The Willingness and Commitment of the Relay Generation (1)

Introduction


For many people, family businesses have long carried a mysterious color. What will come to people’s mind first when thinking about a family business? Its fabulous wealth or its economic contribution to the society? Nowadays, family businesses have become the biggest, also the most active group in the business world across countries. All-China Federation of Industry & Commerce Chairman Wang Qinmin noted at the 2012-2013 Conference on the Development Trends of China’s Private Economy that the private economy accounted for over 60 percent of China’s GDP in 2012. There are many excellent private companies in China, and family businesses are nearly a synonym of private economy in China. In our definition, a family business is the one which is owned or controlled by a family, and involves the actual participation of at least two family members. Over more than thirty years of reform and opening-up, Chinese family businesses have created immense wealth and carved a brand-new industrial landscape.

After a boom period of high-speed economic development, Chinese family businesses are now gradually entering into a stage of stable development and succession. “85.4% of private enterprises in China are family-owned, and about three fourths of the family business are to undergo the process of succession in the next 5 to 10 years.” Chen Changzhi, Vice Chairman of the National People’s Congress Standing Committee indicated at China Large Private Business Succession Forum & 2012 Family Culture Heritage Forum organized by the Global People magazine under the People’s Daily. The family business succession is directly connected with the sustainability of the business, and influence the development of the entire private economy to some extent. In this sense, the succession of family businesses is not only a family issue but a national issue.

Though the majority of Chinese family businesses are still under the control of the first-generation entrepreneurs, it has risen to be an unavoidable task for the founders to look for suitable successors. The intergenerational transition and business succession have become a focus of public attention. Are the second-generation successors psychologically ready to take over the baton? Are they really capable enough to take the reins of their family businesses? How will they realize the switch of role from the “affluent second generation” to the “pioneering second generation”? The joint efforts of the first-generation entrepreneurs and the second-generation successors are required to seek out factors affecting the succession as well as the optimal path to succession.

We put research focus on the family business succession, and depict and analyze the status quo and problems facing Chinese family business succession based on extensive investigations and in-depth interviews among the representative Chinese family businesses which are undergoing or have completed the process of succession. By compiling this White Paper, we aim to identify and understand factors affecting the second generations’ aspiration for succession, the real performance of the successors and their sense of ownership. By analyzing such factors, we find out the most desirable company size, industry, degree of standardization, family values and family cohesion that can best facilitate the succession process. In addition, we also summarize the problems and opportunities with regard to family business succession so as to analyze the development track of Chinese family businesses in a more comprehensive way.

Facts about Family Business Succession


80-90 percent of firms across the world can be classified as family businesses. In China, family businesses also play an important role in the national economy. As shown in the Family Business Research Report released by Forbes China for the fourth time in 2013, as of July 31, 2013, the number of A-share listed companies in China totaled 2,470, of which, 1,431 or 57.94% were private ones. The private companies can be further divided into family-owned ones and non-family-owned ones. According to statistics, the number of listed family-owned companies reached 711, accounting for 49.7% of the total.

The intergeneration succession has risen to be a common challenge for family businesses, which, if not handled well, can become the biggest obstacle on their way to sustainable prosperity. Globally, 70% of the family businesses can only survive over the first generation, 30% over the second generation and 15% over the third generation. Despite the short history of family businesses in China, most of their first generation entrepreneurs will pass on the baton to the second generation successors in the coming a few years: according to the new Fortune 500 list, by 2013, 303 or 60.60% of Chinese entrepreneurs were above the age of 50. Of them, entrepreneurs aged above 60 reached 83 or 16.60%; those aged above 70 totaled 17 or 3.40%. Most of the first-generation entrepreneurs are at their age of 55-75, and their eldest children are over the age of 35 in average.

Though the family business succession has become an imminent issue to be addressed, the status quo of Chinese family businesses is rather worrying: quite a number of family businesses haven’t put this issue on their agenda. According to the Chinese Family Business Development Report, led to be complied by the Research Office of All-China Federation of Industry & Commerce and released in 2012, of the 3,286 family business owners participating in the survey, 1,438 or 43.8% haven’t thought about the succession issue. Things are not going well in those which are undergoing or have completed the process of succession. As shown in the Forbes’ survey in 2013, of all the A-share listed family businesses, 645 or nearly 90 percent were controlled by the first-generation entrepreneurs; 66 have completed the succession process, which was 21 more than the previous year, driving the its weight to reach approximately 10%. It can be thus concluded that A-share listed family businesses have accelerated their pace of succession. However, disappointingly, the family businesses succeeded by the second generation generally underperform those controlled by the first generation: the CAGR of prime operating revenue has doubled the figure created by the first generation, while the CAGR of net profit (2.5%) is much lower than those controlled by the first generation (9.9%), and the three-year averages of net profitability, ROE and ROA are also much lower. These have evidenced that regardless of the rising sales figure, the second generations are still less competent than the first generations in terms of business management and profit creation.

The continuation of family and the upgrading and transformation of business have become the major challenges of the times.

Challenge of Intergenerational inheritance


With the further promotion of market liberalization, the market landscape has been reshaped as some family businesses exited the market because of poor management, while some others gained a firm foothold and even grew into conglomerates advancing towards the international market. Nevertheless, family businesses are facing a variety of challenges---the real economy is handicapped; while running into difficulty in fundraising, family businesses are strongly tempted to make a “quick buck” from high-risk and high-yield Investment, and as a result, many of them try investing in the financial and real estate sectors. The first-generation entrepreneurs are up against both the challenges of family business succession and business upgrading and transformation. They have to think about a number of questions: as they have worked all their lives for the prosperity of their family businesses, now that it’s time to pass on the baton, should they have their offspring take over the baton, or give them the right to make their own decisions? The first-generation entrepreneurs are unavoidably distracted by the conflicts between old-fashioned and new thoughts, and the choice of which development orientation to follow in the process of industry upgrading and transformation.

Generational transition represents a more significant stage than the creation of a family business, and is the highest risk for continuity of the family business. A runaway succession may be a turning point of the company from prosperity to decline, and it may also entail the risk for the family to lose control over the company. Though nearly one third of the literatures about family business focus on the intergenerational inheritance, few have sufficiently elaborated on how the founding generation can successfully pass on the baton to the younger generation. IMD (Switzerland) Professor of Family Business Joachim Schwass points out that the failure of family business succession is nobody’s fault but the founders their own in a sense. “Founders find it very difficult to let go of control and imagine the business without their leadership. And they have no clear idea about how to groom competent successors, either.” He said. Some scholars believe that the blame should be put on the inability of the entrepreneurs in well handling the power handover, as well as on the complicated emotional conflicts incurred in the process of succession.

Family businesses are businesses of relationship, and “relationship” is the core of family businesses. It is necessary to have a close observation on how the family relationship will affect the succession of a family business. Otherwise, the problems facing family businesses would be not different to those facing non-family businesses. Furthermore, the social relationship between family members is a key element of the family system, and generally exerts greatest influence on the family business operations. Prof. Amundson has put forward long before that “Only when you witness how a great family business finally collapses because of quarrels, slander or even radical conflict between family members, will you come to see the importance of family relationship to the success of the family business.”

Hence, a plenty of researches have reached the same conclusion that it is highly important to understand the psychological elements of a family organization so as to effectively address the problems and challenges facing the family business.

Research Methodology


Research Purposes


This research focuses on exploring the succession of Chinese family businesses from the perspective of family organizational psychology. A smooth succession is a prerequisite to the sustainable development of a family business. As the peak succession period for the Chinese family businesses is coming, have the founding entrepreneurs and the relay generation been well prepared for handing over and taking over of the baton? What differences are there between the two generations? What kind of preparations can help streamline the succession process to deliver more desirable results?

CEIBS Centre for Family Heritage initiated this research project in 2012. We carried out in-depth interviews with family business founders and successors to understand their motivations, opinions, puzzles and expectations on family business succession. We then summarized the findings concluded from these interviews and organized a questionnaire survey among 114 family businesses. The 114 family businesses are located in Beijing, Shanghai, Zhejiang, Guangdong, Fujian, Shandong, Jiangxi, Anhui, Jiangsu, Gansu, Guangxi, Guizhou, Hubei, Sichuan and many other provinces. Totally 503 persons, including the founders, successors, top professional managers, financial managers, HR managers, department managers and etc. from each family business, responded to the questionnaire questions. The survey is designed to identify the key factors affecting successors’ aspiration for succession and the effectiveness of succession with the aim to help family business managers to get better prepared for the succession and pass on the baton from the founding generation to the relay generation smoothly.

 
The research is carried out around the following questions:
  1. To whom do the founding generation wish to pass on the baton? And how?
  2. Why are the relay generation willing to take over the baton? And how do they prepare for the succession?
  3. The influence of “family culture” on relay generation?
  4. What factors affect the willingness of succession?
  5. What factors affect the outcome of succession?
 

Research Methods


  • In-depth Interview
We carried out in-depth interviews with founders and successors of family businesses in a semi-structural way. In addition to the pre-set interview outline, we would also throw some flexible questions based on the actual situation so as to know more about the respondents’ ideas and experiences. Averagely, each interview lasted 1.5 hours, during which the respondent shared his/her thoughts on family business succession in detail.

  • Questionnaire
Based on these interviews, the researchers identified a string of key factors affecting family business succession and thus launched a large-scale questionnaire survey to testify how these factors can help enhance the relay generation’s aspiration for succession, as well as the effectiveness of succession. The survey involved the participation of 114 family businesses, 103 family business founders, 54 successors having finished or being in the process of succession, 86 non-family-member top managers, 81 financial directors/managers, 88 HR directors/managers, and 91 department mangers.

  • Data Analysis
We carried out statistical analysis based on mean test, variance analysis, contingency table analysis and regression analysis to identify which variables are significantly correlated to the founders’ attitude towards passing on the baton, the relay generation’s aspiration for succession, organization commitment, psychological ownership, and performance evaluation. The correlations presented in this report are significant at the 5% level.

Research Framework

Table 1.1 Research Framework

 
  • The First Generation Handing over the Baton
  •  
Family businesses come to the stage of intergenerational succession mainly because the founders are getting old, start to shift their interest or die by visitation god etc. Some scholars have studied the succession of family businesses in West Germany and discovered that nearly more than 50 percent of the management handover are done without pre-established schedule; 31 percent of the businesses have to enter into the succession process because of the unexpected death of their founders; and another 23 percent have to choose successors as the founders are no longer interested in running the businesses they’ve created.

Family business succession can be done in three ways: 1) founders may engage professional managers for running the businesses and they themselves will oversee the businesses as the controlling shareholder; 2) founders may pass on the baton to their family members; or 3) founders may sell the entire family businesses. According some earlier theoretical researches, it is not an optimal option to have an insider (either a family member or a non-family member) take over the business so as to improve the business performance. However, having long been influenced by the father-to-son succession tradition, quite a lot of founders of the family businesses in China are still inclined to pass on the baton to their siblings.

The research made by Freund, Kauser and Schroer (1995) showed that nearly a half of family businesses passed the control power on to their family members and also over one fourth of the family businesses finally “closed down” with the lack of successors.

  • The Second Generation Taking the Baton

 

In general, the following aspects of the potential candidates for family business succession are attached higher importance: education background, technical skills, management competence, and financial management skills. Aspects less important include age, gender and seniority among brothers and sisters. In modern family businesses, the long-established succession rule that the “elder son has precedence over the younger ones” has been gradually out of favor. More and more founders have chosen their daughters or younger sons as the family business successors.

In terms of successor grooming, there are many proven practices worth learning. It is suggested that the would-be successors should acquire necessary working experience by working at other companies; the external working experience will help them to better understand their special identity and get prepared for possible challenges their family businesses may run into in the future. Three to five years of external working experience and at least one promotion during the period are very necessary for the would-be successors.

Working inside the family businesses also provides a valuable chance for would-be successors to be better prepared for the succession. The founders can intentionally assign some management responsibilities to them, increase their working scope and diversity such as establishing connections with major suppliers, clients, creditors and other stakeholders. In addition, it is also very useful to send the would-be successors to school for some specialized courses.

Such working and learning experiences, as well as personal development and positive feedback received during the period can help would-be successors build confidence, make more positive judgment on whether they are able to succeed the family businesses successfully or not, and get better prepared for the succession.

  • Family Culture
  •  
Family culture plays a significant role in family business succession. Yang Kuo-Shu (1995) conducted research on Chinese familism and put forward the functions of familism in promoting harmony, solidarity, prolongation and prosperity of a family. The Chinese familism and traditional values have deeply influenced Chinese family businesses through the pan-familism. Chinese pan-familism represents a process of generalizing the family structure, operation principles, ethics, roles, relationships, and family attitudes and behaviors to groups or organizations outside the family. Familism emphasizes the family’s continuity, harmony and wealth, as well as emotional attachment to the family. With the deep influence of the familism philosophy, family relationship turns out to be a crucial factor affecting the family business succession.

The familism values include:
  • Authoritarianism: Show sensitivity, worship and dependence towards authority in social context; able to find out, worship and rely on the representatives of authority in a specific circumstance.
  • Family Harmony: Behave resignedly, exercise patience and self-repression for the sake of family harmony and solidarity; competition inside the family is meaningless.
  • Family Prosperity: Attach high importance to family reputation and prosperity, and thus be strongly motivated to work hard for the family; uphold that family interests are more important than personal interests, and willing to make hard effort for the prolongation and prosperity of the family.
  • Family Attachment: Strong emotional attachment among family members based on the ties of blood or marriage; individuals are a part of the family; show a strong in-group bias.

 

The attitude of family members is the most important factor influencing the family business succession. In case the successor fails to win support from the family members, he/she is very likely to fail in the process of succession. It has been evidenced that potential successors must gain support and trust from those family members who are actively involved in the family businesses. Otherwise, the succession won’t be completed successfully. Olson and his colleagues (1988) developed and described two specific family variables (family cohesion and family adaptability) with relevance to family businesses.

Family cohesion refers to the level of support and emotional exchange family members have for and with each other. With a well-balanced family cohesion level, individual family members are able to be independent of the family on one hand, and are connected with the family on the other hand. For a family with strong cohesion, time spent together with family members is more valuable than that spend individually, as the get-together hours will help enhance the emotional attachment and loyalty that family members show to each other.

Family adaptability refers to the ability of a family system to change its power structure, role relationships and relation rules according to external and internal dynamics. A highly adaptable or open-minded family is characterized by democratic leadership style and partial sharing of roles, as well as firm execution of established family rules. For such families, decision making should be done in a democratic way. In contrast, a family lack of adaptability is featured by the dictatorship of a limited number of family members, restricted negotiations, rigid roles and unalterable rules.

  • Business-related Factors
  •  
Business-related factors also influence the succession of family businesses. Whether a successor has built up mutual trust with the boss and senior employees of the family business, and whether his/her competence has been recognized and believed by the professional managers of the family business do matter a lot.

Neubauer (2003) cited a research conducted by the European Union and proposed that barriers to the succession might exist in a family business, which could be further divided into business-related barriers and personal ones; once such barriers are identified, the family business should take serious consideration about the succession issue as these barriers might drive the family business to collapse ultimately. Business-related barriers include: products/services can no longer meet the market demand; the business size is not desirable; the business management pattern and organizational structure are obsolete, and etc. Gersick et al (1997) believed that the establishment of a perfect succession plan was the key to a successful takeover of a family business by the successor from the founder.

The size and standardization level of the organization reflect the maturity level of the organization. A sophisticated organization must have grown into a certain size and achieve self-development through an optimal institutional structure. The standardization and institutionalization of an organization is a necessary process for the transition from “rule of men” to “rule of law”.

  • The Relay Generation’s Aspiration for Succession, Commitment to the Organization and Psychological Ownership
  •  
The relay generation’s attitude towards succession largely decides whether the succession can be done successfully or not. Venter, Boshoff and Maas (2005) put forward that successful power transition at small and medium-sized family businesses required the following preconditions: successors were motivated to take over the baton, got well prepared for the succession, and were in good relationship with the founders; these factors could influence not only the process of succession but the family businesses’ sustainability in making profits.

The relay generation’s attitude towards succession involves: their aspiration for the succession before taking over the baton, their commitment to the organization after succession and psychological ownership (sense of ownership over the family businesses):

  1. Aspiration for Succession: Whether a successor is strongly motivated to take over the baton, and show positive attitude towards succession.

 

  1. Commitment to the Organization: The degree a successor is involved in the family business, and participates in social interactions of the family business. It reflects the successor’s emotional attachment to the family business, and is an affirmative psychological disposition, embodying the successor’s identification with the family business’ values and objectives, his/her pride in the family business, and the scarification and contribution he/she is willing to give for the interests of the family business.

 

  1. Psychological Ownership: Whether a successor feels a strong ownership of the family business, i.e. regards the family business as his/her own property.

 

A survey jointed initiated by the Research Office of All-China Federation of Industry & Commerce, Sun Yat-sen University Research Centre for Chinese Family Firm, Zhejiang University City College Research Institute for Family Business and Lee Kum family showed that: only 35% of the relay generation had the aspiration for family business succession; the biggest obstacle was the huge ideological gap between the first and the second generations; reluctant successors could be trouble-makers as they would probably not be fully devoted to the business operation, or have no sense of ownership over the family businesses.

Family members’ trust on the successor, family harmony, successor’s personal needs and perception of the succession-related financial return may also influence the successor’s aspiration for succession. “The family situation will decide a person’s job orientation, motivation, competence, emotional energy and needs at the workplace”. In other words, family-related variables can influence the relay generation’s commitment to the organization.
Table 1.2: Definition of Factors Influencing Succession Process and Result
Factor Definition
Self-efficacy A successor’s subjective judgment on whether he/she is able to accomplish a certain thing, equivalent to perceived self-competence or self-confidence.
Readiness for business succession The preparation a successor has made for the business succession, including his/her educational experience, business management training attended and working experience in other companies.
Working experience for business succession The experience of a successor in meeting challenges, sharpening personal abilities, updating knowledge and achieving personal growth in the process of succession.
Authoritarian Air Showing sensitivity, worship and dependence towards authority in social context; able to find out, worship and rely on the representatives of authority in a specific circumstance.
Family harmony Behaving resignedly, exercise patience and self-repression for the sake of family harmony and solidarity.
Family prosperity Attaching high importance to family reputation and prosperity, willing to make hard effort for the prolongation and prosperity of the family, and upholding that family interests are more important than personal interests.
Sense of family belonging Strong emotional attachment among family members based on the ties of blood or marriage, with the strong belief that individuals are a part of the family.
Family cohesion The level of support and emotional exchange family members have for and with each other.
Family adaptability How a family operates as a whole, address difficulties flexibly, readiness to make adjustment according to changes, and the way of decision-making.
Family conflict Relationship conflicts involve unhappy interpersonal relationships among family members, including emotional frictions; task conflicts are resulted from conflicting opinions and ideas of family members.
Relationship with the boss In the process of succession, the mutual support, trust and sharing between the successor and the boss of the family business.
Relationship with senior employees In the process of succession, the mutual support, trust and sharing between the successor and the senior employees of the family business.
Leadership style Visionary leadership---the founder is farsighted, and able to convey the business vision to his/her subordinates in a catching manner; benevolent leadership---the founder take special care of his/her subordinates and respect their dignity; authoritative leadership---the founder exclaims that his/her authority cannot be challenged and requires unconditional obedience of the subordinates.
Aspiration for succession Whether a successor is strongly motivated to take over the baton, and show positive attitude towards succession
Psychological ownership Whether a successor feels a strong ownership of the family business, i.e. regards the family business as his/her own property.
Commitment to the organization The degree a successor is involved in the family business, and participates in social interactions of the family business, embodying the successor’s identification with the family business’ values and objectives, his/her pride in the family business, and the scarification and contribution he/she is willing to give for the interests of the family business.
 

Research Sample


  • Individual Respondents
Among the founders participating in the survey, the majority (87%) are male entrepreneurs; also, 83% of the successors participating in the survey are male and the rest 17% are female. Obviously, male plays a key role in family business management. The average age of founders is 44, and those who have started to pass the baton on to the younger generation are averagely at the age of 53. Successors who began to take over the baton are at the age of 37 in average. About 50% of the successors are between the ages of 30-39; and 37% are much younger, at the age of 20-29.

In terms of the educational background, the second generation in general received more higher education. Most of them (87%) hold bachelor’s degree and above and only 13% graduated from junior college and blow. In contrast, 38% of the first generation only received junior college degree and below. In addition, 45% of the first-generation entrepreneurs are majored in science and engineering while 57% of the second-generation successors are majored in management, which indicates that the management competence is attached greater emphasis in the second generation’s education. Besides, 40% of the second-generation successors have overseas learning experience, while merely 6% of the first-generation entrepreneurs have the same experience.


Table 1.3: Educational Background of the First-generation Entrepreneurs and the Second-generation Successors
Backgrounds 1st Generation (103) 2nd Generation (54) Backgrounds 1st Generation (103) 2nd Generation (54)
Gender Education
Male 87% 83% Junior College and below 38% 13%
Female 13% 17% Bachelor 34% 50%
Age Master 26% 37%
20-29 1% 37% PhD 2%
30-39 22% 50% Major
40-49 36% 13% Science and Engineering 47% 30%
50-59 20% Management 32% 57%
60-69 17% Else 21% 13%
70 and up 4% Overseas 6% 40%
 
  • Organizational Respondents
  •  
Of the family businesses being investigated, 52% are from the manufacturing sector, 14% from trade, wholesale and retail sectors, and 8% from construction sector.

In terms of the business size, small family businesses with less than 100 employees account for a slight part, 63% are medium-sized ones with 100-1,000 employees. Another nearly one fourth have more than 1,000 employees.

The average history of the family businesses is 15.1 years and the median is 12 years. 76% of them have survived more than 10 years so far since their inception. About 5% have a history of more than 30 years and were established around the reform and opening-up policy was just launched.