finally the long-term perspective that is perpetuated by a succession of individuals who have been in the system and understand what is expected of the long term strategies.

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Another factor that has allowed business families to take a prominent role in controlling and managing firms listed on stock exchanges in Southeast Asia is that family-run firms often tend to have longer planning horizons, thereby enhancing growth. This is due to the fact that families normally aspire that their business remains operative for a multiplicity of generations. For example, Dieleman et al. (2013) observe that family businesses listed on the Singapore Exchange (SGX), on average, are older than non-family companies by roughly two years. Similarly, upon comparing family-run firms’ performance with that of non-family firms using Return on Assets (ROA) as an indicator of performance, studies have shown that family-run firms perform significantly better than non-family-run firms. Such better performance of family-run businesses in Southeast Asia is in line with the results of other similar studies (eg Clinical Global Impression of Change in 2011 and Credit Suisse (2011) report) which came to a conclusion that family-run businesses outperform non-family firms in the region, hence the ongoing dominance in the control and management of firms listed on the stock exchanges.

Apart from the above, there are some other factors contributing to the prominent role of family business in managing public listed firms in Southeast Asia including the opportunity of financial support of the firms by the family; increased stakeholder efficiencies as family is in a better position to develop and maintain relationships with other stakeholders such as employees, suppliers and customers, thereby creating long time corporate goodwill; and the focus on identity / branding of the family – well established family identity in business usually corresponds with a prominent business role in Southeast Asia.

8 Is the business families’ prominent role in controlling and managing public listed companies in Southeast Asia likely to change anytime soon?

A key finding of Credit Suisse (2011) research is that Asian publicly listed firms are mainly at early stage of the life cycle with some 38% of those businesses surveyed were only floated after 2000 indicating most of them are either first-generation or to a lesser extent second-generation businesses.

One of the biggest challenges that listed family firms in Southeast Asia have to face is the preparation for the first or second generational change during the next 5 to 10 years. The issue is further complicated by the problems of family feuds which often appear in the heady world of Southeast Asia businesses (eg Loong’s in Malaysia, Kwok’s in Hong Kong and the Moh’s in Singapore). Even where there is a proper succession plan in place for the family business, the transition is sometimes far from smooth. A study carried out by The Chinese University of Hong Kong found that family businesses lost nearly 60% of their value, mostly in the immediate five years before the generational changeover actually occurred. There is a Chinese saying that “富 不及三代”(wealth does not last beyond three generations). Th at is, perhaps, in line with the prediction made by various researchers (eg Fan, Wong, and Zhang 2012; Fernandez-Araoz, Iqbal, and Ritter 2015) that only 30% and 5% - 10% of those businesses will remain successful during the second and the third generation respectively.

9 Another significant challenge is the slowing capacity for growth in Southeast Asia and the intense competition associated with business globalization. Unlike in the early era of having low labour and production costs, the Southeast Asian businesses are gradually losing a major competitive advantage as all costs start to catch-up with that of developed economies. Southeast Asian firms need to be flexible and innovative in order to maintain the competitiveness internationally. In this respect, a strong cultural preference to preserve a founder’s legacy may weaken those firms’ ability to respond to all organizational / environmental changes and pressure.

With the increasing demand for capital funding to generate greater value for minority shareholders in the stock market, there is a general expectation from the investors for a more transparent and responsible corporate governance structure.

It is evident that Southeast Asia family business es have undergone the significant transformation over the past century, growing from small traders and emigrant service-based enterprises to one of the most important economic forces in the region and internationally.

As a result,

development of the next generation leadership and creation of innovative culture among family members are central to these companies. To address these issues, many family firms find it increasingly important to attract non-family advisors, while other firms go beyond and adopt family business advisor strategy, which can be compared with the adoption of Executive Board and Non-executive Committee in traditional Western practices (Deloitte and SMU, 2013).

10 Though not commonly emphasized in Southeast Asian family-owned business, Koh and Kong (2016) observe that family business advisors play a key role in ensuring that these businesses remain on the competitive edge among companies listed on the stock exchanges. Most familyrun businesses have gradually realized the crucial role played by family business advisors in helping owner families to cope with changing dynamics related to the family or the business, or even both (Koh and Kong, 2016). Considering the complexity that characterizes the structures of most Southeast Asian families, business ownerships, and the businesses, family business advisors bear the potential of playing an integral role in maintaining a balance between the demands of these three overlapping aspects. It is, however, salient to note that it is almost impractical to have a single advisor with all the competencies required to address a multiplicity of issues that individual Southeast Asian families or businesses face. Therefore, most successful business families controlling and managing firms listed in stock exchanges are increasingly realizing the significance of adopting a close consultative partnership between business advisors and family members. Most business families have also emphasized the need for advisors to be receptive to working collaboratively with a multidisciplinary team in order to provide optimal advice and solutions for their business problems.

The major challenges that are currently facing the family-controlled listed companies in Southeast Asia underpin the need for a transparent and effective corporate structure with the ultimate objective of not only protecting and promoting the family interests but also the interests of the minority shareholders.

11 Conclusion

A family firm can be described as a powerful and yet complex organizational structure. It can generate both opportunities and challenges due to the overlapping of “family culture, values, and principles and the realities of the business environment” (CFA, 2017, p.32). Quite significantly, it has been observed that family-run firms in Southeast Asia region as a whole account for well over 60 percent of all listed companies in South-east Asia stock exchange market. Family businesses have been most successful over the past decades in Southeast Asia.

Their

performance has been outstanding to the extent that they outperformed the non-family owned businesses. The major reasons for excellent performance have been effective retaining of control through succession schemes, the personal commitment to the business that belonged to the family, uniformity of purpose and long term perspectives maintained by the governance structures that ensure there is an efficient transition. Conversely, it has been argued that aligning family attributes with the changing business environment can be very problematic and challenging. The major setbacks in running these businesses have been sibling rivalry and consequent family tensions, differences in the strategies set by the members and the challenge of ousting complacent members. Much changes are expected in future as more ladies will take up leadership positions in case the families are small or there are favourable conditions and there are expected changes in the structures as succession moves from a generation to another.

(2660 words excluding references)

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