Breaking the third-generation curse in the family businesses; professionalisation can be easily executed but it can dilute family capital

Breaking the third-generation curse in the family businesses
The Nation
March 22, 2014 1:00 am
Wanchalerm: In the third generation, professionalisation can be easily executed but it can dilute family capital. Family businesses must place emphasis on managing family capital to ensure that the business becomes self-sustaining across generations.It is notable that a large number of companies in Thailand are family-owned, where family members have substantial control over both ownership and management. Hay Group’s analysis of data from various sources confirms that family-owned companies consistently outperform other businesses in many aspects such as firm valuation, return on investment, and annual revenue growth.
However, they are susceptible to the problem of generation transition.
“We have seen this at the global, regional and domestic levels, and it’s also shown in much research,” said Wanchalerm Siriphand, a Hay Group managing consultant. “As family-owned businesses transfer their companies to the second generation, only 30 per cent will survive.”
Not only that, it is predicted that fewer than 1 per cent of family-owned businesses will survive beyond the fourth generation.
To increase the life span of family businesses and continue their success, many owners try to professionalise them. Nonetheless, according to a Hay Group study, professionalisation may backfire if it is not balanced well with “family capital”, a term encompassing family relations, traditions, values, rights and obligations.
In the first generation, inherent family capital is likely to be strong. Family ties between generations remain close-knit. However, professionalisation rarely takes place.
In the second generation, where family capital weakens as the size of the family grows and ties become more complex, professionalisation starts taking place.
In the third generation, professionalisation can be easily executed but it can dilute family capital. Therefore, family businesses must place emphasis on managing family capital to ensure that the business becomes self-sustaining across generations.
Hay Group also found that the key drivers of family business – heritage capital, kin-interaction capital, and principled capital – can help them increase their chances for long-term sustainability and become more effective.
In the first generation, family-owned businesses should focus most on heritage capital, as underlying resources are inherited from predecessors and expanded by the current owners. This capital includes knowledge, networks, family reputation and visible identity. To manage the heritage capital, the owners should document idiosyncratic knowledge, along with consolidating networks, and also document the history of the business to build up family identity.
Heritage capital should still feature prominently as a focus area in the second generation of the business. However, kin-interaction capital – the degree of cohesiveness of the family that enables effective resource utilisation – should be considered as another vital key driver.
For heritage capital, businesses should provide successors with formal training using the idiosyncratic knowledge that has been systematically documented and also induct successors into existing consolidated networks. Moreover, they must integrate business-history records as a cornerstone that can be shared with external clients.
On the other hand, as the family size grows across generations, third-generation businesses can build better kin-interaction capital by consciously encouraging closer familial relationships, such as organising frequent family meetings to discuss issues related and unrelated to the business.
Articulating expectations of family members and their involvement in the business is another way to create better kin-interaction capital.
As family size grows and ties become more complex, third-generation family businesses need to focus on kin interaction and principled capital. They should bolster their kin-interaction capital by formalising a routine for family meetings and mandate that all family members attend. Additionally, they should document rules that are translated from expectations of family members and their involvement in the business.
Principled capital, which is the strength of governing principles that guide the deployment of resources, can be bolstered by establishing rules to uphold integrity and ethical standards as well as establishing family governance, for instance by institutionalising ways to resolve conflicts or by setting up a family office.
To safeguard success in transiting from generation to generation, it is time to rethink long-term priorities – and how to achieve professionalisation goals without losing each generation’s spirit and values.
“It’s important for family-business owners to use the right drivers to each generation to professionalise and gain a business advantage, if they want their business to remain in this competitive business environment,” Wanchalerm said.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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