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How to make family businesses sustainable
Publication Date : 02-12-2013
Why do only 4 per cent on average of family-owned businesses survive into the fourth generation?
To Joachim Schwass, director of Switzerland's IMD Global Family Business Centre, there are plenty of reasons. But based on 25 years of academic research into the subject, he says there are ways to preserve family wealth in a sustainable way.
"Academic research offers the rationalisation approach, away from emotionality, to help families become better families, better owners and better managers," he said at a dinner talk on "The Fusion of Family and Business", hosted by Kasikornbank for its premium clients.
The bank last week launched a "Leading the Family Business" course in cooperation with the world's oldest family-business institute to provide insight into the management techniques of world-class family businesses that may be applied to Thai businesses, enhancing opportunities for further success in the future.
During the one-hour talk, Schwass noted that family businesses had inherent strengths but tended to fall into a vicious cycle of the "six D's" - divorce, departure, distrust, disinterest, death and deterioration. While the first generation creates, the second focuses on value and the third (born into a rich family) knows only how to spend, not earn.
This cycle can be avoided with focus on "FOB" - family, ownership and business. The right balance needs to be struck between family and business, and coming between is the word "ownership". Schwass noted there was no need to award the family business to the firstborns, as they were not always the best, and there was no need to divide the business among all the children.
When the business grows in line with the family's size, the three questions that must be asked are: "What are we? What do we want? How will we decide?"
A family starts off as "I" and becomes "us" as siblings arrive. In the next generation, it will become "us and them" with a number of cousins. When in a big boat together, all must row at the same speed, as a single team. This means not all family members can have a say in the business.
Schwass added that most family businesses that had survived for a long time were owned by blood descendants who had inherited the business entirely through meritocracy. In these families, competence rules and all members address problems proactively.
The family business can also be whole and strong if it has the right structure.
One example is the Bonnier family. After beginning in Denmark in 1804 and growing in Sweden, the Bonnier family business now is 209 years old. It is controlled by about 75 family members, including some seventh-generation heirs.
To support the business' expansion, the sixth generation came up with a plan. After the original publishing business branched out into television and movie production, the family decided to focus on media business. In the area of ownership, a governance structure was drawn up. Only family members who are willing and competent sit on the board of directors, which oversees not only business but also non-business activities, from education for family members to philanthropy. To gain an understanding of their commitment, all family members were asked why they still wanted to own the business.
"[Such] clarity also sends a message to all employees [on] who we are and where we're going," Schwass said.
He proposed setting up a governing body consisting of key family members who must be voted in by a family assembly.
The IMD Global Family Business Centre believes there are some key drivers of sustainable family wealth.
Family members should be taught how to earn as well as how to spend, no matter which generation they are. The family must ensure that all members have a part in the succession plan. Family members who control the governing body should be given independence.
Others should be given the chance to start strategic experiments. As 41 per cent of entrepreneurs start their own businesses because they want to be their own bosses, they should also acknowledge that those in the second generation may want to start their own businesses too. This can be done if seed capital is provided as an "advance inheritance", and the children are then given full responsibility for their businesses.
Those who take control should also strive to make the world better with innovation, while also cashing in on the established old ideals.
Last but not least, governance must be in place to ensure internal clarity and to prevent conflicts among family members.
Key drivers of sustainable family wealth
- Culture of earning and spending
- Succession ensured if family business is a joint venture of equal partners
- Independence of partners to preserve and grow business
- Planning for family members, giving them chances for strategic experiments
- Old ideals turning to new ideas, with innovation
- Governance that promises internal clarity and prevents conflicts
Source: IMD Global Family Business Centre