Originally published in: Family Capital (August 24, 2016)
Perhaps the most challenging issue for China’s private businesses in the years ahead is how they deal with succession. Given the country’s brief 30 year experience with a market economy, China’s family businesses have yet to fully embrace succession. That, of course, is changing – as the founder generation begins to transition to the second generation. But what is becoming increasingly clear is that China wants to shape its own thinking on succession, which borrows ideas from the west, but is also about something that feels distinct for themselves.
At many levels, passing the business to the next generation is no different for family-owned businesses in China than it is for other family businesses anywhere else. They face the same set of challenges, such as getting the next generation prepared and committed to taking over management plus encouraging the senior generation to let go in time. The ultimate goal, for any business, is to maintain both the momentum of the business and the family. That’s no different for China’s family businesses.
But succession in China has some particular twists. One of these is that the country is largely dealing with founder succession. Of course, issues around founder succession are universal, where the founder has an intense attachment to the company and they fear to let go.
But the founder generation is split in China between older Phase 1 founders who started in the 1980s and early 1990s, and younger Phase 2 founders who launched private companies in the late 1990s and 2000s. The older Phase 1 founders are mostly in their 70s now, and were mostly involved in transforming state enterprises that weren’t doing very well into private enterprises; they were part of the state structure and their thinking has been influenced by that culture. The younger Phase 2 founders, who are mostly in their 50s, started their own companies from zero and are more similar to the entrepreneurs in the west.
It is the older founders that currently face the greatest challenge with succession, for three predominant reasons.
Because of China’s one-child policy, the family does not really have a choice in terms of who they appoint as their successor. This is especially true because China has yet to develop a deep pool of professional, non-family, senior management talent that operates with high ethics and can be trusted by family owners.
Cultural Divide Between the Generations
There tends to be a cultural gap between the senior and junior generation family members. Unfortunately, many next generation family members do not want to work in the family business. They often see the family business, usually connected to manufacturing, as unattractive because of the low growth of these industries, the often remote locations of production facilities, and the complexity of building and maintaining government relationships. Those feelings tend to be amplified if the next generation is educated abroad. The two generations diverge on their approaches to the family’s wealth strategy, business strategy for specific operating companies, and management strategy of how to lead the business organization effectively.
Another issue that often complicates succession in China is the concept of the extended family. Many times the founder supports members of the extended family informally. Sometimes this means giving relatives jobs inside the company or supporting them in their own business ventures. Typically, in China, the family is a significant obligation and becomes a real headache for the second generation, because they can’t fire members of the extended family working in the company. They also find it difficult to decrease other types of financial support over time, so they have to keep supporting them. This becomes an increasing burden as the size of the extended family grows in successive generations.
This is further complicated by the fact that it often becomes difficult to define what is the boundary of the business family in China. In the west, it’s the owners, their spouses and their immediate descendants; but in China, this idea almost feels socially unacceptable. They see the business family as much broader, and this places a lot of pressure on the only child when it comes to managing expectations.
Models of Succession
As a next generation family business cohort, it is uncertain whether generational transitions within Chinese family companies will generally be successful since succession has yet to go through a whole cycle, which will probably occur in 15 to 20 years time. There have been a few successful cases of family business generational transitions in China so far. For example, Liu Yonghao who founded one of the largest private agribusinesses in China—New Hope Liuhe Co—ceded the chairmanship of his company to his 33-year old daughter Liu Chang in 2013 when he was 62 years old. He selected a director on the company board to be the co-chairman with his daughter. Examples from places like Hong Kong and Taiwan, where succession often has not been well managed, are difficult to be held up as role models in China.
They will not just want to run their businesses as capitalist organizations, but adapt them to a Confucian way of thinking.Over time, it is our view that China is going to develop a succession strategy that is successful, and works for its huge economy—probably a more successful succession strategy than currently works in Hong Kong and Taiwan. But to get there, China still needs to confront a number of challenges—and many of these go to the heart of what type of society China sees itself as.