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Happiness index:                                                  building a lasting                                      ...
Happiness index: building a lasting family business in Asia                                       The heart of doing busin...
Figure 1:    Family capital framework                                          Positive effect on FOBs                    ...
Happiness index: building a lasting family business in AsiaKin-interaction includes the family’s obligations, rights,     ...
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Happiness Index


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Building a lasting family business in Asia.

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Happiness Index

  1. 1. Happiness index: building a lasting family business in AsiaHow 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 thingdestroys. This is the universally acknowledged phenomenon and generally considered to be a necessary step in thethat few family-owned businesses (FOBs) survive beyond evolution of the business. However, the initial success thenthe third generation. becomes plagued by problems, squabbling, or worse, family feuds. Here’s why. The reason lies in the processIn the typical evolution of FOBs, they start from the of professionalizing itself. The same tool that guided theControlling 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 maturefrom 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 wallBy professionalizing, FOBs are able to tap into the denies the reality of family and human behavior, resultingexternal 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 theexpansion and the success potential of the FOB. They also In essence, there is a trade-off between professionalism andinject 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, itfinancial 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. 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 moneyThus professionalizing is non-FOBs, relationships among family The Kikkoman Corporation is a primelike 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 otherbusiness management relationships. The soya sauce manufacturer started out asis 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 formalizedwhen family capital is not member of staff, the manager assesses the numerous values typically found in familiesaccounted 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. 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 capitalWe are not saying that family harmony must always take What makes up the happiness index? In short, the index isprecedence over profitability. In the case of a family-owned a reflection of an FOB’s heritage, kin-interaction and civicpharmaceutical company we worked with, one of the structure. Figure 1 illustrates the interplay ofowner’s wife joined the company after the children started professionalization and family capital and how it is linkedschool. In charge of business development, she tabled a to happiness. This index can be calculated by taking amotion 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 tomany warm hearts, but certainly not deep pockets! At least Heritage consists of the relationship networks and familynot for very long. identity, how family members see themselves as one. For instance, a cherished value from inception might beThe reality for FOBs is that it is crucial to manage family “respect for elders”, which may have been lost in thecapital, in addition to managing the financial capital of the professionalization Highly dynamic and often latent, it encompassesemotions like power, love, hatred, trust, and commitment. Accusations that we often hear in FOB disputes like “youThis is both their strength and Achilles’ heel. How are departing from our founding principles”, or “that issuccessful a FOB is depends on how emotional and not who we are” all stem from an unclear or differentfinancial capitals are concurrently managed as intersecting understanding of family values. Hence it will be helpfulcomponents. 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 toMeasuring family capital all employees and family members alike so that the family values become corporate values, thus lessening the brandHow 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 surveyedand monitored over time, as an indicator of the robustnessof 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. 4. Happiness index: building a lasting family business in AsiaKin-interaction includes the family’s obligations, rights, As the case studies have demonstrated, the success ofand social norms. In business, rights and obligation comes FOBs depends on driving the balance between thefrom position of power within the firm. The right refers to family “heart” and the business “head”. By monitoring thethe power to make business decisions and the obligation happiness index on top of financial performances, FOBslies in having to ensure both the financial and the can keep the hearts of the family members warm and theemotional 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 rightto exert power but not the obligation to care for thesubordinates. Thus, in moving towards professional- About the Hay Group global R&D centre for strategyism, such obligations may have been removed from the executionposition of power, causing dissatisfaction among familymembers 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-Westnot acting in a way that protects the family wealth or in a perspective for business leaders all over the world. Ourway that is fair to everyone. (I believe this is the heart of research helps provide insightful advice to executivesthe 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 withinfrastructure. 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 themis the set of processes, customs, policies, laws, and to perform at their best. With 85 offices in 49 countries, weinstitutions 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 andHeart versus head helping people and organisations realise their potential. For more information, please visit, blood is thicker than water – it is important tomaintain high levels of family capital to encourage furtheraccumulation of financial capital. The current perceptionthat professionalism is beneficial for a FOB is misplaced.Without accounting for family capital, professionalizingwill be like playing Russian roulette. Author Andreas Raharso, DirectorThe content in this report is provided solely for informational purposes. This Hay Group global R&D centre for strategy executionreport 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.comis, in connection with this report, engaged in rendering accounting, advisory, t| +65 6323 1668auditing, consulting, legal, tax or other professional services or advice.©2011 Hay Group. All rights reserved