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How will family businesses make sure they reach the 22nd century?

By EY: Building a better working world
Published Last updated This article is more than 2 years old.

The story of family business is often an opaque one. Few of these firms command the public profile of the world’s largest listed companies or the latest Silicon Valley darlings. This partially reflects a tradition of privacy, but also reveals a perception gap in the importance of these companies as economic engines.

The 2016 Global Family Business Index study (pdf), compiled by St. Gallen University with EY support, reveals combined revenues from the world’s top 500 family businesses amounting to just over half that of the Fortune 500—an impressive feat. But even more impressive is their commitment to employment, with a staffing roster three-quarters the size of these same Fortune 500 peers.

At the same time, there is no doubt we are in a period of massive economic transformation. Global incomes, connectivity, and population are all on the rise—as are the resulting challenges. With family business critical to both economic activity and employment, can these companies weather the winds of change? This is an important question many multi-generation firms are asking and was a central theme at EY’s recent Strategic Growth Forum, held in Shanghai.

Although China recently relaxed its one-child policy, the rule is just now making its mark on succession planning. With only one heir to choose from in the latest generation, traditional gender roles and hereditary customs are fading in importance.

In Asia, family businesses are not standing still. Although China recently relaxed its one-child policy, the rule is just now making its mark on succession planning. With only one heir to choose from in the latest generation, traditional gender roles and hereditary customs are fading in importance. It’s a change that is slowly working through the biggest family businesses across the region, noted SGF panelist Dr. Roger King, a Hong Kong-based academic and entrepreneur who has studied family-driven commerce. 

“Many businesses in Asia today are managed by the female side of the family,” said Dr. King. “And many more of these women are being encouraged to start their own businesses as well, with the financial support and social network benefits that come with their family name.” Balanced gender representation in the family boardroom is not just a feel-good change; it can have an outsized impact on business performance, as revealed in the recent EY Staying power survey (pdf).

Equally important is convincing the next generation to participate in the first place. In search of the best education opportunities possible, many successful scions in Asia push their kids to attend top universities in the West. Unsurprisingly, a very different life path can result in very different values.

After four years in NYC or London, a return home to the toothbrush factory in inland China might not be a new graduate’s first career instinct. A more relaxed approach to succession planning can pay dividends.

“Many kids today want to first prove themselves outside of their family business,” says Peter Englisch, EY global leader for family business. “Surprisingly, more and more come back to the family business after working outside, with the skills and mandate to be agents of change.”

This outside work experience and sector exposure can be key for companies exploring new business opportunities. Youth-led investments in start-ups and emerging technologies can bring interesting businesses into the family fold, or even head off potentially disruptive challenges that might not otherwise be on the radar.

An ability to change requires a healthy governance structure. The longer lived the business, the higher the likelihood that ownership is dispersed across more people. To defuse the tensions and disagreements that can arise in this situation, family firms should consider adopting an open culture with clear mechanisms to address disputes and guide future investments.

An open culture also means transparency on succession planning, according to Ben Gough, a New Zealand-based entrepreneur and investor who runs his family office. “What happens with life beyond me is a question that leads to both interesting and uncomfortable conversations,” says Gough. “When my demise ultimately does occur, I know the governance structure will ensure a smooth transition and more stability for the organization.”

In sum, there are concrete steps that family businesses can take today to adapt to a changing world. Those that embrace a forward-thinking mentality to succession planning will be the ones who survive to face the challenges of the 22nd century. In Asia and beyond, this longevity and the continued success of the family enterprise will be central to building a better working world for tomorrow.

EY’s Better Questions series asks some of the tough questions faced by today’s global businesses. Better questions. Better answers. Better working world. Discover more

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This article was produced on behalf of EY by the Quartz marketing team and not by the Quartz editorial staff.

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