From trust to impact - The time is now to secure your legacy for the future

15 March 2021 – In a year where business has had to transform the way it meets the needs of society and the environment, family owned businesses risk falling behind, according to a new global survey of 2,801 family business owners. 75 of them are from Indonesia.

While more than half (55%) of the global respondents saw the potential for their business to lead on sustainability, only 37% have a defined strategy in place. European and American businesses are lagging their Asian counterparts in their commitment to prioritising sustainability in their strategy. 79% of respondents in mainland China and 78% in Japan reported ‘putting sustainability at the heart of everything we do’ compared to 23% of US and 39% in the UK. Larger businesses and those owned by later generations also buck the trend, with greater focus on sustainability.

This reluctance to embrace sustainability comes despite the fact family owned businesses are highly likely to see a responsibility to society. Over 80% engage in proactive social responsibility activity, and 71% sought to retain as many staff as possible during the pandemic. However, the issue is an increasingly out-of-date conception of how businesses should respond to society, with 76% in the US and 60% in the UK placing greater emphasis on their direct contribution, often through philanthropic initiatives, rather than through a strategic approach to ESG matters. Family businesses are also somewhat insulated from the investor pressure that is currently pushing public companies to put ESG at the heart of their long-term plans for commercial success.

Peter Englisch, Global Family Business Leader at PwC says, “It is clear that family businesses globally have a strong commitment to a wider social purpose. But there is a growing pressure from customers, lenders, shareholders and even employees, to demonstrate a meaningful impact around sustainability and wider ESG issues. Many listed companies have started to respond but this survey indicates that family businesses have a more traditional approach to social contribution. Family businesses must adapt to changing expectations and, by failing to do so, are creating a potential business risk. This is not just about starting a commitment to doing good, but setting meaningful targets and reporting that demonstrate a clear sense of their values and purpose when it comes to helping economies and societies build back better.”

Growth
The survey suggests family businesses have weathered the pandemic relatively well. Less than half (46%) expect sales to fall despite the pandemic and survey respondents felt optimistic about their business’ abilities to withstand and continue to grow in 2021 and 2022. Slightly different, the growth aims in Indonesia are ambitious for 2022 but more cautious for 2021. 65% of Indonesian family businesses expect to see growth in 2021 (same as the global average) but 93% expect to see growth in 2022 (compared with 86% globally).

In terms of performance, Indonesian family businesses have seen mixed performance over the last financial year (pre-COVID-19), with 51% experiencing growth and 25% seeing a sales reduction. 60% of Indonesian family businesses expect COVID-19 to lead to a reduction in sales, much higher than the global average (46%).

From the result of Indonesian family business survey, Irhoan Tanudiredja, PwC Indonesia Entrepreneurial and Private Business Leader shared that, “The key priorities facing Indonesian family businesses over the next two years are expanding into new markets/client segments, changing/adapting the business model, increasing use of new technologies and protecting the business or survival. The family business requires a new approach for lasting success - accelerated digital transformation, sustainability goals and professional family governance.”

Family business lagging on digital transformation
Even though 80% of family businesses adapted to the challenges of the COVID-19 pandemic by enabling home working for employees, there are also concerns about their overall strength when it comes to digital transformation.

Globally, 62% of respondents described their digital capabilities as ‘not strong,’ with a further 19% describing it as a work in progress. In Indonesia, the family businesses are struggling to close the digital gap. Only 25% feel they have strong digital capabilities (lower than the global average: 38%).

Yet here there are clear generational differences: 41% of businesses that describe themselves as digitally strong are 3rd or 4th generation, and Next Gens have taken an increased role in 46% of digitally strong businesses.

“Digital transformation not only requires new technical solutions; it also requires a new culture. There is clear evidence that having strong digital capabilities enables agility and success. In order to successfully shape changes, family businesses should consider how they can engage the experience and fresh insight of Next Gens when it comes to prioritising their digital journey,” as said by Irhoan.

The governance gap
While family businesses report good levels of trust, transparency and communication, the survey highlights the benefits of a professional governance structure. While 79% say they have some form of governance procedure or policy in place, the figures fall dramatically when it comes to important areas: just over a quarter state they have a family constitution or protocol, while only 15% have established conflict resolution mechanisms.

In Indonesia family business, levels of trust, transparency and communication are felt to be reasonably high. However, only 51% say there is family alignment in company direction (compared to 58% globally). The result also shows, two thirds of Indonesian family businesses feel they have a clear sense of company and/or family values and these values have helped them manage the impact of COVID-19 pandemic. However, only 44% have their values and company mission down in written form. 31% of Indonesian family businesses claim to have a robust, documented and communicated succession plan in place, compared with 30% globally. Over 80% of Indonesian family businesses admit family conflict occurs within the business.

Peter Englisch says,” Family harmony should never be taken for granted – it’s something that must be worked on and planned for, with the same focus and professionalism that’s applied to business strategy and operational decisions. There are growing concerns from regulators around the world about family business succession, especially with a third of 1st, 2nd or 3rd generation businesses expecting the next generation to become majority shareholders in the next five years. It is therefore vitally important that businesses take a lead on ensuring they have formal processes in place that can ensure stability and continuity in the long run.”