Grant Thornton Indonesia's Update

Don’t Let the Kingdom Fall

It is often mistaken by many that Indonesia has nothing to offer other than sunny beaches and cultural experiences. However, being the world’s fourth most populous country and Southeast Asia’s largest economy, it is not surprising that Indonesia has world-class inspiring and successful family businesses, businesses run and owned by certain family.

Take Djarum Group, a family business which runs the producer of one out of every five cigarettes manufactured in Indonesia. The family is also the biggest shareholders in Bank Central Asia, Indonesia's largest bank. Bank Central Asia had revenue of 56.8 trillion Indonesian rupiahs ($4.2 billion) in 2017. The list of successful family businesses goes on with Salim Group which produce the infamous Indomie, Sinarmas Group, Bluebird Group, and so forth.

The global economic landscape is still recovering from the prolonged economic crisis which has significantly affected consumer’s buying power, hit commodity prices, as well as hampered growth in general. However, in the midst of the crisis, research has shown that family businesses remain a strong and resilient force which helps propel the economy. A Harvard Business Review article argued that family businesses tend to be more frugal and enter recessionary period with leaner cost structures.

According to McKinsey on their article published in 2014, in emerging economies, family businesses account for approximately 60 percent of the private-sector companies with revenues of $1 billion or more, compared to less than one-third of the companies in the S&P 500. However, the upward trend for family businesses as a significant part of their national economies in emerging markets remain strong, and will represent nearly 40 percent of the world’s largest companies in 2025, up from 15 percent in 2010, which shows the growing importance of understanding family business and its sustainability in the long run in the midst of the current global scenario.

Unfortunately, successful family firms are rarity; most family firms fail to survive multiple generations. The statistics are grim: only 30 percent of family businesses survive the transition from first to second generation. Just 12 percent reach the third generation. Why do so many successful family businesses fail after the founding generation?

Some 70 percent of family-owned businesses fail or are sold before the second generation gets a chance to take over, according to a 2012 Harvard Business School study. What is it about family businesses that make them so susceptible to failure? The reasons are varied but there are some common themes that run through them.

Heirs Lack Financial Education

Many children born into wealth are ill-prepared to manage money due to a lack of financial education from their predecessors. This results in poor decision making and puts the family’s capital at great risk. Families that also fail to nurture a sense of responsibility, history and family values in the generations to come, ultimately fail their business.

So, it is important to educate the next generation about wealth and responsible financial management as early as possible. Protect family wealth by insisting on premarital agreements and separation of personal and family property.

A Culture of Nepotism

Families who continue to promote unqualified relatives into positions of power simply because they are members of the founding family are also on a fast-track to failure. It is urgently needed to professionalize the business by establishing employment standards for both family and non-family employees.

Preparing Succession Planning Struggles

The vast majority of family businesses encounter difficulties when it comes to succession planning. According to the 2016 Family Business Survey by the National Bureau of Economic Research, 43 percent of family firms don’t have succession plans in place.

Many current generation leaders are also delaying retirement as they struggle with the reality of leaving their business in someone else’s capable hands. This further exacerbates the problem of succession planning as an unexpected illness or sudden death poses real risk to the business and the family’s financial health.

Start success planning now. Whether you intend to train up an internal successor or bring in outside managers, proper succession planning takes years. If you truly want to ensure your business will survive after transition or death, it’s critical you begin laying the groundwork early.

A Lack of Family Governance Structure

Plenty of families are reluctant to address governance issues because it forces them to confront the possible need for major changes in how they manage their business. Governance structures formalize exactly who does what and how, but also provide a distinct line between family and business.

Without family governance, it’s easy to fall victim to internal discord and ownership issues down the track. Protect your business by instituting formal governance and ownership structures that clearly separate family control from the daily management of the business. Consider bringing in professional managers to run the business while retaining ownership stakes for your family.

Joining a family business isn’t for everyone. It’s a risky decision that needs a lot of careful consideration. You might build a successful dynasty that grows into a Fortune 500 company, with generations of family continuing to lead the business. Or, like the vast majority of family businesses that might not make it to the second or third generation. Even worse, your family dynamics could break down, leaving a legacy of dysfunction that long outlasts the business.