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Family Enterprise Governance

Recently there was news about one of the conglomerate family member who are not satisfied with how wealth are distributed and managed after the father, a founder of big businesses in Indonesia passed away.


The dynamics in battle of power in business legacy of family business does not only occur in Indonesia. In other countries the same thing happened. Call it the struggle for the second-generation legacy of the Samsung Group family, South Korea, in 2014, the Gucci family in Italy, or the family of India Reliance Industries in 2012.


Family businesses constitute the world’s oldest and most dominant form of business organizations. In many countries, family businesses represent more than 70 percent of the overall businesses and play a key role in the economy growth and workforce employment.

South-east Asia is one of the world’s most economically vibrant and fastest-growing regions.

 

The terms “family business”, “family firm”, “family company”, “family-owned business”, “family-owned company”, “family enterprise” and “family-controlled company” can be used interchangeably and refer to family businesses.

 

There are several definitions of family enterprise, which include:

  • A family business refers to a company where the voting majority is in the hands of the controlling family; including the founder(s) who intend to pass the business on to their descendants. (IFC)

  • An organization is defined as a family company if there is at least two generations of a family involved in the organization and they affect the company’s policy. (Robert G. Donnelley)

  • An organization is considered a family company if there is two or more family members involved in overseeing the company’s finance. (Ward & Aronoff)


Family-run firms account for more than 60% of all listed companies in South-east Asia, where they frequently outperform non-family-controlled companies (Credit Suisse, Asian Family Businesses Report 2011). Family businesses range from small and medium-sized companies to large conglomerates that operate in multiple industries and countries. It is also a fact that most family businesses have a very short life span beyond their founder’s stage and that some 95 percent of family businesses do not survive the third generation of ownership. This is often the consequence of a lack of preparation of the subsequent generations to handle the demands of a growing business and a much larger family. Family businesses can improve their odds of survival by setting the right governance structures in place and by starting the educational process of the subsequent generations in this area as soon as possible.



Highlights on Family Enterprise in Indonesia

10 richest people in Indonesia had a wealth equivalent to 8% of Indonesia's GDP in 2019

In Indonesia, it was recorded that the 10 richest people in Indonesia had a wealth of US $ 87.95 billion or the equivalent of 8 percent of Indonesia's gross domestic product in 2019, which was valued at US $ 1,120 billion. The Top 10 richest person (family) in Indonesia based on 2019 Forbes were:

  1. Budi & Michael Hartono (Djarum Group, BCA); US$37.3 billion

  2. Widjaja family (Sinar Mas Group, Golden Agri Resources); $9.6 billion

  3. Prajogo Pangestu (Barito Pacific); $7,6 billion

  4. Susilo Wonowidjojo (Gudang Garam); $6.6 billion

  5. Sri Prakash Lohia (Indorama); $5.6 billion

  6. Anthoni Salim (Salim Group, Indofood Sukses Makmur, Bogasari Flour Mills); $5.5 billion

  7. Tahir (Mayapada); $4.8 billion

  8. Boenjamin Setiawan (Kalbe Farma, Mitra Keluarga); $4,35 billion

  9. Chairul Tanjung (CT Corp); $3,6 billion

  10. Jogi Hendra Atmadja (Mayora); $3 billion


Quoting the research made The Economist Intelligence Unit (EIU) on 250 majority family-owned businesses from Indonesia, Malaysia, the Philippines, Singapore and Thailand, there were several characteristics of family businesses in Southeast Asia, including:

  • 67% of family businesses in South-east Asia said they have made arrangements to ensure continuity after their current leaders step down.

  • For business families, retaining control is paramount.

  • 48% of respondents said that having to remove family members from positions of power causes tension in the company.

  • Formal governance structures such as family offices, foundations and trusts have not been widely adopted among family businesses.

  • Looking into the future, family businesses are less confident ownership structures in 10 years will be the same.

Challenges Ahead


Keeping it in the family has some inherent advantages, such as commitment to the firm, uniformity of purpose and mission and a long-term perspective. Many family businesses in South-East Asia are still run by their first generation of leaders. The first handover is looming, and how it is managed could make all the difference. A diluted focus on core strengths due to portfolio diversification can lead companies to lose sight of the long-term vision.

“The bigger the family is, the harder it is to get everyone to come to a unanimous agreement, so you have to leave it largely to the board” (Richard Eu, CEO of Chinese medicine company Eu Yan Sang)

Empirical analyses show that family enterprises are more successful when they have established optimally designed management, control, and family structures.

Despite this, many family enterprises neglect governance.


Family tensions or unchecked nepotism can hinder progress, and at no time more so than when the younger generation is about to take the reins. The transition is fraught. It can lead to stagnation and increased conflict, or equally can revitalize management. Either way, performance is often affected.


As family-owned businesses grow, they will need to continue changing and adapting to a new environment. They will have to build the right fundamentals.


Success comes with discipline and good structure — something that is easier to create but much harder to sustain. The coming years will show how the new generation of family owners will embrace this change, and lead their companies to rise or fall.






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