Succession planning is key to longevity

2 in 3 companies fold after founder’s death but some dynasties fight to beat odds.

Fri, Feb 19, 2010
The New Paper

By Desmond Ng

THE first generation toils and builds the wealth.

The second, who has seen and tasted some hardship, maintains it.

And the third, born with the proverbial silver spoon in the mouth, takes it for granted and squanders the wealth away.

Herein lies the notion behind the old Chinese saying that wealth does not last beyond three generations.

The death of Singapore’s richest man, Mr Ng Teng Fong, earlier this month has put the spotlight on family wealth. The property tycoon was the chairman of Far East Organization (FEO) and left behind $11.2 billion.

Wealth preservation, it seems, is more than simply a matter of passing the reins to the next generation and hoping that they’ll do their best for the family business.

The statistics paint a grim picture.

According to a 2006 Straits Times report, 66 per cent of family businesses do not survive the founder’s generation.

And globally, only 10 to 15 per cent survive up to the third generation, according to a study by Professor Randel Carlock from global business school Insead.

Take home-grown beverage company Yeo Hiap Seng, for example. It began as a soya sauce firm in 1935 in Outram Road but was dissolved in 1994 due to a family feud.

The company is now owned by FEO.

Prof Carlock, who teaches and researches family enterprises, told The Business Times last November that many firms don’t last more than three generations. They go bankrupt, merge or close down because they just can’t face the competition.

“If you look at the Fortune 500 in 1955, you will see just 77 of those companies are around today.”

Family businesses are unique in that they hold a long-term perspective and they are driven by values.

And their decisions tend to be based on what’s good for the family and the values they hold, he said.

“But working with family, people can sometimes get emotional, and so you need professional management. It’s all about combining family sentiments with professional management,” he added.

Non-family professionals

Family-controlled businesses, for example, tend to suffer the perception that top jobs are “reserved” for family members.

And that there is little empowerment of non-family professionals, which makes it difficult for them to attract top talent.

Associate Professor Chung Chi-Nien from the NUS Business School said that business leadership needs to be selected based on competence and not just by traditional family hierarchy.

He said: “My study shows that ideally, family members should not make up more than 60 per cent of the department heads. The rest should be non-family professionals.

“The family members, with their vested interest, will possess a more long-term view for the business, while non-family members, with different capabilities, will bring new ideas and perspective to the business.”

He added that these founders should plan ahead to ensure that their legacies live on.

Dr Chung, who studied 100 family businesses in Taiwan from 1970 to 2000, said that ownership structures are commonly used in Taiwan for such dynasties.

In an ownership structure, the founder divides the shares of the various companies equally among his children.

For example, if the family has three companies run by three different sons, each company will own about 30 per cent of the other company.

He said: “In this case, no one has total ownership of a company. This prevents fighting within the family after the founder dies and ensures that there is a balance of power.”

A trust can also be an effective way to ensure that shares in a business can continue to be held together for the benefit of all family members, said HSBC Private Bank’s private wealth solutions managing director, Mr James Aitken.

The family members are obliged to manage the assets and act in the best interests of the beneficiaries, guided by the wishes of the patriarch.

The governance document sets the rules as to how the various family members participate in the business – both in terms of management and as shareholders.

But there are a handful of home-grown companies here which have beaten the odds and are now into the fourth generation.

They include Eu Yang Sang, Royal Selangor and Tan Chong International.

For Leung Kai Fook Medical Co, which produces Axe oil, the company’s success lies in its succession planning.

Mr Jimmy Leong, 50, is a third-generation descendant.

His grandfather opened the company’s first factory in Chinatown in 1928.

It now has five factories in Singapore, Malaysia, Indonesia, China and Vietnam and a yearly turnover of $50 million.

4th generation

He said that it has already started succession planning for the fourth generation of leaders – his nephews and nieces, who are all below the age of 30.

Mr Leong said he worked in three different jobs before joining the family business 17 years ago.

He said: “We have a rule that we have to work outside before we return to the company. It’s important for us to get more exposure and experience outside first.”

Like every other employee, he had to submit his resume, go through an interview and sign an appointment letter.

Although the top five director positions in the company are filled by family members, there are managers who are not related to the family, he said.

Mr Leong and his cousins are managers there.

He said: “My relatives hold director positions and they give us a lot of leeway to run the business.

“We’re already doing our succession planning for the fourth generation and, yes, we hope to beat the odds.”

Can family businesses survive beyond third generation?

NG TENG FONG
Far East Organization (FEO)

Business: Property

Age: 82 (died this year)

Net worth: US$8b ($11.2b)

Children (2 sons, 6 daughters): Elder son Robert Ng, 57, is chairman of Hong Kong property developer Sino Group and his son Daryl, 31, is executive director, while daughter Nikki is general manager.

Second son Philip Ng, 52, is the CEO of FEO, while daughter Dorothy Chan is its executive director.

WEE CHO YAW
United Overseas Bank (UOB)

Business: Banking

Age: 80

Net worth: US$3.1 billion ($4.4b)

Children (3 sons, 2 daughters): Eldest son Ee Cheong, 56, is the CEO of UOB. Wee Ee Chao, 53, is chairman of UOB-Kay Hian Holdings, while younger brother Ee Lim, 46, is president and CEO of Haw Par Corporation.

Daughter Wei Ling is executive director of Parkroyal Group.

KHOO TECK PUAT
Goodwood Group

Business: Banking & Hospitality

Age: 87 (died 2004)

Net worth: US$5.5b ($7.8b)

Children (4 sons, 11 daughters): Eldest daughter Mavis Khoo-Oei, 63, is chairman of the Goodwood Group of Hotels, while sister Elizabeth Khoo is executive director of Goodwood Park Hotel. Youngest son Eric Khoo, 45, is a critically acclaimed local filmmaker with four sons between 9 and 15 years old.

SHAW BROTHERS

Business: Cinema

Founders: Run Run Shaw, 102, & Run Me Shaw, 84, (died 1985)

Net worth: US$3.5 billion ($4.9b)

Children: Runme Shaw: 2 sons, 4 daughters Run Run Shaw: 2 sons, 2 daughters

Shaw Vee King, eldest son of Run Me, 66, is managing director of Shaw Organisation, while Run Run’s son, Harold Shaw, 70, is a director there.

Shaw Vee Meng, 76, Run Run’s son, is chairman of the Shaw Foundation.

The executive director of the Singapore Environment Council, Howard Shaw, is a third-generation descendant of the Shaw brothers.

This article was first published in The New Paper. Link

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