Leadership succession challenges for Asian family businesses

31 January 2022 Consultancy.asia 4 min. read

In a new report, researchers from Russell Reynolds Associates have explored some of the key challenges family business leaders are set to face in the coming years. Anupama Puranik, a consultant at the human capital consultancy, zooms in on one of the key challenges identified: leadership succession.

Family businesses form the backbone of the Asian economy, with 85% of the companies in the Asia Pacific region owned by a family group. Meanwhile, of the top 750 global family businesses ranked by revenue, over 20% are Asia-based, with combined revenue of almost $2 trillion.

Across the continent, family businesses are undergoing a pivotal shift, where it is anticipated that over 30% will go through a generational change over the next five years, and this change is already in motion.

Anupama Puranik, Managing Director, Russell Reynolds Associates

Based on the discussions Russell Reynolds Associates conducted with family-owned businesses in Asia (over 30 for our research series), it is clear that this leadership succession wave will come with its challenges.

Need for formal leadership succession plans

One element which comes to play is the fact that in the Asia Pacific region, reflecting the economic and societal histories of each country, family businesses are generally much younger than their European counterparts and many family firms are in their second or third generation of family leadership.

According to a study by the Family Business Institute, only 30% of family businesses can be passed down to the second generation; 12% can continue to the third generation; and only 3% develop to the fourth generation or more.

Within the second generation, which largely involves siblings, conflicts tend to arise when the founder of the business has not established a clear succession plan or family charter. Often, the founder retains sole authority throughout their tenure and is relied on to resolve conflict, triggering a crisis or family feud when the founder passes away or is no longer involved in the business.

By the third generation, potential conflict intensifies as the family business now involves a bigger group that includes cousins, partners and their families (in-laws). Some of them may be more detached from the vision or understanding of the family business than the second generation. There could be added complexity as all family members may or may not be employed in the business.

With many Asian family businesses at the cusp of generational transitions, clarity around leadership succession is an emotionally difficult topic – but a necessary one to tackle for the business to thrive. Families who have mastered leadership succession either create formal succession and governance codes or charters for family members or start the process of professionalising the businesses by embedding formal governance structures, potentially involving external leaders.

Development of the next generation

A second challenge relates to ensuring that the next generation leaders are equipped with the knowledge and experience to successfully take on their (future) leadership role within the family business.

Many families develop the next generation by letting them take the lead in setting up new businesses, developing new product or service innovations, driving digitalisation initiatives, or expanding the business into new regions. White space opportunities (whether in innovative areas or geographic expansions) give the next generation room to manoeuvre; and autonomy to shape strategy or come up with new ideas without excessive risk taking, oversight and intervention.

By allowing them full ownership of these areas, current leaders give the next generation an opportunity to prove their worth and gain respect from family and non-family member colleagues.

Another trend that we are seeing among some progressive families is giving the next generation of leaders the opportunity to gain global experience in relevant ecosystems, usually in the early years of their career, before joining the family business. These experiences can be assignments in banking, private equity, accounting, management consulting, or even entrepreneurship.

This gives them first-hand experience in different functional areas and industries. In addition, it allows opportunities to bring back personal discoveries and explorations, which can be infused to rejuvenate or modernise the business.

While the above initiatives work, there is a real need to develop a broader understanding of the business and societal ecosystem. Thus, more progressive families are looking for a structured development and coaching programs to allow the incoming family members to be “fit for purpose” and “future-ready,” helping them rapidly develop their confidence and gain respect of senior professionals in the business.