Family Business

Family Business: a
Roger King, PhD
Adjunct Professor of Finance
Director of Center for Asian Family Business Studies
Director of Center for Business Case Studies
Induction to HKUST
• No. 1, World's Top 200 Asian Universities (2011)
(QS Asian University Rankings)
• No. 40, World's Top 200 Universities (2010)
(QS World University Rankings)
• No. 41, World's Top 200 Universities (2010)
(Times Higher Education World University Rankings)
• School of Business & Management
• No. 47, World's Top 100 Universities in Economics/ Business (No. 1
in Greater China) (2010)
(Academic Ranking of World Universities by Shanghai Jiao Tong
Kellogg-HKUST EMBA Program:
No. 1, Global EMBA Rankings (2010)
No. 1, Global EMBA Rankings (2009)
No. 2, Global EMBA Rankings (2008)
(Financial Times)
Full-Time MBA Program:
No. 6 in the world (2011)
(Financial Times)
School of Engineering
No. 26, World's Top 100 Universities in Computer Sciences (No. 1 in Greater China)
No. 39, World's Top 100 Universities in Engineering/ Technology and Computer
Sciences (2010)
(Academic Ranking of World Universities by Shanghai Jiao Tong University)
No. 20, World's Top 50 Universities in Engineering and Technology (2010)
(Times Higher Education World University Rankings)
No. 26, World's Top 100 Universities in Engineering and IT (2010)
(QS World University Rankings)
• Center of Asian Family Business and
Entrepreneurship Studies
Topics to be Covered in the 1st
• Why family business is important?
• Family business is complex
• Notion of Wealth Preservation from generation to generation,
Harmony amongst descendants and preservation of Legacy
• Distinct characteristics of Asian/Chinese family Businesses
• Some unique causes of early demise of Asian/Chinese family
businesses: Wealth does not past beyond 3 generations (shirt
sleeve to shirt sleeve in 3 generation)
• Current challenges facing Asian Family Businesses: Culture
clashes, globalization, value vs. relationship based
How many of you are from a family
So what is a family business?
Common Myths of Family Business
• Small business – mom and pop
• No growth
• Limited capital
• Nepotism – lack opportunities for nonfamily members
• Generational conflicts and succession
Why family business is important?
• Family businesses are pervasive and
• Family businesses are more profitable
• Family businesses are better place to work
• Family businesses are complex
Family Businesses are Pervasive
and Significant
• USA:
20% of 1,000 largest firms are family owned
1/3 of the S&P 500 firms and 18% of outstanding equity
60% of workforce
Wal-Mart; Ford; New York Times; Cargill; Mars
• China:
– 70% of GDP and 75% of the workforce
• India:
– 20 groups (16 family controlled) = 66% private sector assets
• Germany:
– 66% of the GDP and 75% of workforce
Family Businesses are More
26% vs. 21% ROIC
Morgan Stanley:
16%/yr vs. MSCI & 18.5% ROE
vs. 14.1% ROE
30% Premium MV/BV
Largest FB 1000:
Forbes 400 Private
+35% ROIC
5 – 10% S&P 500
Greater sales revenue per employee
Family Businesses are Better Places
to Work
• Founder Businesses
• Family Businesses
• Partnerships
• Non-Profits
• Associations/Co-Ops/ESOPs
• Widely-Held
Family Businesses are Complex
Family first or Business first?
Family Businesses are complex
Another reason is the complex relationships
between various interested parties
Family owner only
Family manager only
Family owner and manager
Family no ownership and management involvement
Non-family owner only
Non-family manager only
Non-family manager with ownership
Family Businesses are Complex
A key reason is Family Business are the blending of two
inherently different realms – performance-based of
business and emotion-based of family. A system fraught
with role confusion and conflict.
•Emotional based
•Subconscious behavior
•Inward looking
•Risk averse and slow to change
•Task based
•Conscious behavior
•Outward looking
•Exploit changes
Key Concerns of Founders
of Family Business
Perpetuate the family name and values
Wealth preservation for descendents
Division of family wealth amongst descendents
Policy for family members to participate in
• Role, if any, for spouses, in-laws and other
• Harmony amongst descendants
Yet Most Family Business
Cannot Survive Beyond 3 Generations
“Shirt Sleeves to Shirt Sleeves in 3
“Wealth Doesn’t Pass Beyond the 3rd
• The first generation creates the business
• The second generation enjoys the business
• The third generation destroys the business
Reasons/Causes of Early
Demise of Family Business
The single greatest cause of demise of family
businesses is family conflicts
Notion of “Steward” and “Inheritor”
• Steward refers to a member of the 2nd generation
who wants together with his or her fellow siblings
to see the family firm continue under family
• Inheritor sees their ownership in simple financial
terms and lack emotional commitment
Unique characteristics of Chinese
culture and family business
• For Chinese family businesses, the most important
family values are Confucian based
• Respect (孝 xiao) is the most important virtue in
• Five basic social relationships are – father and son,
ruler and ruled, husband and wife, elder brother
and younger brother, and friend and friend
• Hierarchical relationship - the ruled is expected to
be submissive to the ruler, while the ruler is
expected to be kind and caring to the ruled
Unique Characteristics (cont’d)
Family is always more important than any
individual member, and harmony is the most
important value for all family members. Without
harmony, no family can stand, neither can a
family business
Social and economic network relationships (关系
guan xi) are highly valued and they tend to be
based on personal friendship and trust (信用xin
yong) rather than on a formal contractual
Unique Characteristics (cont’d)
• Confucian influenced cultures are among
the most collectivist. The Anglo-American
culture is the most individualistic
• Work, leisure and home life are blurred
• Often job specification are irrelevant – all
are required to do whatever is necessary to
complete the task
• Face saving is essential to avoid direct
confrontation on poor performance –
handled through indirect hinds
Unique Characteristics (cont’d)
Reasons/Causes of Early
Demise of Chinese FB
Political stability and its implications on Family
Business Longevity
Lack of appreciation for branding, long-term
capital investments and R&D (notion that “the
bag is always packed” –Diaspora mentality
especially amongst the ethnic Chinese)
Equal (or near equal) inheritance amongst male
descendants vs. primogeniture (Europe and
Japan) - fragmentation of economic resources
and causes sibling rivalry
Reasons/Causes of Early
Demise of Chinese FB (cont’d)
• Lack trust of anyone outside of family (nepotism)
– limited talent pool
• Local (regional at best) vs. global businesses
• Relationship vs. market driven business
Current challenges facing Asian Family
Businesses: Culture clashes,
globalization, value vs. relationship based
• Better and often western educated (over 90% have
university degrees and ~26% have a MBA from Europe or
US – value system influenced by other (Western) cultures
• Better career opportunities outside of family business –
reluctant or unwilling to join the family business (notion of
obligation, burden and/or duty)
• Willing to invest for future: brand, product development
(R&D), and diversification (including M&A)
• Performance and accountability driven – potential for
sibling conflicts
• Global vs. local orientation
Concluding Remarks
• Family business is pervasive and important globally
yet few survive beyond the 3rd generation
• This is true for Chinese as well as Western family
businesses who have very different family
governance systems
• So can we conclude one system is better than the
other – perhaps not
• Are there concepts that we can learn from both
systems to increase the survival rate of family