Family Business: a Asian/Chinese Prospective

1. Family Business: a Asian/Chinese Prospective Roger King, PhD Adjunct Professor of Finance Director of Center for Asian Family Business Studies Director of Center for Business Case Studies

2. Induction to HKUST • No. 1, World's Top 200 Asian Universities (2011)(QS Asian University Rankings) • No. 40, World's Top 200 Universities (2010)(QS World University Rankings) • No. 41, World's Top 200 Universities (2010)(Times Higher Education World University Rankings) • School of Business & Management • No. 47, World's Top 100 Universities in Economics/ Business (No. 1 in Greater China) (2010)(Academic Ranking of World Universities by Shanghai Jiao Tong University)

3. Kellogg-HKUST EMBA Program:No. 1, Global EMBA Rankings (2010) No. 1, Global EMBA Rankings (2009) No. 2, Global EMBA Rankings (2008) (Financial Times) • Full-Time MBA Program:No. 6 in the world (2011) (Financial Times) • School of Engineering • No. 26, World's Top 100 Universities in Computer Sciences (No. 1 in Greater China) (2010)No. 39, World's Top 100 Universities in Engineering/ Technology and Computer Sciences (2010)(Academic Ranking of World Universities by Shanghai Jiao Tong University) • No. 20, World's Top 50 Universities in Engineering and Technology (2010)(Times Higher Education World University Rankings) • No. 26, World's Top 100 Universities in Engineering and IT (2010)(QS World University Rankings)

4. Center of Asian Family Business and Entrepreneurship Studies

5. Topics to be Covered in the 1st Session • Why family business is important? • Family business is complex • Notion of Wealth Preservation from generation to generation, Harmony amongst descendants and preservation of Legacy • Distinct characteristics of Asian/Chinese family Businesses • Some unique causes of early demise of Asian/Chinese family businesses: Wealth does not past beyond 3 generations (shirt sleeve to shirt sleeve in 3 generation) • Current challenges facing Asian Family Businesses: Culture clashes, globalization, value vs. relationship based

6. How many of you are from a family business? So what is a family business?

7. Common Myths of Family Business • Small business – mom and pop • No growth • Limited capital • Nepotism – lack opportunities for non-family members • Generational conflicts and succession problems

8. Why family business is important? • Family businesses are pervasive and significant • Family businesses are more profitable • Family businesses are better place to work • Family businesses are complex

9. Family Businesses are Pervasive and Significant • USA: • 20% of 1,000 largest firms are family owned • 1/3 of the S&P 500 firms and 18% of outstanding equity • 60% of workforce • Wal-Mart; Ford; New York Times; Cargill; Mars • China: • 70% of GDP and 75% of the workforce • India: • 20 groups (16 family controlled) = 66% private sector assets • Germany: • 66% of the GDP and 75% of workforce

10. Family Businesses are More Profitable

11. Family Businesses are Better Places to Work • Founder Businesses 34% • Family Businesses 26% • Partnerships 16% • Non-Profits 12% • Associations/Co-Ops/ESOPs 4% • Widely-Held 8%

12. Family Businesses are Complex Family first or Business first?

13. Family Businesses are complex (cont’d) Another reason is the complex relationships between various interested parties • Family owner only • Family manager only • Family owner and manager • Family no ownership and management involvement • Non-family owner only • Non-family manager only • Non-family manager with ownership

14. Family Businesses are Complex (cont’d) A key reason is Family Business are the blending of two inherently different realms – performance-based of business and emotion-based of family. A system fraught with role confusion and conflict. • Family • Emotional based • Subconscious behavior • Inward looking • Risk averse and slow to change • Business • Task based • Conscious behavior • Outward looking • Exploit changes

15. Key Concerns of Founders of Family Business • Perpetuate the family name and values • Wealth preservation for descendents • Succession • Division of family wealth amongst descendents • Policy for family members to participate in business • Role, if any, for spouses, in-laws and other relatives • Harmony amongst descendants

16. Yet Most Family Business Cannot Survive Beyond 3 Generations “Shirt Sleeves to Shirt Sleeves in 3 Generations” “Wealth Doesn’t Pass Beyond the 3rd Generation • The first generation creates the business • The second generation enjoys the business • The third generation destroys the business

17. Reasons/Causes of Early Demise of Family Business The single greatest cause of demise of family businesses is family conflicts Notion of “Steward” and “Inheritor” • Steward refers to a member of the 2nd generation who wants together with his or her fellow siblings to see the family firm continue under family ownership • Inheritor sees their ownership in simple financial terms and lack emotional commitment

18. Unique characteristics of Chinese culture and family business • For Chinese family businesses, the most important family values are Confucian based • Respect (孝 xiao) is the most important virtue in Confucianism • Five basic social relationships are – father and son, ruler and ruled, husband and wife, elder brother and younger brother, and friend and friend • Hierarchical relationship - the ruled is expected to be submissive to the ruler, while the ruler is expected to be kind and caring to the ruled

19. Unique Characteristics (cont’d) • Family is always more important than any individual member, and harmony is the most important value for all family members. Without harmony, no family can stand, neither can a family business • Social and economic network relationships (关系guan xi) are highly valued and they tend to be based on personal friendship and trust (信用xin yong) rather than on a formal contractual relationship

20. Unique Characteristics (cont’d) • Confucian influenced cultures are among the most collectivist. The Anglo-American culture is the most individualistic • Work, leisure and home life are blurred • Often job specification are irrelevant – all are required to do whatever is necessary to complete the task • Face saving is essential to avoid direct confrontation on poor performance – handled through indirect hinds

21. Unique Characteristics (cont’d)

22. Reasons/Causes of Early Demise of Chinese FB • Political stability and its implications on Family Business Longevity • Lack of appreciation for branding, long-term capital investments and R&D (notion that “the bag is always packed” –Diaspora mentality especially amongst the ethnic Chinese) • Equal (or near equal) inheritance amongst male descendants vs. primogeniture (Europe and Japan) - fragmentation of economic resources and causes sibling rivalry

23. Reasons/Causes of Early Demise of Chinese FB (cont’d) • Lack trust of anyone outside of family (nepotism) – limited talent pool • Local (regional at best) vs. global businesses • Relationship vs. market driven business

24. Current challenges facing Asian Family Businesses: Culture clashes, globalization, value vs. relationship based

25. Better and often western educated (over 90% have university degrees and ~26% have a MBA from Europe or US – value system influenced by other (Western) cultures • Better career opportunities outside of family business – reluctant or unwilling to join the family business (notion of obligation, burden and/or duty) • Willing to invest for future: brand, product development (R&D), and diversification (including M&A) • Performance and accountability driven – potential for sibling conflicts • Global vs. local orientation

26. Concluding Remarks • Family business is pervasive and important globally yet few survive beyond the 3rd generation • This is true for Chinese as well as Western family businesses who have very different family governance systems • So can we conclude one system is better than the other – perhaps not • Are there concepts that we can learn from both systems to increase the survival rate of family businesses