“Lighting” the family business

Dr. Pham Dinh Doan, Chairman of Phu Thai Group, Chairman of the Vietnam Family Business Council

According to Dr. Pham Dinh Doan, the year 2020 was a test for everyone, as COVID-19 pandemic disrupted lives and livelihoods. Family businesses in Vietnam are going to meet the challenges at a time when financial uncertainty has affected their manufacturing and trading.

- From the perspective of the Chairman of the Vietnam Family Business Council, how do you think about the succession process in Vietnamese companies today?

Succession is always a great concern of the founders in the family business. However, the succession process has largely failed to meet expectations due to both objective and subjective reasons.

There are many problems that family companies have faced: how to balance the relationship, apply modern management principles, attract outside talents, build and implement a succession plan. Running business companies, entrepreneurs realized that Vietnamese family businesses are lacking successors, while it often takes decades to train a successful successor generation. Vietnamese family businesses are very young, so many enterprises that failed to do succession.

A recent survey by PwC shows that, in the next five years, Vietnamese family companies will become more diversified, with greater external management and greater NextGen involvement. 52% of Vietnamese family businesses said they would have a second-generation as majority shareholders. Management structure will shift from family-owned/managed businesses (down from 87% to 38%) to family-owned ones managed or operated by outsider CEO (up from 12% to 60%). This will be a sizeable generational shift in the coming period.

PwC's research results highlight the trend that more Vietnamese family businesses will become Family Investment Offices. According to the UBS/PwC Billionaires Insights 2019, in the period from 2013 to 2018, the aggregate wealth of billionaires has increased by over 33% (equivalent to USD 2.2 trillion). Given the growing wealth in Asia, and Vietnam particularly, it is not surprising that Asian families are planning and starting to institutionalize the management of their family wealth. The topic of setting up a family office has now moved from dinner conversations to planning and implementation.

Vietnamese family businesses are relatively young, with nearly two-thirds of the firms reporting 1st generation as majority shareholders, compared to 43% in the Asia Pacific region and 32% globally. In the next five years, there will be a sizeable generational shift with 52% of companies saying they will have 2nd generation and about 20% having 3rd or 4th generation as majority shareholders. Only 36% of Vietnamese family businesses claim to have a robust, documented, and well-communicated succession plan in place. These plans have not been translated into company governance policies, with only 6% having testaments/last will and emergency and contingency procedures.

- In your opinion, how will the process of succession create pressure for Vietnamese family businesses in the coming time?

Setting up and implementing a business development strategy as well as a succession plan is challenging and full of options. The biggest challenge that family businesses have faced during the process of succession is to reconcile the difference in ideology between the founding generation and the next one. The succession means inheritance and continuation, but it is no longer so simple, but must be creative and advanced.

A typical family business in Vietnam has three main options: First, it continues to maintain the family business management model, but has a clear succession plan, while the family members still maintain ownership and management of a family business. Second, it will be gradually equitized by selling shares to strategic partners, investment funds, or other external shareholders, so as to gradually improve governance, management, and use resources from the sale of shares to bring the business to new heights. This would mean sharing the power and right to run the business when the governance and ownership structure changed. Third, it transfers all or most of the company to other entities, which are domestic or foreign ones.

Choosing a strategy will require family business owners to have a long-term vision and do a thorough assessment of the features of the family business combined with appropriate steps in a volatile world. 

It matters to private economic corporations how to innovate the way of corporate governance and management while ensuring the preservation of cultural traditions, brands, and achievements and taking businesses to the next level. The pressure for family businesses is to improve generation transfer and sustainable development.

Moreover, the current trading in Vietnam is still based on personal relationships, so the transfer of power to outsiders is not simple. Besides, there are still opportunities to get richer by relatives and friends, policy loopholes... Only when the business environment is more open, transparent, and close to international standards, and corporate governance is also based on legal standards and fair competition, the succession process is convenient and less pressured.

- Succession or starting a business will be a thorny problem for Vietnamese family businesses, sir?

The previous generations started a business in a different domestic and international context, so their business strategies and models are also featured by distinction. Today, everything has changed, especially the international integration, fourth industrial revolution along with protectionism, trade war, COVID-19 pandemic… has radically and rapidly changed the business strategy and model.

The next generation of family business acquires new knowledge of business management in the world, but applying it to the Vietnamese context requires an approach that is suitable with Vietnamese practices and culture, otherwise, it will be very difficult to get success.

Vietnamese family businesses mostly appeared from the 1990s. Up to now, those entrepreneurs are also aged 60-70. So the transfer of family business ownership and management to the next generation is very important. It is noted that there are also many family business owners whose children follow a different career and don’t want to take over the business that their parents want to transfer.

Someone said that, compared to startup, succession is much more favorable, as a launchpad is available. However, many entrepreneurs failed to transfer their family businesses.

On the other hand, on the macro level, people have talked too much about supporting "start-ups" for a long time, but almost nothing is mentioned about successor training, while for the future of the economy, succession is as important as entrepreneurship.

The said gap has caused many entrepreneurs to encounter many difficulties, even they are erroneous in training and fostering their successors by relying on experience and feelings.

Thus, starting a business is very difficult and succeeding is challenging as well. It depends greatly on the capacity, passion, and choice of the second generation.

- Parents who are entrepreneurs want to successfully transfer their business to their children, but sometimes they don’t get success as expected. How can the successors prepare to face failure and take responsibility for their decisions, sir?

Exactly! No one can do it for anyone, and no one can be responsible for anyone. Therefore, it is necessary to have a step-by-step succession plan, including education and training for the next generation to be able to stand and develop.

In my opinion, it is important to unify the purposes and create all conditions so that the successors can be firmly independent. To do this, it is necessary to equip them with passion and ambition to enrich themselves and society, bravely cope with difficulties in a changing world.

Knowledge and skills are important, but that's what the successors can learn, especially today's younger generations who have the opportunity to study abroad and have access to the latest international knowledge. But it matters to nurture pride, inspire creativity and innovation, have big ambitions and visions to form the qualities of successful successors, helping them start action in practice.

- How are you implementing the succession roadmap at Phu Thai Group?

Currently, at Phu Thai Group, the key leadership positions as well as its subsidiaries are still the second generation (father and mother). We are training the third generation (children) through professional training at universities abroad while practicing work at the company to choose the right job position for each child, train the core staff to help them become successors. However, among our children and grandchildren, not everyone chooses and is suitable for the business, so we only transfer our management when they are ready and capable. 

Thank you!