SINGAPORE (Jan 15): Singapore’s largest listed companies are mostly government-linked entities, but there are also a good many that would be classified as family businesses. These include the likes of City Developments, controlled by the Kwek family; Thai Beverage, controlled by Charoen Sirivadhanabhakdi; Genting Singapore, controlled by the Lim family; and United Overseas Bank (UOB), led by the Wee family. In fact, the local stock market is largely comprised of family-owned — and often family-run — businesses. While these family businesses often have the benefit of a highly motivated shareholder, they carry their own unique set of risks.
To evaluate the risks and likely success of a family firm, investors may want to consider its level of complexity, says Koay Peng Yen, a consultant with global leadership advisory firm Spencer Stuart. “Family businesses can be complex in terms of their business and family. Different complexities show different kinds of risks for investors,” he says. “Investors who want to assess family firms and their ability to thrive need to categorise these family firms according to complexity.”
Koay and National University of Singapore associate professor Marleen Dieleman are undertaking a study of Asia’s top family firms. The duo picked out the top billionaires in 10 Asian countries based on Forbes’ rich list, and traced the billionaires to companies that they own. Those deemed not to be family businesses were filtered out, leaving a sample of 200 companies. In Singapore, these companies include the Ng family’s Far East Organization, the Lees’ Oversea-Chinese Banking Corp, the Kweks’ Hong Leong Group and Wilmar International.
The 200 companies are then scored on a list of 10 questions evaluating both business and family structure complexities. Business structure evaluators include the company’s revenue size, number of countries it operates in and the industries in which it is involved. In terms of family structure, some factors are the number of family members in management, the number of family members who own shares and the number of generations involved in the business.
“In Singapore, family firms dominate the [public market],” says Koay. “There is now considerable variety in family firms in Singapore, from the very large to small and medium-sized enterprises, from old to new, and from founder-led companies to business clans.”
These family-run firms have plenty to offer investors, adds Dieleman. “[These include] faster decision making, a more integrated management style, increased emphasis on long-term goals, or a win-win mindset toward business partnerships,” she says in her report. At the same time, a family feud could affect a stock’s valuation. “If [investors back] family firms [with highly complicated family structures], they should pay attention to whether the family governance is well organised,” she adds.
Different categories, different risks
The simplest family businesses are the ones with both straightforward business and family structures, says the study. The company may be involved in just one industry with only a few family members involved in the business. A case highlighted in the study is hospitality group Hoshi Ryokan in Japan, which runs just a single hotel. It also has a clear succession plan that mandates that only the eldest son inherits the business. Family businesses that fall in this category do not require elaborate governance rules, the researchers suggest, but would benefit from small and centralised management.
The second category involves a simple business but a complicated family structure. A local example of this is property firm Hiap Hoe, say the researchers. Founder Teo Guan Seng had children with three women, which led to a lot of squabbles over wealth and succession. Without proper governance to guide business ownership and wealth distribution, Teo had to break up his family firm. “[Family firms in this category will] need some rules about what these family members can and can’t do,” says Dieleman. It may also be necessary to limit the number of family members who are involved in the business, based on the size of the business.
The third group comprises a family business that has a complex business structure but is run by an uncomplicated family. For instance, India’s Tata Group is involved in nearly every industry, from cars to food. But its founder Ratan Tata has no children to inherit the business. “In cases like this, the business needs a lot of business governance and talent from outside the family — because it is a complex business and there may not be enough talent in the family to operate it,” says Dieleman.
Finally, the most complicated businesses are those with complex business and family structures. “They may have multiple listed companies in different countries, and lots of family members involved in different parts of the business,” says Dieleman. “One example is [Macau magnate] Stanley Ho’s [empire]. He has multiple wives and children.” These businesses typically need more stringent governance structures, such as a family constitution or trust.
Challenges for family firms
Investors need not steer clear of complicated family firms. But they should be aware of the various governance codes of a company to regulate its relationship with the family. “Most companies start [to put in governance controls] quite late,” says Dieleman.
Some of the rules that would be useful to have are around the issue of ownership and the decision-making process. “Families like to think of ownership as a block. But if the block is internally owned by many people, then there is a risk of certain people banding together and, perhaps with outside investors, overruling other family members,” says Dieleman.
There is also a tendency for very few family members to take every decision on their own, “which makes handing over to the next generation difficult because you get what I call the Prince Charles syndrome — where the next generation is already old [as] the previous generation is still sitting there doing everything. The younger generation has missed its prime years”, she adds.
Talent is another issue in family firms. “When you are operating a more complex business and one that is spread out globally, and you are managing the business only within the family, the risk might be higher because you might not be depending on the best talent,” says Koay. Dieleman and Koay suggest that family firms should also set rules on the tenure of family members in the company and how their performances should be evaluated.
“As a business moves towards the next generation of ownership, it’s likely that the successor will need to be empowered to make sense of the business from their own perspective,” says Alexander Scott, founder of Sandaire Family Investment Office. “The fluid operational and management styles that were so critical to the business’ entrepreneurial stage will not work in multi-generational businesses.” Family firms will also have to construct rules on how different generations interact with the business, he adds.
“That your boss happens to be related to you is quite common among Asian businesses,” says Linus Lim, co-chief investment officer of Phillip Capital Management. “Sometimes, people hold back so as not to jeopardise the relationship, but we need the right processes to allow this conversation.”
One company that has set in place stringent family governance rules is Singapore’s Tolaram Group. It is involved in everything from food to energy and financial technology, with its businesses largely in Africa. There are four generations of business owners within the group. In 2015, it set up a trust. Seven family members were appointed as trustees and are not allowed to sell their shares. No family members are allowed to interfere in the day-to-day operations of the business, which is now entirely run by professionals. Major decisions are still made by the Tolaram family but only through the trustees.
Local furniture maker Koda says the Singapore Exchange’s code of corporate governance can help family firms. Joshua Koh, CEO of Koda, is a third-generation family member. Koh says the SGX’s code of conduct outlines, among other things, the role of the board and responsibilities of independent directors. “Getting a [family firm] listed is one way to ensure the family business will be able to make decisions not based on the family members’ feelings but with consideration for third-party shareholders,” he says.
