Asia Pacific: Special Report - Keeping it in the family

Asia's family-owned businesses must come to terms with the need to modernise in an increasingly competitive world.

by Michael Backman, World Business
Last Updated: 23 Jul 2013

On 3 January, Krit Ratanarak resigned from his management posts at the Bank of Ayudhya, one of Thailand's biggest banks and the bank that his father had founded some 60 years before. His resignation was part of the deal with GE Capital in return for taking a 29.4% stake in the bank, even though the Ratanarak family is still the single biggest shareholder with a 32% stake.

The family's move follows its strategic withdrawal from another of its companies, Siam City Cement - Thailand's second biggest cement producer - in 1999 after Holcim of Switzerland took a 25% stake. Again, the family remained the single biggest shareholder, but it turned the company's management entirely over to the Swiss cement firm. Holcim professionalised the management, restructured the company and its debts, and turned its fortunes around. Today, the Ratanaraks have a competitive, well-run, healthy company on their hands.

Families are good at starting businesses. They are less good at maintaining them. And that is something of a problem for Asia because the vast majority of Asian businesses - small and large - are owned and run by families. But the Ratanaraks at least seem to have found a solution.

A 1999 World Bank study, Who Controls East Asian Corporations?, which looked at nearly 3,000 publicly traded companies in Hong Kong, Indonesia, Japan, Korea, Malaysia, the Philippines, Singapore, Taiwan and Thailand, found that outside Japan families controlled, on average, at least 60% of the large listed companies. Separation of ownership from family control was also found to be rare. The proportion has almost certainly increased since 1999, as more and more family companies have chosen to list.

Family interests and the interests of the business are often at odds. "In a family business context, it is never just about money. Family members are prepared to sacrifice monetary gain for emotional reasons," said Richard Eu, a fourth-generation family member from traditional medicines company Eu Yan Sang, at a conference on family businesses held in Singapore in January.

But not everyone agrees that family ownership and management are always a bad thing. Isaac Schwartz, an analyst at New York-based investment advisor Robotti argues that family ownership can benefit other shareholders: "Since I know that the managers will do whatever they want whether or not they own shares, it's comforting when they're large stockholders because it's more likely that they'll behave prudently."

Credit Suisse has found that European stocks with a significant family interest have outperformed their peers by an average of 8% every year since 1996. It argues that the superior performance is because since the families intend to pass their businesses on to their children, they focus on long-term strategy rather than obsess about quarterly results. They also tend to avoid highly leveraged and costly acquisitions.

Certainly, all of this is true if the listed company is the family's main business and there are no privately held companies to which funds can be transferred via unfair related party transactions. And that is key, for in Asia rarely are a family's total business interests listed - usually it is only a small part of the family's empire, and not necessarily the most profitable part.

There are cultural considerations too. The structure of many Asian family companies reflect the family's desire to give family members a job, to hold the family together and to promote the family's prestige and honour, so that it has 'face' in the local business community.

But most outside partners and investors or regulators would say that these motivations have nothing to do with enhancing the firm's productive capacity or improving rates of return on invested equity. For example, a corporate that is highly complex and lacking in transparency might be structured that way to make it harder for individual family members to split off and go their separate ways, taking their equity with them.

Appeals for reform based on efficiency, transparency and better corporate governance in general are likely to fall on deaf ears in such cases. Corporate structures designed to keep the family together can lead to very messy bust-ups if the family does decide to split. Witness the acrimony and legal action in 2005 between the Ambani brothers of India's Reliance Group after the death of their father and group founder, Dhirubhai.

Similarly, return on capital may not be much of a motivator. Some Asian family-run business groups are not profitable at all. They are not required to be. Some groups have become large and complex because the families behind them have become large and complex. A new division might be set up not because there is a market need, but because a cousin needs something to do.

Sometimes, returns are so low that working in the family business is the only way that individual family members are able to profit from it. The desire to keep companies under family control can mean that many families do not raise capital and bring in outside investors when they need it. Sometimes companies are pushed to the point of insolvency before the controlling family is ready to accept other shareholders. Many Korean business families fall into this trap.

A sub-set of this is that many of Asia's business families prefer to borrow rather than issue new shares that might see a dilution of their control. This pushes their gearing ratios beyond what is optimal, making them vulnerable at times of crisis. It's also why most companies listed in Asia have a free float of shares as a proportion of total equity of no more than 30%. Indeed, many list only to achieve a market valuation for their equity, so that it can then be used as collateral for loans to raise the cash that they really need.

Succession in family firms is often a problem. Founding patriarchs who drive the family firm do not live forever. Unless they are replaced by a similarly driven successor, the family's business interests can become rudderless. This is compounded by the joint stock nature of family ownership, whereby families control companies through a trust arrangement.

Family members receive dividends according to their needs rather than in a manner that necessarily reflects their share of the family's equity. This lessens the interest they have in ensuring sound governance and an adequate return on their invested capital.

But change is coming, as families such as the Ratanaraks illustrate. The Asian economic crisis of 1997-98 was important at loosening the grip that many families had on their businesses. Many lost them outright, while others were forced to accept new equity and new partners. Nowadays, many second and third generation families find that the business their grandfathers or great-grandfathers started simply isn't in a field that interests them.

The Indonesian-Chinese Sampoerna family is an example. In 2005 it sold most of its tobacco interests in Indonesia to Philip Morris for about $5 billion. Family members no longer felt comfortable being in the tobacco business or with having such high exposure to Indonesia. In 2006, the Chan family of Hong Kong sold its Asia Commercial Bank for almost $600 million. Bernard Chan, who orchestrated the sale, said it was time to move on: "A synergy 50 years ago isn't a synergy now."

It's a sentiment that's increasingly echoed around Asia as its families come to grips with a more competitive world and the need to modernise. How can they preserve their wealth in an increasingly competitive world? Some have turned to outside help for advice.

Several years ago, 10 of the Philippines' biggest business families, including the Tuason, Ayala and Cojuanco families, forgot their differences and clubbed together to hire a Harvard Business School academic to come to Manila and run a five-day seminar for family members. Ways in which to retain control and grow were addressed, as were options on how to divest and divide the proceeds without acrimony. The conference on family business in Singapore in January this year, held at Singapore's Ngee Ann Polytechnic, also addressed the options available for family-owned companies. Singapore's trade and industry minister attended and speakers included members from local families, such as Eu.

But perhaps the best way that Asia's families can modernise and keep their business is by streamlining - grouping what's left under one holding company and listing it as one entity. Thus, the risky mix of privately held and listed companies is avoided, the group's accounts can be consolidated and transparency is enhanced. The opportunities for outside corporate advisors are enormous, or they should be.


Li family (Hong Kong) With an estimated fortune of $18.6 billion built largely on telecommunications and infrastructure, Li Ka Shing is ranked by Forbes as the world's 10th richest individual. Aged 77, the identity of his successor is not clear, but his two sons are involved in the business.

Yoovidhya family (Thailand) The formula for the energy drink Red Bull was created not in Austria but in Thailand by Chaleo Yoovidhya, where it has been on the market for many years as Krating Daeng ('Red Bull' in Thai). Red Bull was taken global by Austrian entrepreneur Dietrich Mateschitz. Both have a 49% stake in the Red Bull company, with Chaleo's son Chalerm owning the remaining 2% stake. Forbes estimates Chaleo's wealth at $2.7 billion.

Sampoerna family (Indonesia) The family sold out of its massive tobacco interests in 2005 for $5 billion. What makes it watchable is that it's still sitting on a huge cash pile. Where will it invest next?

Lim family (Malaysia) Lim Goh Tong and his family have built a fortune of $2 billion from operating Malaysia's only legal casino. In December, the business was awarded a licence to operate a casino in Singapore - an important step as the family seeks to diversify away from Islamic Malaysia.

Shinawatra family (Thailand) Thaksin Shinawatra was deposed as Thailand's prime minister in September 2006 after selling his family's telecoms interest to an arm of the Singapore government for almost $2 billion. Like the Sampoernas, the family now has a massive cash pile still looking for a home.

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