Confronting the Corporate Succession Issue

FAMILY FEUD — Winston Wong (right), son of Formosa Plastics Group founder Wang Yungching who died while in the United States, enters New Jersey Superior Court with an aide in 2009 to dispute inheritance claims by his half-siblings. Photo: CNA

Who will take up the baton from the current generation of Taiwan’s corporate leaders?

Corporate succession is a sensitive topic in Taiwan, where many top business leaders take on larger-than-life roles in their firms, often opting to continue working well into their eighties. Strong family and personal connections often complicate the transfer of company leadership.

The business community well remembers the years-long, chaotic family feud that ensued when Formosa Plastics Group Chairman Wang Yung-ching passed away in 2008 without leaving any known will. More recently, the sudden passing in January of Taiwan Cement Corp. Chairman Leslie Koo after a fall down a flight of stairs served as a clear reminder that a company may be forced to face a leadership succession at any time.

Both family-run and non-family businesses face the risk. Analysts point out that tech manufacturing behemoth Hon Hai (Foxconn) is still very much dependent on the business genius of its founder and chairman, Terry Gou, who is often described as a micromanager. At Taiwan Semiconductor Manufacturing Co. (TSMC), founder Morris Chang continues as chairman at the age of 86, although he has twice shed the role of CEO.

Even with a huge generation of Taiwan’s corporate leadership now at or approaching retirement age, though, few companies are taking on the difficult work of training the next generation or formulating credible succession plans.

Filling that gap, more and more external advisers are stepping in to help guide companies of all sizes through the complex set of personnel and corporate-governance issues involved in the succession process. This growing ecosystem includes professional service providers, consultants, private bankers, investors, academics, and non-profits, with each addressing a slightly different angle of the succession challenge.

As succession becomes critical at many Taiwanese businesses, the success or failure in many cases will depend on the insights and guidance provided by this emerging group of advisers.

Allen Tsai, who heads the investment banking arm of BNP Paribas in Taiwan, is a zealous advocate of improved corporate governance. Five years ago, he founded the Taiwan Institute of Directors as a nonprofit knowledge-sharing platform for members of Taiwan’s corporate boards. He quickly found that many of these directors were facing succession issues, and governance in family enterprises became a primary focus. “I think the most pressing issue for these companies right now is succession,” he says.

Tsai is concerned about the aging demographic of Taiwan’s corporate leaders, many of whom first rose to prominence leading the surge of new companies that emerged in the 1970s and ’80s.

According to 2014 figures from the Taipei-based China Credit Information Service (CCIS), more than half of the executives working at Taiwan’s largest 100 listed companies are over the age of 61. CCIS found the average age of the top companies themselves to be just over 31 years. In addition, observers say that more than half of these companies are still being run by the first generation of executives, and given these demographic realities, many predict the next decade to see a rolling wave of corporate successions.

The bulk of these successions have yet to take place, and as long as the old guard remains, Tsai and others worry that conservative attitudes toward business strategy will dominate, blunting Taiwan’s competitive edge. “They don’t really innovate,” he says. “They operate.”

All in the family

A large share of Taiwan’s firms are family owned and operated, which brings an additional set of succession challenges.

Professor Joseph Fan of the Chinese University of Hong Kong Business School has focused his research on the many ways in which corporate succession can damage the value of family firms. In one study, Fan tracked the value of more than 200 publicly traded family-run companies in Hong Kong, Singapore, and Taiwan both before and after the year in which a transfer of power took place. He found an overall average loss of about 60% in market value over the course of the transition. In Taiwan, the effect was less severe than in the other two areas, but still amounted to an average loss of about one-third.

According to Fan, these losses have many causes, including family infighting, unprepared leadership in the second generation, and the difficulties inherent in passing on important relationships and connections.

Despite the high stakes, though, corporate leaders often studiously avoid succession decisions. They do so for a host of practical reasons, but also for the very human reason that facing succession means contemplating one’s own mortality. Many experts advise that starting the process early is extremely important, as successful transitions require years of preparation, and in some cases training new leadership can take a decade or more. However, very often no one in the company is in a position to press leadership on the issue and move the process forward.

“A significant issue in Taiwan continues to be the reluctance by senior management or independent directors to challenge the controlling family, even in the face of poor decision-making or illegal behavior,” says Ross Feingold, a longtime Taipei-based lawyer and business consultant. “In a society that highly values personal relationships, and where the senior level of business and politics is populated by a relatively small group with longstanding personal relationships, independent directors can be reluctant to question or challenge corporate behavior.” Independent directors who do openly oppose corporate leadership run the risk of damaging their relationships and may even face legal challenges, he adds.

Allen Tsai’s Taiwan Institute of Directors is in many ways an attempt to address the succession inertia. “We make the founders and chairmen face the issue,” Tsai says. “You know, no one lives forever.”

To that end, the group holds meetings, workshops, gatherings, and small seminars that often feature expert advice from U.S. and European family businesses as a means to facilitate sharing among peers. Tsai says he hopes that his organization will help raise awareness and in the process drive demand for the service providers and investors now turning their attention to succession.

“This is a totally new market,” he says. “We will become a platform for the demand and supply sides to meet each other.”

Professional services firm PricewaterhouseCoopers Taiwan (PwC) first began turning its attention to the succession issue in the run-up to a major reduction in Taiwan’s inheritance and gift tax that passed in 2009. “In Taiwan, we are probably the first firm to educate our clients and tell them this is an issue you need to be very careful about,” says Ryan Lee, a financial consultant and a leading member of PwC’s family business team.

Anticipating the tax reduction, one major client with a large family asked PwC for consulting on the inheritance issue. At the same time, the family’s next generation was getting old enough to enter the family business, but it remained unclear who would take which job. With the big questions of inheritance and succession hanging in the air and creating internal friction, the need for well-planned family governance became urgent.

PwC began to dig into this question in earnest, analyzing how best to hold family meetings, make strategic decisions, and set up voting procedures – all in an effort to create a more systematic way of resolving corporate family disputes.

Such disputes come in many forms. Last year’s high-profile family spat within the Evergreen Group, following the death of founder Chang Yung-fa, saw members of the Chang family battling over top leadership positions, in the process creating chaos and perhaps even future business rivals.

In that case too many people wanted the job, but the reverse situation is common as well. In many small- and medium-sized enterprises, frequently no one in the second generation has any interest in carrying on the family business. When the founder does not accept the second generation’s refusal, such disputes can drag on for years, creating tension within the family and gumming up an already difficult process.

PwC aims to help move this process along by offering an additional perspective with a bit more distance from the raw emotions felt within the family. In doing so, the line between consultant and close family confidant can sometimes blur. “We have to be very trusted because that’s a family issue rather than a business issue,” says Lee.

In one instance, PwC went so far as to arrange a large dinner that brought everyone in a client’s family together to finally face the succession issue. With ample wine on hand to loosen up the conversation, the evening hit its emotional climax when the eldest son, who had been reluctant to assume corporate leadership, declared that he would indeed give it his best.

The father was moved to tears.

Talent development will be key to addressing the challenges of succession. In the case of family firms, results from a 2016 PwC survey of several dozen businesses in Taiwan showed that 58% of those surveyed plan to pass on both ownership and management rights to the next generation. Globally, the same survey found that percentage to be only 39%.

“As this proportion increases, so does the overall risk for family businesses,” says Howard Kuo, who heads PwC Taiwan’s family business services. Kuo doubts that 58% of Taiwan’s family businesses have qualified managerial talent waiting in the wings who are both willing and able to take on a leadership role.

Closing the talent gap

Those who are not ready will need help to get up to speed. According to the same PwC survey, 29% of surveyed family firms in Taiwan say they plan to transfer ownership rights to the younger generation, but will install a professional to manage the company. Qualified professional management will also be difficult to locate, though, as Taiwan faces a shortage of top executive talent, exacerbated by a common reluctance to recruit outside of Taiwan.

Filling out the executive bench can be just as important – and sometimes just as challenging – as filling the top job itself. Lee Ji-ren, a professor at National Taiwan University’s College of Management, assisted Hon Hai in 2008 with the creation of a “talent development program” aimed at creating a team of capable top executives to spread out management responsibilities.

“This is not the kind of thing you can just build overnight,” says Lee. “You need a development process that includes project-based assignments along with rotation among departments. That’s the only way these executives will gain the ability to work across products, functions, and geographic areas.”

International management consulting firm McKinsey & Company has also begun assisting clients with executive talent development in Taiwan. Associate Principal Tina Chen says the centralization of decision-making at the top of Taiwan’s companies makes management transitions all the more challenging. Of the founding generation, she says: “They probably came through a lot of hardship to build up their businesses. They themselves have very good capabilities, and so over time they’ve gotten used to making a lot of decisions on their own.”

“They never delegated, and now that they are thinking about retirement, they haven’t built up a management team around them with the capabilities of taking on the whole business,” says Chen.

At one such company with a dominant leader, McKinsey worked with 30 top executives, providing both collective training and fieldwork in the form of personally assigned business challenges to broaden their skill base and, ideally, prepare them to shoulder the burden of leadership when the founder departs.

McKinsey approaches the succession issue only indirectly. “Nobody is saying come and help me with my succession plan,” says Chen, perhaps reflecting the highly sensitive nature of the topic. However, succession casts a long shadow, and when McKinsey is called upon to assist clients with talent or business development, oftentimes a succession issue is looming in the background.

Returning once again to PwC’s survey results, 11% of surveyed companies expect to sell off full or partial ownership of the business to investors. Of those, fewer than 1% say they expect to sell to a private equity (PE) firm. Nevertheless, one private equity specialist focused on greater China says the succession issue quite often serves as a catalyst for deal making.

“It gives us our opening,” he says, creating awareness that there is a potential deal to be done. “If ownership may be undergoing a potential change, somebody needs to help them with the succession planning. That’s something we can use to talk to the company about.”

While many business owners remain suspicious of private equity investors, the industry insider stresses that PE firms are in fact well-positioned to help with the reorganization process. Their broad experience and managerial expertise enable them to act as a knowledgeable, neutral third-party, assisting with the tricky process of transitioning in a new management team, he says.

This injection of experience can be crucial, as most Taiwanese companies facing a succession are doing so for the first time. Lee Ji-ren, the National Taiwan University management professor, says that current executives, incoming management, and even corporate boards all lack succession experience. Consequently they may either fail to anticipate potential dangers or adopt an overly cautious approach that draws out the process.

The PE specialist says he believes successions spurred by investments can set good examples for successful transitions. “Once we set those examples, other people will follow,” he says.

Then there are shareholders. While local shareholders in Taiwan traditionally have seldom become involved in succession issues due to widespread reluctance to challenge corporate leadership, this hesitation may be changing. “The pressure is coming,” says Alex Lee, CEO of capital market service provider Quantum International Corp. If he is right, investors may begin to push more aggressively for written succession plans and more talent development.

Lee predicts that as more and more foreign investors enter the Taiwan market, and as their investment strategies begin to be adopted by local investors, market forces will push companies to address succession as well as other corporate-governance issues. “The local guys will start learning from them and changing,” he says.

With many companies underperforming in the market due to poor corporate governance, he says the situation represents an invitation to investors. “What would you do? Attack! Take over the company when the stock price is not reflecting its true value,” he says.

The range of advisers offering assistance for succession-related issues may be increasing, but for those companies still unwilling to take on the issues themselves, the market may soon find a way to resolve the succession quandary whether they like it or not.