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IMAGE: ROLL M
In his opinion piece, Mr Martin Roll discusses the importance of family firms in contributing to the economy across the world and the need for an increased focus towards enabling long-term value creation. Some of the key success criteria that family firms can integrate in their business strategy and operations to ensure their longevity and prosperity are described below.
The Importance of Family Firms in the Global Economy
Family firms account for 70 per cent of the global gross domestic product (GDP) and 60 per cent of global employment according to a recent study by INSEAD Business School (Mr Martin Roll is an Entrepreneur in Residence at INSEAD). They are a key driver of global business and growth, so their sustained long-term value creation is important for the global economy as a whole.
However, long-term success of family firms is not a given. There are many complexities involved when ownership, management, and family roles tend to overlap. The challenge often arises when the next generation takes over from the original founder who personally had everything poured into the business whereas the next generation tends to be less emotionally connected.
That being said, there are exceptions where family businesses have managed to overcome this challenge. Hoshi Ryokan, a traditional Japanese guesthouse-styled hotel, was founded in the year 718 and has spanned 46 generations. This illustrates that with proper processes, governance, and risk management, family firms can successfully reign for generations.
Family and Business are Complementary Assets
The long-term value for family businesses are driven by performance (business) and platform (family). Balancing the two drivers is critical, as is looking at strategies through a long-term outlook in order to build an enduring entity that lasts for generations. Optimising performance is crucial to survival as it generates income and dividends, while the platform needs to have the right set-up and be fit for the purpose of the family.
Sometimes success will follow from having the two pillars overlap in various ways, and sometimes it is better for to keep them separated. One of the key characteristics of a family-driven firm is that it is business with “heart and brain combined” compared to a pure shareholder value-driven company.
The Importance of Ownership, Management and Family Roles
The family should consider whether they are the best owner of the business and best suited to take it forward compared to external investors/new owners. Some of the questions to consider are whether sufficient capital is available, if large future investments are necessary, whether there will be a better owner that is more capable and/or experienced to run it, and whether future family generations are interested in owning the business. Families should also be prepared for external takeover attempts and ensure their ownership structure can meet those challenges.
The management issue is important because the family needs to decide who will run the business, hence determining whether the chief executive officer (CEO) is a family member or an outside talent. In Asia, communication between generations is typically less direct as compared to Western cultures. When combined with inherent respect for seniority, open discussions and potential disagreements tend not to surface so issues can hang in the air for a long time. In the next five–to–10 years, many Asian family firms will have to go through succession but their paths are less clear.
Taking your time and drawing up a proper process, with expert help where necessary, can help minimise conflicts and steer the family through the decision. The key virtues here are patience, inclusiveness, and transparency.
Successful family businesses are characterised by some distinct traits. Establish a clear view of:
• What the family as well as the business brings to the world (purpose),
• Why it matters to stakeholders (financial impact) ,
• Who will do it (leadership),
• How the family will do it (organisation and execution), and
• When they do it (balance of time).
Conclusion: Raise the Bar to Succeed across Family Generations
Leadership in the 21st century will be influenced by constant change. Next generation family leadership will have to effectively deal with multiple demanding global challenges spanning from geopolitical volatility, technological disruptions, to the rise of new challengers like China. Mr Martin Roll recommends to focus on and nurture the six strategic skills employed by many successful family business leaders to lead with clarity: Purpose, Resilience, Networks, Long-term lens, Adaptation and Agility, and People and Culture.
The success of next generation family business leaders will be defined by their ability and willingness to drive a powerful transformation agenda across their organisations: to be daring, bold, and different.
to download the PDF—Legacy Business As Heirloom.