Question

How does family firm differ from state owned enterprises?

Answer 1

Family firms grow over time to reduce their percentage in shareholding through divestment or crisis. The reduction in percentage will bring about a removal of non-independent family member directors and more independent directors from diverse backgrounds to re-elect shareholders diversity and increase the ROI of the firm. Eventually they may, in a few generations turn into dispersed organisations through divestment by the second or third generation or through a crisis. For example, Cadbury Chocolate. By this time, the board composition will reflect the dispersed ownership with more independent directors with more diverse backgrounds.

A fresh state-owned enterprise in a monopoly that recently went public would be staffed by directors known to the politicians to be the most trustworthy and capable and this would usually fall into an intimate circle of those whom the politicians trust: namely ex-colleagues and civil servants. For example, SMRT. However, critics may say this leads to cronyism and corruption. When an SOE isn’t in a monopoly and has to compete against tough market forces competitive business, eg. Singapore Airlines, Singtel and DBS, the composition of directors get more professional and diverse to extract the best ROI for shareholders.