CUHK Passions and Pursuits

9 Taiwan Hong Kong Singapore F amily businesses the world over face the same difficulty in succession, the issue of transferring the company from one generation to the next. One generation creates wealth, the next maintains it and the third wastes it, conventional wisdom holds. But the problem is even more severe in Asia. In fact, Asian family firms lose almost 60% of their value in the first transfer of power, when the founder steps down, according to research by finance professor Joseph Fan . Professor Fan’s findings, which led to a book he co-authored with Morten Bennedsen of INSEAD— The Family Business Map: Assets and Roadblocks in Long Term Planning , came from sampling 217 Chinese- run publicly listed companies across Hong Kong, Singapore and Taiwan. He examined the share price of a family company from five years before the year that the founder steps down to three years after a successor takes over. Leading up to the handover, 56% of the company’s value was lost, with another 2.9% lost after the transfer of power. Taiwanese businesses showed the highest propensity for a family transition, with 74% of companies handed down to heirs or close family members. Hong Kong was similar at a rate of 69%, with only 36% of companies in Singapore passed down to the next generation. The dissipation of wealth was the lowest with Singaporean companies, although they still lost 22% of their value. Taiwanese companies saw almost one-third (31%) of their value destroyed. Hong Kong companies are the most affected—they lost 126% of their value, meaning not only would ‘buy and hold’ investors have lost all the money they invested in the company, but they would have contributed added funds during the nine-year transfer period and lost those as well. Professor Fan has ruled out that the decline is caused by the incompetence of the successor since the decaying of the company in fact slowed down dramatically after the transfer of power. ‘The value destruction started well before the successor took over,’ Professor Fan noted. ‘It can’t be that it’s solely the cause of the successor.’ His best theory is that much of the value in an Asian family business is intangible—investors look at who is running a company and what the owner’s values are, when determining whether or not to invest. That’s far more important than the fundamental analysis of revenues and earnings that would drive the investment decision in the West. Asian families are much more hands- on with their businesses than their counterparts in the West, where the descendants of a founder typically eventually withdraw from working at the company. So it is the values of the founder and his family that explain the company’s success, according to Professor Fan. The value also comes from their connections and reputation in society, including with the government and the financial sector. ‘Chinese business families should begin to plan their family and business future 20 years before the old generation retires,’ Professor Fan said, because it takes that long to transfer the intangibles. Do Asian Family Businesses Self-destruct? Joseph Fan analyses how fortune runs in the family c c (Source: The Family Business Map: Framework, Selective Survey, and Evidence from Chinese Family Firm Succession) Monthly Cumulative Abnormal Stock Return (CAR) around Chinese Family Firms Succession by Economy