FAMILY-RUN businesses dominate economies in Asia - as they do elsewhere in the world - generating substantial economic output and wealth.

In the European Union, family firms are said to make up 60-90 per cent of businesses in the various countries there.

While there are no statistics on Asian family businesses, an earlier study put the combined value of the top 500 ethnic Chinese companies worldwide at almost US$898 billion. And with many having shorter histories and smaller sizes than their Western counterparts, manpower management is becoming a key area of concern, especially for those undergoing inter-generation leadership transition and those facing a talent crunch for line managers in the current competitive labour climate.

East vs West

Nanyang Business School associate professor of banking and finance Fock Siew Tong notes that Asian family businesses tend to be characterised by centralised decision making and prevalence of nepotism.

They also tend to attach greater importance to relationships.

'With both ownership and management firmly in the hands of a single family, Asian family businesses are more willing and able than publicly-owned corporations to take a long-term view of their investments,' Dr Fock says.

'In terms of the practice of nepotism which favours the preferential employment of one's relatives in the family firm and is widely practised in family businesses, nepotism in Asian family businesses is limited in three ways.

'First, relatives as employees make up just a tiny fraction of the personnel in nepotic companies, unless such companies are very small. Second, such relatives are predominantly members of the employers' immediate families rather than their wider kin group. Third, there are active as well as passive forms of nepotism. In my studies on Asian family businesses, I have found that business industrialists in Asia tend to appoint family members to key positions in their enterprises, but take on kinsmen outside of their immediate family rather reluctantly,' Dr Fock explains.

'Active nepotism is often practised on rational grounds. For small family firms, family members and other relatives provide reliable and cheap labour. They may be expected to work harder for less pay. This practice may have contributed to such family businesses' resilience and competitiveness particularly in tough times.'

Insiders and outsiders

Associate professor Tan Wee Liang of SMU's Lee Kong Chian School of Business notes that Asian family businesses are also less open to involving outside professional managers in running their companies.

A number of Western academic studies have suggested a shift towards professionalism for family businesses to grow and succeed across generations.

This entails the hiring of professional managers outside the family to strategise and execute growth plans, while founding family members retain ownership or reserve their places on the board.

That may not apply in Asian family businesses, according to Dr Fock and Assoc Prof Tan.

In a paper titled Coping with growth transitions: The case of Chinese family businesses in Singapore, the two found that if the Western model of professional management is introduced at the point when the business is in transition - such as when the leadership has yet to establish authority or when the appointed successor does not show entrepreneurial flair - it may not succeed either.

'Defining family governance is equally important,' says JP Morgan Private Bank wealth advisory group executive director Cynthia Lee. 'Management and the family owners should have shared vision for the family company including its ownership, succession, business, investment, estate planning.'

By family governance, it means stating the rules and procedures for decision-making, for example, spelling out the requirements for a family member before he/she may start work in the business. According to Ms Lee, such practices should clarify the roles and responsibilities and stipulate the need for communication.

'Management needs to communicate effectively with the family as to the operation of the company and its business issues whereas family members need to understand the position of the company more clearly (and in a business-like fashion),' she says. 'Management needs to understand the view of the family members. It is a two-way process.'

Changing with the times

The complexity of relationships in family businesses coupled with the global manpower competition is making talent attraction and retention a challenge.

According to an Insead white paper supported by ABN Amro Private Bank, a number of family businesses are increasingly tapping on wives, daughters and daughters-in-law to manage their businesses, bucking the tradition of leaving the business operations to sons and male relatives only.

'Increasing numbers of daughters have risen through the ranks of many lesser-known family businesses that play vital roles in the Asian region's local economies,' Leslie Glass, ABN Amro Private Bank human resource head for Asia, notes.

'Thanks to cultural changes, increased chances of higher education and a younger generation of fathers accepting women in the workforce, daughters have been gaining influence in more family businesses.'

For family-run SMEs that may not have the resources of bigger families, Assoc Prof Tan says they need to implement a system of wealth sharing with their workers.

'It will require a mindset change,' he adds. 'The fear is the outsiders will be mercenaries. Not so, they are also stewards who can account for actions. If you set them goals and they measure up, reward the professionals. In this way, the mistrust between family and outsiders can be reduced, and mutual benefits accrue.'

Taking the cue from bigger family businesses in the West, Dr Fock says compensating non-family executives can take the following forms: 1) stock compensation - to confer greater emotional meaning or status to the non-family executives 2) unusually high pay, perks or incentives - to make up for their inability to acquire stock or rise to the CEO position 3) multi-year profit bonus - to tie them longer and encourage a longer view 4) deferred compensation plan (some companies make the money available upon retirement) 5) participation in family investments at a discount 6) allowing the ownership of franchises or shares in related business units

Ultimately, whether talent is groomed from within the family or sought from outside, family businesses need to give much thought to their manpower development, as they do with their succession planning as well.

'Many of these families have already been engaged in personal wealth succession planning, but they are starting to realise that wealth can be better sustained and grown if a clear business succession plan is drawn up and implemented,' says Fortis Intertrust Singapore manager Evelyn Yap.

'This helps to reduce the potential for management tussles after the founding members let go of the reins which could culminate in a sell-off of the family business painstakingly built up by the original founders. In the worst case scenario, these tussles can run the business aground.'

This article was first published in The Business Times on May 12, 2008

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