Top managers need a degree of excess control to achieve targets
Study shows too little or too much excess authority in the hands of a few is unlikely to make companies more competitive
It’s a story we are far too familiar with in Hong Kong business. A small family company has a tightly controlled management clique, with just individuals or a small group of people in charge of a business far in excess of what their ownership and cash flow rights would normally dictate.
We know the situation well. Just take a walk around Kowloon and look at the office blocks around you – many boardrooms here have just one matriarch who dominates business discussions. This is one of the very popular forms of business governance in Asia.
Tightly held majority control of a group of businesses is often understood to be a benefit, offering a competitive advantage. After all, it allows for the greater flexibility and cost-savings offered by centralised management. It creates the opportunity for negotiation across a broader spectrum, as opposed to each entity managing its own lesser requirements. It also promotes a consistency of management, starting from one entity that was successful enough to spawn another.
Family-controlled business groups, which are very common in Hong Kong and much of Asia, generally perform better than non-family groups
However, the assumption that such “excess control” of a business or a group of businesses is a positive has been questioned in our latest research at the UNSW Business School.
We have been deconstructing how these business groups form, how managers operate within them, and looking into what affects their performance related to market competitiveness.
In particular, we have discovered that the relationship between excess control and performance is not as clear cut as has been presented in the past.
In our research we confirmed that the effects of excess control, typically within a family firm, are double-edged. Certainly, some firms within a business group do appear to benefit at the expense of others, but there are discrepancies around the links between ownership practices and the efficiencies of firms.
One major danger of excess control is that it can sometimes pose risk. Cross-holding among affiliated companies and pyramidal structure make ownership and control in business groups difficult to trace and understand. This means the desired performance effect of excess control becomes unpredictable as company-level and group-level decisions lose their specificity and clarity.