Local family businesses an integral part of the global economy
EY’s Low (left) and Teo: Family enterprises help boost the economy, create jobs and often do a lot of social good
Kwek Hong Png’s journey as a towkay was one taken by many immigrants to Singapore before the Second World War: In the 1920s, he came to Singapore from China’s Fujian province. After working as a store hand at a hardware shop for 20 years, Kwek set up Hong Leong Company in 1941. Kwek’s goal with Hong Leong, which means “good harvest” in Mandarin, was simple: To serve the community by providing general services for ropes, ships and paints as well as supplies for rubber estates — all out of a small shophouse at Beach Road.
Today, nearly eight decades on, Hong Leong Group has outgrown Kwek’s vision, becoming a multi-billion-dollar business. One of Asia’s largest and most successful conglomerates, it remains of service to the community through its multiple businesses. These include City Developments (CDL) which develops residential and commercial properties; the Millennium & Copthorne hotel chain that operates 150 hotels across 80 locations; and its financial services arm Hong Leong Finance which offers fixed deposits and savings, mortgages, home and car loans, and share financing to consumers as well as SMEs. Also under the group is Hong Leong Asia, its trade and industry arm which provides industrial solutions to companies in Singapore, Malaysia and China.
Today, Hong Leong Group is led by second-generation leader Leng Beng, who is Kwek’s eldest son. One of Leng Beng’s initial roles in the company was as general manager and director of Hong Leong Finance, which he took on in 1967. He subsequently undertook bigger responsibilities such as transforming the then loss-making CDL into a global real estate company with a presence across 106 locations. He is also the man behind the group’s venture into China’s manufacturing and distribution industries.
Having achieved these successes, Leng Beng is known for his foresight with a nose for making astute acquisitions. However, family has always been at the core of the business, says the executive chairman of Hong Leong Group. “Whether bonded by blood or a common vision, we will carry on a legacy that continues to inspire generations,” he says.
For the legacy that Hong Leong Group built over the past 80 years, the group was conferred the Ernst & Young’s (EY) Family Business Award of Excellence this year. This award was introduced in 2013 to honour family enterprises that form an integral part of both the domestic and global economies.
“Family enterprises are an essential source of economic growth because they create jobs and often do a lot of social good,” explains Low Bek Teng, Asean family enterprise leader and assurance partner at EY, in an interview with The Edge Singapore. He reckons that these enterprises may make up some 90% of companies globally and collectively account for up to 70% of the global GDP.
At 46% and 30%, most of the world’s largest family enterprises are concentrated in Europe and North America respectively, according to the 2019 Family Business Index administered by EY and University of St Gallen. This index is obtained by ranking 500 of the world’s largest family enterprises by their revenue. Asia had the third-largest number of such companies, with 19% of the world’s top family enterprises calling the region home.
Even so, many of these companies have “made their mark by becoming household names, as consumers use their products on a daily basis”, notes Desmond Teo, APAC family enterprise leader and tax partner at EY in the same interview. Aside from Hong Leong Group, such companies include Far East Organization and Eu Yan Sang International from Singapore, the Great Wall Motors owned by the Wei family in China as well as India’s Mahindra Group owned by the Mahindra family.
Teo notes that family enterprises in Southeast Asian countries such as Indonesia, the Philippines and Thailand are “doing very well in producing large family enterprises”. The advantage these companies have is their large domestic markets that provide more opportunities for diversification and help them reach out to a larger consumer base.
By contrast, family enterprises headquartered in Singapore are constrained by a small domestic market. Therefore, they are motivated to expand regionally or globally to scale their business. However, local companies enjoy a certain home ground advantage: Singapore has good governance, a safe environment and it is easy to do business. As a result, Singapore companies, with a secure home base, are able to focus on their regional expansion, says Low.
Nevertheless, the very conditions that give Singapore an ideal business environment are also available to many other non-Singapore businesses. “Singapore should focus on supporting these family enterprises so it can become a regional hub for such businesses,” says Low.
Aside from boosting Singapore’s economic development and job creation, Low and Teo say this can help create competition for family businesses in Singapore, pushing them to become more productive, efficient and creative in their product and solution offerings.
Three generations of wealth
Indeed, family businesses do have some peculiarities compared to other types of organisations. According to the EY experts, family enterprises have two unique characteristics that are absent in SMEs and MNCs. Firstly, as long as the families themselves are very much in control, they can afford to make decisions for the longer term without being distracted by other stakeholders who may focus on short-term goals.
Secondly, Low says that families — and their close personal relations — are intertwined with the operations. As a result, emotions often become a large determinant when it comes to decision-making. Using the case of cash flow constraints as an example, Low notes that a leader of a business that is not family-owned may choose to divest or cut costs from a business unit that is not performing as well. In contrast, the leader of a family enterprise may not be as keen to make such a decision as they may place a higher priority on the social element of the business. These include the history of the business unit as well as the lives and livelihoods of the individuals involved.
As a result, rightly or not, family businesses are perceived to be traditional in terms of the mindsets of the leaders, and also the kind of sectors they operate in. There is also the old Chinese adage that wealth cannot pass beyond the third generation. However, Low and Teo are quick to dismiss these misconceptions and say it really depends on what the leaders want for the company.
“What we find is that companies with leaders that are agile, foster innovation and are forward-thinking are the ones that are successful in surviving across multiple generations,” notes Teo. His reference point is the attitudes and performance of the family enterprises that EY advises, which include more than 80% of the world’s top 500 family enterprises.
At present, these family businesses see the involvement of the next generation who are typically millennials. “Unlike in the past, we are now seeing that the patriarch or the matriarch of the business have been starting to get the next generation involved earlier in the business so they can guide their successors who are typically younger,” mulls Low.
He views this as good for the business as these individuals tend to be better educated than their older family members. They also enjoy a head-start through diverse experiences ranging from overseas exchange programmes and internships to taking on jobs in a field outside the specialisation of the family business before they join the family business. What the experience does is broaden their perspectives on the New economy, such as the e-marketplace for the purchase and sale of goods and services, virtual payments and banking, as well as FinTech. It also builds the younger leaders’ network, which is critical in helping them understand the tastes and preferences of cultures across geographies and age groups, adds Teo.
The way he sees it, this understanding is critical for business owners as it will enable them to adapt business models to ensure the relevance of their product offerings to society as well as the economy as a whole.
At a micro level, Low reckons that the younger generation of leaders may also be open to hiring individuals outside of the family — unlike their older family members who may have a strong preference to keep the top management ranks within the family. Hiring outside the family — especially for roles that family members have limited experience and knowledge in — will help boost the company’s capabilities, innovation and product offerings.
Meanwhile, Teo and Low have also observed a completely different situation: Next-generation family members not wanting to come into the family business. “Many of today’s youngsters prefer to experience the world first and have varied experiences that bring about a positive impact on society. Not all of them may be keen to become a CEO,” muses Low. He notes that some of these individuals go on to work with the family office arm of their family enterprise. The benefit of this is that the individuals can still contribute to their family’s group, but in a role that is better suited to their interests.
As with any business, the success and legacy that a family enterprise leaves is dependent on the governance structure it adopts and Low and Teo have an effective tool for that: The EY Growth DNA model that entails four overarching categories of values, family, assets and business. “This model breaks down every aspect of the business from its purpose, to ESG goals to growth strategies, capital deployment and innovation plans. So, planning, according to this, is one step towards breaking down the long-term goals of the enterprise,” stresses Teo.
Aside from this, Low deems effective and open communication as necessary skills needed among leaders such as from the older generation as well as the younger ones touted to take over their reins. “Very often the conversations that families need to have are the ones they say they can’t have because they’re too difficult. They lift the carpet, sweep it under and 20 years have gone by,” he notes.
Having these difficult conversations early on would prevent misunderstandings between family members, especially cousins and other distant relations, who, unlike siblings, may not share the same level of familiarity and comfort level.
Given the heft of its contribution to the global economy, it seems family enterprises should start having these difficult conversations now so that they can propel their businesses to generate positive economic activity in what is deemed the world’s worst recession. In the process, they may very well build a resilient business model that lasts several decades, just as the Hong Leong Group has done.