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[Management in Korea] Values, governance and transparency

By Korea Herald

Published : March 28, 2018 - 16:23

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Management in Korea is a regular column written by the members of Egon Zehnder Seoul touching on various aspects of Korean enterprises and business leaders and offering management tips. -- Ed.

Family is central to the idea of chaebol, which literally means “money clan.” Yet the fact that chaebol are family businesses has helped them resist adopting governance practices that have become standard in the developed world.

Somehow, because they are family businesses, it does not seem realistic to hold chaebol to the same professional standards that we readily apply to a non-family enterprise. As a result, the personal dramas of the governing family are free to play themselves out in the boardroom, leading to successions full of secrecy and intrigue, a lack of transparency and accountability to those outside the family, and autocratic rule by the patriarch.

Eugene Kim Eugene Kim
Kim Ah-jeong Kim Ah-jeong
However, if you examine family businesses in other parts of the world, you will find that the ones that most successfully endure from generation to generation are those that follow well-established principles. These principles are not exactly the same as the ones that apply to non-family businesses -- indeed, it is essential to recognize that family businesses are both “family” and “business.”

Rather, successful family businesses are able to strike a balance between these two identities. Our colleagues in Egon Zehnder’s Family Business Advisory have worked closely with many large family-owned enterprises around the world. While there are numerous best practices depending on the particulars of an owner family’s situation, there are three that are particularly relevant for Korea’s chaebol.

A family’s values are its compass. 

To examine a family’s values in a business context, it is essential to look beyond the traditional Confucian mores of Korean society. Instead, a family’s values might show themselves in commitment to craftsmanship, or to serving a particular market, or in conducting business in a particular way. Having a clear sense of what sets the family apart helps the family differentiate itself and define priorities when tough decisions have to be made.

Governance starts at home. 

Well-run family businesses actually need extensive governance in order to manage the family/business balance. At the core is the family charter. This document augments the shareholders’ agreement and covers issues such as establishing the roles of family members, dispute resolution and succession planning.

It also addresses the roles of next generation and non-bloodline family members and establishes procedures for their continued involvement or for managing their exits. The family charter, and other governance mechanisms that may exist, need to be reviewed on a regular basis to keep up with the expansion of branches of the family and the evolution of the interests and goals of individual members.

Good decision making starts with clear criteria. 

The common “language” and shared history between family members allows family businesses to reach decisions and take action quickly. This can be a significant strategic advantage. But it also can be an impediment that prevents owner families from developing clear standards for how decisions are made, what constitutes acceptable performance and other essential benchmarks.

As a result, everything from whether or not to open a new office to who will be the next CEO can end up being determined by personalities and relationships. Establishing clear communication standards in advance improves decision making and keeps it aligned with the long-term goals of the organization.

These three pillars are important because they build a foundation for the owner family that allows it to look beyond whomever its current leader might be. Family businesses that are able to maintain a long-term perspective that transcends strong personalities are much more likely to be able to perpetuate themselves over generations -- which should be one of the central goals of any family business CEO.

Institutionalizing values, governance and transparency also allows family businesses to fully leverage the unique strengths they have when compared with non-family enterprises. Family businesses often have rich histories, deep roots and extensive social capital. They can foster an authenticity that that builds enduring brand loyalty. It can be easier for them to maintain a sense of entrepreneurialism as they scale. But these qualities need to unfold within a framework that provides stability and continuity.

Owner families should establish this framework early on; waiting until there is a business crisis or family rift is too late. It is also important to remember that establishing a family’s values, governance and transparency requires a significant investment of time and emotion -- developing the consensus necessary for establishing a family charter, for example, can easily require one or two years of intense and sometimes acrimonious discussions among family members. Outside facilitators can be helpful in managing this process and keeping conversations on track.

In the face of all this effort, the more autocratic approach of the traditional chaebol leader may seem preferable. But this is a short-term view. Over the long term, owner families that invest in establishing these pillars will be stronger as both families and as businesses.

(Herald DB) (Herald DB)

By Eugene Kim and Kim Ah-jeong

Eugene Kim is the managing partner of advisory firm Egon Zehnder Seoul. He can be reached at Eugene.Kim@egonzehnder.com

Kim Ah-jeong is the head of research at Egon Zehnder Seoul. She can be reached at AJ.Kim@egonzehnder.com