Family-owned enterprises make up the bulk of Malaysian businesses, thus their continuity is important for the country’s economic landscape. But this does not come without challenges.
Stories of feuds over the family business transcend time, place and cultures. The Dassler Brothers Shoe Factory, for instance, was run by two German brothers in the 1920s to 1930s. When the older sibling left the company to start his own after a rift, his brother renamed and expanded the original business. The two shoe brands are known today as Puma and Adidas.
In more recent times, the chairman of South Korea’s Samsung was sued by his two siblings over company shares left by their late father. And on the home front, a family feud in the Kamdar Group last year turned ugly when the executive chairman was voted out by shareholders.
Such disputes point to the importance of implementing a succession plan for family businesses. According to a research paper by Dr Abdul Aziz Hassan, a specialist in Islamic wealth management at the Labuan International Business and Financial Centre (IBFC) Malaysia, succession is the top concern of executives at family firms. Furthermore, only 30% of family-run businesses are taken over by the second generation, and 15% by the third.
“The first generation makes the money, the second one maintains it, but the third one spends it. A lack of its continuity will affect the economy,” Abdul Aziz tells Personal Money. “In academic literature, a family business is where an individual either owns over 51% [of the business], or less than 51% but controls the business. Any business started by an entrepreneur is considered a family business. But in terms of practice, he must have an intention to pass it to the next generation. Non-family businesses are those where no one person in particular controls it and everything is done by consensus.”
In his research paper entitled “Family Business Succession Planning: A Case Study of Malay Entrepreneurs in Malaysia”, succession among family businesses here is a relatively new concept as Malaysia is comparatively a young country. The Chinese lead the way in family business succession and are already well into the second generation, with the third generation coming on board now. Malay family businesses tend to be a generation younger as, in many cases, their wealth was a result of the New Economic Policy in 1971, while Indian Muslim businesses have been present in Penang for the last 60 years, Abdul Aziz says.
His paper also states that family businesses perform better than non-family businesses on average, as evidenced by the performance of family-run firms in Taiwan, Australia, Hong Kong, Singapore and China. “Family businesses are often espoused by research scholars to be cutting edge in terms of corporate performance, job creation, return on investment, quality of product and service, flexibility, customisation capability and speed to market.
“They are not only important for what they represent to the economy, but also for the commitment they show to the local communities, the long-term stability they bring, the responsibilities they feel as owners, and the values for which they stand.”
Abdul Aziz estimates that 80% of all businesses worldwide are family businesses. In Malaysia, they constitute 43% of Bursa Malaysia’s Main Market and are involved in manufacturing, retail and construction. Currently, 59% of them are managed by the founder while 30% are run by the second generation, the majority of whom are the founder’s children.
“Interestingly enough, the average life span of a family business is 24 years, which coincides with the number of years most founders remain at the helm of the business. Founders generally don’t force the children to join the family firm, unless the children are willing to work with their families,” Abdul Aziz says in his paper, adding that family businesses that survive are those with succession plans in place.
“Succession planning ensures continuity to more than one generation. From the patriarch’s perspective, it’s more than just wealth,” he says. “It’s also about passing on a legacy, vision and dream.”
Don’t drop the baton
Passing on those values is easier said than done, however, especially if each generation espouses a different set of beliefs. Joseph Fan, a professor at the School of Accountancy and Department of Finance at the Chinese University of Hong Kong, sees this in many Asian families, including those in Southeast Asia.
“The value gap between the old and new generations is increasing. The older generation is traditional, believing in the Confucian tradition of a hierarchy within the family. The father is the head of the business and the others have to obey,” he says. “But the younger generation, many of whom receive Western education, prefer discussion and democracy.”
Hence, Asian families have a harder time communicating and making decisions together — a roadblock in business succession planning. “We don’t usually see them voting or coming up with a consensus. More often, we see conflict and separation among siblings,” says Fan. “It doesn’t mean Western families don’t have value gaps, but they are less dependent on family hierarchy.”
Another challenge in ensuring a smooth succession process is when the patriarch is unable to step down. In many cases, Fan continues, it’s not a case of refusing to let go, but that he is the source of value creation and if he retires, no one can replace him and the family will break away.
“[A family business’] core assets are intangible: family relationships, business, political and financial relationships as well as relationships with employees. So when the father figure walks away, the siblings might not know how to get along,” he says.
“Therefore, we encourage family businesses to prepare for retirement 20 years prior. If you want to retire by the age of 70, you need to start the process when you are 50, because transferring these relationships across generations takes time.”
When a family business expands to encompass external management staff or shareholders, conflicting goals could cause disharmony. Abdul Aziz explains the dynamics between the three parties using a three-circle model.
“You don’t see these circles in the first generation because roles usually overlap. But when you get to the second or third generation, [the roles] begin to be segregated,” he explains.
“In the second generation, you may have family members who are in management but aren’t owners. Some family members are owners but are not in management. Then you also have people in management who are owners but are not family members — the minority shareholders.
“The conflict lies in their objectives: the owners want to get the best returns, management wants to get the best pay, and family members want to be in harmony. So conflict is a given, as people will have differing opinions and goals. The question is how do you manage it?”
Conflict Resolution
Abdul Aziz advises patriarchs of family businesses to know what their exit strategy is, whether it is to pass on the business to the children, to sell it and cash out, or to have it publicly listed. “If [the company] is publicly listed, it is not a family business per se, but it could still be family-controlled indirectly through a holding company. The family still owns the listed company, but their proxies are the ones running it,” he says.
He also says it is important to differentiate between management and ownership. “[At this level,] the patriarch doesn’t have to think about these things because he is both, but going forward, he must know the business cannot be run the way he did it, that is, making all the decisions himself.”
To ensure the business lasts for generations to come, business owners should consider something known as a family constitution, which is a legal structure that can come in the form of a trust or foundation. Under British law, a trust is valid for 80 years. A foundation, on the other hand, is supposed to last forever.
“It is supposed to be a dynamic document, not cast in stone. The family council will review it and make sure it applies to family members as it goes down the generations,” he says, adding that foundation structures are more relevant for family businesses that are worth between US$3 million and US$5 million. “But this does not mean you shouldn’t start planning for one even if you are not at that value yet.”
Fan, however, warns that using a trust to hold business assets isn’t as simple as it sounds. “Using a trust to hold operating assets, such as a company’s controlling ownership, is more complicated than you think. Don’t depend on your banker’s standardised products and be responsible for designing your trust structures, especially if you use it to hold complicated operating assets, such as company shares. Have a detailed, vigorous decision transfer mechanism in your trust — how family members make decisions and how this mechanism can be transferred across generations — especially if you have a long trust structure,” he says.
Ultimately, the structure’s main aim should be to ensure harmonious family relationships across the generations. Governance is important. And, as Fan points out, it is important not to create what he calls a critical minority. This is because the minority shares, while insignificant in themselves, could be used to sway the vote on major decisions.
What does he mean by this? Say a family business is split between two brothers and the sister is given a 10% share in the business so that she benefits financially from the company but has no say in the running of it. When conflict arises between the brothers, the one who effectively gets her on his side will be able to sway the decision in his favour.
As family business succession consultancy is still new in Malaysia, Abdul Aziz advocates that universities create courses for business owners and the younger generation on the subject so that they can better understand their responsibilities and the intricacies of a family business.
The Chen family
LH Plus Sdn Bhd is a family business being run by the second generation, with the third already waiting in the wings to take over. The plastics company, set up in 1947, is headed by the founder’s two sons, chairman Tony Chen and CEO Callum Chen, who have a 34% stake each. Their two younger brothers hold the remaining 32% of the company.
“At the moment, we are managing the company as a family, and our succession plan is an ongoing journey,” says Callum.
Even though it is a family business, it only has a place for family members who can contribute towards it in a positive way, and not for those who cannot find jobs elsewhere.
Callum’s four children — Callie, Clement, Clarence and Celine — are all part of LH Plus. Callie handles the company’s major clients, Clarence manages human resources and is Callum’s personal assistant, while Celine, the youngest, is working in various departments to get a feel of the company.
Clement, who worked for his father for a while, has set up a company, Halo&Syn, to complement the family business. “Halo&Syn focuses purely on product innovation, design and development to add value to our products. This isn’t to say LH Plus isn’t important, but we can take this family business as a platform for better things,” he says. “Also, we shouldn’t hog the same piece of the pie when it is actually our responsibility to create more pies.”
All the Chen children have experience outside the family business, but they were eventually drawn back to it when they had gained enough experience. “I came back because, at the end of the day, this is my family’s business,” says Clarence. “Instead of working for someone else, I might as well put all my energy, effort and knowledge into helping LH Plus grow.”
In grooming his children to become the company’s future leaders, Callum takes a back seat when it comes to operations, allowing them to make the decisions. “I get them to do the homework and I ask questions. I want to know how and why they arrived at a particular decision. At times, I may not agree, but sometimes they present a perspective I had never considered, which is good,” he says.
“We encourage everyone to speak up. We have family meetings and outings once or twice a year. For the last retreat, we went to Koh Samui; it was simple but it was real family bonding where we really talked.”
Overall, Callum places more emphasis on family harmony than money. He thinks you shouldn’t be a slave to money or allow it to create animosity within the family. And there should be no feeling of compulsion, meaning his successor, whoever it may be, should be happy to take over.
“They must have a passion for the business and believe in it. If they don’t, we will let them do what they want to do. Worst case scenario, we will become investors and bring in professional managers, or go for a listing,” he says.
The company has already been approached by potential underwriters, but so far it has refused to consider a listing because it is able to manage on its own quite profitably. Also, it prefers to maintain control and choose its own successor, which will be more difficult, once it is listed.
The Beh family
BP Healthcare Group (BPHG) may be a family-managed business today, but its founder and chairman Datuk Beh Chun Chuan, 58, does not want it to stay this way.
“This is a training ground to groom my children, but once they are capable, they must move out of BPHG for bigger and better opportunities,” he tells Personal Money. “I don’t want them to feel like this is good enough for them. They should be more dynamic than me. My rice bowl is limited to me, my mother, wife and loyal employees.”
Beh chooses to prioritise his employees when it comes to long-term career opportunities at BPHG. He provides key staff benefits, such as company shares for loyal employees who have served at least 10 years.
“My children have enough. I don’t want them in the business because it will further complicate my life. It’s easy to manage outsiders, but not family members. Furthermore, if you keep dividing your wealth among an increasing number of family members, the last person ends up with much less,” he says.
“Hence, my family should expand their opportunity and wealth outside, rather than following in my footsteps. And when they are more successful than me, I will be proud of them.”
Lovy, the eldest of his four children, owns and runs Lovy Pharmacy, a subsidiary of BPHG. She is also the managing director of BPHG, a position she formerly shared with her brother, Chevy, who has since left the family business to pursue other ventures. Joevy, who founded BP Environmental Testing and BP Hearing Solutions, is currently BP Healthcare International’s chairman.
Youngest sibling Garvy, who recently finished his undergraduate studies, operates a health eatery, Garvy’s.
Beh says he is prepared to fork out capital for his children should they need it for future businesses. His final gift to them, he adds, will be BPHG shares.
“However, they will only get a share [of the company] if they are filial. I don’t want to promise them anything because I don’t want to breed false hope,” he says. “If you just give it to them, they will feel entitled to more. That’s when it gets unhealthy and politics will come in.”
This article was first published in the November 2014 issue of Personal Money.