To attract more investment family enterprises prioritize leadership succession plan – study

MANILA, Philippines - Many family businesses in Southeast Asia have already made preparations for leadership succession because they believe doing so is important in attracting investment, but many still go through the process informally rather than seek professional advice, says a new report from the Economist Intelligence Unit (EIU).

Family businesses are a vital part of economies in Southeast Asia, accounting for 62 percent of the region’s stock market capitalization. Yet many do not make it past the first generation, said the report Building Legacies: Family Business Succession in Southeast Asia.

“It is clear from this survey that the issue of leadership succession is taken seriously, but many smaller and newer companies – and even some larger, well-established ones – are yet to seek external advice or to put vital plans in place,” the report said.

The study, which was based on a survey of executives in the region, finds that 67 percent of Southeast Asia family businesses have leadership succession plans, and a significant majority of these companies say their boards have reviewed these plans.

Winning business and attracting investment are strong motivators for family business leaders to establish successors, despite the risk of triggering sibling rivalry or other conflict. Two-thirds of survey respondents agree that customers and investors have more trust in a family-owned business with a succession plan than in a business that lacks one. Seventy-one percent of family business leaders say it is easier to attract investment with a succession plan in place.

Of the five surveyed economies, Singapore stands out as having the fewest companies with a succession plan (58 percent), while Indonesians are the best prepared (78 percent). In the Philippines, 60 percent of family businesses surveyed indicated they have such a plan, while Malaysia has 66 percent and Thailand 74 percent.

Discussion to form succession plans often takes place in informal settings, such as family council meetings. Only one-third of family businesses seek advice from external sources on setting up a formal governance platform.

“In spite of the benefits inherent in leadership succession planning, one in five business families has not sought any professional advice on succession issues. As one would expect, first generation companies are least likely to have consulted an advisor,” noted the study. It said this is likely due to a combination of low awareness, denial and the cultural sensitivities surrounding talking about death.

Where companies do seek external advice, the most popular topics are tax liabilities and estate planning. These trends are broadly similar across all five countries, the paper said.

“Family businesses are the backbone of Southeast Asia’s economy. It’s a sign of their maturity that they are making leadership succession planning a part of their long-term business strategies. However, they need to establish stronger formal governance structures to help ensure continuity beyond the next generation,” said Kevin Plumberg, senior editor, The Economist Intelligence Unit.

“Studying Southeast Asia’s smaller family businesses is important to understanding the region’s future industrial and commercial trends, since some privately held family businesses today will likely become tomorrow’s larger, publicly listed firms,” it added.

The research was sponsored by Labuan International Business and Financial Centre, a wealth management firm in Southeast Asia.