Family businesses

Weak corporate governance in Hong Kong family businesses

Hong Kong family businesses struggle with recruitment and succession planning, while corporate governance improves among Hong Kong-listed companies, according to two separate surveys.

Asia is well-known for the wealth and power of its family businesses, but poor succession planning and the longevity of their founders have sometimes caused messy disputes among rival heirs.

Recent soap operas include the haggling over the assets of Macau casino boss Stanley Ho, the fraternal discord among the Kwok brothers’ property empire and the forged will of Nina Wang, known as “Little Sweetie”.

Family businesses argue that their structure offers significant advantages and benefits, such as flexibility, continuity and the ability to focus on the longer-term perspective.

According to a survey published by PwC last week, more than three-quarters (76%) of Hong Kong family firms intend to grow during the next five years, while almost half of them have increased sales during the past 12 months.

“Many family businesses in Hong Kong are very successful, however, some of them lack a professional management structure and good corporate governance standards ... [which] can easily give rise to internal conflicts,” said Richard Sun, head of the entrepreneurial group at PwC for Hong Kong and China South.

One way to prevent or help resolve these problems may be to convert them into listed companies.

“During the listing process, family businesses obtain additional capital for business development, helping to ensure a proper structure between shareholders, the management, and the business, making each of these roles clearer,” said Sun. “Depending on their interests, family business members can choose to become part of the management board, and take care of daily operations of the business. Or they could simply become shareholders.”

The PwC Family Business Survey 2012 examined family companies with a sales turnover of more than $5 million in over 30 countries, and conducted interviews with senior executives in 1,952 firms between June 7 and September 18.

Firms in other regions, especially Europe, Latin America and the Middle East showed even more robust sales growth during the past year, and are more confident about the role that their family businesses have in job creation and in helping create a more balanced economy.

For example, only 44% in Hong Kong agree that family businesses play an important role in job creation (77% in the global sample), and 42% said that family businesses add stability to a balanced economy (72% in the global sample).

Staff recruitment and the unstable market conditions are the biggest issues facing Hong Kong family businesses during the next 12 months, according to the survey. In addition, challenges around succession are a constant headache, often made worse by family politics and the need to attract and motivate non-family staff. For example, more than half (56%) of family businesses in Hong Kong do not have procedures in place to deal with family conflict.

“Professional external advice can help to establish a more robust structure to the management of a business,” said Kitty Chung, a PwC assurance and business advisory services partner. “Family members given professional support can work towards common goals and as a result minimise the chance of running into family conflicts.”

More funding support and tax incentives to develop brands, optimise their operations structure and prepare them to expand overseas could also help, she argued.

Meanwhile, a separate study by The Hong Kong Institute of Directors and Hong Kong Baptist University also released last week found that the standard of corporate governance of companies listed in Hong Kong has improved significantly since 2009, when a similar comprehensive assessment was last conducted.

Surprising key findings included that standards were best in the financial industry and among firms owned or supported by the Chinese government.

A scorecard was drawn up based on the five principles of corporate governance established by the Organisation for Economic Cooperation and Development: rights of shareholders, equitable treatments of shareholders, role of stakeholders, disclosure and transparency, and board responsibilities.

The top 10 companies (in alphabetical order) were Bank of China, HKEx, Cosco, HSBC, China Life, ICBC, CLP, Lenovo, Cnooc and MTR.

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