Family Firms and Growth of MNCs

Disclaimer: This article is meant for family firms and businesses in a vibrant economy and none of the discussions here should be inferred for any other purposes, for example politics.

Two interesting articles came at the beginning of the week. The title of the first one is “Having made it big, he’s giving it back” (Sunday Times, 12 Feb 2006) and described the life and views of Yan Jiehe, company chairman of China Pacific Construction Group, the second richest man in China. The title of the other article is
“Only 1 in 7 family firms makes it to 3rd generation (Straits Times, 13 Feb 2006 by Lorna Tan, Financial Correspondent) and the issue is about longevity of family firms.

The similarity in both articles are the views presented about family run firms. If one looks at companies by a naive cross comparison between the American firms and Asian firms, one of the disparities is that very few Asian companies made it to big MNCs. Cultural differences remains to be one of the key factors. It is well known that most Asian businesses are family oriented and the succession of the business tends to be passed within family.

The study done by Prof Carlock from Insead showed that the results are not encouraging based on a survey of more than 10,000 such families. It is interesting to note that most families lost their businesses in the 2nd and 3rd generation and these family run businesses do not last longer than 30 years. It is very applicable in Singapore as most of the businesses are of such type.

In Carlock’s model, family businesses develop in four stages, starting with the initial entrepreneurial urge. Then when the business is up and running, the challenge is to balance ownership with day-to-day operations. After that, family issues such as succession, creates complications for the businesses. External forces, such as outside investors, can create difficult issues for the companies, because the alignment of goals and visions between the family and the outside investors on the business.

I am not surprised by the findings, particularly sibling rivalries and problem of sucession create survival problems in family firms. In my opinion, it is not a good thing to pass your business to your kids, because they may not share your vision in bringing the business to the next stage. Successful companies like Hewlett-Packard, are now run by external people. The family can still have a stake by being in non-executive roles for example, board of directors and shareholders.

That comes to the second article, where you hear Yan Jiehe’s views on family businesses (quoting directly from the Straits Times),

“One thing is certain: his two children will not succeed him as company chairman. Indeed, he makes it a point not to hire family members, classmates and friends. When he took over as company chairman, his wife quit her job in the company’s finance department. China Pacific Construction Group.

He believes in keeping the business strictly professional. ‘A lot of talented management won’t join a company if all the top management positions are held by the family.’

He plans to retire from his post as chairman in 2008 and has been reducing his stake in China Pacific Construction by rewarding his loyal staff with shares. Last year, he gave 40 per cent of his shares to 250 senior managers. By the time he retires, Mr Yan will be left with just 25 per cent of the firm.

He says he will take his money and build a new business school in Shanghai to train China’s next generation of entrepreneurs. ‘My first career was in education. I want to return to my roots.’”

If Asian businesses can do away with this family succession like the way how Yan Jiehe looks at it, we can have a better chance in seeing the rise of Asia MNCs that will spur the growth of the Asian economy.

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