28 January 2015

Singapore's family-run businesses the least prepared for succession

Family businesses in Singapore are the least prepared of five countries in Southeast Asia for what happens after the current business leader steps down or retires, according to a new report commissioned by the Labuan International Business and Financial Centre (IBFC), a mid-shore international business and finance centre serving the Asia Pacific region.

Source: Labuan IBFC.
Just 58% of Singapore family businesses have prepared for succession, states the Building Legacies: Family Business Succession in Southeast Asia report* by the Economist Intelligence Unit. A further third (35%) have established formal wealth management structures such as private foundations while 41% maintain trusts for inter-generational wealth transfer, fewer than their peers in Indonesia, Malaysia, the Philippines and Thailand.

In contrast, Indonesian family-run businesses reported the largest share of companies with formal succession plans. The survey found that 78% of family businesses in Indonesia have formal succession plans, with 57% saying they have already established private foundations and 53% reporting that they have trusts to manage wealth and succession.

Kevin Plumberg, Senior Editor, Thought Leadership, Asia, EIU, the editor of the report, noted that succession planning is more than the naming of a successor. He said: “The question is whether it's the right plan, something that can last for generations."

Plumberg highlighted the counterintuitive finding that business families in Singapore, a financial hub for the region, lag in their use of foundations, trusts and external advisors when it comes to succession issues, whereas family-run companies in Indonesia are leaders. "It is representative of the region’s diversity as well as its uneven progress in addressing questions about succession,” he said.

The report, based on a survey of 250 majority family-owned businesses from Indonesia, Malaysia, Singapore, Thailand and the Philippines states that 60% of all listed firms in Southeast Asia are family-run, making their success crucial to national economies. The report also found that customers and investors have more trust in a family-owned business with a succession plan than those without, with 71% of regional family business leaders acknowledging it is easier to attract investment with a succession plan in place.

Saiful Bahari Baharom, Chief Executive Officer of Labuan IBFC, said: “Family-run businesses account for more than 60% of all publicly-listed companies in ASEAN, making them an essential part of the region’s growth. Considering the significance of these businesses to the region, this research has shown that there is an over-reliance on informal structures such as family councils to manage succession issues, which are neither legally binding nor necessarily permanent structures.”

Research highlights include:

  • Two-thirds (67%) of respondents said they have a succession plan, while 71% of these two-thirds have had the plan reviewed by their boards.
  • Two-thirds (65%) say the family is involved in long-term decisions about the company and 29% are involved in day-to-day operations.
  • Ten percent of businesses have measures in place to allow family members to be excluded from management. Businesses in their third generation or later have usually instituted such a measure. 
  • More than half (55%) of all Southeast Asian business families use informal gatherings or family councils for business governance. "Retaining control is paramount," Plumberg explained. 
  • Indonesia leads the pack with 74% of respondents reporting that they have a family council, with Thailand a distant second with 56% of respondents reporting the same. Singapore was dead last with 40% of respondents saying that they have a family council.

The full report is available online here.

*The report is based on a survey and interviews conducted in from July to August 2014. Survey respondents included 250 majority family-owned businesses from Indonesia, Malaysia, the Philippines, Singapore and Thailand. All respondents have senior managerial responsibility at a minimum, and 50% of respondents are board members or C-level executives. Slightly over half (54%) are first-generation businesses. Sixty-two percent of survey respondents are from companies with global annual revenues of US$150 million or less, and 11% make US$1 billion or more.