Panellists from NTU's Nanyang Business School:

• Wee Chow Hou, head and professor of marketing and international business;
• Fock Siew Tong, associate dean (external relations) and associate professor of banking and finance;
• Lang Chin Ying, Josephine, associate professor of strategy, management and organisation;
• Ho Tzu Wei, Violet, associate professor of strategy, management and organisation
• Moderator and writer: Narendra Aggarwal, director, public affairs

OVERVIEW

IN an ongoing Nanyang Business School-Business Times Roundtable discussion series, senior professors at Nanyang Technological University's business school highlight some of the problems faced by family businesses in transforming themselves into modern enterprises as control passes to the next generation and suggest some possible ways to ensure the future growth of this vital sector of the business world.

Mr Narendra Aggarwal: Family businesses have traditionally played an important role in the business sector of most countries. What are some of the key challenges and issues currently being faced by family businesses in Singapore and in the region?

Dr Wee Chow Hou: The three common top challenges for family businesses that need to be highlighted are: succession planning, embracement of professional people and the ability to set up structures, systems and processes to strengthen corporate governance.

In succession planning, the issue is not so much whether you have children or whether you have the best person in the family to take over from you - it is about leadership. As for embracement of the professional people, at some point of the business, you really need to bring in the professionals if you want to grow big and want to go overseas and this is always a challenge for many family businesses.

And the third key challenge is the issue of corporate governance. It is the ability to set up structures, processes, systems and so on to ensure the continuity of the business.

Dr Fock Siew Tong: While a family business is not different from any other form of business structure in terms of its business objective to maximise returns and profits for its shareholders, the family business structure is unique in that it is made up of three independent and overlapping subsystems: business, ownership and family.

The three subsystems create a lot of tension, for example, to an individual who is at the same time a family member, an owner and manager of the family business. The different individual role of the family member in the family business often colours the individual's point of view, expectations of returns from the family business and what is considered to be best practices in the interest of the business.

When such tensions are not appropriately managed, the family business structure becomes a source of interpersonal conflicts and explosive negative expressions among the different stakeholders of the family business.

Dr Lang Chin Ying: The three different systems exist in different contexts and have their own power structures. For instance, while the family unit as a social structure is informal, the business management structure is likely to be formalised and hierarchical. On top of that, the shareholding structure would matter as well.

When you have three different power structures intersecting, there are bound to be conflicts. This is because each system is quite different. An organisation's power structure is different from the family structure and the value systems are different. There could be situations where the values may be in conflict and cannot be reconciled.

Dr Ho Tzu Wei: Taking a human resources perspective, one of the key challenges for family businesses is the ability to select and retain key talents, especially for small businesses which may not be big and as glamorous as MNCs and may not be as exciting as other key players in the industry.

Although they may have succession planning that involves family members, they also need the troops, so to speak, in order to keep the business going and execute the plans. So there is the challenge of trying to recruit and retain enough of these key talents.

Another key challenge for family businesses is making the non-family members feel that they are valued and that they actually have a career within the company rather than thinking that the next CEO will be someone from within the family and that my job here is not a career but just a short-lived association.

Mr Aggarwal: Why is it very challenging for those running family businesses to show good leadership qualities and foresight in building the next generation of leadership, be it from within the family or outside?

Dr Wee: The challenge, in my view, is for the leader to build his leadership team and to embrace professionals from outside the family in building his team. You may have a charismatic leader but he may never build a strong leadership team to take the business forward.

Actually, for family businesses, there are different stages of development. When you start up a business as an entrepreneur, you are small and, in the first generation, there may be a few brothers involved and everyone is friendly. In the next generation as the business grows big, they bring in their sons and daughters, and in-laws.

By the third generation, you start taking the family members to court. As there are more players, more stakeholders if the business gets listed along the way as it grows big, usually there are problems with family businesses and new challenges.

Dr Fock: When we talk about the continuity of family businesses especially from one generation to the next succeeding generation, and at different stages of growth of the family business, we must recognise that the leadership needs, demands of the family business in terms of scale and scope of the business, and the mindsets of the family business leaders can be very different.

The first generation patriarch founder of a family business will think very differently from a third or fourth generation family business leader who has succeeded in globalising his or her family business. Moreover, the leadership needs of the family members in different generations are very different.

Naturally, when you start up a small family business, the business can be managed by family members but as you grow the business in terms of scale and scope, there is definitely a need for the professionalisation of the family members who are involved in the business, and the need to bring in outside non-family professionals to help in managing a fast growing family business.

What is important for us to understand is that underpinning the growth of family businesses are some distinctive strengths that allow many family businesses to sustain their success across the generations.

When you have a successful family business, the shared vision and values that are passed from one generation to the next is a very powerful abiding success factor for the continuity of the family business. The family bond, trust and commitment of family members during difficult times make planning a lot easier to meet the vicissitudes of the business environment. Such strengths are unique in family businesses and successful family businesses are able to capitalise on them.

Dr Wee: At this stage of our discussion, it is important to remember that any business only becomes a family business when the founder intends to pass it on to his family and may bring in his children into the business.

Dr Lang: It is nice to say that there should be planning for transition from one generation to the next. In Asia, however, you are talking about handing the family business to the next generation, so it has a lot to do with inheritance and who in the family is favoured by the family patriarch and who is not. He may not really want to make it clear ex ante who he will pass the business on to and how he is planning to apportion his estate.

Sometimes, merit is not dispositive. If you have a child who is really not that able, you may want to give him a bigger share to make sure he is well taken care of after you are gone. This may not be in the business' best interests, of course. For such reasons, transparency may not figure high in the patriarch's list of priorities. Even for the offspring, it will be very difficult to raise transition issues with the parents as they may fear being perceived as not being filial and selfish.

So you need a good system of values. If there is no sense of unity in the family, if the family is not close-knit, there could be a lot of behaviour that destroys value, like taking family members to court.

Dr Fock: Despite the perceived cultural attributes that characterise family businesses and which arguably seem to stand in the way of the emergence of large and successful family businesses, there are many highly successful family businesses in Asia that have gone beyond the third generation.

Based on my current research, I can highlight names such as the Ayala Group in the Philippines, a seventh generation family business and the Tata Group in India, a fourth generation family, as very successful family businesses that have gone beyond the third generation.

Case studies of some of those family businesses in Singapore such as the Hong Leong Group and the Eu Yan Sang Group that have successfully completed intergenerational transitions are highlighted in my recent book: Dynamics of Family Business: The Chinese Way. We do not have many cases of family businesses that have gone beyond the third generation here as we are relatively nascent compared to the mature economies in the United States and in Europe.