When keeping it in the family is not such a clear-cut issue

Entrepreneurs look to Italy for ideas on one of their most important concerns

In an old house that dates back to the Renaissance in Florence, a group of leading Chinese entrepreneurs bombarded Piero Antinori, chief executive of the winemaker Antinori, a company more than 600 years old, with questions about the secrets of passing on a family business from one generation to another.

How do you split equity shares between three daughters? How do you deal with the relationship when they have conflicts? Are there any opportunities for Chinese and Italian family businesses to work together?

Antinori was playing host to the China Entrepreneur Club on Oct 20, when a group of its members visited Italy.

"Time is the most important teacher," the club's founder, Liu Donghua, says of the succession issue. "Most Chinese companies now have about 30 years' history, and Chinese entrepreneurs are keen on ensuring they are still here in 300 years, so they want to know about family succession."

Many Chinese family businesses face the problem, which is critical because the quality of succession will directly affect China's economic growth, industry insiders say.

A book on the issue published in the past few days, China Family Business Inheritance, is based on months of investigation of dozens of businesses in China. It was published jointly by Harvard Business Review China and the Italian luxury car brand Maserati. The book aims to be a reference for private and family businesses.

Zhang Jin, executive general manager of Harvard Business Review China, says that the more than 30 years' reform and opening-up has produced many entrepreneurs who now face the problem of how to successfully hand over their company to the second generation, ensuring at the same time that the family business continues to thrive.

At the same time, China is a country with a long history and culture, with many national brands and traditional crafts, and how to keep them fresh is important for many companies, she says.

Zhang Zheng, director of the National Center for Financial Research at Peking University and deputy director of the university's family business research center, said at the annual forum of the Harvard Business Review in Beijing on Oct 23: "China's economy is at a new stage now, and first-generation entrepreneurs face the challenge of adapting to this transformation, as well as the transformation of their companies. Second-generation family businesses are more familiar with new economic concepts and capital markets, but they lack experience in management.

"Conflicting ideas and poor communication between the two generations are liable to create challenging issues during succession."

Family businesses are a critical part of every national economy, Zhang Zheng says. About 40 percent of the companies listed on the Fortune 500 are family business. Peking University, Harvard Business School and Said Business School in Britain have created a group to do research on the subject.

Family businesses are highly energetic because of trust that is based on kinship and shared interests, which produces better decision-making and more efficiency, and cohesive power, which produces longer-term thinking and a consistency in the values of those who run them, he says.

Nevertheless, succession remains problematic.

"Research on family businesses in the US had found that about 70 percent of them are not handed down to the second generation, 88 percent are not handed on to the third generation, and only 3 percent are handed on to the fourth generation."

Research in Southeast Asia shows that, during the succession of the first and second generations, the market value of the listed family businesses falls about 60 percent, he says, and in China about 40 percent.

In China, about 85 percent of companies are family businesses, Zhang Zheng says, and the coming five to 10 years will be important for them in matters of succession. Chinese family businesses are a phenomenon of only the past four decades, he says, which helps explain why succession from the first generation to the second generation is just about to happen.

"Many successions are approaching in unprecedented numbers for China, and we have no experience in the matter. In fact, most companies are just not ready for it."

Zhang Zheng says his research shows that about 40 percent of the owners of family businesses in China would like the second generation to inherit the businesses, about 55 percent would like to keep family equity stakes and get professional managers to take over, and about 5 percent would choose to reduce or transfer their equity stakes if there is no appropriate successor.

Entrepreneurs older than 50 are more likely to pass their business on to the second generation, and younger ones are more open to the idea of engaging professional managers. Because of China's family planning policies, many entrepreneurs would probably have problems choosing the right successor.

As for how to cultivate the second generation, about 40 percent would like to have them work in rotation in different departments, 35 percent think they should start from the bottom, and about 20 percent think their first role should be as a middle-level manager.

About 52 percent of the second generation have overseas experience, and about two-thirds are learning economic management. However, only about 20 percent would like to take the reins of the family business, about 70 percent would like to start their own business, and the rest aspire to be lawyers, doctors or accountants or to take up some other profession.

"Although many of the second generation would prefer not to take over the business, only about 24 percent want professional general managers to do so, which means many of them are made to take over the business against their will.

"The first generation and second generation in China usually have conflicts in management concepts, business strategy, talent appointment and capital markets."

Zhang Zheng says that when he was doing research in Zhejiang province, where family businesses are common, about half of the second generation said they would fully obey their parents when they have disagreements over the management of the family businesses, but about 20 percent were at loggerheads with their parents on the matter and ended up starting their own businesses.

Zhang Zheng says that family business succession in China has its peculiar features. First, Chinese put great store by family continuity, and since the first generation feels it has poured a lot of effort into the business, they are keen for it to be passed on down the generations.

Second, most entrepreneurs in China are male, and some stay at the helm of their companies until they die.

"Sometimes family members don't even talk about succession because that would be seen as disrespect for the father and could hinder the succession process," Zhang Zheng says.

"Apart from that, soft assets and people networks are very important to the companies' growth, and it is difficult to pass those on."

Contact the writers through chenyingqun@chinadaily.com.cn

(China Daily European Weekly 10/30/2015 page21)