Family-owned businesses are often portrayed as the engine of the private sector—pointing at advantages such as faster decision making, a more integrated management style, long-term mindset or a win-win approach toward business partnerships. However ...
Marleen Dieleman is an associate professor of strategy and policy at the National University of Singapore (NUS) Business School.
Richard Eu, chief executive officer of Eu Yan Sang International Ltd., left, and Yong Chin Kuay, herbalist, inside one of the company's stores in Singapore. Eu Yan Sang International is the largest seller of traditional Chinese medicine in Asia outside of China. Photographer: Munshi Ahmed/Bloomberg
Economist Joseph Schumpeter famously identified owner-entrepreneurs as key enablers of economic development. But, once entrepreneurial companies evolve into family firms, can they maintain that positive role in society? This is an important question since in many economies, especially in Asia and other emerging markets, family firms are the dominant form of business. It is important also not just for family business owners, but for employees, investors, business partners and governments.
Family-owned businesses are often portrayed as the engine of the private sector—pointing at advantages such as faster decision making, a more integrated management style, long-term mindset or a win-win approach toward business partnerships.
However, while combining family and business can be a winning strategy, it also comes with limitations, particularly when family businesses become more complicated.
Decision making becomes less straightforward when it involves more than one decision maker, or when the business has outgrown the entrepreneur’s ability to run it alone.
A cautionary tale
Eu Yan Sang is a successful traditional Chinese medicine (TCM) company based in Singapore. When Richard Eu, a fourth-generation member of the family, took over in 1989, the Eu business empire was but a fraction of its former size.
Established by Eu Kong in 1879 in Malaysia, and expanded by his dynamic son Eu Tong Seng, the family firm became a complex business group with mining, plantations, banking and real estate businesses stretching from Singapore to China. However, after the empire passed on to 13 grandsons, the business disintegrated after decades of family feuds. Only a small traditional Chinese medicine company called Eu Yan Sang survived.
Richard, along with two cousins, eventually consolidated their shareholding and rebuilt it into a trusted Asian brand, centered on a modern approach to TCM. The Eu Yan Sang example illustrates that family firms have a tendency to become more complex, which hampers their dynamism and success. Business growth and a thriving family are good things, but added together may create a complex melting pot of strengths and weaknesses.
Family firms may lose their dynamism and go into decline if they do not have governance systems to address their growing complexities. But complexity should not necessarily kill the firm, or the family, as long as it is managed.
So, how can business families successfully mix family and business? We unbundled these two dimensions to offer the following suggestions:
If the entrepreneurial founder succeeds, the business will grow and become more mature. As a result, running it will be an increasingly sophisticated task requiring more advanced managerial talent.
This process is especially acute in emerging markets, many of which have seen decades of rapid economic growth.
Chairman of Tata Sons, Ratan Tata (C) and Cyrus Mistry (R), Deputy Chairman of Tata Sons meet with Commerce and Industry Minister, Anand Sharma (L) on December 22, 2011 in New Delhi, India. (Photo by Raj K Raj/Hindustan Times via Getty Images)
India’s Tata Group, for example, makes everything from food to cars and energy, offers services ranging from consultancy to hospitality, and is active globally.
When Ratan Tata, the group’s highly-respected but ageing patriarch who had no children, finally found a successor in 2012, the appointee, Cyrus Mistry, complained that the empire could not be effectively governed. Eventually, in 2016, he was removed and Ratan Tata returned as interim chairman to begin the search again.
But the next chosen successor, an internal candidate, will have a tough job: Tata is so complex that it is hard to see how it can even be run by a single individual, no matter how talented. Simplifying its business governance will surely be Tata’s priority.
Most firms are started by a single entrepreneur, sometimes complemented by other family members.
At some stage, the next generations may enter the firm, creating a sudden jolt of additional complexity. This typically requires a major adjustment. This process then repeats itself even more forcefully in the third generation, often with greater numbers of younger family members involved. At this stage, it is uncommon for everyone in the family to join the firm management.
This creates another layer of complexity in the form of the distinction between “active” and “passive” family owners, something many family firms are unprepared for.
The gambling empire of tycoon Stanley Ho in Macau, established in 1962, is a good example.
In addition to creating a very successful group of companies, Ho rapidly increased his family complexity at record speed after marrying four wives and having 17 children, several of whom then became embroiled in struggles for both management positions and controlling shareholdings in group firms, culminating lengthy and costly family lawsuits.
Macau casino tycoon Stanley Ho, center, with his third wife Chan Un-chan, right, and their daughter Florinda, on Jan. 26, 2011 a few days before lawyers for Ho released three videos that they say show he wants to continue with a lawsuit against family members accused of seizing the tycoon's US$1.6 billion stake in his Macau casino empire. (AP Photo/Tai Kung Pao, Lam Yu San, Pool)
Knowing what to do
Family firms can remain dynamic drivers of economic growth if they can address the right problems at the right time.
Those with greater business complexity need to focus on business governance–including defining the roles of boards and management, setting guidelines for decision-making and building a capable leadership team.
Those with complex business families need to pay greater attention to family governance: setting the rules (often a constitution), creating proper structures such as family boards or a family office and thinking through the roles and powers of those leading them.
Family firms where both types of complexity are pertinent need to pay attention to both simultaneously.
Those firms that anticipate the challenges of greater complexity in family and business stand a better chance to remain dynamic creators of wealth, employment, and economic progress.
Koay Peng Yen, a former family firm CEO, contributed to this article.
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