Ownership Structure of Family-controlled Firms in East Asia

1
Ownership Structure of Family-controlled Firms in
East Asia

• Prepared by Team D2, 30 September 2002

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Group Members

• Chan Wing Lan, Christine 02402531G
• Cheung Kit Yan, Alice 02415378G
• Lau Dan, Dana 02427943G
• Man Oi Ling, Irene 02713161G
• Ng Hon Yin, Alec 02730827G

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Contents

• What is a family-controlled firm?
• How common are family -controlled firms in East
  Asia?
• Characteristics of family-controlled firms in
  East Asia
• Advantages and disadvantages

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What is a family-controlled firm ?

• Suehiro (1993) the family business can be
  thought of as a form of enterprise in which
  both ownership and management are controlled by a
  family group, either nuclear or extended, and the
  fruits of which remain inside that group, being
  distributed in some way among its members.
• Berle and Means (1932) more than 20 of the
  voting rights is said to have an ultimate owner.

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Voting Rights Vs Cash-flow Rights

• In all East Asian countries, control is enhanced
  through pyramid structures, and cross-holdings
  among firms.
• Voting right Control
• Cash-flow right Ownership
• Voting rights gt Cash-flow rights
• Why? Indirect voting rights exist !

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How Common are family-controlled firms in East
Asia?

• A single family controls 16.6 17.1 of the
  total value of listed corporate assets in
  Indonesia the Philippines respectively

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Characteristics of family-controlled firms in
East Asia

• Voting rights exceed cash flow rights
• Rare separation of management from ownership
  control
• Concentration of control

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Characteristic Voting rights exceed cash flow
rights

• Definitions
• Voting rights ? Control
• Cash flow rights ? Ownership
• Voting rights exceed ? Uses of deviation from
  one- cash flow rights share-one vote,
  pyramiding schemes, and cross-
  holdings

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Voting rights exceed cash flow rights

• Example 1
• No deviations from one-share-one vote or
  cross-holdings

Lees Family
The family owns 11 of both voting cash flow
rights of Firm A
The family owns 11 of voting rights of Firm B
The family owns 2 of cash flow rights of Firm B
10
Voting rights exceed cash flow rights (Cont)

• Example 2
• Cross-holdings are present, there are several
  control right chains

Lees Family
11
Voting rights exceed cash flow rights (Cont)

• The familys voting rights on Firm B will exceed
  its cash flow rights

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Example of ownership structure of the Li
Ka-Shing family
Hong Kong Electric
Dao Hang Bank Ltd
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Example of ownership structure of the Li
Ka-Shing family (cont)
Li Ka-Shing and family
O Ownership C Control
35 O C
Cheung Kong
34 O 40 C
Hutchison Whampoa
60 O 65 C
Cavendish International
34 O C
Hong Kong Electric

• The family controls 34 of the vote with only
  2.5 of cash flow rights

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Example of ownership structure of the Li
Ka-Shing family
Dao Hang Bank Ltd
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Example of ownership structure of the Li Ka-Shing
family (cont)
Dao Hang Bank Ltd

• The family controls 12 of the vote with only 3
  of cash flow rights

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Characteristic Rare separation of management
from ownership control

• Management of 60of the firms that are not widely
  held is related to the family of the controlling
  shareholder.

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Characteristic Concentration of control

• Control of publicly traded companies in East Asia
  
• Correlation between age and the size of control
  stakes in East Asian corporations
• Correlation of control and company size

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Control of publicly traded companies in East Asia
(Cont)
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Control of publicly traded companies in East
Asia

• Some of the differences in the concentration of
  control are due to the variations in company laws
  across countries
• Differences in min. in shareholdings for
  blocking major decision
• Differences in min. in shareholdings to call an
  extraordinary shareholders meeting
• Differences in level of restriction of voting
  rights at institutional investors
• Concentration of control seems to diminish with
  the level of economic development of the country

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Correlation between age and the size of control
stakes in East Asian corporations
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Correlation between age and the size of control
stakes in East Asian corporations

• Only in Japan are older firms more frequently
  widely held
• In all other eight countries, older firms have
  more concentrated corporate control, significant
  in the Indonesian, Malaysian and Taiwanese
  samples

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Correlation of control and company size
Country Category Family()
Japan Largest 20 Middle 50 Smallest 50 60.0 62.7 93.0
Korea Largest 20 Middle 50 Smallest 50 20.0 11.0 97.0
Hong Kong Largest 20 Middle 50 Smallest 50 72.5 66.0 57.0
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Correlation of control and company size

• In most countries, the share of family ownership
  increases for smaller firms. ( Only Hong Kong is
  the exceptional case)
• The majority of large and medium size Japanese
  and Korean corporations are widely held. All
  bottom 50 companies have ultimate owners
• Much less variation of control structures across
  company size in the Philippines

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Characteristic Concentration of control

• Concentration of control is determined by
• Development of the country- concentration of
  control diminishes with the level of development
• Age of company - older firms are more likely
  family controlled
• Size of company - the share of family ownership
  increases for smaller firms

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Advantages

• Reduce Principal Agent Problem
• Principal/Agent Theory
• Divergent interests between owners (Principals)
  and managers (Agents)
• The managers may not act for the interests of the
  owners
• Increase monitoring cost (a source of transaction
  cost)
• Induce moral hazard
• Family relationships among owners-managers
• Reduce Agency cost (Fama and Jensen, 1985)
• Family membership served to monitor discipline
  managers
• The asymmetry of information between owners and
  managers is not usually very serious
• Lower monitoring cost
• Less moral hazard and more efficient
• Less opportunism within family group
• Reduce transaction cost

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Advantages

• Enhance profit-maximization
• Profit-maximization
• Interest of owner Interest of management
• (assuming that they prefer more profits)
• Loyal family-tied managers
• Strong leadership cohesive management team
• Reduce managerial discretion
• If owner and managers are profit-maximizers
• Firm will maximize profits

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Advantages

• Make fast decisions and actions
• Management can deal with fewer committees, layers
  of bureaucracy other constituencies
• Easier communication
• e.g. hold a family council about the decision,
  relatively easier to accomplish
  compared with general
  shareholder meetings
• Fewer layers ? Higher flexibility ? Reduce
  transaction cost
• CEO dominative / paternalism
• ? Centralized decision making

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Advantages

• Ability to make long-term decision
• Patient Capital
• Allow management to consider more strategic
  options
• e.g. Invest in a market / product / service
• (may not be profitable for 5-10 years,
  but can be immensely beneficial to the
  firm)
• Extensive expertise
• Family members have extensive expertise regarding
  to the firm since they have known it in early
  childhood
• (Kets de Vries 1993)

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Advantages

• Take advantage of cross-shareholding pyramidal
  structure
• e.g. HK Electric buy things with an expensive
  price from Cheung Kong and it results in
  the big profits shown in the annual report
  of Cheung Kong

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Disadvantages
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Disadvantages

• Crony Capitalism
• Small number of families effectively control the
  economy, giving them incentives and ability to
  lobby government for preferential
  treatments e.g. trade barriers,
  non-market based financing
• Example (1)
• Imelda Macros, widow of the former Philippine
  president Ferdinand Marcos said We practically
  own everything in the Philippine from
  electricity, telecommunications, airlines,
  banking, beer and tobacco, newspaper publishing,
  television stations, shipping, oil and mining,
  hotels and beach resorts, down to coconut
  milling, small farms, real estate and insurance

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Disadvantages

• Example (2)
• Non prosecution of Sally Aw Sian in 1998,
  former Sing Tao Group chairperson, for
  sales figures forgery of Hong
  Kong Standard due to close connection with the
  Mainland and being a friend of Tung
  Chee-hwa
• Conglomerate expansion leads to conflict between
  private and public interests

• Vicious Cycle further concentration of corporate
  control and increased dependence on politicians
  and tycoons

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Disadvantages

• Expropriation of Minority Shareholders
• Expropriation arises when
• Insiders set unfair terms for intra-group sales
  of goods and services e.g. set
  exorbitant prices to gain profit
  out of private interests
• Mediocre family members appointed as managers
• High voting right, low cash flow right ? wrong
  investment decisions causing disastrous loss to
  minority shareholders.

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Disadvantages

• Others
• Succession problem
• Limiting contribution by non-family managers
  which leads to low motivation or shoe-shine
  problem

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• Thank You!

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Reference

• Baskin, O.W. Trust as a Competitive Advantage
  Why family firms have an edge in the global
  marketplace Online Available
  http//gbr.pepperdine.edu/012/family.html 2001
• Claessens, S., Djankov, S. and Lang, L.H.P.,
  2000, The Separationn of Ownership and Control
  in East Asian Corporation. Journal of Financial
  Economics 58,pp. 81 112
• Davies, H. and Lam, P.L. Managerial Economics, An
  Analysis of Business Issues. Financial Times
  Prentice Hall.
• Fama, E.F. and Jensen, M.C., 1985.
  Organizational forms and investment decisions.
  Journsl of Finsncisl Economics, 14, pp. 101-109
• Kets de Vries, M.F.R., 1993. The Dynamics of
  family controlled firms The good and bad news
  Organizational Dynamics, 21,3,pp. 59 71
• Suehiro Akira (1993), Family Business Reassessed
  Corporate Structure Late Starting
  Industrialization in Thailand, The Developing
  Economics, 31- 4, pp. 378-407