Passing the Baton to the Adopted Son: A Succession Model Combining Capability with Morality

A dearth of worthy successors has long been a cause of concern for family businesses. This is especially true with family firms on the Chinese Mainland because the one-child policy even rules out the possibility of “picking the best out of a mediocre bunch”. As a result, an entrepreneur’s only son (daughter) is the only possible successor to the family business.

A wise goose may lay a tame egg. According to research by overseas scholars, handing over the family business to the founder’s son (daughter) entails three major disadvantages: firstly, the founder’s business acuteness cannot be passed along like fortunes; secondly, inheriting colossal family wealth generally stifles the talent and the spirit of enterprise of the next generation; thirdly, the boss’s decision to leave the top position to his son will dampen the enthusiasm of professional managers.

How to address this thorny issue? A research in 2011 by the scholars from the University of Alberta, Canada is somewhat enlightening. By undertaking an empirical study on 392 family businesses and 668 non-family businesses among the listed companies in Japan, these scholars found the family businesses run by adopted heirs outperformed the family firms managed by blood heirs and non-family businesses. Passing the baton to the adopted son could go a long way to deal with the business succession issue: (a) providing the family business with plenty of options in place of incompetent blood heirs; (b) spurring the professional managers within the family business on to work hard so as to be promoted as an adopted heir; (c) motivating blood heirs, who are confronted with the threat of being replaced by a “better” adopted son, to press forward and invest more in human capital. Besides, the research indicated that grooming a talented son-in-law as a successor was as good as handing power down to an adopted son.

In the western society, the vast majority of adoptees are children. Family businesses in Japan, however, usually adopt adults within the company for the purpose of business succession. The yoshi must take on the adoptive family’s surname, and register with the koseki office. From Chinese people’s perspective, adult adoptions intertwined with family firms mean, in essence, grooming a successor from within so that a fair number of talented executives can qualify as a successor. Leaving the hereditary executive position open to competition enables outstanding professional managers within the company to identify with the family business and make a commitment based on something akin to the blood ties rather than the mere employment relationship. For Chinese people, the identification and commitment originate from the loyalty system based on the trust between the family business founder and professional mangers. What Midea and Lenovo have done with regard to the succession model was quite similar to Japanese family businesses. 

Resources:Mehrotra et al. Adoptive expectations: Rising sons in Japanese family firms.  Journal of Financial Economics, 2013