By Mak Yuen Teen

On 4 March, CNA published my article about CDL and governance of family businesses. The article can be accessed here: https://www.channelnewsasia.com/commentary/cdl-kwek-leng-beng-sherman-father-son-family-business-governance-succession-4972801

CNA did a great job in editing it. However, due to space constraints, there were certain details in my original article that did not make it into the final version.  Here is the full version, with some further amendments.

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There is a famous Chinese saying about wealth not lasting beyond three generations and indeed it has been estimated that 95 percent of family businesses do not survive the third generation of ownership. However, family businesses often out-perform non-family businesses in the longer term.

Some family businesses evolve to professional management with the family retaining control.  Others continue to be both family-owned and managed.

In Singapore, we see the two different models among two of the three listed banks. OCBC has long transitioned to professional management while continuing to have significant family ownership. There is only one member of the founding family on its 10-member board, and it has had non-family members as CEOs for decades. Meanwhile, UOB continues to have significant family ownership and a family member as CEO, who is currently also deputy chairman.

Globally, we see successful examples of both models. Family-controlled companies such as Bechtel Corporation in the US and Victorinox in Switzerland have family members as CEOs, while Walmart and L’Oreal have families in control but non-family members as CEOs.

In Asia, Tata trusts set up by the family still control Tata Group in India, but the current Chairman and CEO is not a family member. In contrast, over in Philippines, the Ayala family continues to control and manage the eponymous group, with Jamie Augusto Zobel de Ayala from the seventh generation as Chairman, and until August 2022,  his younger brother Fernando Zobel de Ayala as President and CEO.

Succession rarely goes perfectly

Succession planning is important for all companies and arguably even more critical for family businesses but is often neglected. This must take into account unexpected events, and availability, suitability and readiness of family members to assume senior leadership roles.  Whether a family business is transitioning to professional management or continuing with family management, things do not always go as planned.

In the case of Tata Group, its attempt to appoint someone from outside the family into the top role created a major corporate governance saga for the group. In 2011, the group appointed Cyrus Mistry as deputy chairman of Tata Sons, the holding company of the Tata Group, after Ratan Tata endorsed him as his successor. A year later, he took over as Chairman. However, in 2016, he was ousted under very bitter circumstances, and Ratan Tata returned as interim Chairman. In 2017, Natarajan Chandrasekaran became the third non-Tata family member to be Chairman of Tata Sons.

A highly successful professional executive may not succeed in a family business because of how family businesses are governed and managed compared to non-family businesses. I know a highly successful senior executive of a MNC who joined a family business after the MNC was bought out and he lasted only about a year.  The family business was simply too set in its ways and the senior executive did not agree with how things were done.

For Ayala, there have been 18 consecutive members at the helm of the group over the seven generations. Three members of the eighth generation, all educated in top universities in the US, have slowly stepped into the management of the group, with each having to prove themselves before joining the group. When Fernando Ayala resigned in 2022 for health reasons (he returned to leadership roles in Ayala subsidiaries in 2023), Ayala appointed Cezar P. Consing, a long-time Ayala executive and a non-family member, as his replacement. Ayala did not accelerate the appointment of the eighth generation family members to this senior leadership role.

Common family governance issues

Conflicts in a family business tend to increase as it moves through generations because different members of the extended family may be involved in different capacities as shareholders, directors, executives or employees. Some may be shareholders relying on dividends while others may be executives or employees drawing salaries, and therefore, criteria for employment in the business and the setting of remuneration become important.

Failure to properly plan for succession is a common failing of family businesses. This could have business-ending consequences. In 2006, Hanjin Shipping in Korea was recognised with “Korea’s Best Company Award” and “Korea’s Value Creating Company Award”. Later that same year, the third son of the founder who inherited the company and was CEO and vice chairman, passed away. His wife, who had no business experience, became Chairman. The company became bankrupt about 10 years later, due to a combination of aggressive expansion in the face of overcapacity and over-leveraging.

As a family business grows, having proper family governance becomes increasingly important. Family governance mechanisms such as a family constitution (which sets out the family vision, mission, values, and policies regulating family members’ relationship with the business), family meetings, family assembly or forum, family office and family council may become necessary.

Family disputes in listed companies are not uncommon

CDL is just the latest case of a bitter dispute in a listed company. In Singapore, we have seen it in other listed companies such as Chemical Industries and Hwa Hong (which has since delisted). At glove manufacturer Supermax in Malaysia, the purchase of a corporate jet to replace a one-year old jet led to the recent public exposure of a bitter dispute between a husband on one side, and his wife and two daughters on the other. This led the wife to vote against the independent directors and other resolutions at the AGMs.

At one Japanese company, a father unhappy with his daughter reportedly said at the AGM that he believed something went wrong during her birth. At Evergreen Group in Taiwan, the passing of the founder was followed by bitter legal battles involving his youngest son from his second marriage and the sole heir to his entire estate, and three elder sons from the first marriage who held significant stakes in the group’s major subsidiaries.

A couple of years ago, a group of young second-generation siblings who are heirs to the family business in Malaysia reached out to me for advice, after hearing me speak at an event about things that go wrong in family businesses. I told them while they all seem to get along now, they need to put in place family governance mechanisms to mitigate the risk of them getting into disputes in the future and ruining the family business.

Corporate governance considerations

Family businesses that hope to continue to flourish must be open to having external professional managers run the business, either permanently or as a transitionary measure if there are no suitable family members who are ready. A group like Ayala expects their family members to cut their teeth outside and then learn enough about the business inside, before making them senior leaders. There are too many listed family businesses that seem too keen to quickly appoint inexperienced family members to senior roles.

CDL appointed a non-family member, Grant Kelley, as group CEO in January 2014. Three months later, two third-generation members of the Kwek family, Sherman Kwek and Kwek Eik Sheng, were appointed to senior management positions.  Sherman was appointed as Chief Investment Officer and was also CEO of the subsidiary CDL China, while Eik Sheng became Chief Strategy Officer. Sherman became deputy CEO in September 2016 and a year later, CEO-designate, after Kelley resigned as CEO. He formally became Group CEO on 1 January 2018. Given the recent poor financial performance of CDL and its disastrous investment into Sincere Property Group (SPG) in China, there would be questions as to whether he was the right choice or whether he was made Group CEO too early. Of course, I am sure the father would now think it was the wrong choice.

Both sides in the CDL dispute have been using good corporate governance as the basis for their actions. But like many other listed family companies, there were already cracks in CDL’s governance.

For example, having an Executive Chairman and Group CEO from the same family, which is not uncommon, is not ideal. And while the Code of Corporate Governance allows an executive director to be on the Nominating Committee (NC), a wholly and truly independent NC would have been better.  In an article published on this website in January 2021 called “City Developments: More “G” Please” (https://governanceforstakeholders.com/2021/01/05/city-developments-more-g-please/)  following the SPG debacle, I went into some lengths into the governance issues at CDL.

The governance cracks and fissures in the family were exposed in 2020 when Kwek Leng Peck, cousin of Kwek Leng Beng, resigned in October 2020 citing disagreements with the board and management over the group’s investment in and continuing support for SPG and reservations with the group’s approach in the management of Millennium & Copthorne Hotels Limited. His resignation was followed soon after by the departure of three independent directors, with two citing an investment disagreement as the reason. CDL also had a stream of retired partners of its long-standing auditor join the board as independent directors (although one did resign over disagreement with the handling of the investment after the acquisition of SPG).  It should also be noted that a major investment decision such as the one for SPG would have required Board approval and would not be a decision of the CEO alone.

Continuing with its current model of family management may be challenging for CDL given the fraught family dynamics and it may need to be more open-minded about having non-family members holding senior leadership roles. However, external professional executives can only succeed if the family takes a step back from day-to-day management of the company and restructure its board.

I would add a piece of advice for family companies which is not specifically directed at CDL. They should avoid appointing IDs who are friends of the family, not only because they may not have the necessary skills and experience and may only tell management what they want to hear. They may become a liability when family disputes arise. This is because in such situations, these family-friendly IDs may be seen to be aligned with certain family members and not objective in their views on matters that affect the interests of different family members.

Finally, I think the Code of Corporate Governance should focus more on corporate governance issues in family-controlled and managed companies, which are very common on SGX. Family companies should also be encouraged to disclose their family governance mechanisms to demonstrate how they manage disputes and ensure that family members contribute to good corporate governance and management of the business.

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The author is Professor (Practice) of Accounting and Director of the Centre for Investor Protection at the NUS Business School. He is not a shareholder of CDL. The views in this article are his personal views.