Professionalising the business and the family

Are family businesses here to stay? In the latest global PwC survey of 2,378 family firms in more than 40 countries, 20 per cent of these businesses have indicated plans to sell or list.

In Singapore, this percentage is higher at 32 per cent, with many citing a lack of interest or competency in the next generation to take over the company. How likely then, are Singapore’s family firms able to keep blood ties within the business? Is there value in doing so?

The value of family businesses goes beyond the monetary — often playing a significant role in building a brand. These business owners continue to feel a strong sense of responsibility in supporting employment and retaining staff even in bad times.

The intrinsic values held by blood ties can also translate to greater accountability for a family business to do well and continue its legacy.

However, there are unique challenges for family firms in Singapore. In creating better opportunities for owners to keep family in the business, as well as to ensure a smooth succession with minimal conflict, family firms need to professionalise both the business and the family.

Singapore’s family firms see the importance of good corporate governance, but getting their business on a professional footing is not enough. It has to be accompanied by an equally rigorous approach to professionalising the family.

This means, for example, putting processes in place to govern how a family interacts with its business — including having a succession plan, establishing rules of engagement and setting up a structure for proper governance and accountability. These are crucial for family wealth planning and, most importantly, the continued success of a family business.

When a founder has decided that he or she wants to keep the business within the family, there are three gaps that family firms will have to bridge.

Generation and communication gaps are two key areas that families must be mindful of. Parents from the baby-boomer generation and their children need to communicate their assumptions and expectations to one another to avoid conflict and misunderstandings.

The third gap is credibility, where the next generation will need to establish its authority and prove itself, while the older generation has to learn how to let go.

SETTING UP A FAMILY COUNCIL

With many of these gaps residing in the family ecosystem, it is even more crucial to pair a professional business with a professional family.

What this means is that family stakeholders are interested in the business and see the need for family values to be represented in the company. Conflict is also resolved through formalised channels.

For this to take place, a common and largely successful approach is to establish a family council. Very often, the council includes non-family members such as trusted friends or experienced professionals — lawyers and accountants who are present to provide their insights on possible business options.

The key duties of a family council are to assist the family in making rational decisions by establishing the rules of engagement in the business, decoupling family issues from business ones and ultimately preparing the next generation for ownership and possibly management. It is akin to a board of directors in corporates.

Through a family council, the family can agree and build on a set of rules that addresses key ownership issues. These values are often referred to as a set of family protocols or a family constitution and are no different from listed companies, where a board obtains mandates from shareholders at annual general meetings that are then enshrined in articles.

The coming together of all family shareholders or members to discuss matters concerning their business is achieved through a family assembly. It should be decided how many times a year such assemblies are held.

Some family businesses do not have a clear delineation between family and business matters, which can greatly increase the potential of conflict. Families that are able to separate ownership issues from those of management are better placed to maintain relationships and harmony.

The involvement of the next generation in a family council from an early stage can also help to train the younger ones in understanding their business, how to lead and at which points they should let go at different stages of the company’s growth.

In professionalising the family and the business, there are many emotional and structural hurdles to overcome. Family members will be forced to make tough decisions and will not necessarily provide for everyone’s wants.

However, addressing both sides early will help a business cope with external factors (such as innovating faster, diversifying more effectively and growing faster) and allow family members to become more effective owners, whether or not they are actively involved in the company.

This approach will give family firms the same, if not better, resilience in an increasingly competitive and volatile economy.

ABOUT THE AUTHOR:

Ng Siew Quan is a Entrepreneurial and Private Clients Leader at PwC Singapore.