The average first generation Asian family firm loses 60 per cent of its stock value during the succession process, from five years before succession, to three years after.

The recent media feeding frenzy over the warring Rinehart family proves just how destructive a family feud can be, reported here. But when there is a business involved - which represents a large chunk of a country’s stock exchange - family feuds can destroy more than filial harmony.

Family feuds are frequently down to succession. Like in the case of Georgina Rinehart, who caused a ruckus with her three eldest children when she tried to secretly change the vesting date of the family trust to several decades in the future, leasing control over a fortune is a common source of spats. 

These spats can disintegrate shareholder value, according to new research conducted by Professor Joseph Tan, director of the institute of economics and finance at The Chinese University of Hong Kong.

In his new study of 250 family firms in Hong Kong, Taiwan and Singapore Professor Tan shows that the average first generation family firm loses 60 per cent of its stock return during the succession process, from five years before succession, to three years after.

Put another way, a shareholder with $100 worth of stock before a leadership change in a family firm, would on average be left with a holding worth $40.

This varies regionally and is most dramatic in Hong Kong, said Professor Tan.

Urgent and challenging

“Leadership succession in family businesses is an urgent and challenging task,” said Professor Tan. “Most family businesses in Asia were set up after World War Two and most have recently experienced leadership succession or soon will.”

Indeed, two thirds of Asian firms choose a family member, be it an heir or a relative, to succeed them. Only 22 per cent opt for an outsider. Family succession is clearly prevalent across Asia, so what is it that makes it so damaging?

“In emerging markets, particularly in China, leaders’ personal values heavily influence business decisions and outcomes,” explained Professor Tan. He pointed to bottled water and soft drink tycoon Zong Quinghou, currently the richest person in China. Zong does not use a computer. He puts in orders over the phone and answers subordinates' requests using a traditional brush pen with red ink.

Culture and implicit rules like these, handed down from one leader to another will not always be easily transferred, said Professor Tan. “These assets, often intangible, can critically contribute to the success of a family business but they are specialised to the entrepreneur and cannot be easily bought or sold in the marketplace,” said Professor Tan.

“Because corporations are owned and managed by families, family governance is critically important to corporate performance. But family relationships are governed by a traditional value system (custom, social norm, religion), not formal laws or regulations. This makes them difficult to transfer across generations,” said Professor Tan. 

Family fortunes

And with such wealth at stake, perhaps family feuds are inevitable. In Asia, where fortunes are newer and the majority of high net worth individuals are first or second generation, feuding is more prominent than in developed countries where wealth has already passed through several generations.

Examples of warring Asian kin abound. India’s wealthiest brothers Mukesh and Anil Ambani were locked in fierce dispute over their father’s Reliance empire, when he died in 2002 without leaving a will. Eventually their mother intervened and divided the conglomerate. Reliance is India’s largest private sector enterprise and accounts for a large chunk of India’s stock exchange.

Likewise the large and complex family of Macau casino tycoon Stanley Ho have been battling each other – and him – for his multi-billion dollar empire. Reports say some of Ho's relatives (he has 17 legitimate children born of four wives) have been forcing the 90-year old to relinquish power.

A study from Switzerland’s Credit Suisse last year showed that family enterprises make up half of listed companies and a third of total market capitalisation in the 10 Asian economies studied in the research. Around 70 per cent of Asian firms overall are family-owned, say industry experts.

Family enterprises are also one of the biggest employers, accounting for 57 per cent of staff employed a listed firms in South Asia and a third of those in North Asia.

Which makes mastering succession planning in Asia crucial to its nascent economy.

Editor’s note: ClearView Financial Media – publisher of WealthBriefing, Family Wealth Report and WealthBriefingAsia - is hosting a WealthMatters event entitled “The Right Time and Process for Intergenerational Wealth Transfer” in Hong Kong on 27 March at the Four Seasons Hotel.