FAMILY MATTERS
The strengths that helped many familyrun businesses weather the pandemic can be put to good use in building back better. By Nareerat Wiriyapong
Driven mainly by the economic fallout from the protracted Covid pandemic, the tumultuous events of the past year have presented family businesses with unprecedented challenges.
Although many have demonstrated significant resilience, the rapidly changing state of the world has served as a wake-up call for family business leaders looking toward the future.
Yet even as they reconfigured their operations to combat shrinking economies and an uncertain future, the health and safety of their people was the priority.
The people-first approach also extended to supporting the communities where they do business. They believe the strong fundamentals that are their hallmark — commitment to values, long-term thinking and sensible leverage — are what recoveries are based on.
It happened in 2009 after the financial crisis when family businesses rebounded to build back opportunities in a weakened world economy. And it will happen again in the post–Covid recovery for two key reasons: family businesses are more trusted than other institutions and leaders, and, in most sectors, they are more resilient.
“The unprecedented Covid-19 pandemic has tested business families’ capacity to adapt to change and be resilient across generations,” said Farhad Forbes, chairman of the Lausanne-based Family Business Network (FBN), the world’s largest organisation of its kind.
“Family businesses contribute meaningfully to both economic growth and employment, and with their inherent focus on long-term success and responsible ownership, many create a more purpose-driven model of business. These contributions have also been amply demonstrated during the pandemic.”
The FBN gathers 4,000 business families in 65 countries, encompassing 17,000 individuals, of whom 6,400 are next-generation leaders. Mr Forbes is the chairman of Forbes Marshall, an engineering and utilities management company based in Pune, India.
FBN collaborated with PwC for the latter’s Family Business Survey 2021, the tenth edition of the global survey, conducted from October to early December 2020. The responses from 2,801 family businesses in 87 territories confirmed their resilience and optimism about the future.
Before the pandemic, 55% of respondents were predicting growth for 2020 — the lowest percentage since 2010, the year following the global financial crisis. But at a time when companies raised a record US$3.6 trillion in capital from public investors to ensure liquidity, only 21% of family businesses said they required additional capital in 2020.
Now, looking beyond Covid, almost half (46%) of family businesses expect sales to decline. But 86% anticipate a return to pre-pandemic growth rates by 2022, an impressive level of optimism given that no vaccines had been approved when the survey was conducted.
Not surprisingly, the impact of the pandemic on sales has been uneven across sectors. Eighty-four percent of those in hospitality and leisure — the highest proportion of any sector — expect a contraction, followed by 64% in automotive and 63% in entertainment and media.
Only one-third (34%) of businesses have had to cut dividends, while 31% of family members have taken salary cuts. Overall, only 21% needed to access extra capital; 15% of the owners are putting in more of their own cash, and a further 23% say they are prepared to do so if necessary.
This optimism isn’t blind; it’s based on planning and risk management. Four out of five (82%) are prioritising diversification and/or expanding into new markets or products. These are two of the three top priorities for businesses over the next two years, the survey noted.
Nonetheless, the results show that the world is changing, and so is the formula for lasting family business success.
“If family businesses want to get to the sweet spot where competence and ethics converge, it requires a change of mindset, a rethinking of their priorities and behaviours and a new definition of legacy,” said Peter Englisch, global family business leader and a partner with PwC Germany.
STRENGTHS OR WEAKNESSES
According to McKinsey & Company, about one-third of the Fortune 500 today comprises family-run or family-owned businesses, with a large portion coming from emerging economies in Asia.
“In the past three decades, changing trends in consumers, manufacturing and supply chain, cross-border trade flows, and technology, have all contributed to lifting both multinationals and family-run businesses to new growth levels,” it said.
Family businesses have certain strengths but if they are not properly managed and cultivated, they could become weaknesses in the long term, McKinsey pointed out.
A core strength is personal commitment/ownership, compared with public companies that have larger groups of external shareholders.
“How this personal investment fits into the company’s governance structure is important. If left unchecked, concentrated ownership, lack of transparency and poor investor relations may occur,” said the McKinsey research shared with Asia Focus.
“Achieving the right governance balance requires putting in place a strong board and advisory council, and fostering employee engagement, empowerment and incentives.”
Other aspects of family involvement are often expressed in intangible terms through the organisation’s culture, values and brand. This too can be a double-edged sword.
“If not properly managed, these factors can result in a rigid culture marked by blind trust and complacency, authoritative leadership style, and lack of innovation,” the international consulting firm cautioned.
“Being aware of the dark side of family capital is often the first step to properly managing it, followed by cultivating an open and transparent culture, fair talent and performance management, and diversity and inclusion.”
Harald Link, the third-generation chairman of B.Grimm, said family businesses in principle always have a long-term view, whereas large corporations are run by people with a maximum five-year contract. “They have a fiveyear view, so don’t lose my job before the end of the contact,” he joked during a conversation with Asia Focus.
When a crisis comes, the first thing large companies think about is how to cut costs. They don’t care as much about
With their inherent focus on longterm success and responsible ownership, many [family-run businesses] create a more purposedriven model of business
FARHAD FORBES Chairman, Family Business Network
the people, said Mr Link, whose family founded B.Grimm, now one of Thailand’s largest industrial conglomerates with businesses that span Asean and beyond, more than 142 years ago.
“In family-run companies, we don’t think first about how many people will be let go,” he said. “We think about how we can look after our people and how can we look after the business at the same time. You will find high personal and social engagement with the community and with the people, with the long-term view.
“When you have a family business, how do you develop the family so that the love remains and all the family members keep supporting the business, either with the heart or with the hand or with both.”
Family businesses, says Mr Link, have a stronger chance of survival. “They are owned and run by people whose life depends on that and they don’t have anyone else to support them. They also want to be part of society. That’s why I think that for long-term success, family businesses maybe have a chance of a better outlook.”
It is important for the family to instil the love for the company, he pointed out. “Sometimes, some founders or business owners are so married to their work and they forget how to pass it on. So communication is very important.
“It is very important to be clear with your children, and for your children to be clear with you that what they want, what they think they can achieve and how to work, or to run the business and how to pass it on, because finally it’s about passing it on.
“Many of my friends, at my age, they have this issue about how they can pass it on properly,” said Mr Link, who is 66.
Supat Ratanasirivilai, managing director of Thai Metal Aluminum Co Ltd, said family-run businesses make much quicker decisions. Directors and decision-makers of large corporations always require well-rounded information and that makes the decision-making process much slower.
“Family-run businesses are more efficient and nimble and move faster. We take action faster, both going forward and reversing. In effect, it allows us to take advantage of opportunities while limiting the drawbacks of bad moves by reversing quickly as well,” said Mr Supat, who eight years ago took over the company that was founded by his father.
“As well, being smaller and nimbler, we also carry less overhead costs than big corporations. So we can price our products and services lower in general,” he told Asia Focus.
SUSTAINABLE & DIGITAL
One interesting finding of the PwC report is that Asian family businesses show a stronger commitment to prioritising sustainability than their European and American counterparts.
“79% of respondents in mainland China and 78% in Japan reported ‘putting sustainability at the heart of everything we do’ compared to 23% in the US and 39% in the UK,” it noted.
“It is clear that family businesses globally have a strong commitment to a wider social purpose,” said Mr Englisch. “But there is growing pressure from customers, lenders, shareholders and even employees, to demonstrate a meaningful impact around sustainability and wider ESG (environmental, social and governance) issues.
“Many listed companies have started to respond but this survey indicates that family businesses have a more traditional approach to social contribution.
“This is not just about stating a commitment to doing good but setting meaningful targets and reporting that demonstrate a clear sense of their values and purpose when it comes to helping economies and societies build back better.”
The pandemic, meanwhile, has demolished any lingering doubts about the benefits of digital transformation. Digitised services became the norm overnight, and businesses with digital capabilities fared better than those that had to scramble to keep up.
And while 80% of family businesses surveyed by PwC adapted to the challenges of the pandemic by enabling home working for employees, there are concerns about their overall strength when it comes to digital transformation.
“There is clear evidence that having strong digital capabilities enables agility and success, and that [businesses that are strong digitally] have a similar enthusiasm for sustainability,” Mr Englisch said.
“Businesses should consider how they can engage the experience and fresh insight of next-gens when it comes to prioritising their digital journey.”
B.Grimm’s Mr Link acknowledged that when family businesses look at making digital moves, they tend to be pragmatic, looking at the tangible benefits for the business. “Not just to do stuff so you can say, ‘I’m digitised, and I do digital things.’ It has to be purpose-oriented,” he said.
Mr Supat believes digitisation depends largely on the profile and background of the owners.
“In our case, my sister is quite tech-savvy and, in my opinion, she deploys the power of digitisation to the maximum possible level for an organisation like ours,” he said. “We computerised documentation in our production processes. For example, we use iPads rather than paper for the instruction manuals for production of different products.”
McKinsey argues that many family companies in Asia have in fact been driving digital disruption and innovation for years. “Even before the Covid outbreak, Asian companies were among the most technologically advanced, serving the world’s most digitally savvy consumers,” it pointed out.
According to new research by the McKinsey Global Institute (MGI), over the last decade, Asia has accounted for 52% of global growth in technology company revenues, 43% of startup funding, 51% of research and development spending, and 87% of patents filed.
Family companies in Asia have played a tremendous role in advancing the progress of new technologies, facilitated by the region’s existing strengths in manufacturing and infrastructure. “As Asian economies continue to globalise and grow in scale and influence, family companies are likely to play increasingly important roles in contributing to the digital and innovation capabilities of the region,” McKinsey said.
The PwC survey, meanwhile, observed that while financial resilience makes family businesses well-placed to succeed, they should take a closer look at their role in society in the post-Covid age. “They will need to revisit their purpose and use the trust they have gained to create measurable non-financial impact,” it said.
Next-generation family members, it added, “will play a vital role in pushing family businesses forward in policy areas that are essential to the company’s legacy”.
The European Union and China in late January released new details about the Comprehensive Agreement on Investment (CAI) that they concluded in December. On paper, EU negotiators made some progress in important areas including market access, investment liberalisation and sustainable development. But can an incremental bilateral agreement like the CAI really govern economic relations with today’s China?
To be sure, the EU has secured market access in important sectors — including electric vehicles, cloud computing, financial services and healthcare — largely through the relaxation of equity restrictions. But full details have yet to be made public, and it remains to be seen how many of these commitments are entirely new.
It is possible that the deal largely codifies the steps China has already taken to increase market access, either through its own investment laws and regulations or on an ad hoc basis.
Furthermore, while equity restrictions form a formidable barrier to market access, they are hardly the only ones. Foreign companies often face a series of other regulatory hurdles, which they can clear only by securing approvals from multiple Chinese agencies — a time-consuming and frustrating process.
In any case, the content of the CAI is only part of the story: China often disregards its bilateral commitments. Australia is a case in point. Despite a comprehensive bilateral free-trade agreement, China recently imposed restrictions on imports of Australian wine, barley and coal, among other products, over what are essentially political grievances.
For example, China took issue with Australia’s decision to ban Huawei from its 5G network and its calls for an independent inquiry into the origins of the Covid pandemic.
Australia is not an isolated case. After South Korea’s 2016 decision to deploy an American missile-defence system within its borders, China imposed heavy economic sanctions, despite the bilateral free-trade agreement that had come into force the previous year. If Chinese authorities are not hesitant about abandoning their trade commitments, what is the point of securing them?
The CAI’s attempt to address market distortions caused by the Chinese government’s hands-on approach to economic management is similarly dubious. With Chinese firms receiving large subsidies and other official financial assistance, it is difficult for foreign companies to compete with Chinese firms, both in China and in third countries.
To address these distortions, the CAI includes provisions for enhancing the transparency of services-related subsidies. But its mechanism for discussing other harmful subsidies — where some of the greatest problems lie — is unenforceable.
Moreover, while the CAI’s rules on SOEs are stronger than those imposed by the World Trade Organization, they fall far short of those contained in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. More robust provisions in these areas are essential to make any trade and investment agreement with China meaningful.
The CAI’s final crucial weakness relates to labour provisions. In particular, China offered only a vague and unenforceable pledge to “make continuous and sustained efforts” to pursue ratification of the two relevant International Labour Organization (ILO) conventions on forced labour.
Make no mistake: given China’s highly centralised government, its leaders could quickly ratify the conventions. They simply don’t want to. Chinese leaders have consistently resisted international obligations that permit intrusive inspections, including in response to increasingly dire reports of forced labour by Uighur Muslims in Xinjiang.
With the forced-labour issue reportedly the last to be settled, it seems clear that sealing the deal required the EU to yield on this vital human-rights issue. And for what? A modest and incremental agreement that will deliver only limited economic gains to Europe.
The CAI might have made sense in 2013, when negotiations began. But it is certainly not equipped to address the challenge China poses to the global economy today. On the contrary, it may strengthen China’s hand in rebuffing international calls for meaningful reform.
After all, it was concluded just before the inauguration of US President Joe Biden, despite signals of concern from his team. In this sense, it could complicate the new US administration’s efforts to build a coalition of like-minded countries to address the challenges posed by China.
At best, the CAI is too little, too late. The same goes for the “phase one” trade deal that Donald Trump hailed a year ago. Rather than address the critical issues of government subsidies and the market-distorting role of SOEs, the Trump administration said they would be included in “phase two” negotiations, which never began.
In deciding whether to approve the CAI, the European Parliament and EU member states should think long and hard about China’s track record of disregarding its trade and investment commitments, cutting market access in informal and opaque ways, and brazenly violating human rights. Such an honest assessment would produce a clear conclusion: bilateral deals are not enough.
It is clear now that no single economy can compel China to change its most problematic behaviours, from excessive subsidies and industrial overcapacity to human-rights violations. A collective approach, rooted in effective transatlantic cooperation, at least has a fighting chance.
If Chinese authorities are not hesitant about abandoning their trade commitments, what is the point of securing them?
In the healthcare industry, the coronavirus pandemic led to big fortunes, fast. Now some of them are evaporating just as quickly.
Take Seegene Inc, a maker of Covid19 test kits, and Alteogen Inc, a biotech company Specialising in subcutaneous-injection technology. Their founders became paper billionaires as their shares surged last year. Fast-forward a few months to the vaccine rollout, and they’ve lost their title after both stocks have sunk more than 41%, according to the Bloomberg Billionaires Index.
It’s a similar story for glovemakers in Malaysia, which counted at least five industry billionaires by August as the worsening health crisis increased demand for the protective gear. Despite a brief rebound amid a recent frenzy in retail trading, their shares are down at least 40% since hitting highs, wiping more than US$9 billion from the net worth of their founders.
While the billionaires created by the Pfizer and Moderna vaccines have maintained much of their wealth, many others have seen a falling off. The moves show how fleeting fortunes can be with a market so wild that some stocks have had days with fluctuations of more than 20%.
Some of the founders took advantage of the volatility to book profits, just as others increased their control by buying more shares as prices fell.
“It doesn’t look like fortunes made from a sudden boom in demand — such as for test kits or biotech — will continue to grow once things get more stable,” said Park Ju-gun, president of the Seoulbased corporate watchdog CEOScore. He expects platform-based services that thrived during the pandemic will lead to further wealth creation.
The emergence of Covid-19 and its rapid spread across the globe led to an immediate need for test kits, protective gear and treatments for the disease.
Companies such as Seegene, Alteogen and Top Glove stepped up.
Seegene developed a test kit in late January of last year. Alteogen licensed its injection technology that enabled patients to self-administer medications. Top Glove, the world’s biggest maker of rubber gloves, beefed up production and continues to do so — it’s aiming to produce 110 billion pieces of the protective gear annually by December, up from 91 billion now.
Each of the stocks climbed at least 500% last year at their peak, with Seegene up as much as 919% by August as demand for test kits rose. South Korean President Moon Jae-in even visited the company’s headquarters in Seoul after then-US President Donald Trump asked for medical equipment to help fight the virus.
“I’ve never felt more pressure in my life,” Seegene founder Chun Jong-yoon said in an interview with a local newspaper last June.
But the vaccine rollout has put a brake on the ascent. While Seegene’s revenue for 2020 jumped almost tenfold and Alteogen’s more than doubled in the third quarter, the shares have slumped on scepticism over their ability to maintain such growth.
Chun and his family, who together own 31% of Seegene, are now worth about $840 million, down from $1.6 billion last year. Alteogen’s Park Soonjae, who controls 25% of the company with his family, is valued at $830 million compared with $1.4 billion at the peak.
Glovemakers, which are mostly in Malaysia, became the focus of short sellers soon after the country lifted a ban on such bets against equities at the start of the year. The Reddit-inspired retail trading craze that lifted Top Glove and others in January proved short-lived.
Almost $2.2 billion has evaporated from the net worth of Top Glove founder Lim Wee Chai and his family since October. The fortunes of Thai Kim Sim (Supermax Corp), Kuan Kam Hon (Hartalega Holdings) and Lim Kuang Sia (Kossan Rubber Industries) are each down more than $1.2 billion, while Wong Teek Son (Riverstone Holdings Ltd) is no longer part of the 10-digit club.
Some of the Chinese healthcare and biotech companies that produced new billionaires after the pandemic’s outbreak have also tumbled, including Allmed Medical Products Co, a maker of gauze products and surgical masks, and Guangzhou Wondfo Biotech Co.
Some of the newly ultra-rich have taken advantage of the market volatility.
The Lims of Top Glove bought almost $23 million worth of shares since early December as the stock fell, strengthening their control over the company, while Kossan Rubber’s founder purchased about $4.9 million of equity after he and his family made more than $128 million selling some of their holdings through August.
Alteogen’s Park family gained about $12 million from offloading shares through September, while the Chuns also sold some Seegene stock.
Others are holding on to their gains. Li Xiting, chairman of the Chinese medical-equipment maker Shenzhen Mindray Bio-Medical Electronics, became Singapore’s richest person with a fortune of $23.8 billion as the company’s shares hit a record high last month.
Shares of Moderna and BioNTech, whose Covid-19 vaccines are being administered around the globe, have more than tripled in the past year, boosting the fortunes of at least six billionaires.
And of course tech entrepreneurs that benefited from lockdowns and work-from-home arrangements — such as Jeff Bezos of Amazon.com, Eric Yuan of Zoom and Forrest Li of the Singapore gaming firm Sea Ltd — remain big winners despite recent stock drops.
But for many companies, the tide has already started to turn.
“The extravagant rise in stock prices is going to be far-fetched, and it’s unlikely they’ll grow at the same rate,” said Nirgunan Tiruchelvam, head of consumer sector equity research at Tellimer. “We’re going to see a rotation from virus stocks to vaccine stocks.”
“It doesn’t look like fortunes made from a sudden boom in demand — such as for test kits or biotech — will continue to grow once things get more stable”
PARK JU-GUN CEOScore