Remembering the 'family' in family-owned firms in Singapore

If you think that professionalisation is all that is critical to the success of your family business, think again.

Many family businesses focus on professionalising their businesses to reap the benefits of a fully mapped organisational culture, formalised internal processes and metrics-based decision making practices.

Yet to be truly successful, professionalisation needs to be matched with amiable family dynamics – an aspect many overlook.

Unplanned gifting
Interpersonal dynamics within the family is crucial to family businesses because mismanaged relationships can lead to the unplanned gifting of the businesses. Unplanned gifting is a phenomenon where the passing down of the business is simply left to fate or luck.

One example is the incumbent’s neglect to prepare for succession as he is too passionate to let someone else take over.

For a business to successfully undergo leadership transition however, – a process that is inevitable if the business is to continue – the incumbent must be as willing to pass the baton over to a successor that is willing and able to assume responsibility.

As a consequence of unplanned gifting, family businesses may fail either because successors do not know how or are uninterested in running the business. 60% of the wealth of family businesses is estimated to be lost to this perplexing but avoidable phenomenon.

Unplanned gifting may be especially prevalent in the East Asian region because of the low and falling fertility rates here. Singapore, with a fertility rate of 1.20 births per woman, fares badly against its Asian counter parts such as South Korea (1.24), Japan (1.39), Thailand (1.56), and China (1.58).

This means that family businesses can no longer only depend on fate and luck to pass their business down. If they do so, the odds are likely to be stacked against their businesses. According to the Conway Centre for Family Business, the typical lifespan of family firms has dropped from approximately 50 years to roughly 24 years.

Whereas family businesses used to span up to three generations, most will not make it past the second now. Less family members translate into a smaller chance for someone to be interested in and willing to take over the business.

The story of Singapore’s Hiap Hoe Holdings is a sobering reminder. Teo Guan Seng, founder of property developer Hiap Hoe Ltd and leisure group Superbowl Boldings, wanted to dissolve the family investment company because of problems that stemmed from disagreeable family dynamics and unplanned gifting.

There were accusations that one of the sons, Teo Ho San, was not doing his job properly. Dissatisfaction also grew over the older Teo’s use of company funds for personal needs.

This messy state of affairs between the two generations demonstrates how leaving the process of business succession to develop organically can spiral out of control and affect the business.

Don’t leave it to fate and luck
Some family businesses fixate on professionalisation, whereas others understand the importance of family dynamics. However, most do not know how to foster amiable family dynamics that benefit the business.

Nonetheless, this does not mean that nothing can be done. Three areas of family relationships deserve attention.
Firstly, incumbents in family businesses should focus on passing down intangible resources that are equally crucial to the success of their business as tangible assets are.

Incumbents are endowed in tacit resources such as business know-how, networks and the embodiment of the family brand. These are significant as it helps family businesses promote their uniqueness and competitive strengths to external stakeholders.

To ensure success as the enterprise grows, it is crucial for incumbents to retain and build on such resources through conscious knowledge-sharing within the family.

Secondly, incumbents should clarify the rights and obligations of family members involved in the enterprise. The former refers to privileges that family members enjoy in decision-making with regard to the business.

Privileges, however, should not override obligations to the family and the business. Such clarification teaches family members to utilise the business’ resources responsibly. Many family businesses fail because uncommitted family members exploit the assets they inherit until little is left for functional business operation.

Lastly, the link between family values and business ethics is vital in ensuring that the family business can operate sustainably and span generations. Families should take responsibility for their actions that influence the business and society.

As such, incumbents should align business objectives and family legacy to ensure there is no disconnect between the two.

Family firms that focus on sharing knowledge and experience, managing expectations and emphasizing family values are better equipped to ensure the business’ sustainable success.

Neglecting any of the three areas may lead to unplanned gifting where successors are not adequately endowed with the essential resources, mindset and ethos needed to run the business. If you think that the success of family businesses is only dependent on professionalisation, think again.