Top managers need a degree of excess control to achieve targets

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.

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.

However, in general our multi-level analysis of the performance implications of excess control in business groups found that the detrimental effects of excess control are far less pronounced in family owned groups. Indeed, family-controlled business groups, which are very common in Hong Kong and much of Asia, generally perform better than non-family groups.

It is likely this is because of common management philosophies and a sense of responsibility to manage the business appropriately for future family generations. To put it simply, family firms care about being around for the long term, rather than just putting things in the best possible light for the next shareholders’ presentation.

It is also important to note the positive links between excess control and performance.

Shareholder expropriation and powerful controlling groups have sometimes – particularly in the Australian business environment – developed a negative reputation for the “seizing” of power and the overruling of the wishes of board members. Such controllers can be seen as troublesome and meddlesome, but the study also emphasises the benefits of a balanced level of excess control, particularly in family groups.

Alas, this did not work out too well in the case of Taiwan’s Rebar Group, which filed for insolvency protection in 2007. It had assets which exceeded US$10 billion, but after heavy financial losses it was found the controlling family had excess control over the group through executive positions and board seats.

In others, the dangers of excess control can quite often come down to simply a lack of focus. An example is the failure of Woolworths’ Masters home improvement stores in Australia, which had been managed by already busy executives within the group.

What does it all mean in a practical sense? Any consideration of an independent business, whether for investment, analysis or other business relationship purpose, must be taken with a clear understanding of the level of group ownership and control the independent business operates within.

In contrast to the assumption that the controlling shareholders magnify the separation between ownership and control, our findings indicate a more nuanced perspective and underscore a need to distinguish better the performance of the firm from the performance of the group in business group settings.

This finding is especially pertinent in emerging economy environments where family based business groups are the dominant organisational form for managing large businesses.

However our study identified an inverted U-shaped relationship between group-level excess control and group-level performance.

In other words, the greatest financial performance was experienced by business groups that had an average level of excess control. Very low levels and very high levels of excess control both resulted in lower group performance.

When shareholders or other stakeholders seize disproportionate control in excess of their ownership the intention is most often to keep the group as competitive as possible. But that is not always the result.

In other words, if you are running a family company, perhaps it is always worthwhile maintaining a sense of balance.

Gavin Schwarz is an associate professor at UNSW Business School. Julian Lorkin also contributed to this article