Family business succession needs to be addressed at launch, not retirement

Family business succession needs to be addressed at launch, not retirement

Gunshots were heard in the offices of the Mayfull Food Corporation in Taipei, Taiwan. In a seventh-floor conference room, two men lay dead or dying, after being shot at close range in the head.

Minutes later, as police arrived in investigate, the body of a third man fell onto the street from the building's rooftop, apparently after firing a shot into his own head.

The bloody scene just this last November was the culmination of a bitter family dispute. Following the death of Mayfull's founder, Huang Jung-tu, his six surviving sons had disagreed over how to divide the business empire that included meat importing and hotels and was valued at around $3 billion (S$4.1 billion).

When an argument erupted in the boardroom, Huang Ming-te, the fourth son in the family, pulled out a gun, shooting two of his brothers dead before ultimately pulling the trigger on himself.

Although violent incidents like the one at Mayfull are rare, disagreements and disputes within family business are common and can cause serious or even terminal damage to the firm.

Pillars of the community?

Across Asia, from Korea to Indonesia, firms owned and managed by family members dominate the corporate landscape. They are pillars of Asian economies, driving growth, providing jobs and are often active players in corporate social responsibility.

Yet too often family firms suffer from short life expectancies. In many cases they fall apart as power struggles and family conflicts erupt over inheritance and disagreements over business management.

When Chang Yung-fa, the founder of Evergreen Group, one of Taiwan's biggest family-owned conglomerates, died in January a dispute between his sons from his first wife and another, younger son from his second wife quickly erupted over control of the multi-billion dollar business.

Even though Chang had left a will and designated his younger son to take up the position of president of the Evergreen Group, which includes multiple public and private firms; his older children did not agree and began law suits to challenge the will.

Disputes are almost always centred on ownership and control of the family firm, often due to traditional equal inheritance patterns practiced in Chinese culture. While this gives a fair share to each descendant, it also dilutes firm ownership over generations, leading to fragmentation and instability.

Family firms also suffer from a lack of institutionalized mechanisms for conflict resolution. This can lead to family members resorting to external bodies such as the courts, shareholder votes and mass media, while refusing to talk directly with each other. In extreme cases, such as at Mayfull, this can have explosive and tragic consequences.

Ensuring a healthy business

From my observation of family business disputes across Asia, there are three ways family business can prevent or resolve such conflicts and build sustainability. First, the founder need to align ownership distribution with his or her designated successor. In many cases this successor, while capable, may not have dominant ownership and so can be vulnerable to challenge from other descendants banding together to take control.

In the case of Evergreen, for example, the youngest son owns 10.24 per cent of the firm, while the three sons of the first wife together own 28.47 per cent. Governance structures like this are inherently unstable.

To avoid this kind of instability, founders must ensure their designated successor has sufficient ownership and control of the firm, compensating other descendants with other assets such as property and cash.

Second, family businesses must establish solid mechanisms for conflict resolution. In Europe many family firms have helped reduce and resolve conflicts by establishing a family constitution and family council.

These may be too formal for some Asian business families, but a moderate version of this could involve an outsider - a person trusted and respected by the family - who can mediate differences as an independent voice.

More fundamentally, family businesses need to establish family values, identity and rules as a cultural foundation for conflict resolution. A set of values and beliefs embraced by all members of a family can even go a long way toward keeping conflicts at bay and preventing feuds from forming.

This is a long-term endeavour that needs effort and commitment from the founder.

For family business entrepreneurs, questions of succession should not be an afterthought at the moment they begin to consider retirement. They should begin when the firm is established.

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