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Saturday, October 1, 2022

Family Business in Asia

While some challenges are common across most family businesses, Asians tend to demonstrate a greater level of dynamism and agility in the face of change. They are uniquely challenged in the area of succession due to a more rigid approach to inter-generational transfer.

By Ikram Sehgal

An inside view of a textile factory in Pakistan. (Photo courtesy ILO)

Family firms are the most typical business organizational form, in most Asian countries (excluding modern China) they are often the oldest as well. Representing more than 80% of all (private and public) corporations across a vast swath of industries they are a third of the value of listed firms. Private ownership in China has only been permitted since the 1978 economic reforms, most family firms are still first or second generation. Nevertheless, the Chinese family business has a long history over past centuries, considering the Chinatowns of Asia, America, and beyond.

With family firms in more than a third of listed companies, representing around 90% of private firms, despite their short history, their significance in China is growing. Whereas large state-owned corporations were traditionally the focus of academic research, today the millions of private family-controlled companies contribute to the bulk of employment and GDP growth of the Chinese economy. Family firms in China are on a high growth trajectory growing faster than their counterparts in the rest of Asia, with strong expectations about future growth.

Relatively young compared to those in other economies, there is little succession experience in China in transferring business control across generations, a multi-dimensional challenge for many family firms today. Most family firms are facing their first transition from founder control to heir or other types of control. Second, the one-child policy (introduced in 1974 before private firms were allowed) resulted in a dearth of blood heirs for Chinese business families relative to those in the rest of Asia. Third, a lack of interest from the next generation to take over their family firms—being business owners in remote provinces in China is not as attractive as living a jet-set life in coastal metropolises working in the financial industry. And finally, there is a culture gap across generations.

With most entrepreneurs not having a significant formal education, and growing up poor with traditional Chinese values they often focused on hard work and respect for the elderly. While not as a rule, speaking English or other foreign languages, through hard work and dedication they have changed the lives of their families. The next generation has been brought up in a very different environment. Well-off from the start, they have attended the best national and international schools, often spend extended time overseas, and have a very international lifestyle. The culture gap between these generations making it difficult to communicate and work together can trigger serious and irreconcilable family conflicts.

The role of family firms in India is significant in nation-building, wealth creation, employment generation, and contribution to the exchequer. Comprising 85% of all Indian firms and family firms, they account for around 70% of the GDP. Despite huge diversity in size and industry and numerous outperforming start-ups, India is still characteristically known for its massive and structurally important family business houses. Some companies including the Raheja Group, the Aditya Birla Group, the Reliance Industries Group, and the Tata Group etc. have grown into world-class conglomerates with operations across several industries. Not only do they affect the economy but also the social and political landscape of the country.

Family conflicts have complicated successions in Indian family firms. Founder Dhirubhai Ambani, died in 2002, the quarrel between the two Ambani brothers, heirs to the Reliance Industries Limited (RIL) Group, split the Group in 2005. The two brothers have become business competitors, each using his political and social connections to weaken the power of the other. Appointed successor to Ratan Tata, the legendary family and business leader of the Tata group in 2012, Cyrus Mistry was ousted within four years and Ratan Tata returned. Such cases also ending up in courts have raised the awareness of succession challenges and pitfalls in other family firms in India.

Large family-run business groups in South Korea called Chaebols have been the decisive engine for their economic growth.  Developing strong political ties in the mid-60s Chaebols were crucial in the transformation of South Korea from an agricultural to a modern industrial economy. Approximately 25 Chaebols account for 84.3% of the GDP but only 10% of jobs. The largest are global names such as Samsung, Hyundai, LG, and the SK Group. The dominance of Chaebols in the economy makes for relatively fewer large private family firms; instead, small and medium-sized family firms account for the vast majority of jobs. Despite their outsized contribution to the economy, the role of Chaebols and their business families remains controversial, with several family leaders convicted for tax evasion and bribery.

Very well connected with the government, serious cases of bending of rule have surfaced, and both the second- and third-generation leaders of Samsung’s Lee family were convicted of tax fraud and corruption. The challenge from having a small set of elite families dominate the economy is enhanced through the strong marriage and business networks that have developed among the Chaebol families and beyond.

In comparison to some European family businesses which are moving into their fifth or sixth generation. Asian family businesses seem generally to be younger, more dynamic and have a greater appetite for risk, they are known to be more flexible and faster at decision-making. Especially true within the emerging economies, there still seems to be a healthy balance between strong governance structures and the need for a dynamic and flexible approach to business within more established markets like Hong Kong and Singapore.

Many first-generation family business leaders find it very hard to let go or successfully facilitate a phased hand-over. Inter-generational dialogue is also a significant challenge affecting succession as often the next generation are forced into businesses whether they are motivated or not. Rigid rules attached to succession often discourage the younger generation from a stronger entrepreneurial intent. This rigidity is probably one of the key reasons why studies indicate that only 20 -25% of Chinese next-generation members intend to join their family business.

While some challenges are common across most family businesses, Asians tend to demonstrate a greater level of dynamism and agility in the face of change. They are uniquely challenged in the area of succession due to a more rigid approach to inter-generational transfer. In line with their counterparts in the West, Asian companies are becoming more socially and environmentally conscious, motivated by social inequality and inadequate environmental controls. (this is the FIRST part of a series on “FAMILY BUSINESS”, Ikram Sehgal gratefully acknowledges the research-in-depth by Dr. Bettina Robotka).

 

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