Tackling succession

Known worldwide for high-tech manufacturing, 70 percent of publicly listed firms in Taiwan are family businesses, reports the Economist in its January 2018 issue.

These family businesses are the pillars of Taiwan’s economy.   Today, almost three out of four firms are still currently run by the founders, who have an average age of 62, says the Taiwan Institute of Directors.

Similarly, many Tsinoy businesses in the Philippines are still run by founders or are just transitioning to the second generation.

According to the Economist, many in the next generation in Taiwan have no desire to take over what their parents created.  “Founders … usually eschew outsiders; their children are often uninterested.

“Only 9 percent of firms have written succession plans … the global average is 15 percent.”

Though no figures exist for the Philippines, anecdotally, several in the next generation also want to tread their own path, away from their family enterprises.

Challenges

A generation gap often exists between founders and successors. This gap may include not just different working styles and mind-sets, but also innovative ideas.

For instance, Taiwan President Tsai Ing-wen rightly encourages innovation in cutting-edge fields like “smart machinery, green energy and biotech, [but] that may jar with the instincts of family-run firms.”

In the Philippines, too, successors in family businesses lose heart when founders refuse to heed their ideas, such as using social media for marketing or investing in new technologies.

“Companies with aging bosses often plan only for the short term, rely too much on their past experience and are reluctant to make bold, disruptive changes.”

Division of inheritance is another challenge.  The Economist extols the Japanese practice of naming one successor among several heirs, making succession more transparent and concrete.

In the Philippines and elsewhere, the usual habit is to divide the business among all the children, regardless of merit, temperament or quality of relationship. This is understandable, since parents usually insist they love their children equally.

But as we have discussed (“Equal is not always fair,” March 21, 2014), indiscriminately assuming that all children have equal interests, expertise and experience to continue the business may backfire.

Many parents cannot choose who among their children to lead the business into the next generation. Instead they pray that if they give their children equal shares, the latter will work things out among themselves.

Unfortunately, sibling rivalry often destroys not only relationships, but businesses as well.

What to do

Train successors as early as possible. Expose children to the enterprise while they are still young. The joys of owning and running a family business have to be instilled in them early on, so they can look forward to eventually doing their part in making the enterprise grow.

Training consists of: first, academics (an MBA or knowledge of business basics is essential for successors), and second,  street smarts (shadowing a parent, an uncle or an aunt gives insights to successors on how elders make business decisions, treat clients and employees, surmount challenges). Many founders who are used to working on their own find mentoring difficult, but it has to be done.

Choose one successor based on merit and announce such choice publicly during a noncrisis period.  If key people agree on the choice of successor, then infighting will be avoided, and everyone can focus on the business instead of family squabbles.  If no family member is qualified, then choose a nonfamily professional who can lead the business past the current generation.