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

2. 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

3. 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

4. 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.”

5. 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 > Cash-flow rights • Why? Indirect voting rights exist !

6. 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

7. Characteristics of family-controlled firms in East Asia • Voting rights exceed cash flow rights • Rare separation of management from ownership control • Concentration of control

8. 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

9. Voting rights exceed cash flow rights • Example 1: • No deviations from one-share-one vote or cross-holdings Lee’s 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 (Con’t) • Example 2: • Cross-holdings are present, there are several control right chains: Lee’s Family

11. Lee’s Family The family owns 11% of both voting & cash flow rights of Firm A The family owns 25% of both voting & cash flow rights of Firm C The family owns 18% of voting rights of Firm B The family owns 3.5% of cash flow rights of Firm B Voting rights exceed cash flow rights (Con’t) • The family’s voting rights on Firm B will exceed it’s cash flow rights:

12. Example of ownership structure of the Li Ka-Shing family Hong Kong Electric Dao Hang Bank Ltd

13. Example of ownership structure of the Li Ka-Shing family (con’t) 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

14. Example of ownership structure of the Li Ka-Shing family Dao Hang Bank Ltd

15. Example of ownership structure of the Li Ka-Shing family (con’t) Dao Hang Bank Ltd • The family controls 12% of the vote with only 3% of cash flow rights

16. Characteristic: Rare separation of management from ownership control • Management of 60%of the firms that are not widely held is related to the family of the controlling shareholder.

17. 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

18. Control of publicly traded companies in East Asia (Con’t)

19. 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

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

21. 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

22. Correlation of control and company size

23. 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

24. 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

25. 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

26. 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

27. 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

28. 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)

29. 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

30. Disadvantages

31. 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”

32. 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

33. 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.

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

35. Thank You!

36. 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