Text | Zhu Xun: Associate Professor, School of Management and School of Entrepreneurship, Sun Yat-sen University, and Researcher of China Family Business Research Center, Sun Yat-sen University
In the intergenerational succession of family businesses, successors face the conflict of reinventing authority. So, how should authority be reinvented? It includes three aspects: within the ownership system, to ensure the legal authority of the successor; within the family system, to reduce the threat of the successor; and in the enterprise system, to help the successor rebuild the authority.
Family businesses, especially those under the control of founders, are highly centralized enterprises with power and leadership authority, and leaders have strong authority in the three systems of ownership, family and enterprise, and this governance structure feature brings the advantage of low agency costs and rapid decision-making to family businesses, and also brings more challenges to the succession of future generations. To achieve a smooth handover of the scepter in intergenerational succession, successors need to reshape authority within three systems at the same time in order to achieve effective management of the enterprise. Since the three systems of ownership, family and enterprise can correspond to the classification of legal authority, traditional authority and management authority in authority theory, the classic three-ring model of family business is suitable for helping us see the conflicts and challenges in the reinvention of authority by successors.
The legal authority in the ownership system comes from the statutory power provided by the equity, mainly including the right to vote, the right to proceeds and the right to transfer, of which the former is the key to determining the legal authority. Because of its connection to equity, legal authority is also the only one of the three authorities that can be inherited. As long as a new generation of successors has access to a majority stake in the business, authority in the system can be established. The decentralization of equity brought about by intergenerational succession is a major challenge for successors to establish authority in this system. The decentralization of power caused by the division of equity can make it difficult for successors to establish an authoritative position, it is difficult to prevent other competitors from competing for control, and companies are often affected by control wars within the family. If families fail to regroup their dispersed equity, businesses tend to disintegrate as families split. The common cultural tradition of Chinese society is the natural enemy of equity concentration, Chinese has always had the tradition of dividing the property of all sons, and as the status of men and women in modern society tends to be equal, daughters can often participate in the inheritance of property, which makes it more difficult for Chinese family enterprises with many children to concentrate equity.
Chinese family businesses have explored many ways to address this challenge. One kind of exploration is to divide the family and get what they want, that is, through business diversification, let the children inherit a business that is not competitive with each other, and resolve the succession conflict between the children. For example, Li Ka-shing entrusted the family business to the eldest son, and at the same time provided financial support for the second son, encouraging him to start a business abroad and develop new businesses such as science and technology and telecommunications. Many business families in Hong Kong plan different career paths for future generations, some inherit the family business, some engage in politics, and some enter the development of professional industries such as lawyers and doctors, so as to solve the competition of their children and preserve the integrity of the family business with the separation of career paths. The advantage of this arrangement is that it can reduce conflicts between family heirs, but it is still difficult to avoid the problem of dispersing family wealth and restricting the development of enterprises.
The second attempt is to make an unbalanced shareholding arrangement. Such shareholding arrangements are often based on deep traditional cultural concepts in certain regions. The concept of traditional Chinese culture has a clear idea of son preference, and the daughter who marries is regarded as a person of someone else's family, and rarely considers the interests of the daughter in the inheritance of property. Nowadays, this concept is still popular in many regions, and entrepreneurs often leave their property to their sons according to the concept of location. Guangdong Chaoshan area is very typical, so far many families do not consider their daughters in property inheritance, in some families with a strong traditional atmosphere, parents want to give their daughters a little property also need to seek their son's consent first. The order between sons and sons sometimes becomes the basis for uneven succession arrangements, because in history, the royal family has a tradition of inheritance by the eldest son, and there is also a saying that "the elder brother is like a father", and some families also give the family property to the eldest son according to this concept, and only give less equity to other sons. Leaving aside the unfairness of such arrangements and the potential to damage the feelings of future generations, such concentration is not necessarily beneficial to business. Although unbalanced share arrangements can effectively weaken the conflict of authority between children, if the son or eldest son lacks entrepreneurial ability, it may also lead to a mismatch of authority and ability and the failure of the enterprise.
The third is the equalization of equity among children, which prevents the division of enterprises by establishing a governance structure. Hong Kong family businesses Sun Hung Kai and Lee Kum Kee represent two different models. Sun Hung Kai's model is to split the right to the proceeds of the equity, but use the family trust fund (contract governance) to bundle the voting rights, hoping to use this arrangement to tie several sons to the same platform and prevent the separation of the family business. However, this arrangement also means that whoever controls the family trust fund controls the entire business, and the lack of corresponding family governance arrangements after the death of the older generation to select the right person to vote on behalf of the family to control the trust fund may create a situation where whoever controls the company's board of directors has the opportunity to control both the trust fund and the company. Thus, before his mother was old and traditional governance methods were about to fail, this arrangement triggered fierce infighting, and the eldest son, Guo Bingxiang, who had lost power, acted as a tainted witness for Hong Kong law enforcement agencies to testify against his brother in order to pull his brother down.
If Sun Hung Kai's model is to tie heirs together, Lee Kum Kee is trying to glue heirs together. Lee Kum Kee resolves conflicts among children and prevents equity decentralization by establishing a family governance structure: on the one hand, it is necessary to establish a formal family constitution to restrain the behavior of family members, prevent the outflow of family equity, establish internal communication mechanisms such as family committees, select the most capable and representative corporate leaders and family elites who can best represent the overall interests of the family, and on the other hand, strengthen the inheritance of values and internal trust, so as to unite family members and resolve internal conflicts. The Lee Kum Kee family hopes to use this soft and hard arrangement to achieve the division of production without separation of families, and the division of production without division of industry. Lee Kum Kee's succession arrangement is a useful exploration of intergenerational inheritance in multi-child families, and if this micro-institutional innovation can be successful, it may take into account the two goals of equitable inheritance of property and the appropriate allocation of power and authority.
The source of authority within the family system is the cultural tradition. Chinese culture is deeply influenced by Confucianism, and the vertical order prescribed by Confucian ethics often becomes the basis for the formation of traditional authority within the family. According to Confucian ethics, children are subordinate to their parents, wives are subject to their husbands, and younger siblings are subordinate to their brothers, and this traditional order establishes the traditional authority of male parents within the family. Most family businesses in China at this stage are founded by male parents of one family, so the traditional authority within the family naturally coincides with the authority of the other two systems. Founders of family businesses often rationally choose other family members involved in the business in the process of starting a business, so that they can use the traditional authority within the family to restrain them. If more authoritative figures in the family are involved, it may interfere with the stability of the business. A key reason for the civil unrest in the Zhejiang Far East Leather Family is that the excessive involvement of the founder's parents broke the founder's authority over the family members involved in the enterprise, and intensified the conflict between several brothers in the family.
However, this natural order poses a challenge for the next generation. If after the parents quit the enterprise, other family members who worked with the parents are still working in the enterprise, when the next generation manages the enterprise, the superior-subordinate relationship in the enterprise will deviate from the family order and become the source of conflict between the successor and the older family members in the enterprise. Because family members are often more willing to play the role of "royal relatives" in the enterprise, rather than the role of employees of the enterprise. This conflict is exacerbated when older family members work long hours and have high prestige within the enterprise, and their legitimacy in both the family and the business system exceeds that of the next generation of successors who have ascended to power through inheritance of property. Haixin Steel in Shanxi is a typical example. Li Zhaohui's fifth uncle has a high generation in the family, has made great contributions and prestige in the entrepreneurial development process of the enterprise, and has won the support of many family members at the family meeting of the Li Haicang family to select a successor, which poses a great challenge to the heir Li Zhaohui to establish authority within the family.
Intergenerational succession requires the previous generation of leaders to "help the second generation of successors on the horse and send a ride", not only to better pass on wisdom and experience, to cultivate the ability of successors, but more importantly, to use the authority of the previous generation in the family to help the next generation balance the older family members in the enterprise and straighten out the family relationship within the enterprise. Because the fathers have traditional authority and management authority, some problems that are difficult for the successor to communicate with the older family members can be completed with the help of the fathers. In the absence of the previous generation for unexpected reasons, other authorities within the family can play a similar role. A typical example is Shanxi Haixin Iron and Steel, after the company's founder Li Haicang was accidentally killed, it was Li Haicang's father Li Chunyuan who helped his youngest son Li Zhaohui to rise to power. Li Chunyuan not only clarified Li Zhaohui's legal inheritance status within the ownership system, but also promoted him to the status of successor, and established a special supervisory board to help supervise the family members in the enterprise, and finally helped Li Zhaohui eliminate competitors in the family. Of course, parents' individual decisions are susceptible to one-way altruism, and the chosen successor may not be the best candidate to lead the business.
Since order within the family is an immutable natural order, the previous generation also needs to remove the threat of establishing authority for the successor when it completely withdraws from the enterprise, such as considering arranging for the withdrawal of family members of the same generation, or establishing rules to institutionalize the system to help family members distinguish the business role from the family role. Fangtai's successful inheritance is related to the good arrangement in this regard. When Mao Zhongqun returned to take over, he made a pact with his father not to let any relatives or friends other than his father enter the new business, eliminating the threat of family members to his traditional authority from the beginning. It should be noted that if it is really necessary to arrange for other family members of the older generation to withdraw from the business with the founders, if their historical contributions can be affirmed by way of redemption, the management rights in their hands can be recovered to reduce a lot of conflict and turmoil.
The management authority in the enterprise system is the basis for the legitimacy of the leader to manage the enterprise, and the separation of management authority and authority during the change of leaders is a great obstacle for the successor to effectively manage the enterprise, and the establishment of management authority is also the biggest challenge faced by the successor. The basis of managing authority in a family business is employees' trust in the abilities and willingness of leaders. The former needs a history to prove it, and the latter needs to use long-term relationships to convince employees. The establishment of regulatory authority can neither be inherited like legal authority, nor can it rely on nature like traditional authority, and it needs to be rebuilt brick by brick by action and effort, so it is the most difficult for successors to establish regulatory authority.
It is difficult for successors to rebuild their authority from clashing with the authority that existed within the system, both between successors and previous generation leaders, as well as between successors and other executives within the company. Succession planning for family businesses requires arrangements to resolve both types of conflicts. The previous generation of leaders would have been the most important ally of successors in the enterprise system. However, for both emotional and cognitive reasons, they can become an obstacle to the re-establishment of authority by successors. Because they have been single-handedly starting and managing businesses for a long time, the previous generation often has deep feelings and strong psychological ownership of enterprises, and in their eyes, enterprises are like their own sons. The problem is that too strong emotions will bring excessive control over the enterprise, always worry that others will manage the enterprise will hurt the enterprise, it is difficult to accept that others are wrong. The process of the second generation taking over the enterprise itself is a process of constantly making mistakes and learning through trial and error, which can easily lead to conflict between the two generations. The leaders of the older generation need to be clear that they are the biggest obstacle to the new generation's authority in the enterprise, and that the overly successful self will become a shadow that the next generation will be difficult to get out of. The ideal way to reduce this conflict is for the older generation of leaders to gradually reduce their involvement in business management. Mr. Mao Lixiang, the founder of Zhejiang Fangtai, has explored a meaningful experience - looking for new career focus. Finding that both the business community and academia were interested in the inheritance of the other party, Mr. Mao developed a new career — giving lectures, writing books, and then opening a school to share his family's experience, which he called his third venture. Because the new cause diverted his focus, he was more proactive and bold in decentralization, and also made Fang Tai's inheritance less conflicting.
Another source of conflict between the two generations is the difference in cognition, the previous generation who is ready to work is mostly successful entrepreneurs, successful experiences have strengthened self-confidence, coupled with the gradual solidification of people's cognitive patterns after the age of forty or fifty, two factors make it difficult for the previous generation of leaders to accept different views from themselves. The next generation of young people who take over are easy to accept new things, and they are growing up in an environment of rapid economic and social development and change, the thinking mode and knowledge structure are quite different from the previous generation, and the things they pay attention to and are willing to try are often difficult for the older generation to understand or even reject, which can easily lead to two generations disagreeing on decision-making. The intergenerational inheritance of Zhejiang Fangtai can be relatively smooth, largely due to the fact that the first generation of founders, Mr. Mao Lixiang, had two transformation setbacks before cooperating with his son Mao Zhongqun, which made him open in thinking and decision-making, and had more communication foundations with his son in cognition. Even so, after the father and son intervened in the range hood business, they still had a big disagreement on key decisions such as brand naming. If this conflict is superimposed on the differences in values between the two generations, the conflict may be even more intense. At present, many entrepreneurs send their children abroad to study at the university or even high school stages, because most of the values of Chinese students are formed in high schools and universities, and staying in the west prematurely brings about the inconsistency of the values of the two generations, which brings great challenges to the communication between the two generations. The communication between Wahaha founder Zong Qinghou and his daughter Zong Fuli, and between Zongshen Group founder Zuo Zongshen and daughter Zuo Ying, all face this challenge.
The key for the new generation to establish its authority and legitimacy in the enterprise system is to prove its ability to the members of the enterprise and rebuild a relationship of mutual trust with them. Due to the disadvantages of age, seniority and experience, the new generation of successors enters the management of the enterprise, leading the original executives or cooperating with the original management will face the embarrassment of mismatch between authority and authority, bringing considerable pressure to the new generation of successors. Some enterprising new generation successors are often inclined to make radical decisions in a hurry, seeking breakthroughs in the short term while ignoring risk control, but often failing to do so. Guangdong Galanz encountered a similar situation. After convincing his father to intervene in the air conditioning industry, his successor, Liang Zhaoxian, believed that he should seize the opportunity to expand production and quickly replicate his successful experience in the field of microwave ovens with the help of economies of scale. He tried his best to overcome public opinion and persuade his father to invest heavily in the construction of an industrial park, but unexpectedly encountered multiple unfavorable factors such as the decline of foreign markets and the intensification of domestic competition, the company encountered greater difficulties, and the turmoil of the senior management team made its succession more bumpy. Generally speaking, the new generation of successors will encounter greater challenges in showing their abilities in the family's original main business, because they will encounter difficulties in which their abilities are difficult to prove. Even if the new generation of traders make progress in their original business, their performance is difficult to separate from the help of their parents' yuyin and entrepreneurial elders, which is not enough to prove their ability. This is exactly the embarrassment that Li Zhaohui faced in the early days of taking over Haixin Group. In addition, the original business of the family is often managed by many senior and experienced elders, who are accustomed to the original management mode and operation process, and the breakthrough and innovation efforts of the new generation are easy to conflict with them.
The elders of the enterprise are not willing to give up their power and the established position of authority, in fact, there are more considerations of interest. These elders often enter the enterprise during the difficult period of entrepreneurship or growth, and make a lot of additional investment in the growth of the enterprise. We believe that behind their efforts is the hidden real option contract of business leaders and elders, who exchange their additional investment for the opportunity to share the remaining opportunities of the company after the success of the business. However, in order to maintain the control of the family over the enterprise, many founders of enterprises are reluctant to let the management backbone share the equity, and only grant part of the management rights to the elders, and the benefit sharing is linked to the management power they hold. In contrast to formal equity, management gains are state-dependent gains, and once they lose power, they also lose the opportunity to earn them. In the absence of assurances of over-investment in the past, the elders were very sensitive to the potential threat of their own management. This is precisely the reason why Zhao Kuangyin, the grandfather of the Song Dynasty, chose to "release the military power with a cup of wine" in the first place. Founders understand the historical input of the elders, but also have a deep personal relationship with these elders, for the stability of the enterprise, they are often willing to abide by the psychological contract with the management backbone, based on the deep trust between each other Elders usually also believe in the commitment of the founders. However, the new leaders may not understand the implicit contract between the previous generation and the elders, and even if they do, they may not be willing to abide by this unpenetized agreement. Due to the lack of understanding and trust between the elders and their successors, and not necessarily believing in his or her commitments, the elders often have resistance to the second generation of successors. Xu Jingnan, the founder of Peak, is well aware of this situation, so when Xu Zhihua returned to take over the management, he made a three-chapter agreement with him to prevent him from moving old employees, and Xu Jingnan's reason was that it would affect the stability of the enterprise. In fact, reducing conflicts is also conducive to Xu Zhihua's achievements in less hitting the wall in management.
We believe that if the new generation wants to prove its ability, it should consider starting from entrepreneurship as much as possible to do incremental, rather than changing the stock, starting from the areas and businesses that the older generation is unwilling to do, do not know and cannot do, and gradually show their talents from easy to difficult. Starting with new areas and new businesses is easy to prove your ability, and it is unlikely to threaten the power and traditions of the older generation. Fujian Peak's successor, Xu Zhihua, adopted this strategy. After he returned to the headquarters after familiarizing himself with the family's original business in the northern market, he took the promotion of the internationalization of the Peak brand as the focus of his work, personally won the Houston Rockets, the American NBA and other world-class sports marketing resources, and helped Peak open the situation with the help of internationalization. Since internationalization has always been the dream of the first generation of Peak entrepreneurs, but the older generation is difficult to achieve breakthroughs due to language and other barriers, Xu Zhihua successfully implemented the internationalization of Peak and proved his ability to the older generation of entrepreneurs, establishing legitimacy for fully taking over the company's business. There is also a typical example of the successful succession of the second generation of family businesses that Mr. Mao Lixiang often mentions - a second-generation successor opens up product sales channels for the enterprise through network sales, gets rid of the company's dependence on traditional channels, and thus initially establishes his own prestige in the enterprise.
In order to better prove themselves, many second-generation successors of family businesses choose to innovate new businesses. This is a reasonable idea for the successor to get out of the shadow of the previous generation's authority and reduce the dependence on the original basis of success, and the good results in the new business can become a strong signal of the successor's ability. A team study by the Family Business Research Center of Sun Yat-sen University traced the intergenerational inheritance of Chinese family listed companies and found that the entry of the second generation significantly increased the opportunities for enterprises to expand into new fields and open up new businesses, while the combined entrepreneurial activities of family enterprises were more active in the case of more authoritative conflicts between the second generation and their parents, entrepreneurial elders and other family competitors. Many second-generation families have been committed to stepping out of the "shadow of their fathers" in the process of inheritance, and establishing their own authority in the family and enterprise with their own ability and dedication, which has brought additional impetus to the innovation and entrepreneurship of the family business.
An added benefit of this entrepreneurial succession is to leave the family business's "historical liabilities" to old employees, allowing new generations and start-ups to move lightly.
Based on the analysis of the above three aspects, for the successors of the family business, since the authority of the previous generation of entrepreneurs is difficult to copy, they should create their own new business like the elders, which is not only a shortcut to establish new authority, but also conducive to the enterprise to create brilliance.
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