Managing family firms is one of the biggest challenges in China--

Managing family firms is one of the biggest challenges in China(2)

2007-07-11 17:28:28 [ Big Normal Small ] 　Comment

Xing Zong: for the next generation of the family business. There is a very interesting point: if you want to destroy your business, the best way is to ask your son to take over it. Do you agree?

Amit: Yes, our research paper published in the Journal of Financial Economics found, on average, a very large data set. When the business goes from founder to the descendant, second generation, whether son or daughter, the value of the firm goes down.

Xing Zong: Do you think that’s inevitable?

Amit: it is based on our analysis over a long period. Our research also found in the third generation, the value is being created again. For example the Ford company, after bringing in professional managers, was revived. This was in their best economic interests. I should tell you I spent a lot of time in Asia, in Hong Kong, in Singapore, in Korea, in mainland China. I find that especially Chinese firms have a very hard time entrusting the CEO position to a manager outside the family. Our research shows that it would be better off to have the professional managers for the second generation. It’s a challenge to convince family firms that they can trust these guys.

Xing Zong: Many Chinese family firms would like to learn from U.S. leading firms’ experience. How to make family business sustainable? Do you think diluting the founder family’s share holdings is the only solution?

Amit: It is not diluting the founder’s share holding. It is diluting the value. For example, from 50 dollars per share to 30 dollars per share. If the percentage goes from 50% to 30%, that’s diluting the shareholding.

Xing Zong: In large U.S. corporations, founding families are the only block holders whose control rights on average exceed their cash flow rights. Your research shows the primary source of the wedge is dual-class stock and voting agreements. Could you please elaborate?

Amit: I guess the background of this is that, in the family firms, the need to control rises when the firm grows. The share of the family goes down. For example, in the year 2000, the founding family only owns 3% of the stock, that they control 86% of the hold. I can tell you that particular in Asia, control is everything. So what are the controlling mechanisms? That’s the first point. The second point is that, the situation between family cash flow and controlling in Asia, in Europe, and in United States.

In the United States, we found the conflict between large and small shareholders. Superpower voting the control is very prevalent. What we found is that, on average, control mechanisms destroys value.

Let me give you an example, for the New York Times, there are two classes of shares. The class B share is basically owned by the family. Essentially they control the firm. They control the company because they control the board.

We also found that agreement between shareholders have a positive impact on value. I will give you another example, the Washington Post is controlled by the Brown family.

Xing Zong: Additional control is frequently obtained through disproportional board representations and the presence of a family member as CEO or Chair of board. Could you please explain?

Amit: of course. Suppose my family controls 30% of the company, but we have 6 out of 9 board members. I would probably have only 1/5 of the board members. Because I had 6 out of 9, I had disproportional representations on the board, the equity on the company. It is a little bit complicated, but that’s the way it is. Actually I am working with some Chinese firms about these issues.

Xing Zong: Your research also shows that founders matter. Often the struggling companies will bring back their founders to right the ship. Why?

Amit: Yes, this happens at Apple, at Dell, at Ford. Because as I said, the founders are the spiritual leaders. People identify him in the company, he can mobilize the company resources in a more effective and profitable way.

Xing Zong: Compared with U.S., 90% of the small enterprises in China are family firms, what are your suggestions for them?

Amit: first of all, I am very impressed by the rapid economic growth in China. I have been there six times and will be the seventh in this coming month. I think managing Chinese family firms is one of the biggest challenges in China. I have never seen faster learners than Chinese managers. It is very enjoyable for me to interact with them. The language problem is one issue, which can be solved.

Xing Zong: where do you see the room for improvement for Chinese family firms?

Amit: I think the major issue would be family firm governance, family firm financial management and transparency.

Xing Zong: What is the better solution for transparency?

Amit: To adopt the standard financial accounting standard and to require more exposure. More regulations from the security exchange commission.

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