'Family business can pass wealth for generations'
Updated: 2006-10-21 05:51
By Louise Ho(HK Edition)
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Old Chinese wisdom tells us that "wealth cannot be passed on to the third generation". How far is this true for family businesses in modern society of Hong Kong?
A research by the Chinese University of Hong Kong (CUHK) tells us if a company has succession plans, codifying its key assets and beginning standardization, it is actually possible that wealth can exceed three generations or more.
The research studied financial performance of more than 500 publicly listed family businesses in Asia which have experienced succession process from 1990 to 2005.
The companies include 60 from Hong Kong, 300 from Japan, 150 from Taiwan and 50 from Singapore.
Director of CUHK's Centre of Economics & Finance and Professor of School of Accountancy Joseph Fan, however, said many Asian family businesses were facing challenges in succession.
Reputation, social network and political connection - the invisible capital of the first generation entrepreneurs was difficult to transfer across generations, he said.
In order to pass on wealth to the next generations, it is important to have a succession plan and to standardize and professionalize family businesses, he said.
He quoted two examples of successful and unsuccessful business successions in Hong Kong.
Following a bumpy succession in 1980s, the third generation of Li & Fung, a global consumer products trading company in Hong Kong had begun processes to standardize and professionalize the company in supply chain management.
It used IT system and hired professional managers to codify its advantages in logistics. In this way, the family business could be passed on to the next generation, said Kevin Au, Assistant Director of CUHK's Centre for Entrepreneurship.
Lai Sun Group, a diversified Hong Kong conglomerate with five subsidiaries including Crocodile Garments Limited had a very unsuccessful succession, said Fan.
In 1980s founder Lin Po-shin tried to pass on the family business to his elder son but his son experienced some major investment failures.
Due to some abortive investments by his son such as buying Furama Hotel in 1997 with huge price before financial crisis, Lin Po-shin had to take over business. He only handed over his management a few months before he died in 2005, he said.
The CUHK research also indicated that substantial decline in family businesses' financial performance was recorded in the succession process.
Hong Kong family owned companies had the worst business performance during the succession period, an average of 80 per cent decline in stock return performance, the highest compared to 40 per cent in Singapore and Taiwan, Fan said.
This is the finding after studying the long-term stock performance of 38 Hong Kong family businesses over eight years prior to, and years after succession completion.
Fan guessed that the bad stock performance in some of Hong Kong's family businesses could be related to Hong Kong's industry focus in infrastructure and property construction in which business relationships were difficult to transfer to the next generations.
The ongoing research is conducted and sponsored by Hong Kong Research Grant Council, CUHK's Centre for Institutions and Governance and Centre of Economics & Finance and Hitotsubashi University's Centre for Economic Institutions.
(HK Edition 10/21/2006 page2)