Sibling rivalry eclipses Asian family businesses
While more than half of the leading 200 companies in Southeast Asia are controlled by a single family, few have succession plans in place as a pioneering generation fades away
Late last year eight daughters of the late Malaysian property tycoon Loong Yoke Phin sued their brother, his two sons and a sister over four family-owned companies worth US$50 million.
A few months ago, the son of Hainanese chicken rice pioneer Moh Lee Twee took his two brothers to court for a share of proceeds from the US$11.7 million sale of the late Singaporean patriarch’s home in 2015.
To be sure, family feuds are nothing new in the heady world of Southeast Asian business. But they are becoming an operational risk as the pioneering generation of 1950s entrepreneurs fades into history without putting sustainable succession strategies in place.
A study by the Singapore Business School and DBS Bank reported that only about 40% of families in the island republic have appropriate succession plans.
In Malaysia, the ratio is just 15%, according to a survey by consultants PricewaterhouseCoopers (PwC), which also found 31% of businesses in the region had not undertaken any succession planning.
A worrying 60% of respondents to the PwC survey said that succession would be a pressing issue for their company over the next five years, pointing to turbulent times ahead for regional business.
The concern is that family conglomerates control more than 60% of stock market listings in Singapore, Malaysia, Thailand, the Philippines and Indonesia, which is an awful lot of business clout to be riding on the outcome of potential court challenges.
More than half of the leading 200 companies by revenue in Southeast Asia in 2015 were controlled by a single family. The top 15 families held assets equivalent to 48% of gross domestic product in Singapore, 76% in Malaysia and 47% in the Philippines.
Singapore Business School’s study indicates that listed family businesses in the republic dominate the construction sector (81%), hotels and restaurants (72.2%) real estate (70.7%), manufacturing (64.3%), services (59.8%) and commerce (58.2%).
According to Forbes’ annual billionaires list, the Chearavanont family of Thailand, with interests ranging from agro-industry to telecommunications, have the highest net worth, at US$21.5 billion.
Indonesia’s Hartonos, best known for their tobacco empire, have assets valued at US$17.1 billion. The Philippines’ Sy family, meanwhile, is worth US$13.7 billion and Malaysia’s Kuok family US$11.4 billion.
Research by the University of Melbourne suggests that Asian firms have a better survival chance as family units than counterparts elsewhere because they are able to spread risk by diversifying; in contrast, Western companies trend to focus on core activities.
The Singapore Business School study found that family firms on the Singapore exchange have a bigger return on assets – 3.9%, against a market average of 2.6% and 0.9% for non-family firms.
But businesses that stay within the family bosom often lack some of the natural advantages of their non-family competitors.
Concerns over the governance and transparency of family units have traditionally made it more difficult for them to access funds, list assets on stock exchanges and take on strategic partners.
Regulators are pushing for greater disclosure of family holdings to avoid the destabilizing effects that interlocking networks had on financial systems during the 1997-98 Asian financial crisis. These risks will spread as private firms diversify into new markets.
Based on global experience, more than 60% of family businesses will break up once the founder has departed and 95% will have vanished by the time ownership has reached its third generation.
Even where there is a succession plan in place, the changeover period is far from painless. The Chinese University of Hong Kong found that family businesses shed nearly 60% of their value, mostly in the five years before the generational transition actually occurred.
The reason? Inadequate preparation, often because there are too many heirs – and too few jobs to be given to them – or because they are reluctant to discuss the issue while the patriarch is still alive.
This partly reflects the concentrated structure of ownership, with a few senior family members holding most power. The leading five family shareholders in Singapore firms collectively control an average 66% of equity, the Singapore Business School found.
Consequently, a succession strategy involves not only a leadership transition but also a change of ownership. In Singapore, family members fill 29% of board positions and also occupy most key leadership positions, such as chairman and chief executive officer.
There are plenty of examples of families with a long pedigree. The Zóbel de Ayala family has controlled the largest conglomerate in the Philippines since 1834. Hong Kong’s Lee Kum Kee Group has been around since 1888.
These companies have endured by bringing in outside managers and being open to new business practices, thus securing access to expertise and innovative technologies that they might have been denied in a secretive back-room family environment.
The PwC Malaysia survey indicated that 54% of family businesses plan to bring in management professionals within the next five years.
Some second-generation family members are electing to leave before it gets messy. Indonesian Martin Basuki Hartono founded the tech startup Global Digital Prima rather than wait in line for his turn. John Riady of Indonesia’s Lippo Group runs a venture capital company.
Those who hang around often end up in turf wars. In the 1990s, the Yeo family found itself split into several camps in a dispute over the management of food and beverage firm Yeo Hiap Seng.
Chairman Alan Yeo wound up the holding company to fight off a rival faction and equity was distributed among family members, but his opponents got control anyway by buying up all shares.
In 2007, Low Ah Cheow, widow of the shipping magnate Ng Teow Yhee, two of her sons and some nephews sued a third son, Sebastian, after he was named as sole heir. The case was initially dismissed but the decision was reversed on appeal after it was ruled the late Ng’s will did not clearly state his intentions.
The Chinese have a saying that “wealth does not last beyond three generations”, based on the premise that the first generation founds a company, the second builds it up and the third pulls it all apart. Many Asian family firms are now entering that third final phase.