Around the world, you’ll find family businesses that have fallen into decline due to inadequate governance, poor talent management, and absent or improper succession planning. As we explain in the most recent issue of HBR, only 30% of family-owned or -controlled companies last into the second generation, and it takes extreme discipline to institute the best practices required to escape that fate.
Nowhere are these challenges more acute than in the Asia-Pacific region, where family businesses represent more than half of large corporations (plus many more smaller firms) and account for a significant percentage of employment and economic development. Many of these organizations are still run by their founders, so will soon be facing leadership successions for the first time. If these critical transitions are mishandled, it could put many of them at risk, destroying economic value and severely handicapping a region that currently accounts for more than a third of the world’s GDP and an even larger proportion of global growth.
Cultural norms are one big stumbling block. Many Asian executives equate succession with mortality, and simply don’t want to talk about it. For example, one of our firm’s clients in the region once said that he couldn’t possibly discuss retirement until he was 100 because his company felt like part of his body. Those who are willing to let go typically gravitate to family members, whether the next generation deserves it or not. Nearly three-quarters of companies in Taiwan and 69% in Hong Kong hand down to heirs or close relatives. In Japan, founders’ sons are favored; in fact, one Japanese CEO who has only daughters recently asked one of our Egon Zehnder colleagues to find an appropriate groom for one of them! In other areas of Asia, family composition can make nepotism even more dangerous: 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 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 tendency of Asian family firms to mismanage succession planning—by failing to do it or automatically appointing children or nieces and nephews—has serious financial consequences. 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% in the eight years surrounding a change of CEO. In his 20 years of studying Asian companies, Professor Fan says, “I have never seen any corporate event that is more serious.” He found a similar pattern in China, where our research shows that family firms are already producing less growth and lower profits than privately owned non-family firms.
When Fan looks at the dynamics of family businesses in Asia, he sees a ticking time bomb – and we agree. In order to deactivate it, these companies must heed the lessons of
successful family firms we’ve analyzed. They must:
- Strengthen their governance, recruiting truly independent board members as a first step.
- Assess and develop top family and non-family talent, with a special focus on potential, or the ability to learn and grow into new roles.
- Professionalize their succession practices, starting years before a new leader is needed and considering both internal and external, family and non-family candidates.
There is a great future ahead for Asian family businesses when they realize that it is not only the operations and strategy that one needs to carefully manage, but also governance, talent development, and leadership transitions.