MANAGEMENT

Study: Family Businesses Choose Profitability Over Preserving Legacy

Most (93 percent) of Singapore-based business founders say continued profitability is more important than preserving their legacy, finds a new report by KPMG and CPA Australia on family businesses.

Among those participating in interviews, 8 out of 10 believe that family legacy, though important, should not be allowed to get in the way of business growth and profitability.

Titled “Two Sides of a Coin: Differing Perspectives in Singapore’s Family Businesses,” the report also found that 98 percent of business owners struggle with succession as it is a complex and sensitive issue, requiring more time to develop long-term workable solutions.

In fact, most family businesses in Singapore falter at first transition, with only 13 percent surviving to the third generation.

“Informal governance structures that may have worked well for the founders of the business may not meet the needs and interests of a new generation,” says Chiu Wu Hong, Head of Enterprise at KPMG in Singapore.

“With limited external influence, there could be questions about whether family businesses are allowing for rigor in their governance and if they are overlooking the added value of non-family members.”

Professionalizing the business

Among survey respondents, 46 percent cited professionalizing the business as a pressing issue, compared to 41 percent who indicated that retaining family control was of utmost importance.

Almost all founders interviewed recognize that succession planning needs to be addressed with a professional or interpersonal approach.

Among successors, many believe that a formal learning process would have given them a holistic understanding of the business faster, which in turn would have enabled them to make a difference to the company’s performance much sooner.

They are also more open than founders letting outsiders (or non-family members) run the business, prioritizing business sustainability over family control.

Over half of respondents (56 percent) cited the challenge of attracting and retaining talent as the most important issue.

“It is critical for founders of the business to develop leaders who will run the business, not just inherit it. Instead of just identifying, family business owners could empower successors to make independent decisions, provide challenging assignments and increasing responsibilities while incrementally letting go of control to focus more on mentoring.”

Of control and conflict

Defining ownership and managing conflict are also among the top of mind issues for family businesses. Regulated ownership issues were one example of what many second or third generation family businesses struggle with, such as the trading of shares both inside and outside the family and how best to implement shareholder agreements.

Often, the owner-founders of large family businesses preferred to pay low dividends and reinvest profits for expansion, rather than dilute ownership by issuing new stock or assuming debt.

Despite safeguards to avoid controversy while maintaining business profitability and family control, family members can and will face conflict. 60 percent of founders interviewed said they prefer to make difficult decisions themselves. Only 37 percent let their successors manage the conflict but remained available for mediation at all times.

Among survey respondents, 72 percent resolved conflict through the intervention of the CEO or chairman.

In the digital arena, all founders interviewed were committed to keeping up with technological advancements, noting that this is an imperative. Yet, almost all survey respondents were keen to err on the side of caution when it came to investing in technology.

Seventy-five percent see the disruptive power of technology but 9 out of 10 business owners interviewed did not outline a specific technology strategy.

Yong said: “Good stewardship of any business is vital. But to steer family businesses, there are added challenges due to their unique make-up and forms of ownership. We hope this report can provide family businesses with useful takeaways to establish the values and vision to guide their own circumstances.”

“Our research suggests that it is time more family businesses consider creating family charters and councils to improve governance and align the values and culture in the company. Whether a family business thrives over time, isn’t about family succession but about leadership. The best successor, is the best leader whether a family member or a professional,” concluded Chiu. 

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