Not long ago, the CFO of an Asian public company arrived at work to hear some startling news: the firm had just made a major acquisition. The deal hadn’t been arranged by the finance executive or his staff — they learned about it only that morning. It was not an impulsive purchase by the CEO. Nor was it approved by the board of directors. Instead, the deal was negotiated and signed by someone who doesn’t work for the company and whose name appears nowhere in its public filings.
The target company was an odd choice. It was a weak business far beyond the company’s area of expertise, on a par with a toy maker deciding to buy a management consulting firm. Not surprisingly, the acquisition hasn’t been a stunning success. It is losing money and has proved hard to manage. At another company such a turn of events — a major corporate decision taken without the involvement of top managers and without board approval — might have triggered a management revolt, if not a shareholder lawsuit.
But not here. The buyer was the company’s major shareholder, a patriarch whose relatives and friends continue to occupy many of the company’s important managerial roles. And far from being an anomaly, the acquisition is just one example of how decisions get made at the company, according to its finance executive. “No one will ever challenge the patriarch,” he says.
Welcome to the life of an outsider at an Asian family firm. Big family companies are by no means unique to Asia, but they appear to be more common — a study in the mid-1990s found that at two-thirds of the companies listed in Hong Kong, families owned at least 20% of the shares. As family businesses have become public companies over the years, many have been slow to abandon old forms of management. Minority shareholders complain of opaque financials, suspicious related-party transactions, and an autocratic management style. “The average listed company run by a family in Asia is still run along traditional lines, with family members on the board and insider traditions in management,” says Jamie Allen, secretary-general of the Asian Corporate Governance Association.
Now, under pressure to improve governance and profits, many of these companies are looking beyond the family for professional managers, and for CFOs in particular. There can be many rewards: the pay is often good, managers tend to plan for the long term, and a CFO who wins the family’s trust can count on a job that may last a decade or more.
But beware: conversations with current and former managers suggest that life in a family business can be very different from what a CFO might have experienced elsewhere. As one of them says: “You have to go in with your eyes open.”
Many of Asia’s large family businesses have colourful histories. Consider the Formosa Group, Taiwan’s largest company. It started in the 1930s when, as a teenager, YC Wang opened a rice shop with a $200 loan from his father. He expanded into rice milling, lumber and, eventually, power production and plastics, becoming one of the world’s largest producers of PVC. The Wang family still controls the enterprise.
In Asian Godfathers (Profile Books, 2007), Joe Studwell argues that many of these businesses have a common trait. Through their founders’ connections, they obtained a concession or licence that allowed them to build monopolies or oligopolies. That’s been true in businesses as diverse as gaming (Stanley Ho), sugar and flour importing (Robert Kuok) and ports (Li Ka-Shing and the Kadoories). For tycoons with the right connections, it is like “being handed a money-printing machine,” as David Webb, a Hong Kong-based investor activist, describes it.
With such an unassailable position, the families never felt much pressure to open themselves to outsiders, even when they’ve taken their companies public. The result, says Low Chee Keong, a law professor at the Chinese University of Hong Kong, can be that governance reforms are a matter of form over substance. “There’s reluctance on the part of the patriarchs to give up control on a day-to-day basis,” he says. “Even when a company has a non-executive chairman, it can be abundantly clear that nothing in the company happens without his say-so.”
That’s not necessarily a bad thing, argues Henry Yeung, an economic geographer at the National University of Singapore who studies family enterprises. He points out that even when these companies diversify, they often still need the political connections that helped the founders launch their operations in the first place. And it’s usually the patriarch who knows the ropes, not his sons and daughters returning from Wharton, and certainly not the professional managers hired from outside the family. Sustaining the business may require the patriarch’s guiding hand.
Still, these businesses are changing. For reasons ranging from rising competition and pressure from lenders, to the influence of younger family members with MBAs, family businesses are updating at least some of their practices. And one of the first steps these companies take is to swap family for professional managers. “Family firms are realising that they can’t survive with only family members running the business,” says David Hui, who runs Korn Ferry’s Asian financial services recruiting business. A 2005 study by McKinsey and the University of London provides some support for this view: the researchers found that European family firms run by outside managers performed 20% better than those run by the patriarch’s eldest son.
For some finance professionals, the development has created promising opportunities. This is the case for KF Tan, CFO of Eu Yan Sang, a Singapore-based producer of traditional Chinese medicines and a clinic services health-care company. Founded in 1879, the firm is now run by Richard Eu, a fourth-generation family member. Before the 1990s, Eu Yan Sang was very much a traditional family business, with relatives throughout management. The company had two listings — in Hong Kong and Singapore — run by different parts of the family. In the early 1990s, Richard Eu and a few cousins arranged a management buyout, reuniting the company and vowing to modernise its management. The family agreed that no more than two of its members would be managers at any time. Eu has said publicly that his successor doesn’t need to come from within the family.
When Eu Yan Sang hired Tan as a group controller (he became CFO a year later), it was looking for a finance executive who could work well with operations and eventually participate in strategic discussions. Tan was a logical choice: after beginning his career in finance, he had served as general manager for NatSteel Chemicals in Singapore, and as managing director for Nextec, a US fabric company.
Life at this company closely resembles the multinationals where Tan worked previously. “This is a very professionally managed company,” he says. “Corporate decisions are made by consensus. Richard doesn’t come and say ‘Hey, KF, I want this to be done.’ We freely share our views and come to an agreement.”
Ricky TF Tsang reports a similar experience. Tsang is the Oxford-educated CFO of Hysan Development, a Hong Kong property company controlled by the Lee family. Hysan is another business with a colourful past: like the founders of Jardine Matheson, Hysan Lee got his start in the opium trade before buying a big plot of land in Hong Kong’s Causeway Bay neighbourhood in 1923. (Lee died five years later, the victim of an assassin’s bullet.)
Today Hysan — which is listed on the Hong Kong Stock Exchange — is positioning itself as shareholder-friendly and socially responsible. Like Eu Yan Sang, most of Hysan’s managers are non-family members. Only the executive chairman is from the Lee family. Tsang says that the firm sees changes ahead, driven by quarterly reporting for Hong Kong-listed companies, rising investor scrutiny and growing competition.
Tsang views his hiring in 2004 as part of that change. He has speeded the management reporting process, improved the finance function’s ability to analyse trends and provide advice, and established an internal audit function. Tsang has also clarified the system of financial limits and authorities, which allows managers to make some decisions without top management (or family) approval. “We are moving from having a handful of senior decision-makers to a more systematic, objectives-driven decision-making process.”
Hard to See
For every such experience, however, there are others that don’t turn out so well. One European finance executive says that when he was recruited by a Chinese family firm from a multinational, he assumed that it was one of the reforming companies — “An ideal blend of East and West in terms of management style,” was how the recruiter had put it. In fact, while the business has the trappings of being shareholder-focused — including independent directors and split roles for chairman and CEO — it remains insular. Family members, not professional managers, make the decisions. The board has little authority. The family rarely consults the finance function. But having an outside CFO serves a purpose: “They wheel me out whenever they need credibility in front of investors and bankers,” he says.
Within the company, lines of authority are submerged. A junior manager from the same village as the patriarch may feel entitled to undermine his direct superior by communicating directly with the family boss. And since everyone defers to the family, it’s unclear whether senior managers’ opinions are really their own or those of the patriarch. “There’s no clarity of structure,” complains the finance executive. “Trying to figure out who’s responsible for what decision is almost impossible — it’s like Jello.”
This isn’t unusual, according to others who have spent time in family operations. A professional CFO will often remain outside the circle of decision-makers. The family may turn to the finance executive for help in carrying out some transactions, but rarely for advice. “The CFO position is a more real position than most,” says an equity analyst with experience working for several family companies. “But don’t think that the guy goes in with his discounted cash flow model and says to the board, ‘I would take project one, not project two.’ He’s told, ‘We’re doing this. Can you fix up the money?'”
This lack of financial advice can result in some strange decisions. At one company, family managers unexpectedly purchased a plot of land and built a new facility on behalf of the local business unit. But the divisional manager, who had not been consulted, didn’t need the extra capacity. Instead, he complained, the result was just to push down the operation’s return on assets.
Predictably, trying to achieve meaningful change in such an environment can be frustrating. “I feel like my hands are tied behind my back,” says the European finance executive.
However, there are times when the mix of an outside finance executive — albeit one with ample willpower and a dose of good luck — and a headstrong boss can produce a more rational family business. At Joincare, a Shenzhen-based pharmaceuticals company, this happened after the firm’s near-death experience.
CFO Alan Zhong joined the company as head of investments in 2001, shortly after the company’s listing on the Shenzhen Stock Exchange. He spent several years working closely with the founder and CEO (whose wife also works at the company) on acquisitions, including one major deal that propelled Joincare into the front ranks of Chinese pharmaceutical companies.
In 2005, the founder decided to take himself out of day-to-day management by hiring a professional chief executive and becoming chairman instead. It was an unfortunate decision. The new CEO, full of determination but lacking experience in pharmaceuticals, made a series of blunders that set the stage for the company’s first-ever loss.
First, seeing that the company worked with 800 distributors, the CEO saw a chance to save money. He quickly decided to cut the smallest distributors and keep only the 180 biggest. He didn’t know, however, that only the small distributors reached China’s smaller cities — suddenly the company’s products were available only in the big markets.
Next, the CEO devised an incentive to spur sales whereby if shops ordered more products, they would receive a rebate. It seemed to work well to begin with as orders rose in the first few months. But he hadn’t considered the effect of another decision. During store visits a few months before, the CEO saw that Joincare’s products were reaching their expiration dates. His solution was to allow stores to return goods at any time to ensure freshness.
The store owners saw an opportunity and pounced. They ordered as much of the company’s product as they could, waited for the rebate cheque, and then sent it all back. In 2006, the company posted a loss of 80m yuan (€7.4m) on revenues of 207m yuan. “It almost killed us,” says Zhong.
Alarmed, the chairman sacked the CEO and returned to management. For his part, Zhong tried to make sense of what had happened. “Whose fault was this?” he asks. “It was the manager’s. But it was also partly finance’s — we didn’t foresee this outcome quickly enough.” Accounts receivable had soared, cash flow had fallen and goods returned had spiked. “If you see this pattern, you should know there’s a problem.”
The Practice of Management
The crisis had exposed the weakness of an organisation whose processes and systems hadn’t kept pace with rapid growth. Now Zhong and the founder are working together to turn things around. They’ve instituted monthly meetings with all of the business heads to review performance. Management reports have been redesigned to present a clearer, more consistent picture of performance, so that it’s easier to compare businesses.
Within finance, Zhong is retraining his staff. “The boss wants us to help him forecast and think through the implication of any decision,” he says. “I’m teaching my controllers that they have to understand the business thoroughly. We can’t just be accountants who report the figures. We have to pay attention to the story behind the numbers.”
Will a stint in a family business turn out to be a rewarding (albeit turbulent) experience like Alan Zhong’s? Or will it end up like those of the unhappy CFOs who find themselves in a dysfunctional business and excluded from important decisions? Certainly, taking a close look at the family making the job offer can help. (See “Look Before You Leap” at the end of this article.)
There’s a good deal of doubt that the average family business in Asia will ever change. But Yeung of the University of Singapore is optimistic. He recently completed a study that involved 100 interviews with leaders of Asian businesses, half of which are family-owned, and sees evidence that the pressures for change are yielding results.
But don’t expect families to relinquish control of their businesses anytime soon. The likely outcome, says Yeung and other observers of these businesses, is a hybrid model: more professional management and improved decision-making processes, but with the ultimate authority remaining with the family. And as long as that’s true, professional managers joining such companies should keep in mind this advice from Korn Ferry’s David Hui: “Don’t go in expecting to change the world.”
Don Durfee is managing editor at CFO Asia.
Look Before You Leap
For a professional CFO, joining a family business isn’t a decision to take lightly. According to Guy Day, a finance recruiter with Ambition, it is easier to enter a family operation than to leave one. That’s particularly true for small outfits. “There’s a perception that once you’ve spent time in a small company environment, you won’t be able to readjust,” he says. “I get a lot of approaches from CFOs who want to go from private to public companies, but it’s hard to find them jobs.”
Headhunters advocate careful due diligence. Learn about the business. Read about the family’s history. Understand the dynamics between the generation currently in charge and the one poised to take over.
Alan Zhong was aware of the risk before signing up with Joincare, a Shenzhen-based pharmaceuticals firm 65% owned by the founder. “My friends were surprised when I left Deloitte to join this relatively unknown company,” he says. “But I had studied their filings.” Zhong saw that Merrill Lynch had made a $20m (€13.7m) investment in the company.
Make the right choice, and life in a family company can be rewarding. One benefit: a refreshing willingness to focus on the long term. This makes sense, considering that family owners are deeply vested in the enterprise’s long-term performance. Family businesses also offer a more stable career. In most public companies, a new CEO — who may change every three or four years — typically means a new management team. Senior managers at family enterprises usually stay together for longer. Prove your loyalty to the family, says David Hui of Korn Ferry, and you could have a job that lasts a lifetime.