Building family businesses to last

Loy family scion seeks to build knowledge about family firms and their concerns in Malaysia

There is a Chinese proverb that says, “Wealth never survives three generations”.

Research seems to bear that out. Only a third of family firms survive to the next generation and even fewer — a tenth — successfully transition to the third generation, said Johnben Loy, director of the Enterprise Corridor at Taylor’s Business School — the business faculty of Taylor’s University College.

Ensuring the longevity and success of family businesses — or “dynasting” — is the main concern among Chinese family-owned firms in Malaysia, especially when more than 80% of companies in the country are believed to be family firms, said Loy in a July 13 interview.

He recently completed his PhD dissertation titled “Dynasting Across Cultures: A Grounded Theory of Malaysian Chinese Family Firms”, in which he defined dynasting as “the act of building, maintaining and growing the power and resources of the business within the family lineage”. Loy, who also heads the Centre for Asian Family Enterprise (CAFE) at Taylor’s University College, said he hopes to do more research and educate others on family businesses in Asia.

Loy described grounded theory as “a set of hypotheses or relationships between concepts that explain the latent pattern of social behaviour that is aimed at resolving a main concern. He said that grounded theory is a research method in which the theory is developed from data or concepts and is inductive in approach — moving from the specific to the general. 

He said he sought to develop a theory because scholarly work on the topic was scarce in the region and there were few theories of family businesses outside Western contexts.

“You need theory to guide academics. We know about family firms mostly in Western contexts but we need to understand Chinese family firms because they are very important in Southeast Asia and East Asia,” he said.

Loy said research showed that family firms make up more than 80% of all businesses in the world and 37% of Fortune 500 firms. Family businesses also contribute almost 50% of the US GDP (gross domestic product) and more than 75% of GDP in most countries outside the US, he said.

“Chinese family firms also contribute significantly to the market capitalisation of companies in Thailand (90%), Singapore (81%), Indonesia (73%), Malaysia (60%) and the Philippines (50%),” he said.

Access to data proved to be a challenge in completing his dissertation, he said, which only proved that there was a dearth of scholarly research on Malaysian family firms.

According to the dynasting theory, the likelihood of dynasting increases when the business founder’s authority decreases and successor trustworthiness and competence increases. However, this is only likely to happen in businesses that are already successful and have successors available, he added.

His thesis sought to discover the main concerns of Chinese family businesses in Malaysia and how the participants were resolving this concern.

The study was conducted from March 2009 to March 2010 in Kuala Lumpur, involving 22 formal interviews with various participants from family-owned businesses — successors, founders and long-time staff — across small to large public-listed companies in various industries. Participant observations through formal and informal gatherings as well as scholarly literature.

Dynasting, which involves at least two generations within a family, is more than “family business succession”, said Loy. The company’s growth is an important aspect to the concept of dynasting as the successor must want to grow the business beyond its existing state, he said.

Loy said the concept of  “dynasting” is not entirely new to Asian society as Confucian ideals have long stressed the importance of the family unit as the source of economic providence, high achievement and filial piety — all of which motivate the act of dynasting among Malaysian Chinese firms.

Aside from his scholastic background, Loy speaks from experience. His father, the late Tan Sri Loy Hean Heong, founded MBf Group, and his eldest brother, Datuk Loy Teik Ngan, helms MBf Corp, which also controls the Taylor’s Education Group.

“From the time I was young, there were always social gatherings. It was part of who I am,” said the younger Loy.

Dynasting generally applies to firms that have a founder generation who are traditional Chinese with limited education, and a successor generation that has a Westernised education.

As family businesses become larger, corporate governance and leadership become increasingly critical in managing such firms, especially in preventing the occurrence of family feuds, he said.

Loy said family-owned firms tend to be much more patient with their use of capital and think long-term in business. They are also less likely to cut jobs easily — “especially when the CEO is a family person”.

“I remember very clearly in the 1980s recession, not even a single person from MBf Group was retrenched,” he said.

As for family feuds, he said founders must instill good values in their children from a young age because such feuds are developed over the years.

Family business founders can also structure their organisations for conflict minimisation, such as opting for a coparcenary or joint inheritance of property.

Introducing Western concepts of open communication and spending more time with one’s family is a way of curbing family feuds, Loy — who is also a trained family and marriage counsellor — said.

He said that when he and his brothers were growing up, his father would bring the family to the family’s beach house in Penang where they would go fishing. Family businesses are essentially built on family ties, he said.

“If the founder is all about the business and does not concern himself with the family, the business won’t work,” added Loy.


 Written by Kathleen Tan  
This article appeared on the Management page, The Edge Financial Daily, Aug 30, 2010.