THU 23RD NOV 2017

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Bringing the family business community together

Transitioning Entrepreneurial Ventures Into Family Businesses

23rd October 2017 Andrea Santiago

An oft-asked question is: Should a family position their business as family-owned or even family-managed? Is there any competitive advantage for choosing one option over the other?

From Phnom Penh and Hangzhou to Yangon and Calcutta, I have come across many different types and sizes of entrepreneurial firms

Often, a number of these ventures were started by a parent to provide for the financial needs of the family. Others were a response to an opportunity. Still others started as an expression of creative passion. How many of these businesses do you think are family-owned?

Statistics show that family businesses employ about 80% of the labor market. Although it may be difficult to distinguish family from nonfamily businesses, in Asia (as in the rest of the world) businesses are predominantly family-owned.

The lines become blurred when a business is led by a dominant figure, a family partners with a firm, or a family-owned company offers its shares to the public.

The character of a business also changes when professionals come aboard and are given greater autonomy than family members to decide on the firm’s direction.

Indeed, some businesses have so large an employee base that it would be foolhardy not to grant nonfamily members discretionary power. There are, however, some businesses that are so closely associated with the family that one wonders whether this is deliberate, coincidental, or accidental.

An oft-asked question is: Should a family position their business as family-owned or even family-managed? Is there any competitive advantage for choosing one option over the other?

The 2017 Edelman Trust Barometer report showed that, except in China, family businesses generated more trust than general business.

On average, family businesses surpassed nonfamily business rankings by a double-digit margin—the highest difference was posted in Germany with the spread narrowing in two Asian countries, namely Indonesia and India, which formed part of the 12-country study.

Overall, customers preferred to purchase goods or services sold by family businesses. Furthermore, among those who indicated this preference, 54% also preferred to work in a family business, compared to 21% who did not.

Family businesses are perceived to be committed to the long term and to the community in which they operate. This commitment could explain consumer preference. But a good number of these family businesses may be perceived to be unprofessionally managed owing to a lack of rules and structures.

To counter such perceptions, families either influence individual members to obtain technical management skills—or they simply hire professional managers. The latter requires, however, that families learn to trust the judgment of others by empowering them with enough autonomy.

Leveraging Trust

Trust builds effective organizations.   One of the difficult challenges for business families is how to transition from being family-centric to being family-enterprise-centric, where the family and the business are well integrated.

High-trust families make this transition better. I discuss this topic in much more detail in my book, The Family, Incorporated: Lessons from Filipino Business Families.

In essence, professionalism is one of the most important attributes because it is the first step toward transparency and good corporate governance. These two outcomes are relevant to family businesses that make the shift from private enterprise to publicly listed firms.

Of course, when a business becomes listed, any lack of professionalism and transparency may impact the decision of investors to purchase stock.

Customer Loyalty Correlates to Investor Confidence

We conducted a survey on the perception of individual investors regarding family business stocks. The study was part of a research project under the Basant and Sarala Professorial Chair in Asian Family Corporations at the Asian Institute of Management.

Preliminary results show a great preference for stocks owned by well-known business families in the country.

Additionally, individuals tended to invest in companies where product or service loyalty was high. As observed by one investor relations executive, customer loyalty was a critical success factor—and building a strong brand that delivers what it promises adds to that loyalty.

A large number of individual investors (although they may be fully aware that they are part of a block of minority shareholders) require that their perceptions be considered by the family business.

Now, not all family businesses take the path to becoming a listed firm. An overwhelming majority are naturally inclined to stay under the radar; and there is good reason to preserve privacy.

Even then, we find that more successful entrepreneurial ventures are those backed by a strong family, who take time to build appropriate organizational structures to deal with the challenges of developing and protecting the brand image.

Conversing with business families from Myanmar, Cambodia, Malaysia, and China, I take pleasure in hearing about how they manage day-to-day responsibilities while working alongside family members.

Earlier in October, I spoke to the youngest son of 11 children, who took over a family business in Cambodia. His father passed away over a decade ago, but had always wanted his children to work together. The youngest son settled in Cambodia, managing the family’s hotel business.

“Just last week, I shared with my brother, who is based in Singapore, my plans of starting a cruise to traverse the Mekong river,” said the son.

The brother responded: “Sure, younger brother; but you handle the hospitality side and I, the technical side.”

“We laughed,” the youngest son told me. “My father would have been very pleased.”

 

About the Author - Professor Andrea Santiago, CPA, DBA holds the Basant and Sarala Birla Professorial Chair in Asian Family Corporations at the Asian Institute of Management. She is author of the book, The Family, Incorporated: Lessons from Filipino Business Families. E-mail ASantiagoMT@AIM.edu or visit AIM.edu for more information.  This article was first published in the Manila Times and has been reproduced here with the permission of the author.  Find out more here

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