Breaking the third-generation curse in the family businesses

Corporate March 22, 2014 00:00

By The Nation

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It is notable that a large number of companies in Thailand are family-owned, where family members have substantial control over both ownership and management. Hay Group's analysis of data from various sources confirms that family-owned companies consisten

However, they are susceptible to the problem of generation transition.
“We have seen this at the global, regional and domestic levels, and it’s also shown in much research,” said Wanchalerm Siriphand, a Hay Group managing consultant. “As family-owned businesses transfer their companies to the second generation, only 30 per cent will survive.” 
Not only that, it is predicted that fewer than 1 per cent of family-owned businesses will survive beyond the fourth generation. 
To increase the life span of family businesses and continue their success, many owners try to professionalise them. Nonetheless, according to a Hay Group study, professionalisation may backfire if it is not balanced well with “family capital”, a term encompassing family relations, traditions, values, rights and obligations.
In the first generation, inherent family capital is likely to be strong. Family ties between generations remain close-knit. However, professionalisation rarely takes place. 
In the second generation, where family capital weakens as the size of the family grows and ties become more complex, professionalisation starts taking place. 
In the third generation, professionalisation can be easily executed but it can dilute family capital. Therefore, family businesses must place emphasis on managing family capital to ensure that the business becomes self-sustaining across generations. 
Hay Group also found that the key drivers of family business – heritage capital, kin-interaction capital, and principled capital – can help them increase their chances for long-term sustainability and become more effective.
In the first generation, family-owned businesses should focus most on heritage capital, as underlying resources are inherited from predecessors and expanded by the current owners. This capital includes knowledge, networks, family reputation and visible identity. To manage the heritage capital, the owners should document idiosyncratic knowledge, along with consolidating networks, and also document the history of the business to build up family identity.
Heritage capital should still feature prominently as a focus area in the second generation of the business. However, kin-interaction capital – the degree of cohesiveness of the family that enables effective resource utilisation – should be considered as another vital key driver. 
For heritage capital, businesses should provide successors with formal training using the idiosyncratic knowledge that has been systematically documented and also induct successors into existing consolidated networks. Moreover, they must integrate business-history records as a cornerstone that can be shared with external clients. 
On the other hand, as the family size grows across generations, third-generation businesses can build better kin-interaction capital by consciously encouraging closer familial relationships, such as organising frequent family meetings to discuss issues related and unrelated to the business. 
Articulating expectations of family members and their involvement in the business is another way to create better kin-interaction capital.
As family size grows and ties become more complex, third-generation family businesses need to focus on kin interaction and principled capital. They should bolster their kin-interaction capital by formalising a routine for family meetings and mandate that all family members attend. Additionally, they should document rules that are translated from expectations of family members and their involvement in the business. 
Principled capital, which is the strength of governing principles that guide the deployment of resources, can be bolstered by establishing rules to uphold integrity and ethical standards as well as establishing family governance, for instance by institutionalising ways to resolve conflicts or by setting up a family office.
To safeguard success in transiting from generation to generation, it is time to rethink long-term priorities – and how to achieve professionalisation goals without losing each generation’s spirit and values. 
“It’s important for family-business owners to use the right drivers to each generation to professionalise and gain a business advantage, if they want their business to remain in this competitive business environment,” Wanchalerm said.

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