Succession and unlocking the future of family businesses

The humble image evoked by the idea of a traditional, family-run business contrasts with the fact that they are considered economic powerhouses, or hold the potential to be, with the right foresight, planning, and management. Conglomerates and well-known franchises may have started out as mom-and-pop stores, before penetrating mainstream retail. And such a tale is not at all uncommon. A recent study from the Harvard Business School on family businesses noted that family firms account for two-thirds of all the businesses around the world. Additionally, 70-90% of global GDP is created by these institutions annually, and 85% of start-up companies even gain footing with capital investments using family money. In short, family businesses have prevailed and continue to do so in every sector and region, on a global scale.
Given their economic impact, it is critical for family businesses to keep up with innovation and digital transformation. More industries are implementing strategies and workflows utilizing digital platforms, rendering traditional marketplaces and transactions out-of-date. If a family business is to retain its relevance in this disruptive business environment, management-level decisions must see beyond new technologies. Without a doubt, family businesses require commitment from the next generation of digital natives and trailblazers to lead the way into the new age.
However, what will it take for the new generation to invest in the family business in the same way their predecessors did? Are they in — or are they out?
The topic of succession was put under the spotlight in 2018’s EY global family business survey. Investing in the youth who grew up alongside the digital revolution has become a top priority, especially because this new pool of talent can play a significant role in identifying disruptive threats and trends that can reshape the business landscape. But succession planning has turned into a wooing game — one cannot assume the younger generation is already willing to take over an established business. For one reason or another, from diverging interests to a wider range of attractive opportunities at their disposal, the succession intentions of the up-and-coming generation are in decline. EY’s global 2015 coming home or breaking free study reported that only 3.5% of the students they surveyed, whose parents owned a family business, intend to become the successor directly after graduation. Some 4.9% intend to take over, with a caveat: they will assume leadership only five years after they finish their schooling.
In the Philippines, succession in family businesses is imperative, since they continue to dominate the private sector. Validating this, the Credit Suisse Research Institute’s findings place the Philippines at 11^th in a global ranking of family-run firms, which had respondents ranging from firms with family members owning at least 20%, to large-cap firms with around 90% market cap. Family-owned firms in the Philippines also average a market capitalization of $5.6 billion, making it the 6^th ranking country with the highest market cap for family-owned firms in the Asia-Pacific region (excluding Japan), and 25^th worldwide.
To keep the family business standing strong in the future, proactive steps must be taken to secure proper succession. What must be done to keep the family business a steadfast economic contributor in the years to come?
Perhaps the most important consideration for keeping the business in the family is to manage successors as one would external talent. This means developing and nurturing their talent. A manufacturing firm overseas gave employees in the family firm one afternoon per week to come up with new ideas to improve business processes, product development, and generate creative ideas for discussion with the rest of the organization. The firm leveraged the family’s unique culture of making mistakes to bring about positive and productive change, and created a new tradition that actively engages the younger generation of potential leaders.
Current management must also dedicate some time in deciding who will be the eventual successor. Clearly defining roles and expectations is key in instilling in the new generation not just the sense of responsibility, but also a sense of ownership to the role of eventual leader and head of the business. Succession planning is all about communication, and implementing the right frameworks that complement the unique dynamics of every family. A Forbes article led by EY attests to this; more than 87% of the businesses surveyed made sure they clearly identified who is responsible for the succession, so they knew exactly how to prepare them for the coming years of business planning and decision making.
Additionally, a sound reward system will keep family-run firms equally attractive to the next generation. Family members must be rewarded based on their roles, merit, contributions, and performance. Consistency is important if the aim is to nurture internal talent until they blossom into managerial positions and C-level roles. Consider an appropriate degree of differentiation between family and non-family members, and pursue reward strategies that co-support the family’s overarching business objective. Keep in mind that in terms of compensation, it may be appropriate to see how much professionals playing the same roles as family members are paid for their time and service to a company.
The longstanding success of any family business is dependent on adapting and innovating to survive the everchanging economic ecosystem. If the new generation is to play an active role in deciphering the disruptions of the digital era, it must grow up with a sense of unity and value, which only the family unit can provide. It must have a sense of purpose and work, and a good understanding of what the family business is all about.
These are some policies to ponder, which can propel family businesses far into the future, and into capable leadership.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the authors and do not necessarily represent the views of SGV & Co.
 
Jules E. Riego is a Tax Principal at SGV & Co.