My heir's a mess

PUBLISHED : Monday, 19 March, 2012, 12:00am
UPDATED : Monday, 19 March, 2012, 12:00am

Warren Buffett, the 'Sage of Omaha', recently announced succession plans were in place for control of his company, Berkshire Hathaway. Buffett's attention to this matter and his repeated assurances that his children will neither inherit the bulk of his wealth nor control of his company stand in marked contrast to the nepotism and lack of succession planning in most Hong Kong companies.

Management studies are unanimous in the view that succession planning is a key responsibility of corporate managers, and is best achieved by nurturing talent within the company. Indeed, academic studies have found that internal promotion tends to produce better results than recruiting top management from outside.

Buffett has made it clear that his succession planning revolves around the two aims of preserving the company's successful legacy and continuing its distinctive style of leadership and investment growth. Buffett believes these objectives are easier to achieve by focusing on individuals who are intimately familiar with the way the company is run.

This logic is often employed to justify the dynastic inheritance, which characterises succession in Chinese-run companies across Asia. However, the choice of candidates is very often narrowed to just one person - the founder's eldest son.

Does this matter? Joseph Fan, a professor of finance at Chinese University, tried to answer this question in a study of 250 companies controlled by ethnic Chinese families in Hong Kong, Taiwan and Singapore.

His stark finding was that successions in listed companies tended to be followed by major declines in the share price of these corporations. Indeed, these drops occur even before the successions take place under the cloud that they are about to.

If these companies were private, the families that own them should be entitled to choose whomever they want to continue the business. However, with public ownership comes public responsibility.

In Hong Kong, however, public ownership seems to be incidental because the controlling shareholders typically own the vast majority of the listed shares - often right up to the boundary of the maximum permitted under stock exchange rules.

Most of Hong Kong's largest companies remain under the control of their founders and have either installed the founder's eldest son as their replacement or are planning to do so. Not only is this problematic in terms of the ability of the potential heirs, but even within the families, there have been well-publicised problems.

One example would be the companies controlled by the ailing Stanley Ho Hung-sun, and at Sun Hung Kai Properties, where there was a public and bitter dispute among the three sons who inherited their father's mantle.

Things tend to hold together as long as the patriarchs remain in charge. They bring huge advantages such as ties to the small group of big-league tycoons who control Hong Kong business, the government and the banks that provide financing.

However, those who have shown their capability in building their empires are reluctant to retire, even at an advanced age. Even Li Ka-shing, once known as Superman, is unlikely to maintain the same vision and vigour he possessed in the years when the Cheung Kong Group was establishing itself.

On the mainland, where a new generation of tycoons has been created since the opening of the economy, the average age is lower, but the determination to secure dynastic succession seems at least as strong as it is in Hong Kong.

It is very hard for the old men to let go, and the families that own these companies seem set against ceding control to outsiders. One solution being pushed by the Chairmen's Forum of the United States and Canada is to split control between a chairman, drawn from the independent directors, and a chief executive, who is not independent.

Research by GovernanceMetrics found that in Hong Kong a mere 7 per cent of chairmen are independent board members and that 32 per cent of them are aged over 65. So, there is scope for change here. Indeed, if it happens, this will be seen as a significant gesture towards adopting international management standards.