Learnings from BFI@SMU Knowledge Series: Why Investors Like Governance – The Key to Long-Lasting Family Enterprises

Nov 2017

Learnings from BFI@SMU Knowledge Series: Why Investors Like Governance – The Key to Long-Lasting Family Enterprises on 2 Nov 2017

BFI@SMU recently co-organized a panel discussion on corporate governance with Aberdeen Standard Investments, our knowledge partner for the event. The panel comprised Mr. David Smith, Head of Corporate Governance - Asia Pacific, Aberdeen Standard Investments, Mr. Chin Wei Yao, Group Chief Financial Officer, Health Management International and Ms. Lim Christina Hariyanto, Executive Director, Bumitama Agri Ltd and was chaired by our academic director, Prof. Annie Koh. This blog summarizes the insightful discussion from the event.

Nearly half of the listed companies in Asia are family-owned. Asian family businesses are also relatively younger than their western counterparts, with the founding generation still actively involved in day-to-day management. As the first generation ages and the business grows to accommodate the interests of a broader group of stakeholders, good governance becomes key to maintaining stability and ensuring long-term sustainability.

What’s in it for the family?

The familiar Chinese adage, 富不过三代 (Wealth does not pass three generations), is commonly applied to discussions on longevity of family businesses. The interplay of family, business and ownership issues in a family firm often makes day-to-day management challenging. A little structure can therefore provide a good perspective on the direction a business should take while laying out the roles and responsibilities of everyone involved.

This structure is essentially two-fold. The first part centers around governance for the family. It may include setting up of a family constitution and/or council which lays out the extent of involvement of family members in a business. This will typically set out broad principles in areas such as education, family office and involvement of non-family professionals.

The second part deals with governance for the business. Good corporate governance practices allow for better risk management and help a company raise capital more easily through a reduction in risk premium. The increased regulatory compliance and focus on sustainability that follows may also result in enhanced brand value for the company.

Therefore, from the family’s perspective, governance structures are a stepping stone to commercial success while preserving family harmony.

Why do investors care about good corporate governance?

Just as families have a desire to build long-lasting enterprises, investors like a business that is focused on delivering consistent returns with minimal risk.

Clear rules for family involvement ensure strong leadership and execution, reducing risk of family conflicts running down company assets. From an investor’s standpoint, governance becomes even more important when information asymmetries exist, such as in emerging markets where investor protection is weak.

While a good governance framework is non-negotiable for listed companies, unlisted companies can also benefit from it. This was clear from the panelists’ personal experiences on how their governance efforts have helped them build a better brand value, improve investor relations, attract better talent and nudge the business towards sustainability.