Wednesday, 21 March 2012

Family firms 'need to have better governance'

Article from Business Times (Singapore) about family businesses listed on the SGX. Also very relevant for Malaysia (and other Asian countries), with so many family businesses.

Results are decent, "however, family firms tend to score poorly on the Governance and Transparency Index (GTI), which indicates a low level of compliance to good governance practices".


Study finds 52% of firms listed on SGX are family-owned

FAMILY firms in Singapore form the majority of SGX-listed companies and are a significant pillar of the economy, but they should look to better governance practices and careful succession planning to secure their long-term competitiveness.
These were the findings of a 2011 study of SGX-listed family firms by Marleen Dieleman, Yupana Wiwattanakantang and Shim Jungwook, done in collaboration between NUS Business School's Centre for Governance, Institution and Organization (CGIO) and Family Business Network Asia (FBN Asia).

It surveyed 743 SGX-listed companies, identifying firms owned or influenced by an individual or multiple individuals linked by family ties as family firms.

Dr Dieleman, senior researcher and associate director, CGIO, NUS Business School, revealed the findings to an audience of about 160 senior executives of SGX-listed companies and members of the Australian Institute of Company Directors yesterday.

The study, based on company reports from 2010, as well as a sample size of all SGX-listed firms, showed that family firms constituted 52 per cent of companies listed on SGX.

Notably, a similar study done more recently by Credit Suisse suggested that family-owned listed firms in Singapore formed an even larger majority, of 63 per cent.

Additionally, the family firms outperformed non-family firms, achieving a 5 per cent return on assets as opposed to 3 per cent in non-family firms. This data is also consistent with other studies on family firm performance in developed economies, as well as in Asia.

Stability and continuity in ownership and management structure to implement long-term investment strategy, rather than short-term, profit-oriented models, were cited as contributory to this stellar performance.

Dr Dieleman also spoke of 'patient capital', in that 'people put their own money so they work very hard for their firms, in fact I know of some investors who only invest in family firms because they know that they have their own money in too.'

Interestingly, family firms are also at the forefront of championing gender diversity, with 42 per cent having at least one female director, as opposed to 36 per cent in non-family firms.

In terms of education, family firms have also defied the stereotype of well-qualified business leaders, with 54 per cent of board members in family firms not having a bachelor's degree, which is about double the figure in non-family firms.

However, family firms tend to score poorly on the Governance and Transparency Index (GTI), which indicates a low level of compliance to good governance practices.

They are clearly under-represented in the GTI's top 20, with only three family firms being included.

Also, 44 per cent of family firms fail to comply with the code of governance, with both chairman and CEO being the same person.

Tenure of family firm directors who are family members stood at 19 years, with the longest-serving director having served for 52 years. This suggests that family firms might have marked advantages in terms of maintaining relationships with stakeholders, as well as an intimate knowledge of the firm and its business model.

'Looking at family firm boards, we see that families tend to maximise their influence over the firms by occupying CEO and chairman positions. In doing so, family firms derive benefits such as stability, a long-term orientation, and clear decision-making structures,' said Dr Dieleman. 'But business families should also ensure they maintain a strong and independent element in their boards, which will ultimately contribute to the long-term sustainability of family firms.'

Therefore, this high average director tenure driven by long-staying family members, could be a double-edged issue, which also necessitates the need for good succession planning, even including people outside the family, to embrace the future ahead.

'The firm has a risk of being entrenched or rigid, because people stay very long, so it is important to have trusted (but also critical) outsiders to complement your own expertise and insight into the business as an owner,' explained Dr Dieleman.

Employing external talents to complement those within the family seems to be a viable solution, with 40 per cent of firms opting for succession to persons outside the family.

Given that many founders are passing on their business, Dr Dieleman advises that if 'you're a superman entrepreneur, an owner of a very successful family business, you'll tend to think that your successor should have all the same skills as you have', but in reality 'if the descendents don't have the same aggressive, entrepreneurial skills, that might not be a problem. You'll have to look at what the firm will need in the future rather than a copy of the founder'.

By JOSHUA TAN

3 comments:

  1. What is the definition of family firm?
    Thanks

    ReplyDelete
  2. I guess family controlled, with CEO=Chairman, and many executive directors also being part of the family. INED's are supposed to be independent, but in reality have hardly anything to say.

    ReplyDelete
  3. Thank you for sharing. Family business governance encompasses both corporate governance, typically in the form of a board of directors, and family governance, typically in the form of a family council.

    ReplyDelete