Thai business marriages 'not just for love'

A majority of businesses around the world are still family owned, and succession continues to be a major headache for many of them.

It's a problem well known to the Chinese, who have a saying: "wealth will not pass beyond three generations".

The dilemmas of family succession have led to several recent university studies in countries as disparate as Thailand, Hong Kong, Japan and Denmark. Their findings were revealed at a recent seminar entitled "Succession in Family Firms across Cultures", organised by Thanachart Securities.

One major finding was rather surprising: "Founders are smart. We found they had outperformed everyone. But the second generation underperformed everyone else. This is according to evidence we have gathered from around the world," said Yupana Wiwattanakantang, a professor at Japan's Hitotsubashi University.

Despite the business belief that "genetic traits do not pass on to the next generation", founders of family firms still insist on promoting their children to take over their businesses, leaving family businesses vulnerable to an "idiot son" problem, she said.

Even if the genetic traits of a founder are passed on, businesses that choose from a bigger pool of human resources have a better chance of finding high-calibre successors than if they select exclusively from members of the family.

On the other hand, bringing "outside blood" into family business succession has some downside risks because these people may not work for the best interests of the business, or may not pursue a long-term view because "professional managers usually come and go", she said.

To avoid these succession dilemmas, Yupana said Japanese companies sometimes applied a unique "marriage and adoption" practice. An example was Toyota Motor founder Sakichi Toyoda, who built his business up from a small textile shop. But he married late, and when he died his son was only 20 years old and too young to lead the huge company. Therefore his daughter Aiko married an outsider, Risaburo Kodama, and he was adopted into the family. The young son wrote a protest letter, but in vain.

"The Japanese are practical, and at the same time, cruel. I think it would be impossible to do this in Thailand," Yupana said.

Because of the marriage and adoption practice, companies can "go to market and cherry-pick" their successors, solving the problems of hiring outsiders. The "M&A" system stimulates biological heirs to work hard, or they will not inherit, while there is an incentive for outsiders to perform well, to increase their chances of being adopted by the founding family, Yupana said.

"If they perform, they can pass the businesses on to their sons. It's a very strong incentive.

"When we presented the study in the US, there was a question: why don't they use stock options? First of all, [unlike stock options] it's a lifetime contract. And the [family] name [received when adopted by big business empires] gives very large benefits," she said.

Yupana co-authored the research "Adoptive Expectations: Rising Son Tournaments in Japanese Family Firms" with Vikas Mehrotra, Randall Morck and Jungwook Shim.

In Japan, adoption is a thing to be proud of, and non-blood heirs are unlikely to betray the families because to do so would leave them unable to stand in society, she said.

Among the companies that have used the "M&A" system are Suzuki Motors, Kajima Construction, Matsushita, Kikkoman, Bridgestone, Ajinomoto and Taisho Pharmaceutical (manufacturer of Lipovitan D).

Thanachart Securities' managing director Suvabha Charoenying said adopted heirs could be found in Thai businesses as well, including the cases of Bandit Sarasin, who was adopted into the Bunyapana family, and Bangkok Bank founder Chin Sophonpanich, who adopted a son to take care of his businesses in Hong Kong.

Joseph Fan, director of the Chinese University of Hong Kong's Centre for Economics and Finance, said that his research, conducted among 220 companies in Hong Kong, Singapore and Taiwan, found that the adjusted returns of these firms dissipated by 60 per cent within five years of a family succession.

"When I presented this study in China, they were shocked. This is a common challenge among family businesses," he said.

The key factor, Fan said, was not simply "because the son is an idiot", but because every entrepreneur - by definition - was special and hard to replicate. Some intangible values such as connections and ideology are difficult to transfer to the next generation.

"Li Ka-shing, the wealthiest tycoon in Asia, has very good connections with Chinese leaders. I teach my students how to pick his stocks. It is not through reading his annual reports, but watching to see how many times he shakes hands [with the Chinese leaders]," he said.

Fan, who jointly explored Thai businesses that use marriage as a mechanism to expand their long-term networks with Yupana and Pramuan Bunkanwanicha, co-authored the paper "Why Do Shareholders Value Marriage?" He said Thai people historically recognised the importance of relationships and networks, to the extent that they sacrificed their daughters and sons in return for business success.

The study, which was published in October last year, revealed that out of 200 marriages of the children of big business owners in Thailand from 1991 to 2006, more than two-thirds helped to connect the family enterprise to business or political networks. Only 20 per cent were found to be marriages based on love alone.

"Marriages are not just about love, particularly if the couples are in the 'network businessess'," he said.

To mitigate the challenges of succession in family businesses, Fan offered six recommendations.

lHe said the companies should be professionalised and standardised as early and as much as possible. This will help facilitate a founder's exit if it is decided that the business should be sold, because few buyers will consider a business they don't understand.

lEvery effort should also be made to preserve core values.

lIn order to make a wise succession choice, firms should think about introducing competition among the potential successors.

Fan said that eight years before Jack Welch retired, he chose 30 managers and divided them into three groups: the "least likely", the "somewhat likely", and a few in a "most likely" group. Interestingly, his successor turned out to be the one of the "least likely".

lHe said clearer ownership and control within a family would help the consideration of issues including whether wealth should be divided or concentrated or whether trust should be applied rather than individual ownership.

lChange should also be embraced, because it is sometimes difficult to persuade owner-managers to change before it is too late.

lCorporate governance should also be improved. If a successor doesn't have as much creditability in the eyes of stakeholders as the previous-generation leadership, then introducing more monitoring and outsiders such as independent members on the board can help.

Thanachart's Suvabha said Thaksin Shinawatra had set a good example of well-designed transition of his Shin Corp from a family to a professional business. Charoen Sirivadhanabhakdi was another good example, in that he handed his businesses over to his sons while he was still powerful and able to advise and help them behind the scenes, she said.

Morten Bennedsen, a professor at the Copenhagen Business School, said that a key issue in Denmark - especially among smaller firms - was how to encourage the kids to continue their parents' businesses.

pichaya@nationgroup.com