Why would non-family shareholders be willing to accept the control mechanisms you described?
“This is a very important question… When shareholders buy shares in a widely held public company, there is a conflict between shareholders and managers. This is a classic “agency problem,” whereby managers who control the day–to-day business of the firm tend to manage
the company for their own benefit – for example, they want to have a very stable company so
that their job is secure.
This may not be in the best interest of shareholders and hence a conflict. In a family-owned company, that problem goes away, because the owner is the manager. There is, however,
another problem: namely, the conflict between the family shareholders and non-family shareholders.
The reason for the adverse effect on valuation when the family puts in place a control
mechanism, such as dual-class shares, is because other shareholders are concerned about the appropriation of private benefits of control by the family.
My research with Harvard Business School professor Belen Villalonga revealed that as long
as the founder is the chairman and CEO, or chairman with a hired CEO, the conflict between family shareholders and non-family shareholders is less severe than the traditional conflict between owner and managers. This implies, in turn, that shareholders would be better off in
this situation – to hold the shares of family companies rather than non-family firms.”
Do you see differences in succession issues between family businesses in Asia and in the West?
I think that Western families are better able than Asian families to deal with mortality. I know mortality is difficult for all the people in the world, but it’s a difficult situation when there is no succession plan beforehand and the second generation has to jump into a situation which is unstructured.
“It’s very important to expose the next generation, over many years, to the idea that they have
the responsibility for a family business which employs thousands of people.”
Why is succession so challenging for family businesses?
“Succession in the family business context is very different than succession in widely held
public organizations. Why? I have been a board member for a public organization for many years; my job is to find the next CEO of the company. But in a family business, it’s different because the person who
will be the new head of the family may not be the same person who will be the head of the operational business…
Suppose you have two children. You love both of your children the same way, but they are
very different. The older brother is a very talented artist who has no interest in business, and
the daughter studied finance, management and other business courses; she is a natural. So, you have a little bit of a problem.
One of the issues is that you love both of them and you have to treat them equally; but in business, the younger one will be higher than the elder one, which may cause a problem
if there is no appropriate education and communication. This is just one example. There are
many other challenges that you need to overcome.”
Which is more important, family or business?
“This is a very important question. Some families define themselves as “a family in business,” while others define themselves “a business family.”
For the business family, business comes first; for the family in business, family comes first. What’s right for your family may not be right for another person’s family. It’s very personal,
and it’s how the family feels about it.”
What are you interested to learn about China’s family businesses?
What I am particularly interested in is the governance structure of family business in China; succession issues which might be critical for survival of the family business here and
financing growth issues. I would also like to study the family office, which manages the wealth of the family.
These organizations deal with asset management but also with very important issues
concerning family culture, legacy and educating the next generation so as to preserve the founder’s legacy and the culture of the family.”
Why do you think succession is so critical in financing growth?
Dr Amit has published extensively his empirical and field research on a broad range of issues that relate to Families and their businesses and is frequently quoted in the press. For the full story, read The Cost of Control: Managing the Growth of Family Businesses.