All in the Family
By Tarik Jaleel
April 27, 2012
A recent study by the Credit Suisse Emerging Market Research Institute revealed that family-run businesses are at the heart of Asia, representing half of all listed companies with a market capitalization equal to one-third of Asia's GDP. Naturally, these businesses are a critical source of private wealth creation for the region. In researching Asia's small companies, we note that the role of ownership is important, especially when owners have significant financial interests in a firm, allowing them to take a long-term perspective in running their businesses. Research has shown that over the past 10 years family businesses in many Asian countries (excluding Japan) have generated higher total returns and profitability than their respective benchmarks (India and Indonesia being exceptions).
Many publicly traded owner-controlled businesses in Asia remain in the hands of their founders. By contrast, many businesses in the U.S. and Europe are typically run by fourth and fifth generation family members. However, many Asian family businesses are beginning to undergo a stage of generational transition. An important consideration for these businesses is a solid succession plan, especially when extended families have differing ideas for a patriarch's transition. One notable high-profile Asian family feud is the dispute over Macau gaming industry titan Stanley Ho's empire. The messy dispute may put a dent not only in Ho's reputation but in his assets. Indeed, out of 250 family-run companies in Singapore, Hong Kong and Taiwan that were analyzed in a study conducted by a professor at Hong Kong's Chinese University, shareholder value (by market capitalization) during an eight-year succession period, (five years prior to succession and three years post-succession) dropped by an average of 60%.
Being able to simplify a firm's ownership structure is often the initial step needed for planning a smooth transition. A key decision to be made is whether a family will hire outside management to take over for a passing founder or appoint family members to be in charge. For businesses that continue to be controlled by family members, competent management is an important consideration. When we assess the strength of a firm's management bench during our research trips we look for appointments to key positions that were made on merit rather than merely the wishes of the founding family. As bottom-up investors, we devote a significant part of our research process to identifying companies and management whose interests are aligned with minority shareholders. We try to gauge alignment of shareholder interests through qualitative measures such as a history of dividend payments and a track record of good capital allocation, since smaller companies with superior cash generation may be tempted to invest in projects outside of their main focus.
(c) Matthews Asia