Friday, March 29, 2019


Succession issues at stake for tycoons in Hong Kong and mainland China
Three of a kind: Henderson Land patriarch Lee Shau-kee with son Peter and his triplets
Hong Kong’s most valuable real estate firm Sun Hung Kai Properties (SHKP) was co-founded by three Guangdong natives in 1963. The trio included Kwok Tak-seng and Lee Shau-kee. The latter would split off to start a new firm, Henderson Land, in 1976. Over the succeeding decades Lee grew it into one of the top four developers in a city famously obsessed by property.

Kwok died in 1990. His will required that his three sons work together and share everything in a family trust – a set-up that was once seen as solid succession planning for Hong Kong’s other tycoons.

However, it proved far from harmonious for the Kwok brothers, whose family feud erupted into the public domain in 2008 and would result in Walter Kwok, the eldest of the three, being ousted from SHKP.
On top of that, the squabbling led to the middle brother Thomas receiving a five-year jail sentence in one of Hong Kong’s most high-profile corruption trials 

When Lee Shau-kee’s elder son Peter Lee revealed in 2010 that he was a father to triplets, observers could not help but compare Lee’s three grandsons with the Kwok brothers whom he had once mentored (Lee is still SHKP’s vice-chairman).

Tycoons like Lee face a common challenge: many have bred large families but they know that too many siblings can create turbulence for their family businesses when the founder steps down. And last week, it was Lee’s turn to face up to the future, as the 91 year-old informed Henderson Land’s shareholders that he will retire in May. Once again this has made succession issues a point of debate.

Who will take over at Henderson Land?
Lee Shau-kee celebrated the birth of his triplet grandsons nine years ago by giving out HK$10,000 in laisee to each of his company’s staff. More handouts would follow as his family grew. Indeed as much as HK$50 million ($6.4 million) has been shared in these ‘birth of an heir’ red packets, Hong Kong Economic Times reports.
That is because his younger son, Martin Lee, has out-produced his brother by bearing four children with wife Cathy Tsui, a model and actress nicknamed locally as the ‘HK$100 billion daughter-in-law’.

In a stock exchange circular issued last week, Henderson Land said its founder “being advanced in age” would be stepping down after the blue- chip’s annual shareholder meeting in May. The company is proposing to appoint his two sons as joint chairmen and joint managing directors, while Lee senior stays on as a board director to “continue his service”.

The property conglomerate’s corporate umbrella shelters seven listed firms, with more than HK$500 billion in total market value, including a gas utility that provides nearly 80% of Hong Kong’s residential fuel supply.

Company executives have been keen to explain to investors that Lee’s retirement won’t change the group’s business strategy. Henderson Land’s spokespeople also told the Hong Kong newspapers that the plan was premised on the fact that the brothers are both very familiar with the company’s businesses, having worked together for many years, with Peter Lee in charge of the mainland China units and Martin Lee overseeing businesses in Hong Kong.

The company has not elaborated whether these division of duties will change, although investors will get more clarity in the months ahead.

Does the co-CEO system work?
It is nothing new for large corporates to be run on the co-CEO model. However, according to a study published in 2012 by George Washington University having two siblings in decisionmaking roles has often contributed to failure rates of second-generation, family-owned firms.

Other members of Hong Kong’s property elite don’t seem to like the idea much either. Take New World Development (NWD), whose founder Cheng Yu-tung passed away in 2016 aged 91. The real estate heavyweight seemed to prefer China’s imperial model of handing control to the eldest heir. And indeed, the company is now largely being run by Adrian Cheng, the eldest son of Cheng Yu-tung’s eldest son Henry (whose health has been recovering after the 72 year-old suffered a stroke in 2017).

Li Ka-shing, Hong Kong’s richest man, also opted against the co-CEO approach. The 90 year-old stepped down as chairman of CK Hutchison in May last year and asked his elder son Victor Li to take over. Indeed, in a press conference back in 2012, Li senior made his succession plan clear: Victor was to take full control of the listed empire of CK Hutchison, which Hong Kong media said has a market value of more than HK$1 trillion, while he would give full support to his younger son Richard Li to develop his own businesses.

Richard Li is the chairman of Hong Kong telecoms firm PCCW, which is worth HK$37 billion. But Li senior said the arrangement would end up with his sons having more or less the same amount of wealth. “[In this way] I am sure they can still be brothers,” he remarked at the time. “If they fight each other it won’t be my business.”

Why do the Chinese care about Hong Kong’s property bosses?
Many Chinese entrepreneurs grew up idolising Hong Kong’s most famous businessmen. Unauthorised biographies of Li Ka-shing and books about his business philosophies are bestsellers at mainland bookstores. And many of China’s business-focused bloggers still use the names of Li and the other Hong Kong property tycoons as click-bait for their articles.

That’s why the news of Lee’s imminent retirement has been widely discussed across social media on the Chinese mainland as well. Some articles have gone viral, recounting Lee’s most famous quotes or buccaneering business stories, including the legend of the “three musketeers” who founded SHKP in the first place (the third founder Fung King Hey later left SHKP to found his own investment bank, and became the single biggest shareholder in Merrill Lynch in the early 1980s).

Some of this month’s debate has speculated on Lee’s friendship with Li Ka-shing (they were once card- playing buddies), as well some of the grudges between the billionaire duo in the past.
Other commentators noted that Lee’s retirement marks another changing of the guard in Hong Kong’s economic order.

“A year after Li Ka-shing announced his retirement, Lee Shau-kee of the same era is also going. The curtain on Hong Kong’s ‘big four’ era has officially fallen,” a blogger on Jiemian lamented, referring to the property giants SHKP, CK Hutchison, Henderson Land and New World Development.

This is a topic that we have discussed extensively. Hong Kong’s transition from a UK colony back to Chinese sovereignty really began in the late 1970s (when China was about to open its doors to the outside world) and part of the process saw a small group of local families amass a large concentration of economic power and wealth (see WiC342).

That hegemony appears to be on the verge of a shake-up – partly because of the advancing years of so many of the more prominent names. Stanley Ho, Macau’s casino mogul, 97, also stepped down as chairman of his gambling flagship SJM last year. Lui Che-woo, another Hong Kong property tycoon who controls Galaxy Entertainment, is also turning 90 (see WiC422).

Meanwhile, many of China’s largest state-owned enterprises have been snapping up commercial towers in Hong Kong’s business districts and putting in bids for some of its newest residential plots. The central government in Beijing has also been trying to wean the city off some of its reliance on real estate and efforts are underway to integrate the territory’s economy into the more dynamic and more tech-focused Greater Bay Area (GBA) in Guangdong.

That promises a future in which Hong Kong’s property tycoons aren’t going to be so prominent, some commentators think. “You can call the Greater Bay Area a failure if the richest men there over the next decade or so still come from Hong Kong’s property sector,” one WeChat-based blogger opined.

Time for China’s entrepreneurs to draw up succession plans too?
Hong Kong’s plutocrats are not alone in planning for generational change. China is now home to at least 340 US dollar billionaires and 120 Fortune Global 500 companies. Its first generation of entrepreneurs are getting old – roughly half of the top 100 mainland Chinese on the Forbes Rich List are older than 55, and the oldest is 84.

However, few of them have figured out what comes next, according to a study released last year by PwC, the professional services firm.
Only 21% of the firms that it surveyed had a succession plan in place, which was 28% lower than the global average, the study said.

Many founders are so emotionally attached to their firms that they find it hard to even contemplate stepping down, the authors of the study said. There are also cultural complexities in discussing death with family members in a country where superstition stops most people from even writing a will (see WiC350).

In the coming years many of these founders will still have to work out how they want to hand over their companies when they step down. Interest in what happens next is widespread, not just among the kind of academics who study business management. After all the Chinese have a saying that “wealth never lasts for more than three generations”.

If the retirement age of Hong Kong’s property tycoons serves as a reference point – i.e. making formal departures from their firms at 90 or so – time is still on the side of most of the mainland Chinese entrepreneurs in drawing up their own succession plans.

In some cases a sudden death can propel the child into the top job unexpectedly. This happened late last month when Zhang Jianjie, famed locally as “the king of the irons” died. His 29 year-old son Zhang Zhoufan, who was educated at Imperial College, London, has now taken over at Cuori Electrical, the world’s leading maker of the electric irons used to press clothes. Cuori, which was founded by his late father, sells about one in four irons globally and its revenues topped Rmb2 billion ($296.9 million) last year. However, the death of Zhang senior at the age of 53 is a reminder of the potential fragility of family business structures when the patriarch passes away.

What do we know about succession plans at some of China’s biggest private companies?
Of the 46 people that were 55 or older on the Forbes Rich List, 33 have made it clear that their children will take over at the top.

Some, such as Yang Huiyan, heiress to the Country Garden real estate empire, have already been gifted chunks of their parents’ firms. Yang is the sixth richest tycoon in China as a consequence, Forbes says. At 38, she is the youngest on that list too.

Wahaha’s founder has also said the beverage giant will be run by his daughter when he steps down. And in February Sun Hongbin, China’s 32nd richest man, made his son, 29 year-old Sun Zheyi, vice president at his real estate company Sunac. Sun junior will take day-to-day charge too of Sunac’s cultural businesses unit (which has had a run of success recently, with three of its co-invested films topping the box office over the lucrative Chinese New Year period).

Other heirs may reject the offer of taking on the family firm. For instance, Wang Sicong, the son of Wang Jianlin, has said he has no intention of taking charge at property conglomerate Wanda Group. Wang senior has also said he will hand the company over to professional managers after he steps down.

Wang junior’s career preference is more in line with a report from the Centre for Economics and Finance at the Chinese University of Hong Kong last year. Academics there found that only one in four children of Chinese business owners showed much interest in taking over after their parents retire.

“In China the issue of succession is especially pressing because as many as 90% of the country’s 21.9 million businesses are family-run and huge numbers of these were all founded within the same 10-year period,” an article on the university’s website warns.

It adds that the implementation of the One-Child Policy – which was in effect from 1979 to 2015 – means there is usually only a single candidate for the succession role (an advantage in avoiding sibling rivalry, but a drawback if the heir does not show the interest or the skill needed to take on the business.)
Added to that is the massive attitudinal shifts that shape the different 
generations in China because of its rapid economic and social development. 

Many of those first generation entrepreneurs sent their kids overseas to study. In some cases it means they came back with a very different outlook on business to their parents, or simply very different values and interests altogether.
Take Wang Sicong again. The Wanda princeling has suffered from sustained criticism over the years for being a playboy and a show-off – with even his own father questioning the “bad influence” of some of his son’s social media posts and blaming his foreign boarding school for what he termed his “individuality”. Indeed he even expressed hopes his son would become “more low key” (see WiC284).

That said, the younger Wang could provide a more positive example when it comes to the transition of ‘good’ business genes. That’s because he has built up a commercial empire of his own, reportedly growing a Rmb500 million loan from his dad into Rmb6.3 billion of wealth over the last eight years.

His main area of interest is the fast-growing field of eSports, where his team IG won the League of Legends World Championship in November (see WiC432).

How about China’s tech giants?
The question of whether it is a good idea to mix family and business has been highlighted by the recent case of Meng Wanzhou – daughter of Huawei’s founder Ren Zhengfei. Meng, 47, is under house arrest in Canada, fighting extradition to the US on charges that her father’s company violated American sanctions against Iran.

Ren has since told BBC that Meng has no chance of becoming his successor at Huawei because of her lack of technological background and her shortcomings in “CEO material”

Huawei – arguably China’s most successful multinational (its political challenges notwithstanding) – has even adopted a ‘collective leadership system’ which sees key executives take turns in the chairman or CEO positions.

Other tech firms such as and Baidu have also been trying to introduce ‘rotational elements’ into their senior management ranks so as to dilute the reliance on company founders.

The most-watched succession story in China this year will happen in September, however. By then, Alibaba founder Jack Ma will step down as chairman in a retirement plan he first announced in September last year.

The 54 year-old will stay on as a permanent member of the Alibaba Partnership (this shares de facto control of the company across a group of founders and outperforming executives). There were 27 such partners when Alibaba went public in New York and the partnership has since expanded to 38 people (according to Caixin Weekly). This group owns roughly 13% of the internet behemoth’s stock but takes all the important decisions.

This collective ‘partnership’ structure could prove a significant innovation – should it ensure a continuity of leadership as founding members retire. However, only time will tell whether other family-owned corporates choose to emulate it or judge it unique to Alibaba’s circumstances.  

Week In China - Download

Worries of the Super Rich

The biggest concern of people who have more money than they can reasonably spend in their lifetime is how their children will handle the wealth they will leave behind.

This was one of the findings of the study conducted recently by the law office Withersworldwide on more than 4,500 persons and interviews with members of 16 very rich families in Europe, North America and Asia.

The respondents were divided into two groups: The super-rich or those who have wealth worth $10 million or more, and the moderately rich or those with less than $10 million.

Although both groups put “health” on top of their anxiety list, they differed on the second most significant concern. The super-rich are apprehensive their children “will lack the drive and ambition to get ahead.”

This unease overrides fears of failure of investments, inability to support the family or marital discord.

The moderately rich, however, do not share that pessimism. The prospect of their children losing ambition ranks fourth only in their worry list.

According to a tax and trust partner of the law firm, “It is easy to see why the moderately wealthy don’t worry about that as much. If they are worth around the $10 million mark, realistically they are not well off enough to put their children in the position that they never have to work.”


The survey also showed that affluent families are anxious that third generation family members would eventually lose their wealth.

This sentiment proceeds from the belief that “if the first generation are wealth creators then the second generation tend to be wealth preservers, but it is the third generation that families are worried about.

“If they have had everything put on a plate for them without seeing any of the hard graft that goes into creating that wealth, then they can lose track of how best to use that wealth and how difficult it was to build up in the first place.”

The thought of instant wealth adversely affecting their children’s drive to make something good of themselves has influenced some of the world’s business tycoons against leaving their fortunes to their children when they die.

Microsoft founder Bill Gates, one of the richest persons in the world, has publicly declared that he and his wife will bequeath their $58-billion fortune to charitable causes, rather than to their three children.

Warren Buffett, reputed to be the savviest investor in the United States, has committed to give away 99 percent of his wealth, either in his lifetime or upon his death, for philanthropic purposes. According to reports, 83 percent of his treasure has been reserved for the Gates Foundation.

The list of uber rich people who are averse to making their children wallow in inherited wealth include eBay founder Pierre Omidyar (who became a billionaire at age 31), business tycoon Michael Bloomberg, iron magnate Gina Rinehart (the richest woman in Australia) and Home Depot co-founder Bernard Marcus.


If a similar study were conducted on the Philippines' financial elite, there is a strong possibility that the same results would come out.

The pervasive effects of too much wealth being bestowed on a person without breaking a sweat do not recognize cultural or social boundaries. Any society that uses wealth as a measure of prestige or glory is susceptible to that problem.

It therefore does not come as a surprise that many of the country’s business tycoons who are in their late ’70s or early ’80s are discreetly taking measures to address that concern.

The “estate planning” involves the assumption by their children of key executive positions in their businesses as soon as possible or after they have learned proper management techniques.

To make the “apprenticeship” program more effective, related companies are placed under the umbrella of a holding company or consolidated.

Aside from simplifying the management process, these arrangements give the children a preview of the delineation of authority or corporate hierarchy that the head of the family wants them to observe and honor upon his demise.

The early delegation of responsibility carries with it the underlying hope [and expectation] that it would ingrain in the children the same ambition or vision that propelled their parents when they built and brought the company to the position it now enjoys.


No matter how well mapped out these succession plans may be, there is no assurance that they will be followed to the letter or work as envisioned when the Grim Reaper pays a visit to the family patriarch or matriarch.

As long as the head of the family is physically and mentally fit, peace and harmony among his children in running their respective business assignments can be expected.

Everyone will be in his best behavior and will avoid any act that may induce their “oldies” into revising the assignment of executive positions or, worse, disinheriting them in their last will and testament.

When the last parent passes away, there is no assurance that peace in the family will remain the way it was when either or both parents were still alive.

Deep seated hurts, envy or sibling rivalry may emerge and threaten the viability of the succession plans earlier put in place. The in-fighting often happens if the business units separately managed by the siblings are mismanaged or fail to post the expected profits.

Unless an equalisation or fair sharing of profits agreement is in place, the disparity in wealth distribution among the children could give rise to intra-corporate disputes or civil suits.

There have been instances of siblings filing criminal suits against each other or conspiring with third parties to change the composition of the board of directors even if it would eventually lead to the loss of family control.

When second generation members fight, the discord created often spreads to the third generation or, worse, to the succeeding generations.

Blood supposedly runs thicker than water. Unfortunately, money sometimes has a nasty way of diluting it.
   -- 2014 July   ASIAN PACIFIC POST

PUBLISHED ON 2015 January 28

Singapore's family-owned firms least ready for succession in S-E Asia

FAMILY-owned businesses in Singapore are laggards in the region in two respects - in planning for leadership succession and in using formal structures and wealth-management solutions to manage succession issues and ensure wealth preservation.

FAMILY-owned businesses in Singapore are laggards in the region in two respects - in planning for leadership succession and in using formal structures and wealth-management solutions to manage succession issues and ensure wealth preservation.

A report by The Economist Intelligence Unit has found that fewer than six in 10 Singapore companies (58 per cent) have a succession plan in place.

And just 35 per cent have set up formal wealth-management structures such as private foundations; 41 per cent have trusts to manage inter-generational wealth transfer. 

The report, commissioned by Labuan International Business & Financial Centre (Labuan IBFC) and titled Building Legacies: Family Business Succession in South-east Asia, surveyed 250 majority family-owned businesses from Indonesia, Malaysia, Singapore, Thailand and the Philippines.

Indonesian family-owned companies emerged the most prepared in succession planning, with 78 per cent of respondents indicating that they had formal plans in place.
A further 57 per cent had set up private foundations, and 53 per cent, trusts to manage wealth and succession.

Among South-east Asian businesses overall, 67 per cent said they had succession plans in place; 71 per cent said they have had their plans reviewed by their boards.

This being said, formal governance structures have not been widely adopted among family businesses, and the use of external advisors has largely been limited to areas such as estate planning (41 per cent) and tax liabilities (48 per cent).

Only 34 per cent of executives polled said they had sought external advice about family governance issues; 18 per cent said they had used advisors to resolve conflict between family members.

There is surprisingly little differentiation among the five countries surveyed in terms of succession-planning preferences; whether they undertake this depends on the amount of resources and years of experience they have at hand, said the report.

Even some of the region's most successful companies still hesitate to bring in external advisors to formalise succession plans through a contract or to erect lasting structures such as a trust or foundation.

This is surprising, given respondents' generally positive attitude towards succession planning: 71 per cent said it is easier to attract investment with a formal succession plan in place; 66 per cent said customers and investors have more trust and confidence when such a plan is in the picture.

For business families, unsurprisingly, retaining control is paramount.
Three-quarters of families surveyed (76 per cent) have family members as chairman or in C-level executive roles; only 2 per cent said their management would choose a successor from outside the family.

And while the survey found that attitudes towards women heading family businesses were, in theory, progressive, there was little evidence of this in reality - there remains a strong propensity to appoint the first-born son as successor.

Of the respondents, 97 per cent of companies no longer led by the founder are run by a family member, and of the children now heading the business, 92 per cent are sons.  --  SINGAPORE BUSINESS TIMES


Money thoughts for a lifetime

A year of articles on saving, spending, budgeting and life planning

1 Money is important as a means to an end, and that end is arguably financial freedom. This happy state of affairs is defined by not having to work for a living, so one is freed to do whatever one deems important in life. This can be spending more time with the kids, travelling around the world, or taking time off to pursue a cause. With growing income inequality, ordinary people slogging in middle-class jobs might think they can never retire in their lives, and have to keep working till they are over 70. We beg to differ. For a start, those earning the median salary of $3,000 upon starting work stand a good chance of being able to attain financial freedom before they turn 60, or even 40 or 50.
This is because of two reasons: the mathematical effect of compounding, and the good financial habits one can build up over time. But you have to plan ahead, and above all, start young.
2 One question: Is one million dollars enough to retire on? Singapore is well-known for having one of the highest proportion of millionaire households in the world. Based on recorded spending patterns and a conservative rate of return of 4 per cent a year, along with inflation of 2 per cent a year, we calculated that $1 million would last a typical HDB family spending $3,600 a month today for 30 years. This means that a million dollars should theoretically be enough for a 50-something breadwinner to retire comfortably with. Of course, families spend more than $3,600 a month on both necessities like healthcare and more extravagant things like overseas holidays and overseas education. And the statistics show that a typical family living in a private flat or landed property could spend anywhere from $7,000 to $9,000 a month. In these scenarios, $1 million would not be enough to retire on.
3 Needs are limited and wants are unlimited. Give a person $10 million, and he or she can find a way to live such that the money gets spent pretty fast. Thus frugality has been talked of as a virtue - the idea that one should cut back on expenses by living simply and spending very seletively.

The family-business factor in emerging markets

The industrial titans of the Gilded Age were largely family businesses. But today, in most developed nations—particularly the United States, the United Kingdom, and Japan—the largest, industry-leading companies are typically held by a broad, dispersed mix of shareholders. Less than one-third of the companies in the S&P 500, for example, remain founder- and family-owned businesses, meaning that a family owns a significant share and can influence important decisions, particularly the election of the chairman and CEO.

So far, the picture is quite different in emerging economies. Approximately 60 percent of their private-sector companies with revenues of $1 billion or more were owned by founders or families in 2010. And there are good reasons to suspect that these companies will remain a more significant part of their national economies in emerging markets than their counterparts in the West did about a century ago. As brisk growth propels emerging regions and their family-owned businesses forward, our analysis suggests that an additional 4,000 of them could hit $1 billion in sales in the years from 2010 to 2025 (Exhibit 1). If that’s how things shake out, such companies will represent nearly 40 percent of the world’s large enterprises in 2025, up from roughly 15 percent in 2010. Developing an understanding of them, therefore, is fast becoming a crucial long-term priority—not only for global companies active in emerging markets, but also for would-be investors that must ultimately decide whether and how to support this fast-growing segment of the economy.

Exhibit 1

A growing number of family-owned businesses in emerging markets could hit $1 billion in sales in the years from 2010 to 2025.

Why past may not be prologue

The starting point for many family-controlled local companies is a demonstrable, even dominant, “home field” advantage; they have a deep understanding of their countries and industries, as well as considerable influence on regulators. They derive all this from years of personal relationships with stakeholders across the value chain. Many have proved resilient through times of economic crisis.1

The very fact that they are family businesses may be advantageous in an emerging market. Where the conventions of commercial law and corporate identity are less developed, doing business on behalf of a family can signal greater accountability—the family’s reputation is at stake, after all—and a stronger commitment. Indeed, we have observed circumstances where a personal commitment from the owner of a family business was as powerful as a signed contract.

Local philanthropic efforts reinforce this signaling. In the Philippines, the Ayala Foundation—a nonprofit branch of the Ayala Corporation, the country’s largest conglomerate and a family-owned business—states its mission as improving the quality of life for all Filipinos by eradicating poverty. Similarly, in India, the GMR Varalakshmi Foundation, an arm of the market-leading GMR Group, strives to “develop social infrastructure and enhance the quality of life of communities” throughout the country. Companies such as these work within and for their communities.

They can also work fast. As one executive at such a company told us: “All the world is trying to make managers think like owners. If we put in one of the owners to manage, we don’t need to solve this problem.” An owner–manager can move much more rapidly than an executive hired from outside. There’s no need to pass decisions up a chain of command or to put them in front of an uncooperative board, and many of the principal–agent challenges that confront non-family-controlled companies are neutralized. Family-owned businesses can therefore place big bets quickly, though of course there’s no guarantee that they will pay off. Still, manager–owners are largely relieved of the quarter-to-quarter, short-term benchmarks that can define—and distort—performance in Western public companies, so they’re freer to make the hard choices necessary to create long-term value.

Indeed, the owners’ long time horizons and sense of mission often suffuse the whole organization. A McKinsey survey of businesses owned by families and founders showed that 90 percent of board members and top managers—family members or not—said that family values were present in the organization, and fully 70 percent said that they were part of its day-to-day operations. For the past ten years, McKinsey has measured and tracked organizational health in hundreds of companies, business units, and factories around the world. Nearly two million employees have answered questions that rate the health of their organizations. We then produce a single health score, or index, reflecting the extent to which employees agree that their companies meet empirically derived litmus tests in each of nine dimensions of organizational health. When we isolate businesses owned by families and founders in emerging markets—as we did for nearly 60 leading companies in Asia, Central America, and South America, with over 100,000 survey respondents—we see health outcomes that are better than or comparable to those of other companies in the same markets (Exhibit 2). 

Moreover, in Asia these companies are stronger than their non-family counterparts on several specific management practices, including shared vision, strategic clarity, employee involvement, and creativity and entrepreneurship.

Family-owned businesses in emerging markets have health outcomes better than or comparable to those of non-family-owned businesses in those same markets.

For all these reasons, there may be little need for companies to jettison family-oriented governance to attract investment. In a world where free-flowing capital seeks out success, the emerging markets’ strong-performing publicly traded family businesses will probably be rewarded. Market-leading ones can expect to be sought out by potential investors and venture partners alike, for success is a magnet.

Playing by family rules 

The resilience of family-owned businesses in emerging markets contains a paradox for global companies operating there. Many companies approach these markets in search of rapid growth, yet the family-owned businesses they’re considering partnering with are balancing the importance of liquidity against an extremely long view. Founders and families hold their shares for decades, even centuries. “For us,” the chairman of such a business explained, “short term is 5 years, and medium term is 20 years—that is, one generation.” Multinationals that afford their country managers just three to five years (and sometimes even less time) to make progress are creating a significant mismatch.
Indeed, mismatches between the time horizons of country managers and businesses owned by families and founders can create tensions that undermine strategic partnerships. Exacerbating matters is the volatility of many emerging markets. Many country managers don’t experience a full business cycle, so they struggle to understand and quantify risk, to form a “through cycle” view of the opportunities, and thus to partner meaningfully with their peers in family-owned businesses.

Moreover, many family-owned companies place a premium on building strong, well-diversified businesses—sometimes to an extent that conflicts with the developed world’s conventional core competence–based strategies for value creation. As our colleagues have noted, for example, the largest conglomerates in China, India, and South Korea are entering new businesses (often in unrelated industries) at a startling pace, adding an average of one new-business entry every 18 months.2 Almost 70 percent of these diversifying conglomerates are family or founder owned. In large part, they aspire to play the portfolio game, taking advantage of access to talent and capital, as well as allocating family assets across different industries. This is an appropriate strategy for preserving wealth over the long term—and one that, our research finds, is paying dividends for conglomerates in the BRIC3 countries. The implication for global companies and investors is that family-owned companies making moves into or out of seemingly unrelated industries can show up unexpectedly as competitors, partners, asset purchasers, or sellers, with varying degrees of success.4

The wild card, of course, is succession. Fewer than 30 percent of family- and founder-owned businesses around the world survive to the third generation as family-owned businesses,5 and it’s an open question whether those in emerging markets will fare any better. History suggests they won’t. While statistics are scarce, analyses comparing the top 10 or 20 family-owned businesses in a given emerging-market country 20 years ago with today’s leaders show great discrepancies. Nonetheless, there is some reason for optimism: the factors behind successful transitions are reasonably well known, and much can be learned from companies that failed the test. (Today’s family-owned businesses in emerging markets are more likely than ever to engage in careful succession planning.) Still, the basic challenges—such as family feuds, nepotism, and the gradual loss of entrepreneurship when leadership passes on to new generations—will surely bring down many family-owned companies in emerging markets, as they have elsewhere.

Similarly, such businesses may create ownership models that are inflexible and lack transparency, drawing the attention of activist investors who see value in better governance, more disciplined capital structuring, and getting out of so-called hobby businesses that support family members. This strikes at the heart of the question: Is the family the best owner or manager of a company, or is it in business to support the family? Potential partners, investors, and competitors should carefully look at such a company’s family tree, ownership models, and current succession processes before drawing conclusions about sustainability.
Finally, people who watch emerging markets should keep a weather eye on the role of regulation, as many governments in these countries are struggling to strike a balance between denying family-owned businesses excessive privileges and opportunities to make profits, on the one hand, and fostering entrepreneurism to promote their economies, on the other.6 Would-be investors ignore at their peril the potential of regulatory intervention to reshape the nature of competition in these markets quickly and dramatically.   -  McKinsey