The Week Explained: Family business
No one in Hong Kong needs to be told about the importance of family-run companies - more of them are listed here than on any other major stock exchange.
These companies and their investors will be pleased to read a new global study from Credit Suisse. The study shows that, between 2007 and this year, shares of family-controlled firms outperformed others by an average of 8 per cent. Reasons cited for this include the fact that family firms often bear the owner's name, add management value to their operations, tend to be concentrated in high-margin sectors (such as luxury goods and health care), and seem to have a better focus on the long term.
Other studies have highlighted how family-run companies benefit from continuity, commitment and shared knowledge, which are accrued over time.
The performance of family-controlled firms is, however, a vexed subject - other research contradicts the Credit Suisse study.
In 2003, three Chinese University professors (Larry Lang Hsien-ping, Low Chee-keong and Raymond So Wai-man) published a widely-quoted study that showed positive results for family ownership. Back then, some 81 per cent of the companies on the local bourse were family-controlled; that number has since been diluted by the influx of mainland state-owned enterprises, but family control remains a dominant feature of the Hong Kong exchange.
The Chinese University study found companies with a high degree of family ownership performed better, while those with a greater degree of family management achieved the best results. But it is important to note that better performance (as measured by return on assets) was registered by companies with a listed entity at the apex of their corporate structure. Some family conglomerates prefer to control their publicly-listed entities from a private company, whereas others tend to have a listed firm at the apex of their operations.
In Asia, most of the famous listed family-controlled conglomerates are first-generation entities - they are still run by the people who founded the firm. Even older established companies tend not to be older than the second generation.
Joseph Fan, also from Chinese University, has recently been studying succession in 250 of these family companies, and found that on average their share prices declined by a disturbing 60 per cent in the five years before a succession and three years afterwards.
Fan said it was hard to replicate the charisma and skills of a firm's founder in subsequent generations, and that succession issues tend to create conflict within families.
In Hong Kong, the family rows within Stanley Ho Hung-sun's empire and the turbulence among the brothers at Sun Hung Kai Properties are well documented.
The bottom line is: will the rich kids who inherit these firms work as hard as their fathers? And are the talents required to run a major company necessarily available within a single family?
Some companies are addressing these issues in a hybrid fashion. At Li & Fung, now in its third generation of family ownership, a decision was taken to appoint a CEO from outside the family to work alongside clan members. At Cheung Kong, most operational divisions are not run by family members, but central control resides firmly with Li Ka-shing.
Elsewhere, families have given up control. At the Heinz food empire in the US, family members retain voting rights through shareholdings but do not get involved in management. In Britain, the Sieff family no longer run Marks & Spencer, thanks to their decision to turn over management to outsiders.
Listed Asian family companies have some way to go before relinquishing control.