The emperor has no clothes

As parts of Asia emerge as economic superpowers, the patriarchs driving the region’s growth have faced a succession of scandals, prompting questions over autocratic styles of governance, which appear increasingly at odds with the demands of the new generation.

With many of Asia’s most high profile businessmen now in their 80s, analysts say decisions made now on the shape of the business will be crucial in determining future success. “Many of Asia’s businesses are in transition from the founder to the second or third generation, and are running into difficulties,” says Yuelin Yang, managing director of strategic projects at family-controlled IMC Corporation in Singapore. “There are challenges on the family side and the business side and none of them are easily solved.” Yang is the fourth generation of his family to work in the business.

The most potent recent example of poor governance was played out this year in Hong Kong, where the lifetime achievements of casino billionaire Stanley Ho were at risk of being overshadowed by an unseemly family row over the future ownership of his company.

Ho, who is reported to have three concurrent wives and at least 16 children, in January filed a lawsuit against members of his family, amid open warfare between wives and children over the ownership of his estate.

In two days at the height of a media circus around the case, the stock price of 82-year-old Ho’s company SJM Holdings fell by 5%, cutting about $480 million from its market value. “The Stanley Ho episode was in many ways a wake-up call for wealthy families in the region,” says Patrick Hamlin, a lawyer at Withers in Hong Kong.

“There is a strong culture of retaining control right up until the end, but there is also now a realisation that it may be better to address questions of ownership earlier.” The Ho case highlighted the challenges facing business titans such as 82-year-old Li Ka-shing, Asia’s richest resident and the world’s largest operator of container terminals, 87-year-old Robert Kuok, one of Hong Kong’s biggest property developers, and 73-year-old Ratan Tata, chairman of the huge Indian conglomerate the Tata Group. All three have yet to name their successor, despite their age.

If history is any guide, the road to transition among Asian family businesses will not run smooth, says Joseph Fan, a professor at the Chinese University of Hong Kong. In a study of 250 companies controlled by Chinese families in Hong Kong, Taiwan and Singapore, Fan found that succession coincided with substantial value destruction, evidenced by aggregate stock market returns of minus 60% in the five years before and three years after the leadership change.

“Often the value does not come back and can even decline further, so there can be a permanent loss,” Fan says. “The most fundamental reason is intangible assets, which are difficult to trade across generations.”

Critical to the success of many Asian family businesses, Fan says, is the relationships the founder may have with business partners, governments and banks. Together with the ability to hold the family together, these assets represent a huge chunk of the real value of a business.

“It’s easy enough to pass on tangible assets like factories or equipment, but in Asia these are not the most important assets of the company, as they may be in the US or UK,” says Fan.

“It is very tough for Asian families to pass on the valuable intangibles, and that is why it’s important to try to involve at least one of your successors in the business, rather than non-family practitioners, who may have more skills but who cannot inherit intangible assets.”

Some of the issues facing Hong Kong companies were highlighted in a report published in March by law firm Eversheds, which looked at 241 company boards at the largest companies and financial institutions globally. The report found that boards that had a higher percentage of female and independent directors had a better share price performance over the financial crisis.

In Hong Kong by far the highest percentage of shares (58%) were held by substantial shareholders (holding more than 3% of total share capital), the report said, while Hong Kong also had the lowest representation of female directors of any region. Only 5.9% of directors were female in 2007, although that increased to 8.3% of directors by 2009. Hong Kong companies also had by far the lowest representation of independent directors, with only 38% considered independent.

Another Asian country with an extremely high proportion of family-owned enterprises is India, with nearly half of the companies listed on the Bombay Stock Exchange controlled by their founding families.

Firms such as Tata, Birla and Reliance have been part of the corporate furniture for decades, but India was rocked in 2009 when an admission of fraud by the chairman of Satyam Computer Services led to nationwide soul-searching over the ability of family-run businesses to be held out as torchbearers for India’s fast-growing economy.

B Ramalinga Raju resigned after admitting profits at India’s fourth-biggest software exporter had been inflated over several years. The episode prompted India’s Ministry of Corporate Affairs to publish voluntary guidelines on corporate governance, and a new companies bill is now being considered by the Indian parliament.

The Satyam scandal came on the heels of a drawn out and fraught succession battle between the Ambani Brothers. The brothers’ companies are huge, comprising around 5% of the country’s GDP.

The world’s richest siblings fell out after the death in 2002 of their father Dhirubhai Ambani, who rose from poverty to create the Reliance empire. In 2005 the company was split between the brothers in a deal hammered out by their mother, but simmering tensions, interspersed with furious public spats, have continued ever since.

A questionable corporate governance culture has also come to the fore at Tata in recent months, with its chairman Ratan Tata recently been forced to appear before the Indian parliament to face questions about his group’s participation in the controversial award of 2G telecoms licences three years ago.

Tata has been accused of mishandling the auction, costing the government billions of dollars in lost revenue. The episode has highlighted the often murky world of family-controlled businesses in India, which some say helps to perpetuate crony capitalism in the country.

As Asian companies transition from autocratic governance to structures more suited to the demands of the global economy, the most important initial step, experts say, is to put decision-making architecture in place in the corporate entity.

“With the enormous amounts of capital now involved the old model simply will not work,” says Hamlin. “Family partnerships and trusts are both suitable and can be structured so that founders retain ownership or that different shareholders have separate voting rights.”

For many, good governance starts in the family, with a family council or constitution. While the council would not have legally binding powers over the business, it can operate a system of checks and balances. In addition, the business may appoint external advisers or, in the case of corporates, a board of directors.

One of the challenges in appointing external advisers, analysts say, is sourcing people that can adapt to the demands of the family, and bring the skills and know-how to run a multinational business.

“The ideal profile of an independent director is a person who on the one hand can be trusted like a ‘consigliere’ (counsellor), but then who also needs to be viewed as independent by non-family stakeholders,” Yang says. “It’s more complex being a director at a family company than at a non-family company – and its very tricky to find people who have all those skills.”

The most successful family businesses after succession will align the interests of the family with those of the company and the independent board members, but for some the only realistic alternative may be to divest. Hong Kong media mogul Sir Run Run Shaw made that choice in January, selling his remaining stake in TVB, Hong Kong’s largest television network, for more than $1 billion, and cutting his family’s link to the business permanently.

“The family needs to discuss what is best for them and for the next generation,” says Yang. “If they want to keep the business they must be sure the family members are ready to go with it. If not they must make a choice – either professionalise or sell.”