Banking & Finance

Family planning

A succession time bomb for aging tycoons?

Liu Yonghao w

Hopeful handover: Liu Yonghao

Succession planning in China has often been a messy affair. For centuries, aspiring emperors would resort to poisoning, stabbing or suffocating rival claimants from the scores of children conceived with imperial concubines. Life at the top was often short-lived for the same reasons. In the 1,000 years from the beginning of Song rule to the end of the Qing Dynasty, China had 66 emperors, compared to 39 monarchs in England over the same period.

Modern-day corporate titans face similar difficulties ensuring the survival of their family dynasties, but often for the opposite reason. With far fewer offspring to choose from, the baton can’t always be passed to a son or daughter capable of running the family business, even if they have been groomed for the role for years.

A rueful motto about wealth transfer in successful families – ‘the first generation makes it, the second generation enjoys it and the third generation blows it’ – is a familiar refrain in a part of the world where many of the biggest businesses are still family owned.

The issue is becoming more acute as the tycoons who built up their enterprises in the late 1970s prepare to hand over to the second generation. Beijing News recently ran a feature examining the phenomenon with the help of data from Fortune China. It found that China has 2,500 listed A-share firms of which 30% are family-controlled. Of these 750 companies, 70 have already completed the handover to the second generation. A further 37 companies face an immediate handover issue since their titular heads are over 70 years old. These are led by SK Petroleum’s 79 year-old chairman Gu Zheng; Nata Opto-electronic’s 78 year-old patriarch, Sun Xiangzhen; 77 year-old Li Yunxiao at Sun Cable; and 76 year-old Yin Mingshan at Lifan Industry.

And how is the newly empowered second generation faring so far?

New Fortune magazine has also published analysis based on recent data which suggests that Chinese firms typically underperform no matter who takes over when the founder retires.

If professional managers assume control, the company will produce 83% of the earnings expected by broking analysts.

However, the situation looks to be much worse if another family member retains full control. Then the company will only achieve 33.9% of the market’s profit forecast.

One colourful example of the pitfalls of keeping it in the family comes from Hisoar. As we reported in WiC238, former chairman Luo Yuhong sold the stake in the pharmaceutical firm that his father had bequeathed him. Local media attributed his haste to paying off gambling debts in Macau.

Beijing News also relates the tale of Li Jian at JS Machine. After taking over from his father in 2007, Li decided to diversify away from manufacturing into stock market speculation. He lost about Rmb37 million ($6 million) in the process.

According to Beijing News, about 49% of successors take their companies in a new direction once they take over. This is largely the result of their more privileged upbringings as well as their differing work ethics – after all, their parents’ hard-nosed attitudes were forged by the trials of the Great Leap Forward and the Cultural Revolution.

Perhaps there are positives too. Many princelings have been educated in the West. As Zhejiang Guangsha’s former chairman, Lou Zhongfu, tells Beijing News, this gives the second generation an understanding of Western economic thinking and Eastern business philosophy. When Jin Zhifeng took the helm of elevator maker SJEC, he immediately overturned a rule which banned music and snacking during office hours. Instead, he installed vending machines in the workshops and ping pong tables in staff common rooms.

Some patriarchs try to ease the transition by staying on in an advisory capacity. Liu Yonghao, former chairman of the New Hope Group, became chairman of the parent firm after promoting his daughter Liu Chang to chair the listed company.

Others take the more brutal approach reminiscent of the emperors of old. Says Guangsha’s Lou: “Do not help him when he falls. Make him stand on his own two feet. Do not be afraid to find one day that he is dead.”

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