I recently contributed to the Planning for Prosperity survey and white paper compiled by The Economist. The survey assessed the future-readiness of family businesses in South and South-East Asia, with input coming from 300 family businesses.
The survey, and insights provided by experts in the field of family businesses, highlighted some interesting gaps between perception and reality. In particular, succession planning and digital proficiency were areas where executives felt confident about their readiness for the future, but anecdotal evidence suggests they may be more vulnerable than they admit.
Succession planning is a pressing challenge for many businesses in Asia, where embedded cultural traditions are increasingly being challenged, as younger generations are developing a global outlook, and being exposed to Western culture.
In many Asian cultures the leadership of a family business is passed on to the oldest son. This system of succession may suffice when the business environment itself is not also in a state of perpetual change. However, almost every business is now being constantly forced to adapt to evolving technologies, while also facing the threat of global competition.
The survey revealed that most family business leaders are confident that they have adequate succession plans in place. However, experts in the field feel these succession plans are usually informal agreements and ultimately likely to be overruled by tradition.
If the leader of a business represents a generation that still respects cultural tradition, that leader will often be reluctant to acknowledge that passing a business on to the next in line may not be in the best interest of the business. Similarly, succession is often only triggered by the death of the family patriarch – whereas an earlier transition may be in the best interest of the business.
Most business leaders are aware of the impact changing technologies will have on their businesses and that technologies like AI and robotics are accelerating the pace of this change. However, traditional family business structures and succession plans can put the business at a disadvantage when it comes to adapting at the required pace. In Asia, non-family businesses are already beginning to outperform family-owned businesses for exactly this reason.
It’s not just rigid thinking that is placing family businesses at a disadvantage when it comes to succession planning. Increasingly younger generations are reluctant to follow their families into the business. Those who have been exposed to Western business cultures or received a western education are more likely to want to start their own business or pursue a career in a different field. Younger generations are more prone to rebel against tradition, and the increasingly globalized world has exposed them to alternative career paths.
This problem is amplified in China where the ‘One Child’ policy means there is only one potential successor for a family business.
So, what is the solution? There are three initial steps a business can take to ensure an adequate succession plan is put in place.
- Firstly, appointing non-family members to the board will introduce a neutral element to the decision-making process. It’s vital that there is someone primarily focused on the needs of the business rather than the family.
- Secondly, having external advisors who specialize in governance for family businesses will add another layer of impartiality and experience.
- Finally, businesses can partner with foreign SMEs that can bring fresh perspective to the table. The Economist survey highlighted the fact that executives in Asia are open to partnering with other businesses to help them navigate challenges and stimulate growth. Foreign SMEs topped the list of preferred partners, ahead of large domestic companies and large foreign companies. If these partners have strong governance, they may be able to assist with issues like succession planning by adding yet another layer of objectivity.
With as many as 85% of businesses in Asia being family owned, this issue is of concern for Asian economies. While the problem may not be as acute in Australia, the lessons are still valid.
– David Harland, Managing Director of FINH
Download and read the white paper here.