Family Business

Family Business: a Asian/Chinese Prospective Roger King, PhD Adjunct Professor of Finance Director of Center for Asian Family Business Studies Director of Center for Business Case Studies

Induction to HKUST • No. 1, World's Top 200 Asian Universities (2011) (QS Asian University Rankings) • No. 40, World's Top 200 Universities (2010) (QS World University Rankings) • No. 41, World's Top 200 Universities (2010) (Times Higher Education World University Rankings) • School of Business & Management • No. 47, World's Top 100 Universities in Economics/ Business (No. 1 in Greater China) (2010) (Academic Ranking of World Universities by Shanghai Jiao Tong University)

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Kellogg-HKUST EMBA Program: No. 1, Global EMBA Rankings (2010) No. 1, Global EMBA Rankings (2009) No. 2, Global EMBA Rankings (2008) (Financial Times) Full-Time MBA Program: No. 6 in the world (2011) (Financial Times) School of Engineering No. 26, World's Top 100 Universities in Computer Sciences (No. 1 in Greater China) (2010) No. 39, World's Top 100 Universities in Engineering/ Technology and Computer Sciences (2010) (Academic Ranking of World Universities by Shanghai Jiao Tong University) No. 20, World's Top 50 Universities in Engineering and Technology (2010) (Times Higher Education World University Rankings) No. 26, World's Top 100 Universities in Engineering and IT (2010) (QS World University Rankings)

• Center of Asian Family Business and Entrepreneurship Studies

Topics to be Covered in the 1st Session • Why family business is important? • Family business is complex • Notion of Wealth Preservation from generation to generation, Harmony amongst descendants and preservation of Legacy • Distinct characteristics of Asian/Chinese family Businesses • Some unique causes of early demise of Asian/Chinese family businesses: Wealth does not past beyond 3 generations (shirt sleeve to shirt sleeve in 3 generation) • Current challenges facing Asian Family Businesses: Culture clashes, globalization, value vs. relationship based

How many of you are from a family business? So what is a family business?

Common Myths of Family Business • Small business – mom and pop • No growth • Limited capital • Nepotism – lack opportunities for nonfamily members • Generational conflicts and succession problems

Why family business is important? • Family businesses are pervasive and significant • Family businesses are more profitable • Family businesses are better place to work • Family businesses are complex

Family Businesses are Pervasive and Significant • USA: – – – –

20% of 1,000 largest firms are family owned 1/3 of the S&P 500 firms and 18% of outstanding equity 60% of workforce Wal-Mart; Ford; New York Times; Cargill; Mars

• China: – 70% of GDP and 75% of the workforce

• India: – 20 groups (16 family controlled) = 66% private sector assets

• Germany: – 66% of the GDP and 75% of workforce

Family Businesses are More Profitable Ward: Anderson-Reeb:

26% vs. 21% ROIC

Morgan Stanley:

16%/yr vs. MSCI & 18.5% ROE vs. 14.1% ROE

Pitcairn:

30% Premium MV/BV

Largest FB 1000: Forbes 400 Private Firms:

+35% ROIC

5 – 10% S&P 500

Greater sales revenue per employee

Family Businesses are Better Places to Work • Founder Businesses

34%

• Family Businesses

26%

• Partnerships

16%

• Non-Profits

12%

• Associations/Co-Ops/ESOPs

4%

• Widely-Held

8%

Family Businesses are Complex Family first or Business first?

Family Businesses are complex (cont’d) Another reason is the complex relationships between various interested parties – – – – – – –

Family owner only Family manager only Family owner and manager Family no ownership and management involvement Non-family owner only Non-family manager only Non-family manager with ownership

Family Businesses are Complex (cont’d) A key reason is Family Business are the blending of two inherently different realms – performance-based of business and emotion-based of family. A system fraught with role confusion and conflict. Family •Emotional based •Subconscious behavior •Inward looking •Risk averse and slow to change

Business •Task based •Conscious behavior •Outward looking •Exploit changes

Key Concerns of Founders of Family Business • • • • •

Perpetuate the family name and values Wealth preservation for descendents Succession Division of family wealth amongst descendents Policy for family members to participate in business • Role, if any, for spouses, in-laws and other relatives • Harmony amongst descendants

Yet Most Family Business Cannot Survive Beyond 3 Generations “Shirt Sleeves to Shirt Sleeves in 3 Generations” “Wealth Doesn’t Pass Beyond the 3rd Generation • The first generation creates the business • The second generation enjoys the business • The third generation destroys the business

Reasons/Causes of Early Demise of Family Business The single greatest cause of demise of family businesses is family conflicts Notion of “Steward” and “Inheritor” • Steward refers to a member of the 2nd generation who wants together with his or her fellow siblings to see the family firm continue under family ownership • Inheritor sees their ownership in simple financial terms and lack emotional commitment

Unique characteristics of Chinese culture and family business • For Chinese family businesses, the most important family values are Confucian based • Respect (孝 xiao) is the most important virtue in Confucianism • Five basic social relationships are – father and son, ruler and ruled, husband and wife, elder brother and younger brother, and friend and friend • Hierarchical relationship - the ruled is expected to be submissive to the ruler, while the ruler is expected to be kind and caring to the ruled

Unique Characteristics (cont’d) •

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Family is always more important than any individual member, and harmony is the most important value for all family members. Without harmony, no family can stand, neither can a family business Social and economic network relationships (关系 guan xi) are highly valued and they tend to be based on personal friendship and trust (信用xin yong) rather than on a formal contractual relationship

Unique Characteristics (cont’d) • Confucian influenced cultures are among the most collectivist. The Anglo-American culture is the most individualistic • Work, leisure and home life are blurred • Often job specification are irrelevant – all are required to do whatever is necessary to complete the task • Face saving is essential to avoid direct confrontation on poor performance – handled through indirect hinds

Unique Characteristics (cont’d)

Reasons/Causes of Early Demise of Chinese FB • •

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Political stability and its implications on Family Business Longevity Lack of appreciation for branding, long-term capital investments and R&D (notion that “the bag is always packed” –Diaspora mentality especially amongst the ethnic Chinese) Equal (or near equal) inheritance amongst male descendants vs. primogeniture (Europe and Japan) - fragmentation of economic resources and causes sibling rivalry

Reasons/Causes of Early Demise of Chinese FB (cont’d) • Lack trust of anyone outside of family (nepotism) – limited talent pool • Local (regional at best) vs. global businesses • Relationship vs. market driven business

Current challenges facing Asian Family Businesses: Culture clashes, globalization, value vs. relationship based

• Better and often western educated (over 90% have university degrees and ~26% have a MBA from Europe or US – value system influenced by other (Western) cultures • Better career opportunities outside of family business – reluctant or unwilling to join the family business (notion of obligation, burden and/or duty) • Willing to invest for future: brand, product development (R&D), and diversification (including M&A) • Performance and accountability driven – potential for sibling conflicts • Global vs. local orientation

Concluding Remarks • Family business is pervasive and important globally yet few survive beyond the 3rd generation • This is true for Chinese as well as Western family businesses who have very different family governance systems • So can we conclude one system is better than the other – perhaps not • Are there concepts that we can learn from both systems to increase the survival rate of family businesses