Mixing Family with Business: Succession and Marriage

1. Mixing Family with Business:Succession and Marriage Joseph P.H. Fan (范博宏）Director, Centre of Economics & Finance Professor, School of Accountancy and Department of Finance Phone: 852-26097839; Email: pjfan@cuhk.edu.hk Web: http://ihome.cuhk.edu.hk/~b109671/index.html

2. Family firms are a dominant organizational form in almost all countries around the world.

3. Succession: The Roles of Specialized Assets and Transfer Costs Joseph P.H. Fan (CUHK)Ming Jian (NTU, Singapore) Yin-Hua Yeh (Fu-Jen Catholic University, Taiwan)

4. Some Observations about Family Business • Persistent concentration of ownership • Family (heir or close relative) succession • Mixed performance in succession, especially in family succession • Perez-Gonzales (2006), Bennedsen et al. (2007), Villalonga and Amit (2006)

5. Research Questions • We use firm ownership and leadership succession as an event to address the following questions: • Why family succession, hence the emergence of family firms? • Why persistent concentration of ownership? • What are fundamental determinants of succession performance? • How do firm governance structures evolve around succession?

6. Explanations of Mixed Performance of Family Ownership and Heir Succession • Outsider expropriation • Though a professional manager is more productive, his interest is not necessarily aligned with the family (Bhattacharya and Ravikumar, 2002). • Serious in weak institutional environments (Burkart, Panuzi, and Shleifer, 2003) • Insider expropriation • Family firms are competitive, but insiders capture most of the gain, leaving little to outside investors (Villalonga and Amit, 2007) • Transfer costs of specialized assets (our focus)

7. Key hypothesis • We go back to the old property right literature (Alchian, 1965, 1969; Klen, Crawford, Alchian, 1979; Williamson, 1978), testing the possibility that Family ownership and family succession are arrangements to protect specialized assets that are difficult to partition, value, and transfer across individuals or organizational boundaries

8. Specialized assets in entrepreneurial activities • 1. Entrepreneurial activities are special • Entrepreneurs’ specialized human capital, including superior management skills, creativity, leadership charisma, secret formula, reputation, business/political connections, etc. • These assets are specific to the entrepreneurs because theycannot be quickly learned or easily bought and sold in marketplace

9. Specialized assets in entrepreneurial activities • 2. There exist strong ideologies (personal interests) in entrepreneurial activities • Entrepreneurial activities often consume a large amount of entrepreneurs’ time, effort, and financial capital, dictating an ideology (strong personal interest) to take on these activities and associate risks • Because of their extraordinary interests and efforts, entrepreneurs attach a high value of their firms that are not comparably priced by the market

10. Specialized assets in entrepreneurial activities • 3. Entrepreneurial activities often have strong team spirit • When the required labor, financial and human capital inputs are large and beyond what an individual entrepreneur can supply, friends and/or family members often join to become both highly motivated and disciplined labor force and contributors of financial capital. • Bonded and enforced by friendship or blood tie, contracts with co-founders or family members are often short of details • These implicit contracts can be hard to enforce upon succession

11. High transfer costs of specialized assets • Specialized assets contribute to the initial success of entrepreneurial activities • But difficulties arise when these assets are to be transferred across individuals or organizational boundaries • Even in standardized business, family members or business partners may dispute about their individual contributions to and hence rewards of their team activities, resulting in costly infighting

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13. Li Ka-shing （77） was sent to hospital on Sep. 6th , 2005. 14 Cumulated Daily Stock Return

14. Predictions • Ownership concentration • Cross-sectionally, ownership concentration increase with asset specificity, so that the costs and benefits of the specialized assets concentrate on the entrepreneur • Family or outside succession • The choice of successor depends on how well the value of the specialized assets can be preserved, or conversely how large is the value dissipation during and after the transfer • An heir or a close relative would be chosen as the successor if the extent of asset specificity is large • Firm value • An overall decline in firm capitalized value within the process of succession • Across firms, the extent of value dissipation depends on the degree of asset specificity in their business activities

15. Predictions of governance structure changes • Assuming that the successor only partially inherits specialized assets, such as reputation, political connection, etc, he would need to shore up his credibility to stakeholders by enhancing internal governance • More concentrated ownership • More outsider participation on board and management • Separating chairman and CEO positions • More cash dividends

16. Defining succession • An entrepreneur stepping down from the top executive position (typically the chairman in Asia), replaced by a family member or an unrelated professional • Different from an ordinary managerial turnover, succession is typically associated with transfer of controlling ownership completed at very old age or death of the old leader • A rare opportunity to observe the evolution of firm ownership, leadership, and governance

17. Sampling procedure • Starting with all publicly traded firms in Hong Kong, Singapore, and Taiwan • Excluding SOEs, foreigner controlled firms, and financially distressed firms • Tracking top executive turnovers starting from the IPO year • Excluding the first turnover if the subsequent turnover occur within 5 years

18. The Succession Sample

19. Sample by industry

20. Successor Choices

21. Measurement of Asset Specificity • Ideology (personal interest) • Whether the old chairman is the founder • Whether the entrepreneur has any business in museum, gallery, recreation facilities, club, garden, movie, newspaper or book publication, advertisement, restaurant and hotel (Demsetz and Lehn, 1985) • Indivisibility of common property • Whether co-founded • Number of family members co-managing the business • Relationship and reputation capital • Whether the business is labor intensive • Access to long term loans

22. Summary statistics

23. Successor Choice and Ownership Structure

24. Succession and firm valueMonthly cumulative abnormal stock return (CAR) around succession

25. Succession and firm valueMonthly cumulative abnormal stock return (CAR) around succession, by economy

26. Regression results of firm value changes around succession

27. Does poor performance lead to succession? • Likely only part of the story • Although CAR is significantly related to accounting performance measure, it is also related to proxies for asset specificity which is not caused by performance but rather causing performance outcome • Almost all turnovers occur at old age or even death of the controlling owner • Distressed firms are excluded • Firm performance do not recover after succession

28. Daily cumulative net of market stock return of a HK-based conglomerate around death of the founder at age 90

29. Daily cumulative net of market stock return of a HK listed company around the news that its 98 year-old founder was sent to hospital Cumulated Daily Stock Return Department Retreat @ Shenzhen 2008 32

30. The Role of Entrenchment • It is sometimes difficult to remove an owner-manager refusing to change until he is very old or dead. Firm value deteriorate until the entrenchment problem is corrected by succession • Is the stock return pattern primarily driven by entrenchment? • Overall, CAR did not increase after the old chairman left position, suggesting entrenchment is not the full story • We are investigating this possibility more thoroughly • Finding that both pre- and post-turnover CAR unrelated to whether the outgoing chairman remains on board after turnover • No effects of outgoing chairman’s age and tenure

31. Regression results of governance structure changes around succession

32. Summary and Conclusion • Specialized assets play a crucial role in the emergence of family firms • A tendency that entrepreneurial firms, through family successions, evolve into family owned and managed firms • A tendency that family ownership stays concentrated across generations of management • The slow (or lack of) diffusion of ownership and control can be explained by the desire to protect value associated with specialized assets • A pronounced dissipation of firm value during succession, which is positively related to asset specificity • Firm ownership and governance structures evolve to adapt to the new leadership • Family institution and relationship based contracting substitues weak market institution

33. Extension • Relationship-based contracting and accounting properties • Succession, corporate life cycle, and evolution of accounting properties • Specific governance mechanisms of family firms • Marriage and long-term network creation

34. Why Do Shareholders Value Marriage? Pramuan Bunkanwanicha (ESCP-EAP European School of Management) Joseph P.H. Fan (Chinese University of Hong Kong) Yupana Wiwattanakantang (Hitotsubashi University)

35. Family networks • In emerging economies, businesses are in the hands of small network connected by family networks. • Because institutions are weak, family networks play very important role. • Family relationships provide a degree of trust. • Family relationships in business are regarded as the next-best solution to imperfections in the financial markets and corporate governance [Arrow (1974), Burkart et al. (2003), Bertrand and Schoar (2006)].

36. Family Network in Thailand Nitibhon (3) Phaoenchoke Tangkaravakoon Sethpornpong (4) Bodiratnangkura Sethpakdi (4) Uahwatanasakul Tapparangsi (3) Bulsook Wanglee Karnchanachari Krairiksh (3, 4) Rattanin (4) Jarusatien (3) Bisalputra (4) Navaphan Panyarachoon (3) Leeissaranukul/Phannachet Cholvijarn (4) Lamsam Charoen-Rajjapak Chatikavanij (4) Sethteewan (4) Teepsuwan (4) Chearavanont Mahaphan(4) Srivikorn Virameteekul Vuthinantha (4) Chutrakul (4) Mahagitsiri Thavisin (4) Lim-atibul (4) Poolvoralaks Sibunruang(4) Yip In Tsoi/ Lailert Noonbhakdi (3) Nandhapiwat Chakkaphak (4) Sarasin Na Songkla (3) Leenutaphong Royal families (2) Maleenont Sukosol Chaichanian (4) Sosothikul Jirakiti (3) Piya-oui Karnasuta Osathanugrah Osathanont (4) Chirathivat Hetrakul Thienprasidda (4) Bhirombhakdi Benjarongkul Phenjati Phongsathorn Promphan (4) Techakraisri (4) Wattanavekin Sarasas (4) Kitikachorn (3) Attakravisunthorn (3) Harnpanich (4) Tantranont Angubolkul Thepkanjana (3) Tejapaibul Thailand Asavabhokin Uahchukiat

37. The Mitsui zaibatsu pre WWII Networks via marriage ---the imperial household, the court nobility, the former Tokukawa shogunate, the Shinto hierarchy, the bureaucrats, and other important zaibatsu (such as Sumitomo), as well as independent industrialists…” • “such alliances, which much cost the Mitsuis an enormous amount of thought, research, and negotiations of the most sensitive kind, served to entwine the clan with the most powerful and prestigious families in the empire • [Roberts, Mitsui, 1973, p. 228]

38. Networks via marriage: Japan dynasties • Mitsui (ex zaibatsu) • Toyoda (Toyota Motors) • Kajima (Top 5 general construction) • Shimizu (Top 5 general construction) • Ishibashi (Bridge Stone) • Sumitomo (ex zaibatsu) • Nakasone (top politician family and ex PM) • Hatoyama (top politician family and ex PM) • etc

39. Korea • Lee (Samsung) • Hak (LG) • The top five business groups, are linked via marriage of the offspring of the two group founders. • A daughter of theSamsung Group’s founder and sister of the current chairman is married to Koo Ja Hak, who was the chairmanof LG Semiconductor. • Koo Ja Hak’s brother was the chairman of the LG Group.

40. Canada • Andre Desmarais wed France who is a daughter of former PM Jean Chretien. • Andre Desmarais is the son of Paul Desmarais who is the 6th richest person in Canada. • Paul Desmara owns Power Corporation and extensive companies.

41. Marriage as a method of building business network – It’s Not All about Love

42. The role of marriage in business Marriage has remained, long into the age of romantic love, a business transaction. • Sons and daughters could be used the same way as they were treated by the royal families. • To make strategic alliances between firms on a secure and long term basis. (Harold James, “Family Capitalism”, 2006)

43. The role of marriage in business • Rich families will look for a bride who can take care of household finances and most important, give birth to sons to inherit the wealth of the family. • Poor families will look for a bride who can work hard in the fields and give birth to sons to help out on the farm.

44. Research question • What role dothe family and their business play in the decision of the heirs to choose whom to marry?

45. Marriage Sample from Thailand Year Number Percentage • 12 5.9% • 1992 14 6.9% • 1993 8 3.9% • 1994 15 7.4% • 1995 12 5.9% • 1996 15 7.4% • 1997 7 3.5% • 1998 13 6.4% • 1999 12 5.9% • 2000 11 5.4% • 2001 18 8.9% • 2002 13 6.4% • 2003 11 5.4% • 2004 9 4.4% • 2005 23 11.3% • 2006 10 4.9% • Total 203 100.0% Note: The sample includes 91 families (2 marriages/family on average)

46. The newlyweds (top business family’s offspring): Who is he/she? Number Percentage • Gender • Male 115 56.7% • Female 88 43.3% • Generation to founder • One 4 2.0% • Two 80 39.4% • Three 73 36.0% • Four 31 15.3% • Five 15 7.4% • Relationship with founder • Founder 1 0.5% • Sibling 3 1.5% • Son/Daughter 58 28.6% • Nephew/Niece 22 10.8% • Grand-son/Grand-daughter 73 36.0% • GG-son/GG-daughter 31 15.3% • GGG-son/GGG-daughter 15 7.4%

47. Number Percentage • Relationship to current head • Current head 1 0.5% • Sibling 12 5.9% • Son-Daughter 84 41.4% • Nephew/Niece 102 50.2% • Grand-son/Grand-daughter 3 1.5% • Grand-nephew/Grand-niece 1 0.5% • From the main line • Main line 85 41.9% • Others 118 58.1% • First son of current head • First son of current head 37 18.2% • Others 166 81.8%

48. Number Percentage • He/she is holding a board position • Yes 83 40.9% • No 120 59.1% • He is the first son & holding a board position • Yes 39 19.2% • No 164 80.8%

49. Marriages & Networks Number Percentage • Family background • Top business (i) 42 20.7% • Business, Professional(ii) 52 25.6% • Royal, Noble (iii) 17 8.4% • Politician, Military, Civil servant (iv) 50 24.6% • Foreigner (v) 11 5.4% • Others (vi) 31 15.3% • By type of network • Business network (i)+(ii) 94 46.3% • Political network (iii)+(iv) 67 33.0% • Others (v)+(vi) 42 20.7% • By type of marriage • Business & Political networks 161 79.3% • Others 42 20.7%

50. Where are network marriage prevalent? Network marriage Other marriage No. % No. % • Concession-based businesses • Concession-based 14 93.3% 1 6.7% • Others 147 78.2% 41 21.8% • Real estate businesses • Real estate 43 95.6% 2 4.4% • Others 118 74.7% 40 25.3% • Diversified businesses • Diversified 48 84.2% 9 15.8% • Others 113 77.4% 33 22.6%