Succession strategies in Southeast Asia: successes and failures

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Succession strategies in Southeast Asia
successes and failures

• Victor S. Limlingan
• Asia-Pacific Family Business Conference
• Bali, Indonesia, 5-7 November 1997

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Succession Failure leads to Corporate Civil War

• My goal is to build a business empire so big that
  it is worth fighting over by my children and so
  sturdy as to survive the corporate civil war that
  will surely follow
• remark of business taipan

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Mitsui Constitution of 1722

• The MITSUI CODE OF REGULATIONS is embodied in the
  will of Hachirobei Takatoshi, founder of the
  House of Mitsui, who died in 1694. It was
  promulgated in 1722, on the hundredth anniversary
  of his birth, by his heir Hachiroemon Takahira in
  the form of a will.

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Succession rules of Mitsui

• 1. The head of the senior main family shall be
  regarded as the head of the house those under
  him should serve him as faithfully as they would
  their real parents, heeding his wishes and
  obeying his instructions.
• 2. The family of Hachiroemon shall remain at all
  times as the senior main family. Therefore the
  son of Hachiroemon, if he is sufficiently
  capable, shall succeed his father and become the
  head of the house even though he may not be of
  age.

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Succession rules of Mitsui

• 3. When there are no children to succeed as head
  of the senior family, a son may be adopted from
  among other members of the House. When there is
  no male issue, a female may succeed to the
  headship.
• 4. The second and younger sons may be given in
  adoption to other members of the House or be
  allowed to establish branch families at about
  thirty years of age, if they have acquired
  sufficient business experience and are capable

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Succession rules of Mitsui

• 5. Female children attaining majority should be
  married to sons of House members whenever
  possible. When these girls marry into outside
  families, however, an adequate sum of money shall
  be provided for the wedding ceremony.
• 6. In principle, the eldest son is to succeed his
  father as head of the family, but if his conduct
  should cause harm to the family, he shall be
  expelled, even if he is the only son, and sent
  into the priesthood.

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Ownership structure of the House of Mitsui

• The shares of House assets held by member
  families shall be as follows
• 62 for Hachiroemon
• 30 for Gennosuke
• 27 for Saburosuke
• 25 for Jiroemon
• 22.5 for Hachirojiro
• 22.5 for Sohachi
• 8 for Sokuemon
• 6 for Kichiroemon
• 7 for Hachisuke
• 10 for reserve to grant merit awards

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Business structure of the House of Ayala (1834 -
1968)

• 1. From its founding as CASA ROXAS in 1834 to the
  incorporation of AYALA Y CIA as AYALA CORPORATION
  in 1968, the business structure of House of Ayala
  was that of a business partnership managing the
  assets of the Ayala families.

Senior Managing Partner AYALA Y CIA
AYALA ASSETS AND CORPORATIONS
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Business structure of the House of Ayala (1834 -
1968)

• 2. The business partnership is headed by the
  eldest family member who holds the title of
  Senior Managing Partner. The composition of
  management is therefore not determined by
  ownership structure

AYALA Y CIA
AYALA Y CIA
AYALA ASSETS AND CORPORATION
MANAGEMENT COMPANY
Senior Managing Partners
Stock Holders
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Business structure of the House of Ayala (1834 -
1968)

• 3. Upon the death of the Senior Partner or the
  separation of a family branch, the partnership is
  dissolved and a new one reconstituted.

• -Upon death of founder Domingo Roxas in 1843,
  Sociedad Roxas Hijos replaced Casa Roxas
• -Upon resignation of Jose Bonifacio Roxas in
  1864, Roxas Hermanos replaced Sociedad Roxas
  Hijos.

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The Chemphil Saga The roots of a corporate civil
war

• 1. The founder for understandable business
  reasons creates a monolithic business structure.
  All the diverse businesses of the founder are
  formed as subsidiaries of a single holding
  company.

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The Chemphil Saga The roots of a corporate civil
war

• 2. Into this monolithic structure the founder
  places his children in various positions with the
  eldest appointed president and the rest as vice
  presidents. His expectation is that his business
  empire will outlive him.

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The Chemphil Saga The roots of a corporate civil
war

• 3. Upon the death of the founder, the children
  realize that instead of commanding a business
  empire, they have been thrown into a business
  arena where they are forced to fight each other.

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The Chemphil Saga The roots of a corporate civil
war

• 4. The desperate situation of the children could
  be summed up thus
• a) the bulk of their inheritance is sunk into
  this holding company. If calamity befalls the
  company, they lose practically everything.
• b) despite the vast wealth attached to their
  name, the sole source of their income is the
  salary they draw from the company as the father
  then and the elder now do not declare cash
  dividends

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The Chemphil Saga The roots of a corporate civil
war

• 4. The response of the children to the situation
  they find themselves goes through several stages
• a) They chase after higher titles and multiple
  positions in hopes of increasing their
  compensation package.
• b) They set up their own personal corporations
  whose only business is supplying or buying from
  the family corporations.
• c) They divert the resources of the family
  corporation to their own personal corporations.
• d) Their personal corporations compete for
  markets, partners and business against the family
  corporation.

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The Chemphil Saga The roots of a corporate civil
war

• 5. The strength of the family bonds will
  determine how long the family members will allow
  their enterprising sibling to milk the family
  firm.
• But since goodwill rarely outlasts greed,
  corporate civil war then erupts.

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Key components of a successful succession strategy

• 1. Clear rules of succession.
• 2. Security of tenure for the Successor.
• 3. Security of income for the rest of the family
  members.
• 4. Sell-out provisions for disgruntled family
  members.

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Succession strategies of selected Asian family
firms

• 1. Robert Kuok
• 2. Lamsam of Thai Farmers Bank
• 3. Bakrie and Brothers

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The evolving business environment in Southeast
Asia

• 1. More egalitarian laws and policies.
• 2. More competition from both foreign and local
  firms.
• 3. More need for global reach and regional
  expansion
• 4. The rise of Professional Managers
• 5. The trend to public listing

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Evolving succession strategies in Southeast Asia

• a. The Asian Family Compound
• b. Securities Cocktail
• c. Earlier Ayala model
• d. Rothschild model
• e. Later Ayala model