Family Business: a Asian/Chinese Prospective

1
Family Business a Asian/Chinese Prospective

• Roger King, PhD
• Adjunct Professor of Finance
• Director of Center for Asian Family Business
  Studies
• Director of Center for Business Case Studies

2
Induction to HKUST

• No. 1, World's Top 200 Asian Universities
  (2011)(QS Asian University Rankings)
• No. 40, World's Top 200 Universities (2010)(QS
  World University Rankings)
• No. 41, World's Top 200 Universities
  (2010)(Times Higher Education World University
  Rankings)
• School of Business Management
• No. 47, World's Top 100 Universities in
  Economics/ Business (No. 1 in Greater China)
  (2010)(Academic Ranking of World Universities by
  Shanghai Jiao Tong University)

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• Kellogg-HKUST EMBA ProgramNo. 1, Global EMBA
  Rankings (2010) No. 1, Global EMBA Rankings
  (2009) No. 2, Global EMBA Rankings (2008)
  (Financial Times)
• Full-Time MBA ProgramNo. 6 in the world (2011)
  (Financial Times)
• School of Engineering
• No. 26, World's Top 100 Universities in Computer
  Sciences (No. 1 in Greater China) (2010)No. 39,
  World's Top 100 Universities in Engineering/
  Technology and Computer Sciences (2010)(Academic
  Ranking of World Universities by Shanghai Jiao
  Tong University)
• No. 20, World's Top 50 Universities in
  Engineering and Technology (2010)(Times Higher
  Education World University Rankings)
• No. 26, World's Top 100 Universities in
  Engineering and IT (2010)(QS World University
  Rankings)

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• Center of Asian Family Business and
  Entrepreneurship Studies

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Topics to be Covered in the 1st Session

• Why family business is important?
• Family business is complex
• Notion of Wealth Preservation from generation to
  generation, Harmony amongst descendants and
  preservation of Legacy
• Distinct characteristics of Asian/Chinese family
  Businesses
• Some unique causes of early demise of
  Asian/Chinese family businesses Wealth does not
  past beyond 3 generations (shirt sleeve to shirt
  sleeve in 3 generation)
• Current challenges facing Asian Family
  Businesses Culture clashes, globalization, value
  vs. relationship based

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• How many of you are from a family business?
• So what is a family business?

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Common Myths of Family Business

• Small business mom and pop
• No growth
• Limited capital
• Nepotism lack opportunities for non-family
  members
• Generational conflicts and succession problems

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Why family business is important?

• Family businesses are pervasive and significant
• Family businesses are more profitable
• Family businesses are better place to work
• Family businesses are complex

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Family Businesses are Pervasive and Significant

• USA
• 20 of 1,000 largest firms are family owned
• 1/3 of the SP 500 firms and 18 of outstanding
  equity
• 60 of workforce
• Wal-Mart Ford New York Times Cargill Mars
• China
• 70 of GDP and 75 of the workforce
• India
• 20 groups (16 family controlled) 66 private
  sector assets
• Germany
• 66 of the GDP and 75 of workforce

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Family Businesses are More Profitable
Ward
Anderson-Reeb
Morgan Stanley
Pitcairn
Largest FB 1000
Forbes 400 Private Firms
26 vs. 21 ROIC
5 10 SP 500
16/yr vs. MSCI 18.5 ROE vs. 14.1 ROE
30 Premium MV/BV
35 ROIC
Greater sales revenue per employee
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Family Businesses are Better Places to Work

• Founder Businesses 34
• Family Businesses 26
• Partnerships 16
• Non-Profits 12
• Associations/Co-Ops/ESOPs 4
• Widely-Held 8

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Family Businesses are Complex

• Family first or Business first?

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Family Businesses are complex (contd)

• Another reason is the complex relationships
  between various interested parties
• Family owner only
• Family manager only
• Family owner and manager
• Family no ownership and management involvement
• Non-family owner only
• Non-family manager only
• Non-family manager with ownership

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Family Businesses are Complex (contd)

• A key reason is Family Business are the
  blending of two inherently different realms
  performance-based of business and emotion-based
  of family. A system fraught with role confusion
  and conflict.

• Family
• Emotional based
• Subconscious behavior
• Inward looking
• Risk averse and slow to change

• Business
• Task based
• Conscious behavior
• Outward looking
• Exploit changes

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Key Concerns of Founders of Family Business

• Perpetuate the family name and values
• Wealth preservation for descendents
• Succession
• Division of family wealth amongst descendents
• Policy for family members to participate in
  business
• Role, if any, for spouses, in-laws and other
  relatives
• Harmony amongst descendants

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Yet Most Family Business Cannot Survive Beyond 3
Generations

• Shirt Sleeves to Shirt Sleeves in 3 Generations
• Wealth Doesnt Pass Beyond the 3rd Generation
• The first generation creates the business
• The second generation enjoys the business
• The third generation destroys the business

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Reasons/Causes of Early Demise of Family Business

• The single greatest cause of demise of family
  businesses is family conflicts
• Notion of Steward and Inheritor
• Steward refers to a member of the 2nd generation
  who wants together with his or her fellow
  siblings to see the family firm continue under
  family ownership
• Inheritor sees their ownership in simple
  financial terms and lack emotional commitment

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Unique characteristics of Chinese culture and
family business

• For Chinese family businesses, the most important
  family values are Confucian based
• Respect (? xiao) is the most important virtue in
  Confucianism
• Five basic social relationships are father and
  son, ruler and ruled, husband and wife, elder
  brother and younger brother, and friend and
  friend
• Hierarchical relationship - the ruled is expected
  to be submissive to the ruler, while the ruler is
  expected to be kind and caring to the ruled

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Unique Characteristics (contd)

• Family is always more important than any
  individual member, and harmony is the most
  important value for all family members. Without
  harmony, no family can stand, neither can a
  family business
• Social and economic network relationships (??guan
  xi) are highly valued and they tend to be based
  on personal friendship and trust (??xin yong)
  rather than on a formal contractual relationship

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Unique Characteristics (contd)

• Confucian influenced cultures are among the most
  collectivist. The Anglo-American culture is the
  most individualistic
• Work, leisure and home life are blurred
• Often job specification are irrelevant all are
  required to do whatever is necessary to complete
  the task
• Face saving is essential to avoid direct
  confrontation on poor performance handled
  through indirect hinds

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Unique Characteristics (contd)
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Reasons/Causes of Early Demise of Chinese FB

• Political stability and its implications on
  Family Business Longevity
• Lack of appreciation for branding, long-term
  capital investments and RD (notion that the bag
  is always packed Diaspora mentality especially
  amongst the ethnic Chinese)
• Equal (or near equal) inheritance amongst male
  descendants vs. primogeniture (Europe and Japan)
  - fragmentation of economic resources and causes
  sibling rivalry

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Reasons/Causes of Early Demise of Chinese FB
(contd)

• Lack trust of anyone outside of family (nepotism)
  limited talent pool
• Local (regional at best) vs. global businesses
• Relationship vs. market driven business

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• Current challenges facing Asian Family
  Businesses Culture clashes, globalization, value
  vs. relationship based

25

• Better and often western educated (over 90 have
  university degrees and 26 have a MBA from
  Europe or US value system influenced by other
  (Western) cultures
• Better career opportunities outside of family
  business reluctant or unwilling to join the
  family business (notion of obligation, burden
  and/or duty)
• Willing to invest for future brand, product
  development (RD), and diversification (including
  MA)
• Performance and accountability driven potential
  for sibling conflicts
• Global vs. local orientation

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Concluding Remarks

• Family business is pervasive and important
  globally yet few survive beyond the 3rd
  generation
• This is true for Chinese as well as Western
  family businesses who have very different family
  governance systems
• So can we conclude one system is better than the
  other perhaps not
• Are there concepts that we can learn from both
  systems to increase the survival rate of family
  businesses