A round the world you’ll find family businesses that have declined due to inadequate governance, poor talent management and absent or improper succession planning. Only 30 percent of family-owned or -controlled companies last into the second generation. It takes discipline and best practices to change leadership successfully.
In the Asia-Pacific region, family businesses represent more than half of large corporations (plus many more smaller firms). Many of these organizations are still run by their founders, so they will soon face leadership succession for the first time. If this critical transition is mishandled, such companies could be at risk, destroying economic value and handicapping a region that currently accounts for more than a third of the world’s gross domestic product and an even larger proportion of global growth.
Cultural norms are a big stumbling block. Many Asian executives equate succession with mortality and simply don’t want to talk about it. Others gravitate to family members, whether the next generation deserves it or not.
For instance, nearly three-quarters of companies in Taiwan and 69 percent in Hong Kong hand down to heirs or close relatives. At one extreme, Hong Kong empires tend to be tightly controlled by large, complex families that involve all offspring in the business, regardless of merit.
At the other extreme are Chinese entrepreneurs who abided by the country’s single-child policy: Unless they look outside the family, they have only one potential successor.
The financial consequences can be dire. When Joseph Fan, a professor at the Chinese University of Hong Kong, studied the market value of family-run companies in Taiwan, Hong Kong and Singapore, he found an average decline of nearly 60 percent in the eight years surrounding a change of CEO. To defuse this time bomb, these companies must:
- Strengthen their governance by recruiting independent board members.
- Assess and develop top family and nonfamily talent, with a special focus on the ability to grow into new roles.
- Professionalize their succession practices, starting years before a new leader is needed and considering both internal and external candidates.
A great future is ahead for Asian family businesses when they realize that it’s not only the operations and strategy that need to be managed carefully but also governance, talent development and leadership transitions. Claudio Fernández-Aráoz, Sonny Iqbal & Jörg Ritter
Claudio Fernández-Aráoz is a senior adviser at Egon Zehnder and author of It’s Not the How or the What but the Who. Sonny Iqbal and Jörg Ritter are partners at Egon Zehnder.