The Road to Family Harmony & Wealth

There are many similarities between family and business dynamics. Ethnic Chinese people in Southeast Asian countries have started many family businesses and Chinese mainland family businesses have many similarities to their Southeast Asian counterparts. Family values have also evolved across different countries and generations. The biggest challenge unique to Chinese mainland family businesses is China’s one-child policy, which restrict the successors’ selection. Prof. Annie Koh, Vice President of Business Development and External Relations & Academic Director of the Business Families Institute at Singapore Management University, has explored how members from different families cooperate with others. Among the companies she has studied is the Wen Ken (WK) Group.
 

The WK Group was co-founded by four families in the late 1930s. The collective spirit of cooperation and the common values and traditions of this inter-family group forms the cornerstone of the company. Both tradition and heritage are very important, especially for the younger members of the second generation. Even in today’s fast-paced, globalized information economy, they know where they came from and what they should carry forward to the next generation. The ethos of the WK Group is rooted in a shared history that is underpinned by mutual respect and filial piety. These values are not unique to Asia; even in Europe, people also revere them.


Family Wealth and Family Businesses: From the SEW and Governance Perspectives


Harmonious Family Relationships
 

Harmony is one of the preconditions for a successful family business, and is essential for both the business and the family. Harmony is expressed through two forms of healthy family relationships: respect for the older generation and good communication and consensus among the younger generation. In Chinese family businesses, there is often insufficient communication among family members, especially between the younger generation who have been educated abroad, and the older generation. Communication is the key to ensuring that family heritage is passed on.
 

In recent decades, we have been so focused on the family businesses themselves that we have neglected a very important insight, namely that “family harmony is the basis for success in any undertaking.” Family members all have different personalities, likes, skills and merits, and we must learn to accept and appreciate this diversity.
 

The HR departments of many businesses today use two qualities in evaluating people, known as D&I (Diversity & Inclusion). As Chinese family businesses go global, they will recruit more and more talented people with different national and cultural backgrounds. Not all people (family members included) will fit comfortably into the culture and atmosphere of a family business. Therefore, harmonious families and businesses must make an effort to seek commonality while also respecting individual diversity.


The Life Cycle of a Family Business
 

The life cycle of a family business has multiple stages of development. China’s Reform and Opening Up began in 1978, which means that some Chinese family businesses have now been in operation for 35 years. After starting the company in 1937, the first generation leaders (G1) ran the WK Group from the 1930s until the 1950s.
 

Stage 1 – Survival. The G1 entrepreneurs must make every effort to ensure their business survives. In the 1960s and 1970s, Singapore experienced industrialization and economic growth that attracted many multinational corporations. Many companies based their operations in Singapore, creating employment opportunities that were very important to a nation which had manpower but no resources. During this period, the WK Group was run by its G1 leaders and the development goal, or major focus of the company was to generate sales. The company’s focus was to expand market share and build its brand, rather than just generating profits.


Stage 2 – Growth. During the 1980s and 1990s, the WK Group was run by its G2 leaders, who believed the company should not limit itself to traditional businesses: instead, after gaining a certain amount of market share they would expand a product line. Thus the development goal for this generation was achieving success. For G2 leaders who are ready to take or have taken up the baton, the pressures and responsibilities they assume are no less than those of their predecessors.


Stage 3 – Innovation. In this stage, both heritage and transformation are critical, and both reflect the problems facing Chinese family businesses today. The G3 leaders of the WK Group began to focus on research and development (R&D) and internationalization. They cooperated with private equity firms to build research centres and worked together with universities on R&D. The G3 leaders combined innovation with entrepreneurship. Innovation is necessary for any family business that wants to survive increasingly fierce competition. The younger generation plays a vital role in the innovation process.


F.I.S.H.
 

The WK Group has four types of capital, referred to as FISH: Financial Capital, Intellectual Capital, Social Capital and Human Capital.


Family Wealth and Family Businesses: From the SEW and Governance Perspectives


Financial Capital. The WK Group believes that every business needs financial capital; without this, it’s impossible to sustain the business. Neither bank loans nor private equity investments are as good as your own financial capital. But only when supported by a sound cash flow can operational financial capital play a positive role in managing a family’s current businesses. It’s one of the most important resources for any family business. Meanwhile, shareholders’ interests are also very important, as is using the family wealth fund to offer incentives for future generations.
 

Intellectual Capital. Many Chinese family businesses today pay great attention to R&D and innovation – this emphasis is appropriate. In addition, intellectual property rights are very important: even manufacturing enterprises in the textile industry may possess intellectual property rights. The brand, network and even the market are valuable intellectual capital for a family business, so the family must protect their brand and make their descendants proud of being connected to the business name. Meanwhile, they should value their family reputation, which is also a kind of asset.
 

Social Capital. When passing the baton, one of the most important and challenging questions entrepreneurs face is how to hand down their social networks and connections to the younger generation. Indeed, such intangible assets are the company’s greatest source of wealth. Social capital is very important for family businesses because they like to do business with other families. This is an advantage for the family business community as this is a powerful group.
 

Human Capital. Family businesses have two types of human capital: Family members (as business owners or managers) and non-family members (as business managers or possibly even owners). Regardless of any familial ties, both must be developed through “education + work/life experiences and exposure”. To become the owner of a responsible family business, one is not required to work within the business, but must understand what it means to be the family business owner and what that responsibility entails. In terms of human capital development, family businesses should deepen their bench strength: a family may not necessarily have the most appropriate person to promote the company’s growth, so it is important that the family learn how to attract talented people from outside.
 



Source: Prof. Annie Koh’s Speech at the 2nd China Family Heritage Forum 2013: FISH Approach to Harmony and Family Wealth, June 1, 2013.