Building a lasting family business in Asia.

1. Happiness index:
building a lasting
family business in Asia
How can family businesses break the third generation jinx?
The first generation builds, the second expands and the third On the surface, professionalizing FOBs is a good thing
destroys. This is the universally acknowledged phenomenon and generally considered to be a necessary step in the
that few family-owned businesses (FOBs) survive beyond evolution of the business. However, the initial success then
the third generation. becomes plagued by problems, squabbling, or worse,
family feuds. Here’s why. The reason lies in the process
In the typical evolution of FOBs, they start from the of professionalizing itself. The same tool that guided the
Controlling Owner stage to the Sibling Partnerships stage FOB to success will also lead to its downfall.
and finally, to the Cousin Consortium stage as they mature
from being a start-up company to one thinking about Professionalizing demands equal treatment for all –
passing the baton. family and non-family employees. Owners are required
to judge all their employees objectively. This artificial wall
By professionalizing, FOBs are able to tap into the denies the reality of family and human behavior, resulting
external labor market, giving them access to higher quality in resentment or “pained hearts” (low emotional capital)
and quantity of human resources. These experts in their despite deep pockets (high financial capital).
corresponding fields can contribute significantly to the
expansion and the success potential of the FOB. They also In essence, there is a trade-off between professionalism and
inject more professionalism in the firm and are immensely “family capital”, a term encompassing the family relation-
valuable resources in enabling the FOB to achieve rapid ships, traditions, values, rights and obligations. Hence, it
financial growth within a short span of time. is important to note that it is impossible to take the family
out of the management equation when professionalizing.
©2011 Hay Group. All rights reserved
1

2. Happiness index: building a lasting family business in Asia
The heart of doing business
A professionalization strategy that neglects the important aspects
of family will result in the ‘deep pockets-pained hearts’ scenario.
Even though the business might thrive, the family will start to fall
apart. The continuing tussle over casino tycoon Stanley Ho’s
business empire is testament to this.
Unlike with unrelated parties in Harmony before money
Thus professionalizing is non-FOBs, relationships among family The Kikkoman Corporation is a prime
like a double-edge sword members are highly interconnected such example of a “warm hearts – deep pockets”
that can bring a FOB to that the tremors of one bad relationship success story.
success when levels of are felt throughout the tight web of other
business management relationships. The soya sauce manufacturer started out as
is low but cause it to fail a FOB in 1630, and is still thriving today.
For instance, before firing a non-family The creed they adopted in 1926 formalized
when family capital is not member of staff, the manager assesses the numerous values typically found in families
accounted for. staff’s performance objectively and the staff like “make strong morals your foundation
is obliged to accept the manager’s reasons and focus on money last”, “strive for har-
from a professional point of view. Even if mony in your family”, and “have a family
the staff is disgruntled with the decision, reunion twice a year. At these reunions,
there is little that can be done to rectify the don’t judge your family members based on
situation. their income but rather on their
In comparison, firing a family member character”. These values were designed to
from the firm always involves family and support internal family harmony and have
personal emotions. Even if both parties are worked well in sustaining the business up
able to deal with the situation profession- till today.
ally, there will be ripples within the family In sharp contrast, let us examine Yeo’s, the
in the form of gossip, thus magnifying the well-known food and beverage brand in
unhappiness. Asia. Started in 1901 as FOB, none of the
Thus professionalising is like a double- owners today are from the Yeo family that
edged sword that can bring a FOB to gives the brand its name. By the 1990s,
success when levels of business squabbles over investment and business
management is low but cause it to fail management decisions caused tensions
when family capital is not accounted for. among the third Yeo generation and
leading to an acrimonious dissolution of
In order for FOBs to operate as a going the business. Obviously the family
concern and achieve success in the long agreement signed in 1957 on how the
run, FOB members must recognize that company was to be divided among the five
having a high level of family capital is fun- brothers did not serve to preserve the
damental before the firm is able to achieve business in the family.
financial capital.
©2011 Hay Group. All rights reserved

3. Figure 1:
Family capital framework
Positive effect on FOBs Negative effect on FOBs
Threats of Influence of family Threats of Influence of family
Professionalising capital Professionalising capital
We are not saying that family harmony must always take What makes up the happiness index? In short, the index is
precedence over profitability. In the case of a family-owned a reflection of an FOB’s heritage, kin-interaction and civic
pharmaceutical company we worked with, one of the structure. Figure 1 illustrates the interplay of
owner’s wife joined the company after the children started professionalization and family capital and how it is linked
school. In charge of business development, she tabled a to happiness. This index can be calculated by taking a
motion to sell the company’s R&D arm so as to buy a survey of family members on each aspect of family capital.
private jet for family use. Naturally this would lead to
many warm hearts, but certainly not deep pockets! At least Heritage consists of the relationship networks and family
not for very long. identity, how family members see themselves as one. For
instance, a cherished value from inception might be
The reality for FOBs is that it is crucial to manage family “respect for elders”, which may have been lost in the
capital, in addition to managing the financial capital of the professionalization process.
business. Highly dynamic and often latent, it encompasses
emotions like power, love, hatred, trust, and commitment. Accusations that we often hear in FOB disputes like “you
This is both their strength and Achilles’ heel. How are departing from our founding principles”, or “that is
successful a FOB is depends on how emotional and not who we are” all stem from an unclear or different
financial capitals are concurrently managed as intersecting understanding of family values. Hence it will be helpful
components. for the family members to go back to the family values
that brought them success, just as Kikkoman did. These
values should then be formalized and communicated to
Measuring family capital all employees and family members alike so that the family
values become corporate values, thus lessening the brand
How can family capital be measured in a way that is
dissonance for everyone.
helpful to FOBs? Hay Group has devised a simple tool,
known as the “happiness index”, which can be surveyed
and monitored over time, as an indicator of the robustness
of family capital.
“ The reality for FOBs is that it is crucial to manage family
capital, in addition to managing the financial capital of the
”
business.
3

4. Happiness index: building a lasting family business in Asia
Kin-interaction includes the family’s obligations, rights, As the case studies have demonstrated, the success of
and social norms. In business, rights and obligation comes FOBs depends on driving the balance between the
from position of power within the firm. The right refers to family “heart” and the business “head”. By monitoring the
the power to make business decisions and the obligation happiness index on top of financial performances, FOBs
lies in having to ensure both the financial and the can keep the hearts of the family members warm and the
emotional well-being of other family members. pockets deep, to ensure the long lasting continuity of the
business.
People in positions of power in non-FOBs have the right
to exert power but not the obligation to care for the
subordinates. Thus, in moving towards professional- About the Hay Group global R&D centre for strategy
ism, such obligations may have been removed from the execution
position of power, causing dissatisfaction among family
members who are subordinates. However in FOBs, much Hay Group’s global R&D centre for strategy execution
researches best practices in strategy execution globally.
dissent arises from the perception that the family head is Based in Singapore, the centre provides a unique East-West
not acting in a way that protects the family wealth or in a perspective for business leaders all over the world. Our
way that is fair to everyone. (I believe this is the heart of research helps provide insightful advice to executives
the longstanding feud in Stanley Ho’s family.) looking to build effective organizations for the future.
Finally, the civic structure is the family’s moral About Hay Group
Hay Group is a global consulting firm that works with
infrastructure. It encourages trustworthiness of conduct
leaders to transform strategy into reality. We develop talent,
among family members and in family governance, which organise people to be more effective, and motivate them
is the set of processes, customs, policies, laws, and to perform at their best. With 85 offices in 49 countries, we
institutions affecting the way a FOB is managed. work with over 7,000 clients across the world. Our clients are
from the private, public, and not-for-profit sectors, across
every major industry and represent diverse business
challenges. Our focus is on making change happen and
Heart versus head helping people and organisations realise their potential. For
more information, please visit www.haygroup.com.
Essentially, blood is thicker than water – it is important to
maintain high levels of family capital to encourage further
accumulation of financial capital. The current perception
that professionalism is beneficial for a FOB is misplaced.
Without accounting for family capital, professionalizing
will be like playing Russian roulette.
Author
Andreas Raharso, Director
The content in this report is provided solely for informational purposes. This Hay Group global R&D centre for strategy execution
report does not establish any client, advisory, fiduciary or professional relation-
ship between Hay Group and you.Neither Hay Group nor any other person
e| andreas.raharso@haygroup.com
is, in connection with this report, engaged in rendering accounting, advisory, t| +65 6323 1668
auditing, consulting, legal, tax or other professional services or advice.
©2011 Hay Group. All rights reserved