Despite the unilateral cratering of the global economy in 2020, the entrepreneurial leaders The Art of Smart spoke to are not deeply concerned about long-term survival. Unconstrained by shareholder demands, they often adopt decision-making strategies in which positive legacy planning, generational continuity, and long-term financial well-being are far greater priorities.
Sunil K. Dalal, Chairman of UNIDEL, a technology solutions provider and incubator headquartered in India, has seen many waves of disruption over the past 30 years and responded by reimagining and diversifying his family's business. He joined an industrial automation business founded by his father at the beginning of India's economic liberalization in 1991, leading to foreign competitors taking away customers.
"My approach was to tackle that disruption head-on," he says. "Around 1996, we sold or shut down everything that was dwindling and freed up working capital and people to focus on rebuilding."
By salvaging the technology transfer agreements with UK-based partners, the new business found its shape with a series of joint ventures and equity partnerships. A blend of in-demand technology and market know-how helped the company flourish until a wave of consolidation in the mid-2000s by industry behemoths swallowed up their mid-cap customers. "We sold to our foreign partners and again freed up capita," continues Mr Dalal. "That allowed us to invest in new businesses in which we owned IP and the brand to operate on a global scale."
A masterclass of business jujitsu, with foresight and capital in hand, UNIDEL made disruptive plays within Industry 4.0, cloud computing, FinTech, and EdTech. Dalal now oversees a smart buildings IoT solutions business, an industry-leading family office FinTech solutions provider, and an EdTech startup. "Now we're the ones disrupting established sectors," he grins.
It is estimated that over the next 25 years, US$ 68 trillion will move from one generation to the next; ownership of private and family-owned business form 70 percent of these assets.
Family businesses are highly concentrated in Asia and form 85 percent of companies in the region. Further, they contribute over one-third (34 percent) to Asia's GDP and employ 57 percent of the working population. Given this, it is imperative for the region, and global economies, that family businesses thrive now that they have entered the digital age.
"Only about 13 percent of family businesses are passed down successfully to a third generation, while 3 percent survive to a fourth or beyond," explains Martin Roll, a Singapore-based strategic family business adviser and author of Family Business Strategy and Family Office Strategy.
He points to an INSEAD study of Hénokiens: family-run firms that have survived over two hundred years. How did these firms survive? First, they clearly made smart decisions to navigate disruption caused by war, pandemics, and changing technology suggests Roll. "They learnt from failures, handled succession, and kept up with the times, which made the business more resilient."
Second, good governance and generational handovers emboldened already robust structures. Finally, these successful family businesses looked outside to move forward. "They realized that they might not have the right person for the job in the family," says Roll, "so they learnt to trust an outsider to run the business."
The lesson for business leaders here is clear: diversity and collaboration with “outsiders” is business-critical and will boost an organization’s chances of longevity. If the events of 2020 have taught people anything it is that navigating change is much easier with help, whether internal or external.
Bimal Mehta, Managing Director at Vakils Premedia, is the company’s third-generation Indian owner-operator. He transformed his family's traditional publishing business into an IT-enabled services company with a global clientele. "When I joined, to help my father with the business, in 2004, I saw traditional publishing as a sunset industry," he explains.
One of their largest clients in the US was disrupted by smaller, nimbler IT-enabled services providers. “It was only a matter of time before the same happened to us,” he says. “However, IT-enabled services were far removed from our area of expertise.”
Making the change meant trusting new blood to come and take the reins. In 2007, they set up a new subsidiary for the business, which showed no signs of profitability until 2009. However, with the trust of his father and the parent company footing the bill, he was able to make headway. Today, the IT services wing is far more profitable than traditional publishing.
Now, Vakils finds itself in the throes of disruption again. This time it is the ubiquity of technology, with competition startups both local and global and large global IT conglomerates.
With costs no longer a competitive advantage, Mehta has had to rethink his strategy. His company’s future profitability rests on becoming more professional, while staying true to the ethos. “Over time, we expanded our workforce overseas and worked with partners to create governance structures that emphasize transparency.” He’s established an independent board of advisors. Mehta believes everyone, including the CEO, needs to be accountable to someone.
”Governance is an area where family businesses often lag behind their corporate competitors,” notes Jessica Cutrera, Founding Partner of The Capital Company, an independent asset management firm in Hong Kong. "If your board and advisors are predominantly members of the family, then you do not get as much critical input as you need."
Frequently, as family businesses in Asia try to modernize, expand, and set up family offices, they try to go at it alone. Cutrera cautions against such an approach. "We've met family owners who've tried to set up their own family offices and they put family members in charge who were not the right fit.”
If it doesn’t work out, this can end up taking up a lot of time and capital. “My tip to families is to make sure they get the right professional advice and be prepared to pay for quality advice."
Kiran Kandade, a lecturer at Brunel University, London, has observed that family firms that have external voices, such as non-family stockholders and an independent board of directors, are more likely to choose business leaders based on competency.
"Family businesses in India view succession through a rigid lens," says Kandade. Her research focuses on successful family business succession. "Birth order, gender, and blood, – i.e., first-born son. Other factors they consider are the son’s relationship to the previous generation – not great ways to plan succession. In the past, if there were no sons in line, they prioritized sons-in-laws over daughters.”
Today, this attitude is changing, though heavily dependent on the industries, she posits. Industries like technology, finance, and services see more women in leadership roles, while progress is slower in industries like manufacturing, machinery, and steel.
Kandade’s research suggests that, frequently, a successful handover comes down to interpersonal dynamics. Can the family principal fully step away from day-to-day operations? Do employees see the family put trust in the new leader? Did the leader work their way up within the organization? And have they been able to create a bond with long-time employees?
Family businesses looking to bring in new leadership, whether internal or external, will do well to pay attention to these questions.
A study by Peking University suggested that nearly 80 percent of the next generation are disinterested in taking over the family business. The research highlighted that they’d rather follow their own passions, whether entrepreneurial, professional or creative. Yet, these business owners continue to show aversion to external partners and professional managers. In an increasingly decentralized world, this can have adverse effects on their ability to innovate and move into untested territories.
Dr Roger King, Founding Director, Tanoto Center for Asian Family Business and Entrepreneurship Studies, Hong Kong University of Science and Technology, suggests, ‘I call it the three Ps: Preservation of wealth, preservation of harmony, and preservation of legacy."
"Not the preservation of the family business. What is the point of wealth if the family is in disharmony? The strength of a family business is that they work as a team—otherwise, they break down.”
In addition to being a professor, Dr King is a serial entrepreneur and investor. He was the COO of Orient Overseas (Holdings) Ltd, his father-in-law's company, which he helped navigate through troubled waters and ultimately sold for US$ 6.3 billion. The family's third generation had already taken up leadership roles in the organization. When asked about their response to the sale, he says: "The younger generation is very pragmatic. It was a strategic decision. Selling the business freed up capital for other ventures.”
In Dr King’s view, instead of imposing roles on the next generation, the family business should support their passion and entrepreneurial spirit, and back them with capital – financial, human, and social. “By fundamentally rethinking their purpose, family businesses evolve into business families, owning a portfolio of businesses,” he adds.
In 2021, successful family businesses require leaders who can ensure the preservation of capital, meet the lifestyle needs of familial stakeholders, and chart a path to future growth. Whether those leaders are scions of industry, external professional managers or internal hires, there are three takeaways to consider:
There are 5.2 million family-owned businesses in the UK, making up 86.2 percent of the total, according to IFB Research Foundation from 2021. The majority of family businesses in the UK have fewer than 10 employees. Diversity is also notably less in family businesses, which according to BEIS saw only 5.6 percent identifying a minority ethnic group leader as opposed to 10.2 percent in non-family counterparts. Although this lack of diversity and regional focus would not tend to be an issue with first-generation businesses operating in popular UK sectors, introducing non-family members to provide critical thinking is an important challenge for organizations as they grow. For the family business with longevity, legacy remains important, and having consistent values is vital. We have helped families to develop a family charter to set boundaries and rules of operation, both in terms of how the family behaves, but also in terms of how they interact with non-family members in the business. The impact of COVID-19 on family businesses is far from certain. The pandemic has hit sectors that have a high proportion of family business operators – for example retail and hospitality – and although government support has helped keep many going, a day of reckoning comes as debts start to become payable. Interest rates remain low, however, and the economy is recovering well, so one would hope that our nation of family businesses, now and into the future, will go from strength to strength. You can read more on Crowe UK’s insight into family-owned businesses here.
While across Southeast Asia, India and Latin America, family businesses make up 70 percent of companies with revenues greater than US$1 billion, in the Middle East, this figure is far higher. With an outlook of a diversified tax-based economy, family businesses continue to benefit from government initiatives to both safeguard and support them. For example, in August 2020, Dubai issued a new law regulating family businesses to help protect wealth. This spurred Foreign Direct Investment by families and boosted contribution to the country's economic and social development. Despite these robust foundations, according to Martin Roll "only about 13 percent of family businesses are passed down successfully to a third generation." The firm where I am a partner today was founded in 1981 by my father, who was a sole practitioner. It’s all about playing the long game. There isn’t a business in the world that is not concerned about long-term survival. And if they aren’t concerned, they should be. Most large organisations close or fail, because they were not able to keep up. With changes in, but not limited to consumer preferences, go-to-market approaches and digital transformation. Why then should family businesses be any different. I agree with Sunil K. Dalal’s approach to tackle that disruption head-on. In conclusion, for family businesses to evolve “they need to hold onto their core values but let go of the past.” At Crowe, our experienced advisers understand family business and are here to bring you lasting value – for generations to come.