Keeping the dynasty under rein - MANAGEMENT FAMILY SUCCESSION - second generation businesses in east Asia.By John Ridding.
5 March 1998
(c) 1998 Financial Times Limited. All Rights Reserved
Never invest in rich men's kids. That, with a few exceptions, is the advice of Hugh Peyman, managing director of Kleinwort Benson in Singapore and a seasoned observer of business in the region.
"By and large the story in south-east Asia is rags to riches and back in three generations. Sometimes they manage it in two," he says.
The issue of handing over power to the next generation is at the forefront of investors' minds at the moment. It was recently announced that Li Ka-shing, one of Hong Kong's most powerful businessmen, will step down as managing director of Cheung Kong, the property and infrastructure group, next January.
Mr Li's elder son, Victor, who will take up the reins, is regarded by many in the financial community as a safe pair of hands. Like his father, Victor is seen as disciplined and diligent. "At Chinese dinners, if three dishes are good enough, I'm not going to order four," he once remarked. "Everyone has only so much time in the world and there is only so much one can eat."
However, making a success of his inheritance will require skilful manoeuvring around the pitfalls of family succession and a departure from some nasty precedents.
Indonesia's Suryadjaya family lost control of the Astra industrial group when it was forced in 1992 to bail out a bank headed by the founder's son. On a smaller scale, family wrangling prompted a damaging feud at Playmates, the Hong Kong toy group. Elsewhere, there is often a slower drift towards decline once the patriarch departs.
"Family succession is always going to be particularly tricky because the individuals who have made the company have special abilities and drive," says Martin Tacon, vice-president of Asian equities research at Credit Suisse First Boston. "These are dominant characters with a very tight grip on their companies," adds one fund manager.
Although Asian businesses are scarcely unique in family succession, the traditional importance of contacts and networks brings added complications for management transfers. "Political contacts die or move on, and in business alliances the human chemistry is between the older generations," says Mr Peyman. "So there is no reason the younger generation should share it."
Within the company, there are similar obstacles. "Even if you have a good son, it is difficult for him to command the respect accorded to founder and patriarch," says Henry Yeung, who specialises in regional business at the National University of Singapore. "People will always ask, why is this young chap taking over?"
Maintaining the drive of the founders can prove hard. "They have the ambitions and the convictions of the self-made man," says one Singapore fund manager. "They are usually scrupulous about costs and highly energetic. Those are personality traits, which may not jump down generations, particularly in an environment of affluence."
Nowadays, succession brings added tests. Many of Asia's tycoons built their empires in regulated or monopoly markets. Secure franchises, as with Robert Kuok's position in sugar and flour in Malaysia, guaranteed reliable profit streams. Deregulation has intensified competition, increasing the pressure on management.
This pressure will be raised by the present regional crisis. Economic reforms are set to accelerate liberalisation, while the credit squeeze afflicting east Asia will force companies to increase transparency to raise funds. "For many international investors the lack of transparency is linked to family control and succession," says Mr Yeung.
Although successful transitions are difficult, they are not impossible. Successes include Li & Fung, Hong Kong's oldest Chinese trading company, which has been transformed into a multinational business by the brothers Victor and William; and Sung Hung Kai, where the three Kwok brothers have maintained their father's business at the top of the Hong Kong property sector.
"There are exceptions, says Mr Peyman, citing Kuala Lumpur Kepong, the commodities to property concern. "That is a case where you can invest in a rich man's kids."
Behind many of the successes lies the common theme of professionalisation. The change in the business environment which has rendered conditions more competitive has also shifted management skills away from those developed by their founders.
"The growth of the companies and sharper competition requires delegation, financial controls and man management," says one Hong Kong consultant. "It might well be that the founder is not best equipped to deal with this."
Professionalisation can be achieved from without and within. Many offspring are now armed with MBAs. At the same time, most of the big family businesses are stacked with professional managers. "Many of the people who actually run Robert Kuok's businesses are not linked to the family empire," says one fund manager. "Obviously he has to trust these lieutenants, but he is prepared to delegate."
At Cheung Kong, Mr Li has delegated management of many of the group's main business arms to professional managers. At the same time, Mr Li's sons, Victor and Richard, received MBAs in the US and have been trained within the group. Although Richard has moved to develop his own business, Victor has worked in several divisions within the group. After cutting his teeth on a large property project in Vancouver, seen by some as a testing ground away from the scrutiny of Hong Kong, he has been increasingly prominent at Cheung Kong, heading an infrastructure spin-off and becoming more active in the core property operations.
The gradual approach, and the continued presence of Mr Li - he will remain as chairman - provides reassurance for investors. "What they are doing at Cheung Kong is the best way," says Mr Tacon. "They have brought in professionals, which provides checks and balances, and K.S. Li is stepping back while he is still very much on the ball. If he was going to cruise the Caribbean for a few years then investors should clearly be concerned. But he will have his finger on the pulse."
Copyright Financial Times Limited 1998. All Rights Reserved.
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