Many listed companies in HK are family-controlled businesses. Is proposed regulation to improve corporate governance the way to go or are the rules too stringent? Discuss.

Many listed companies in HK are family-controlled businesses. Is proposed regulation to improve corporate governance the way to go or are the rules too stringent? Discuss.

 

I. Introduction

            Family-controlled businesses continue to thrive in the contemporary competitive environment but challenges also emerge, which means that while a number of successful family-controlled enterprises succeed, these also have to deal with many problems linked with the nature of family-controlled firms. Family-controlled business firms have similarities and differences with firms that are not family owned. Similarities include corporate governance, corporate social responsibility, and adherence to regulations. Regulations guide and support the resolution of issues experienced by family-controlled purposes to motivate these enterprises to improve management and operations as well as protect investors and other stakeholders. Differences encompass decision-making, succession, and other facets of management. Family members primarily manage family-controlled business firms so that the decision-making process would likely revolve around the familial culture of the owners. Succession would also follow the family tradition. These differences in the nature of family-controlled businesses created the issue of regulation. The concern is compliance with the management of family-controlled business firms in a manner that balances the interests of various stakeholders and not just the family. The purpose of regulations for family-controlled business firms is to protect the interest of other stakeholders based on the assumption that there is a tendency for family values and culture to overshadow the interest of other stakeholders. The issue of whether to improve regulation of family-controlled business firms involves the balance of socio-cultural factors influencing management with regulations to ensure accountability and transparency of corporate governance.

            Family-controlled business firms in Hong Kong are of interest because most business firms in Hong Kong whether small or large are family-controlled companies. Apart from the proliferation of family-controlled business firms in Hong Kong, the familial culture is also clear or distinct. The family culture is traditionally patriarchal with the head of the family also comprising the head of the business and succession in the family aligns with succession in the business. Other family-based practice, quanxi translates to networking in business (Chau 1993). Socio-political networks of the family likely comprise the business network of the family-controlled business. As such, the proximity or alignment of family culture with business firms creates an environment that would provide insight into whether to regulate family-controlled business firms to improve corporate governance. The resolution of the issue involves an understanding of the operations of family-controlled business firms in Hong Kong, identification of the corporate governance problems encountered by family-controlled business firms in Hong Kong, determination of the appropriateness of regulation in improving corporate governance, and consideration of all the implications that this could have on family-controlled firms. 

            In this light, the research seeks to look into the issues of regulating family-controlled businesses particularly in relation to corporate governance, which is the area where problems commonly arise. Hong Kong constitutes the jurisdiction in focus because of the unique position of family-controlled businesses providing a context for an insightful investigation. The discussion commences with the definition and conceptualisation of family-controlled business firms, the issues arising from family-controlled business firms, the detailed consideration of the issue of regulation to improve corporate governance, and the conclusions on the implementation of regulation to improve corporate governance in Hong Kong family-controlled business firms.

II. Nature of Family-Controlled Businesses

            A. Definition of Family-Controlled Businesses

            There remains a dilemma (Astrachan, Klein & Smyrnios 2002) in defining family-controlled business firms because of the differences in opinion on the criteria or elements of conceptualisation. The initial consensus on the definition of family-controlled business firms revolved around demographic factors including the number of members of the family forming part of the management of the firm or the percentage of control or ownership of the family. However, these elements are not sufficient to encompass family-owned business firms. Although, there are many family members involved in the management of the business or majority of control is with a family, these do not necessarily explain issues in family business such as corporate governance practices.

            As such, Chrisman, Chua and Sharma (2005) pointed out the consensus that demographic factors such as the number of family members in the management team or the extent of control are not sufficient to describe the nature of family-controlled businesses. Many elements emerged to describe these types of enterprises. Chrisman, Chua and Sharma (2005) introduced intention and involvement as elements of family control of a business. Intention pertains to the plan of the family over the management and operations of the business. Even if there are many family members managing the firm, this may not be a family-controlled business when the intention is to offer for public bidding, majority of shares in the company. Involvement refers to the extent, measured by time and effort, exerted by members of the family in the business. A company, although owned by a family, may not fall as family-controlled business with assignment of management to non-family members. However, considering intention and involvement as the elements of the definition of family-controlled business firms led to the consideration of the factors that distinguish family firms as well as the reasons for the existence of family firms.

            Klein, Astrachan and Smyrnios (2005) discussed influence and vision as determinants of the family owned firms. Although, these point to different but related aspects, Lumpkin, Martin and Vaughn (2008) explained that these elements fall under strategic control. Strategic control finds expression in the manner of passing the business through the generations. If succession of business leadership passes from one generation to another member of the family, then the company is a family-controlled business. Succession within the family reflects the involvement of the family in the business as well as the intention for the management of the company. Involvement in the daily operations of the business also comprises an aspect of strategic control. As such, there are also overlaps in the elements comprising the definition of family-controlled business firms so that combining elements could be the key to developing a working definition of family-controlled business firms.

            By combining the definitions, family-controlled business firms have a number of elements, which are 1) family ownership, 2) involvement in daily operations, 3) inter-generational transfer, 4) family influence, and 5) family control. As elements of family-controlled business firms, these comprise the determinants of family-controlled business firms relative to firms not controlled by a family. Regardless of whether the business is small, medium or large, these elements determine family-controlled business.

            B. Distinguishing Characteristics

            There are differences in characteristics of family business between small and medium with large business firms that could be public firms. Since the purpose of the paper is to focus on the imposition of regulation to improve corporate governance, the more important context refers to large public companies. This is because of the inclusion of shareholders have strong implications on corporate governance. This implies that the issue of regulation to improve corporate governance may not be applicable to all family-owned business firms or applicable in varying extents. The distinction of family-controlled business firms below focus on companies that have offered shares to the public.

            Strategic control factors such as agency relations (Schulze, Lubatkin & Dino 2003) and resource control (Habbershon, Williams and MacMillan 2003) are the encompassing distinguishing factors for a family-controlled business. A number of control factors that differentiate family-controlled from non-family-controlled business firms. First is the control of the top 20 shareholders. This means that looking at the concentration of the top 20 shareholders of public firms determines whether the company is family-controlled. A family-controlled business firm means family members form part of the top 20 shareholders and control majority of the shares. Second is the number of shareholders. If there are only a few shareholders, the ratio of family members to non-family members who are shareholders should be close. This means that many family members are shareholder but even if only a few members of the family holding shares, the percentage of shares held by the family should be substantial. Third is the value of paid up capital relative to share ownership so that the value of paid up capital from family members who are shareholders should be high enough relative to share ownership to imply control over the company. Fourth refers to the spread of shareholders or shares so that the concentration of share ownership to family members makes the company a family-controlled business. Fifth is the chairperson, so that the chairpersons and for the duration of the business should be family members and the extent of influence of chairpersons should be strong to distinguish the company as family-owned. Sixth is the board of directors so that more family members holding positions in the board or family members exercising significant influence in the board make the business family-controlled. Seventh, is the management team led or substantially controlled by family members so that the family exercise influence not only the strategic decision-making but also daily operations. Eight is continuity of control so that the control of the company exerted by family members should persist to make the firm a family-controlled company. Control of shares of the company implies control of resource utilisation because controlling interest held by the family enables influence of decisions (Habbershon, Williams and MacMillan 2003) on the allocation of resources or areas for investment.

III. Dynamics of Family-Controlled Businesses in Hong Kong

            A. Historical and Socio-Cultural Emergence of Family-Controlled    Businesses

 

            The family constitutes the foundation of Hong Kong society so that the business environment in Hong Kong rests upon the dynamics of the family (Chan & Lee 1995). It is not surprising for most business firms in Hong Kong to be family owned because family relations transcend into business relations so that business practices align with family values and norms. Moreover, life in Hong Kong revolves around the family so that the members of the family commit to upholding loyalty, obligation and respect of the family, the family name, the family’s legacy (Wong 2004). This explains the majority control of shares in listed companies or majority control of firm decision-making and operations in other types of Hong Kong business format and structure.

            Yu (2001) explained that two concepts explain the proliferation of family-controlled business firms in Hong Kong. One is the flexibility in resource management. The establishment of a family business depends on the availability of capital and operating a family business offers flexibility in the area of capitalisation. Many family businesses start with whatever capital the family has and expands depending on the availability of capital. The business strategy is guerrilla entrepreneurship that is very hands on. Another is the minimisation of costs. Family business firms in Hong Kong involve the strong participation of family members and this decreases business costs because during the start-up family members may not receive compensation until after profit comes in. These benefits of operating a family business comprise the competitive advantages of family business in Hong Kong. In addition, Wong (2004) explained that many Hong Kong residents, owing to their socio-cultural roots are hard working, competitive, and with strong commercial instincts resulting to the establishment of many family businesses.

            The combination of socio-economic factors of the Hong Kong culture together with business start-up and management benefits explains the proliferation of family-controlled business firms in Hong Kong.

            B. Trends in Family-Controlled Businesses

            Statistical data on the number of family-owned business firms in Hong Kong or growth overtime do not form part of the annual statistical research for Hong Kong. This is because of the fluidity of family businesses, especially small firms. Keeping track of statistical trends is highly impossible. However, it is accepted that most of the small, medium and large firms in Hong Kong are family-controlled firms. The leading firms in the Hong Kong Stock Exchange are family-controlled companies. Six of the largest companies in Hong Kong relative to the amount of capitalisation are family-controlled firms. (Lei & Song 2004)

            In relation to family businesses that are also listed companies, Lei and Song (2004) explained that insiders commonly control 51.5 percent of the top 100 family-controlled companies in Hong Kong. This ratio of shareholdings is necessary to influence decision-making and resource control in the company. Among Hong Kong listed companies, the trend is to keep more than 50 percent or majority of shares within the family to continue control. Cheng and Firth (2006) confirm this by stating that most of the listed companies in Hong Kong that are also family-controlled are controlled by the families by retaining more than 50 percent of shares. This falls within the rules of the Stock Exchange for the minimum free float is 25 percent. As such, many family-controlled firms offer shares enough to reach the minimum but sell more only as needed for investment and expansion purposes. The management of listed family-controlled firms usually falls under the responsibility of the founder of the business or generational successors. Family members also hold strong representation in the board so that family members normally hold the positions of Chairman of the board or chief executive officer (CEO).

            C. Role of Family-Controlled Businesses in the Economy

            Apart from the fact that the leading large firms in Hong Kong are family-controlled, which means strong influence of families in Hong Kong’s economic growth, Luk (1996) explained that the Hong Kong government also recognises the importance of small family-controlled businesses in sustaining the Hong Kong economy. In fact, the government formed the Management Development Council to take responsibility for the design and provision of management trainings for current and prospective owners of small firms. The importance accorded to family-controlled businesses is because of the impact on the economic growth, employment, and household income. Most of the business firms in Hong Kong are family-controlled, which means that economic growth lies in the hands of family entrepreneurs. As such, the government creates and sustains a business environment conducive to the growth of family businesses as well as implement sufficient regulations favourable to the growth of family-controlled business firms. Growth in family-business firms translates to overall economic growth. Thriving family businesses create employment that in turn brings income not only to the family controlling the business but also to the families of employees. Household income supports greater spending or purchases of the products and services of business firms. In effect, by supporting the growth of family businesses, the Hong Kong government ensures a continuous cycle of growth. This implies that in relation to the issue of regulating family-controlled businesses, this would necessarily consider the impact on sustaining growth of family businesses to support overall economic growth.

IV. Issues in Family-Controlled Businesses

            A. Corporate Governance

            Corporate governance refers to the process of establishing objectives, achieving these objectives, and monitoring outcomes in business organisations. Corporate governance also revolves around relationships as well as responsibilities among managers, members of the board, other shareholders, and other stakeholders within the legal or regulatory framework. (Colley et al. 2005) Corporate governance refers to the policies, processes and systems that address the interests of various stakeholders with application to the direction and control of activities and the manner of doing activities in the company. Corporate governance revolves around good business practice and integrity. (Tirole 2001) As such, corporate governance has three characteristics, as a process, a network of relationships, and standards of practice. 

            Corporate governance is a result of internal development of management practices (Colley et al., 2005). Although developed internally, effective corporate governance find basis on external factors such as market trends, industry best practice, and regulations or laws. The adoption of corporate governance is important because this has implications on the share price of the company as well as cost in raising investments. Corporate governance also applies to family-controlled firms, especially listed companies. Corporate governance issues relative to family-controlled firms focus on the extent that the management practices in the company address the interests of various stakeholders.

            Cheng and Firth (2006) described an issue on corporate governance, experienced by family-controlled business firms in Hong Kong, as the entirety of the concerns of minority or outside investors constituting a challenge to family-controlled business firms to exercise good corporate governance. Family-controlled business firms are prone to enrichment in the interest of the family. As such, decisions are likely in pursuance of activities that would support family enrichment. On one hand, this could also beneficial to stakeholders since enrichment of the family comes from enrichment of the business since the source of income of the family is the business. This means that the interests of stakeholders to ensure business growth coincide with family enrichment interest. On the other hand, even with business growth, the interest of family enrichment could translate into issues such as accountability with the family monopolising the profit to the detriment of the interest of other stakeholders. The emergence of these issues depends on the corporate governance of the company.

            Majority control of the family in corporate affairs meant the concentration of power on the family giving them control of decision-making and actions that benefit the family but could be detrimental to minority shareholders (Cheng & Firth 2006). This gives rise to the issue of regulation to obligate family-controlled businesses to comply with regulatory provisions, by integrating these into corporate governance, which extend protection to minority shareholders and ensure that family decisions balance the interest of the family and other business stakeholders.

            Cheng and Firth (2006) also discussed the issue of corporate governance in terms of the pay of company officers or executives. Results of the study made by the authors showed the decreasing trend in the pay received by top executives as their shares or stake in the company increases. This means that an executive director receives lesser pay in accumulating more shareholdings. On one hand, this could represent a compensating process with greater stake in the company offset by the decrease in pay. On the other hand, this could also represent a de-motivation for effective corporate governance. In addition, the pay of top executives are based on profits and not on stock returns so that stock ownership may not actually be an effective offset for the decrease in pay. This is different from the practice in other countries of basing the pay of top executives on corporate performance. This emerges as a corporate governance issue since the performance of the company and the protection of interests depends on top executives motivated to ensure the company’s good performance.

            Lei and Song (2004) explained that board structure also constitutes an issue of corporate governance in family-controlled business firms for purposes of accountability. In Hong Kong, the Chairman of the board is commonly the CEO of the company, which means that the person holding the position becomes accountable to himself. This is the common experience in Hong Kong because family’s running businesses in Hong Kong prefer hands-on participation in the business. This finds explanation from the close link between family interest and business performance. The business could become an extension of the family’s pride and often, the business also constitutes the sole or major source of income of the family. As such, the family prefers control of decision-making on operations, investment areas, and other decisions linked to resource generation and utilisation. As much as this corporate governance arrangement finds justification from family interest, this could also give rise to the potential issue of abuse of power by the Chairman and CEO. Being accountable to one’s self means holding a position of power with limited checks. This could create issues in effective corporate governance since accountability forms part of checks for family-controlled corporations.

            Lei and Song (2004) also mentioned transparency and disclosure as corporate governance issues in family-controlled firms. Since majority of control rests in the owner family in many Hong Kong business firms, disclosure and transparency could become an issue, especially on the part of minority shareholders. Since family-controlled business firms follow the patriarchal family system, it can happen that not all members of the family know the decisions of the head of the family. The same applies in business firms. There is a risk that other stakeholders of family-controlled business firms may not know about decisions. Most Hong Kong firms rely on positive reputation in selecting auditing firms since this increase the semblance of transparency. However, this does not guaranty the extent of disclosure since the code for best practices are not mandatory in application to Hong Kong firms. This could become a deciding issue in regulating family-controlled businesses to improve corporate governance.

            B. Succession

            Sharma et al. (2001) defined succession as the process involving the transference of managerial control of a family-controlled business firm from a member of the family to another. This encompasses the period in between the time when the dominant coalition of the family expresses the intent to go about succession until the period when the incumbent family member holding leadership position actually relinquishes the position to the selected successor. The dominant coalition could be only one person, siblings, or other family groupings. Succession has an impact on the leadership and management of the family-controlled business since a change in leadership could mean a change in corporate governance and other policies. Since succession is predominantly a family matter in family-owned business firms, the process of succession and the selected successor could operate to the detriment of the interests of other stakeholders.

            De Massis, Chua and Chrisman (2008) discussed problems in intra-family succession that are primarily due to the lack of consideration or preparation of succession. This is especially so when the succession happens because of catalysts such as decline in firm performance or loss of key investors or business partners. These trigger succession that in turn leads to the problem selecting successors. The failure of intra-family succession is commonly due to lack of determination of the qualities, expectations and roles of the successor together with poor assessment of the needs and abilities of the successor. This becomes an issue of corporate governance because of the need for the development of policies on succession as part of corporate governance. This is necessary in order to operate in case of immediate need for transitions in leadership or management. However, the process of succession could also lead to problems, especially when other stakeholders do not agree with the process.

            Sharma and Smith (2008) also explained that conflicts in selecting the family member to succeed the incumbent family member could lead to problems such as when a number of family members compete for the position. This could divide the family-controlled businesses and division does no good for the business or the interests of stakeholders. As previously mentioned, the selection of a successor should fall under the ambit of corporate governance. This means that there should be a formal process of selection and screening even if the succession is also a family matter. In the case of listed companies, the actions of the family affecting the business also affect stakeholders so that to prevent unfair practice, corporate governance practices known and acceptable to various stakeholders become necessary.

            Succession constitutes a separate issue from corporate governance but this is also linked to corporate governance in terms of the composition and cohesiveness of top executives since the board may not favour the successor, decision-making with a different composition, and accountability practices among the top executives. Succession, especially intergenerational change in leadership could cause conflicts in corporate governance (De Massis, Chua & Chrisman 2008).  As such, the issue of regulation to improve corporate governance necessarily considers the development of internal policies on succession based on regulations or laws and best practices that considers the interests of various stakeholders.

            C. Conflict Management and Strategic Decision-Making               

            Conflict pertains to the struggle within an individual or among different parties because of opposing beliefs, goals, ideas, needs and values. Personal conflict has implications on the decisions and actions of individuals while group conflicts could lead to non-productive outcomes. These give rise to the importance of conflict management to ensure rational personal decisions and balanced interests for group decision-making. Conflict management is the process of identifying, understanding, and assessing struggles from varying interests or diverse alternative options to prevent and address conflicts. Conflict management operates on the assumption that conflict is inevitable but anticipating, preventing and preparing for potential conflicts eases the impact of the conflict such as unproductive outcomes. Managing conflict revolves around the acquisition of skills linked to resolution options, development of self- awareness, building of communication skills, and establishment of management practices and systems. (Budjac-Corvette 2006) Conflict management has close links to strategic decision-making, which is the mental process of considering alternative courses of action and selecting a particular option to address objectives or achieve an expected outcome (Drucker et al. 2001). Conflict management supports better decision-making. Conflict management and strategic decision-making create issues for family-controlled business firms primarily due to the need to balance familial interests with the interests of the business or its other stakeholders. Often, the interests of the family do not exactly align with the interests of stakeholders. This creates potential or actual conflict requiring conflict management to support decision-making that balances competing interests. In addition, conflict management and strategic decision-making also relate to the issue of corporate governance in family-controlled business firms since conflict management and decision-making fall under the ambit of the standards used in managing the family-controlled business as well as the practices in handling the day-to-day and long-term operations of the firm.

            Eddleston, Otondo and Kellermanns (2008) discussed the issue of the cognitive and relation-based conflict emerging during decision-making among family members. Family members making business decisions are caught in intertwine between familial obligations and business duties that could affect decisions and outcomes for the various stakeholders. Again, regulation emerges as a concurrent issue by providing guidelines in corporate conflict resolution and the degree of family participation or influence in decision-making. In Hong Kong, where family obligation is strong, conflicts of this nature often emerge with concurrent strength that challenges the role and sufficiency of regulations to ensure effective corporate governance based on the context of family-controlled business firms in Hong Kong.

            Sundaramurthy (2008) explained the maintenance of trust among the family members as an issue for family-controlled business firms. There is a positive relationship between the degree of trust among family members and business growth. However, a number of conflict also arise because of the duality of the relationship of the family members as family and as business owners involving different although linked interests and perspectives. These complex problems affect trust. This has an indirect impact on effective corporate governance since issues of accountability, disclosure, and transparency fall under the ambit of trust.

            D. Corporate Social Responsibility

            Sims (2003) defined corporate social responsibility as the way that companies integrate multi-dimensional factors—economic, socio-cultural, politico-legal, and environmental—concerns of the community in the values and culture of the business. Doing so reflects accountability and transparency that create corporate value on the part of the community, which also constitute the firm’s market. Kline (2005) explained corporate social responsibility as a key factor in community relations since it is through the firm’s assumption of its responsibility to the community that the business experience acceptance and adoption by the local community expressed through purchases and employment relations. The assumption of corporate social responsibility by the firm usually manifests through the policies in products and manufacturing processes as well as service features and service delivery. Corporate social responsibility also applies to family-controlled business firms because the family usually ties the business to the community. This means that the reputation of the family in the community determines the degree of acceptability of the business and its brands or products to the community. This creates issues for family-controlled business firms because of the need to delineate interests, influences and priorities. This also has links to corporate governance since the policies or practices in managing the family-controlled business include the adoption of corporate social responsibility and the prioritisation of community interests to address.

            Henderson (2001) distinguished two forms of corporate social responsibility. First is defensive corporate social responsibility with focus on the ways of improving the operations of the business and achieving better performance. This means that the focus of the business is on building better community relations to experience growth and expand its market base. Community relations become a means to an end. Second is positive corporate social responsibility with a broader focus by expressing the company’s assumption of the role as community leader involved in community issues. The focus is in serving the community. The nature and extent of the issues emerging in the case of family-controlled business firms depend on the form of corporate social responsibility assumed by the business firm. In defensive corporate social responsibility, issues emerge from the competing interests of the business, the family and the community. Since the focus is building benefit for the business, this means the emergence of conflicts revolving around prioritisation and/or balance of various interests. In positive corporate social responsibility, the issues lie more between the interests of the business firm and the community requiring the need to reconcile the purpose of assumption of the position as community leader with business interests of stakeholders. This means that the decision and investment of the family-controlled business in its role as a community leader should also find justification in terms of business interests. In effect, family-controlled business firms recognising the importance of assuming corporate social responsibility need to establish guidelines in managing these conflicts.

            Niehm, Swinney and Miller (2008) explained that the corporate social responsibility practice of family-controlled companies depend on three factors. First is commitment of the business firm to the community based on the assumption that the community constitutes the market and labour pool for the business. Second is support of the community in terms of the creation of employment opportunities to provide income to households as well as addressing the needs of the community through products and services. Third is sense of community by positioning the company as an integral part of the community to achieve longevity in relations. These three factors then determine the corporate social responsibility practice that matches community expectations and creates a positive perception of the family and the company in the community.

            This benefits the company in terms of social and business networks. In addition, family-controlled firms usually develop a sense of good business practice, expressed in corporate governance, based on community culture. To ensure acceptability by the community, family-controlled business firms adopt acceptable corporate governance practices in the community. This is inevitable since the family members controlling the business are likely to exhibit the community culture.

            Nevertheless, this could also give rise to the issue of inconsistency between the developed sense of good business practice and regulations or standards. The dilemma relates to the issue of corporate governance because of the conflict that could arise between the good business practice developed by the company based on community culture and the business interests forming part of corporate governance. Acceptable business practices do not necessarily agree with the community culture of doing things because of differences in interests and perspectives. As such, the conflicts arising from this have an impact on corporate governance so that developing corporate governance reflecting the assumption of corporate social responsibility while at the same time justified by business interests would allay these issues in family-controlled businesses.

            E. Performance (Profitability)

            Three general factors affect the performance of business firms. These factors support and find reflection in corporate governance.

            First is organisational culture, which Hofstede (1991) defined as the entirety of the beliefs, values, norms and practices of business firms. Organisational culture determines the manner that the business organisation views its customers. Business firms prioritising customers adopt a customer-oriented culture, which means products and services revolve around the satisfaction of needs and demands. The organisational culture of the firm determines its performance in terms of the ability of the business to develop a culture able to support its goals. The extent of achievement of goals defines performance. Family-controlled business firms exhibit an organisational culture akin to the culture espoused by the family because of the close proximity of the family and the business as structural units. However, the cultural influence of the family may not always support the beliefs and norms that the business needs to efficiently achieve its goals. In the case of Hong Kong, the degree of interference of the family in the business could hamper business performance because of the assertion of familial interests as opposed to the more neutral interests of managers who are non-family members.

            Second is strategic orientation, which Yu (2001) explained as the perspective of the family-controlled business in relation to the planning of activities to address business goals. The strategic decisions of the family-controlled business determine its performance in terms of the impact of the decisions influenced by the family on the achievement of outcomes by the company. If the family influence the preference for short-term strategies relating to areas of expenditure and investment, then performance depends on the impact of these decisions relative to the extent that these address business goals. This means the need to align family influence with business needs translated into objectives.

            Third is management style, which according to Chrisman, Chua & Sharma (2005) comprises the form of management and leadership selected by family-controlled business firms. The style of management and form of leadership should support the mission and vision of the company translated into goals so that these determine performance. The management and leadership style of the family-controlled business depends on the extent of influence of the family. However, the management and leadership style influenced by the family does not necessarily optimise performance.   

            Ng (2005) explained that family ownership affects performance following a pattern of ‘entrenchment-alignment-entrenchment’. This means that family-controlled companies primarily managed by proxies could negatively affect performance because of problems in balancing interests in the achievement of goals. When the role of the family is balanced, the impact on performance strengthens. If the role of the family on the firm becomes stronger, then the effect on performance declines. The implication on family-controlled business firms in Hong Kong is to enhance effective corporate governance practices with strong control of the business in order to address entrenchment.

            Ibrahim, Angelidis and Parsa (2008) discussed strategic planning as an issue for family-controlled business firms. Many family-controlled business firms have informal structures, which mean limited focus on strategic planning and management as means of facilitating performance. Lack of strategic planning explains some of the problems experienced by family-controlled business firms that adversely affect performance. This affects effective corporate governance indirectly since strategic planning has close links with corporate leadership.

IV. Regulation of Family-Controlled Businesses

            A. Assessment of Family-Controlled Business Regulations in Hong Kong

            Hong Kong has regulations pertaining to the corporate governance of family-controlled business firms, especially listed companies. The rationale for regulations is to address the various ethical and legal problems arising from the dynamics of the multiple stakeholders in the context of family control over the management of the business. Generally, regulations for family-controlled business firms fall under statutory and non-statutory regulations. Statutory regulations pertain to the mechanisms for corporate governance provided by law for compliance by family-controlled business firms such as disclosure of minimum items in the financial report and limitations in the utilisation of insider information in the trading of stocks. Non-statutory regulations refer to the mechanisms for corporate governance provided by the industry best practices and guidelines from regulatory bodies. Most statutory and non-statutory regulations impose sanctions for non-compliance but varying in severity with statutory regulations imposing fines and/or imprisonment together with revocation of licenses while non-statutory regulations often impose fines and reprimands for non-compliance.  A common characteristic of regulations for corporate governance of family-controlled business firms is the strong reliance on voluntary compliance. The sanctions apply only in case of claims or complaints from aggrieved parties, which means that the implementation of the law largely depends on the filing of complaints. Only financial reporting standards involve the regular reporting of documents and random evaluations as means of monitoring the affairs of family-controlled business firms, particularly corporate governance mechanisms in the management of corporate resources. The reliance on voluntary compliance constitutes a limitation of the general regulations pertaining to the corporate governance of the family-controlled business firms. Concurrently, the protection accorded by regulations to stakeholders also relies on the exercise of their rights by claiming the remedies provided by regulations in case of claims of violations. The regulations operate effectively with the active participation of the family-controlled business firms and its various stakeholders.

            In addition, individual statutory and non-statutory regulations focus only on addressing specific issues or problems so that the remedies apply only to particular situations. In the case of financial reporting, important remedies apply only to specific aspects of corporate governance and not to the other areas. This means that the impact differs for various statutory and non-statutory regulations. As such, for some aspects of regulation with active monitoring provisions, implementation depends on compliance with requirements by family-controlled business firms; while for regulations without monitoring provisions, implementation relies on the voluntary compliance and enforcement of rights and remedies by aggrieved parties. Thus, regulations achieve effectiveness only with widespread knowledge of business firms and other stakeholders, such as investors to achieve balance of interests and remedies.

            Regulations pertaining to corporate governance covering family-controlled business firms are important because these address the issues emerging from the management of family-controlled business firms. According to Agrawal and Knoeber (1996), corporate governance refers to the general internal and external mechanisms comprising the means of controlling or managing the business firm. These mechanisms can encompass the obligations and rights of institutional shareholdings, block holdings from outside the business firm, takeovers, and other similar processes. Internal mechanisms for corporate governance are set-up by firm decision-makers while external mechanisms for corporate governance emanate from regulations pertaining to family-controlled businesses. Assessment of these regulations in terms of impact and effectiveness would provide insight into the issue of enhancing regulations covering corporate governance of family-controlled business firms.

            In Hong Kong with many family-controlled business firms, the internal mechanism for corporate governance is typically tight control. Apart from holding majority of the shares, which in Hong Kong is 53 percent of shares on the average, as well as a family member holding the position of chief executive officer (CEO). In addition, many if not most of the board members are also members of the family. In 9 percent of Hong Kong firms, half of the members of the board are members of the family. Seventy-three percent of the business firms with majority of the shares falling within the control of one shareholder or the family also operate with half of the members of the board belonging to the family. In 30 percent of business firms with members of the family holding positions in the board, family members hold the position of executive director. As such, internal mechanisms of corporate governance largely depend on the influence of the family. Although, other members of the board with significant shareholdings can assert their interests in decision-making through the voting mechanisms and other venues for exerting influence, the executive director who represents the family or the executive director and board members belonging to the same family makes the ultimate decision. (Cheung 2000) As such, this gives rise to the possible issues in corporate governance discussed in the previous section, especially the conflict between family interest and the interest of the other stakeholders.

            In recognition of these potential problems and extension of protection to non-family shareholders, external mechanisms of corporate governance emerged from the regulatory framework for family-controlled business firms in Hong Kong. Cheung (2000) discussed the regulatory framework of Hong Kong for corporate governance as comprised of statutory and non-statutory provisions. The statutory provisions include the Companies Ordinance, Takeover Codes, Securities (Insider Dealing) Ordinance, and Securities (Disclosure of Interest) Ordinance. The non-statutory regulations include all provisions under the Listing Rules encompassing the composition of the board, independent and non-independent directors, disclosure items, disclosure processes, and other related issues. Many of the statutory and non-statutory regulations are applicable to all family-controlled business firms. However, since corporate governance and the resolution of issues in corporate governance is much simpler in the case of non-listed companies, most of the relevant regulations focused on listed companies. Since the issue of enhancing regulations on corporate governance revolve around listed companies, the focus of the discussion is on the regulatory framework for listed companies.

            Based on the statutory and non-statutory regulatory framework, there are three specific sources of external mechanisms for corporate governance for listed companies, with the mechanisms focusing on the areas of corporate governance requiring regulation. These areas of regulation also give rise to the issues in corporate governance.

            First area of regulation involves regulatory bodies. In Hong Kong, the Stock Exchange is at the frontline in the supervision of the daily operations of the listed family-controlled business firms, particularly the dealings of directors and other major shareholders with the Stock Exchange. The Stock Exchange assumes a self-regulation function by monitoring the actions of listed companies as well as provides stock market products and services. The rules applied by the Stock Exchange are for approval by the Securities and Futures Commission (SFC), which holds regulatory power over futures, securities and financial investment sectors. The rationale of the role of the SFC is to ensure the administration of statutory provisions on full disclosure of stock management decisions to shareholders and the fair treatment of investors using the stock exchange to purchase or sell shares of different listed family-controlled firms. Any possible malpractice is subject to detection, investigation and resolution. To fulfil its duties, SFC carries the power to hold periodic inspections or visits of listed companies on routine schedule as well as to investigate claims of malpractice by investors. During the investigation, the SFC can request access to the books of the company to determine complaints of improper management of the affairs of the company. After conducting an investigation and in case of finding of fault on the part of company officers, the SFC can impose penalties for minor offences ranging from reprimand to suspension and even the revocation of license; and endorse serious criminal offences to the Public Prosecutor’s office for appropriate action. The SFC also holds frontline monitoring role in the case of mergers and takeovers. The Takeovers and Mergers Panel, a committee under the SFC brings down executive rulings to resolve complaints on mergers and takeovers. The composition of the committee includes representatives from financial institutions, SFC, and other constituent parties holding a stake in the mergers or takeovers in question. Since Hong Kong operates as a financial centre in the region, SFC regulations also aligns with the principles set forth by the International Organization of Securities Commission (IOSCO). (Cheng & Firth 2006)

            The regulatory bodies working the Hong Kong Stock Exchange and SFE by developing regulations based on international standards as well as focused on domestic issues concentrate on two areas, one is share dealings and other is mergers and takeovers (Cheng & Firth 2006). On one hand, the focus on these areas for regulation is likely due to the emergence of the most issues in these areas. In the case of share dealings, regulation becomes necessary to ensure that family-controlled business firms do not utilise their controlling shares to suppress the interests of other minority shareholders. The regulatory body provides standards for compliance by family-controlled business firms on the manner of balancing interests in the trading of shares. With regard to mergers and acquisitions, the SFC also provides guidelines on the ways of applying mergers and acquisitions in a manner that takes into consideration the rights of non-family shareholders or investors (Cheng & Firth 2006). Family-owned business firms have to comply with these regulations at the risk of incurring complaints from investors that could result to the imposition of penalties from the SFC and other regulatory bodies. By having regulatory bodies, family-controlled business firms have guidelines in managing company affairs. The adverse impact of non-compliance that include penalties together with besmirched reputation with a long-term effect on the business as well as the family comprise motivations for adhering to external mechanisms for corporate governance.

            However, the limited scope of authority of the regulatory bodies on the corporate governance of family-controlled business firms in Hong Kong leave a wide room for the emergence of issues. One issue is the composition of the board of directors. The board of directors comprise of internal and external members. The purpose of having external members is to add independent parties to the ruling board as a means of balancing the strong influence of the family. Since the CEO is likely to be a family member, the common practice is for the CEO to decide the external members, which defeats the independence of the external board members. Another issue is the remuneration of executive officers. There are different modes of determining the value of remuneration such as based on performance or shareholdings. The guiding principle is fairness by determining the value of remuneration based on the ability of the company cough up revenue and profit. However, in Hong Kong, the determination of remuneration is largely an internal matter without much monitoring from regulatory bodies. A last issue is disclosure and transparency by family-controlled business firms. The purpose of disclosure and transparency is to protect the interest of stakeholders by preventing any room for misconduct on the part of the family controlling the business. However, in practice, monitoring largely depends on the engagement of external auditors for purposes of reporting. This means great reliance on self-regulation by family-controlled business firms. These issues comprise the limitations of the authority of regulatory bodies. These could also support the enhancement of regulation of family-controlled business firms. Nevertheless, even with the limitations in the scope of authority of regulatory bodies, there are ordinances covering various areas of corporate governance for compliance with family-controlled business firms.

            Second area of regulation is ordinances. To protect the interests of non-family shareholders, a number of ordinances emerged addressing particular areas of corporate governance susceptible to abuse.

            The Listing Rules of Hong Kong constitute the primary instrument in reinforcing corporate governance. One rule provides that the directors of family-controlled business firms take responsibility for the management of the business firm as part of their fiduciary duties as individuals or as a group and exercise care and diligence in managing the resources of the firm. Another rule provides for the inclusion of a minimum of two directors who are not holding executive positions. This supports independence and balances the influence of the individual or family holding controlling majority of the shares. Still another amended rule provides for the disclosure of the emoluments received by directors together with statements of the interests of directors on the top five customers or suppliers of the company. These are important provisions augmenting the authority of the regulatory bodies. However, even with these important provisions, there remains great reliance on self-regulation. The Listing Rules do not have that strong an impact in terms of compliance because the penalties are light and lacking in ‘teeth’. The gravest penalty for violation is public reprimand and a period of cold-shouldering. The Stock Exchange also introduced the Code of Best Practice provide guidance to the directors of listed companies over diligent conduct in managing the affairs of the company. Listed companies need to include a statement of the intentions with regard to compliance of the Code. Nevertheless, again compliance is largely voluntary since actual compliance lacks monitoring. (Cheng & Firth 2006)

            The Companies Ordinance covers the mechanisms for corporate governance, particularly the establishment of corporations, sound practices in management such as the issuance of shares, auditing, meetings and shares, as well as the accountability of the executive officers and directors. The means of monitoring compliance includes the filing of statutory reports annually. In addition, there are also accounting requirements especially for business firms subject to regulation such as banks, insurance companies, and other similar business firms. There are minimum items requiring disclosure in the financial statements reported by business firms. The provisions of the Companies Ordinance involve greater monitoring through reports as well as the imposition of penalties for non-compliance. However, these are minimum reporting requirements, which mean reliance on self-regulation for compliance with diligent corporate governance practice. The provisions are generic guidelines that do not particularly consider the unique situation of family-controlled business firms. In actual practice, family-controlled business firms are likely to comply with the minimum reporting requirements and consider other provisions as guides but practice remains the forte of family influence.

            The Securities (Disclosure of Interests) Ordinance is another statute with provisions for corporate governance. This provides that the directors together with spouses and children with significant shareholdings, which is defined as 10 percent of the total shares, in the company need to disclose the extent of their interests in the reports to the Hong Kong Stock Exchange. In addition, acquisition or sale of shares also requires reporting. Moreover, connected transactions in shares also require the reporting of statement of interests and as part of the changes in shareholdings. The purpose of this provision is transparency. Although this targets disclosure and transparency on the part of family-controlled business firms, compliance relies on the family members or members with controlling interest in the business firm. Apart from reporting, which relies on the good faith of family-controlled companies, there is no other way of ensuring compliance. These provisions do not strongly prevent non-compliance and rely only on claims or complaints before the investigation of actual practices by family-controlled business firms. (Cheng & Firth 2006)

            The Securities (Inside Dealing) Ordinance covers the utilisation of valuable information in trading securities. Valuable information relating to securities dealings includes impending joint ventures, fundraising activities, and reporting of the dividends or earnings of the company. This means the discouragement of valuable insider information in trading shares. The purpose of this statute is to ensure fairness and orderly share dealings. Selective sharing of insider information to the disadvantage of unknowing investors is subject to heavy penalties, especially for severe offences. This statute carries a strong incentive for compliance because of heavy penalties. However, investigations depend on claims or complaints so that findings of statutory violations only follow claims. Nevertheless, non-family shareholders also carry a protective stance over their interests leading to immediate reporting. This ordinance is effective in this sense.

            The Code on Takeovers and Mergers provides the rule of maintaining utmost secrecy until the actual or completion of merger or takeover. The Code also provides for accurate and fair communication of all matters involving the merger or takeover. During the completion of the merger or takeover, parties acquiring greater than 35 percent of company shares have to extent the offer to all the other shareholders with voting power. (Cheng & Firth 2006) However, the Code is completely reliant on the initiative of family-controlled business firms towards self-regulation. If family-controlled business firms do not comply, then it is up to the disadvantaged parties to bring their claims to the appropriate authorities.

            The regulations taken together address various corporate governance issues likely to emerge in family-controlled business firms. However, most of these regulations constitute guidelines dependent of voluntary compliances. There are regulations imposing penalties varying in severity. Nevertheless, the imposition of penalties follows investigations and most investigations occur only after the filing of claims or complaints. In this sense, although there are regulations, adherence to these external mechanisms of corporate governance depends on the balancing of interests based on the dynamics of the relationship between the member of the family or the family with control of majority of the stocks and non-family stockholders. While the family controlling the business tend to prioritise family interests, the rights and venues available to non-family shareholders in securing or protecting their interests provides a point of balance.  

            Third area of regulation involves accounting and auditing standards. The Statements of Standard Accounting Practices (SSAPs) make disclosures in financial reports mandatory. There are also other accounting standards applicable to family-controlled business firms but these are not mandatory but comprise best practices in accounting and auditing for companies. The SSAPs align with International Accounting Standards (IAS) and the International Standards on Auditing (ISA). The purpose of the alignment is not only to adopt international best practices but also to ensure that compliance with financial reporting are at par with international standards. Full harmonisation with international standards ensures good mechanisms for corporate governance. The standards are subject to enforcement by the Hong Kong Monetary Authority (HKMA) for firms belonging to the banking sector, SFC for firms engaged in securities, Insurance Authority for firms engaged in the insurance trade, and Hong Kong Stock Exchange for listed companies. The appropriate authority conducts random reviews of accounting firms providing external auditing services for family-controlled companies. Random reviews occur even without claims or complaints. During the on-site review, the assessors hold statutory power to access documents or files of auditors. In case of lapses, the authority conducting the review could implement disciplinary action as well as sanctions such as fines and/or license suspension. (Cheng & Firth 2006)

            Financial standards have preventive and responsive actions but the coverage is limited only to financial aspects. The mandatory nature of reporting specific items constitutes a means of preventing non-compliance with disclosure and transparency, which are aspects of corporate governance. The random reviews of accounting firms and company documents also prevent non-compliance. In case of violations, sanctions comprise the response to these incursions. However, the limitations on financial aspects leave room for violations and still rest on the strong reliance on voluntary compliance.

            Overall, there are regulations pertaining to corporate governance applicable to family-controlled business firms in Hong Kong. On one hand, the various regulations address specific issues emerging from the operations of family-controlled business firms especially listed companies with stockholders. By developing regulations to address specific issues, these should provide corporate governance mechanisms for the resolution of commonly occurring issues of family-controlled businesses. On the other hand, by focusing on specific issues and providing varying obligations as well as mechanisms for the assertion of rights and remedies, there could be areas uncovered by regulation and existing regulations become non-flexible to new issues and developments in commonly experienced issues.

            B. Proposed Enhancement of Regulation of Family-Controlled Firms

            There are two general purposes of regulation. One is to promote fairness, efficiency and order in markets. Achieving this aggregate of purposes involves the development of standards of practice that balance the obligations, rights and remedies available to family-controlled business firms and its various stakeholders. The other is protection of the rights and interests of customers and investors of family-controlled business firms based on the assumption that the weight of control or management of the business firms rests on the family influence, which means possible conflict of interest with other stakeholders. (Bartholomeusz & Tanewski 2006) Based on these purposes, the regulation providing corporate governance mechanisms for family-controlled business firms should be able to balance the interests and even the playing field for various stakeholders.

            The status of regulation of family-controlled business firms in Hong Kong has limitations in relation to the ability to balance interests and ensure an even playing field for stakeholders. As much as existing regulations address issues commonly experienced by family-controlled business firms and stakeholders, there are limitations. This means that there is room for improving the regulatory framework for family-controlled businesses in Hong Kong.

            First area for improvement is more widespread sharing of information to the public. Since most of regulations on corporate governance pertaining to family-controlled business firms depend on voluntary compliance and initiative in the exercise of rights, knowledge of these regulations in terms of the obligations, rights and remedies available to family-controlled business firms and its stockholders becomes important. Information on regulations, including development, requires circulation to the different family-controlled businesses to apprise them of their obligations and the limits of the exercise of family interest in support of the need for balance of interests. This is a pre-requisite for compliance. As such, regulatory bodies and other agencies charged with the development of regulations for family-controlled business firms in Hong Kong need to work closely with family-controlled companies for the sharing of developments in regulations as well as the exchange of feedback on the effectiveness of regulations. The Hong Kong regulatory regime is shifting towards disclosure-based regime, which is a suitable improvement in the regulation of family-controlled business firms. Enhanced disclosure means that family-controlled business firms are likely to adhere to their responsibilities and decide fairly in consideration of the interests of stakeholders because of disclosure. Anticipation that regulatory authorities and stakeholders can monitor decision making particularly on resource use and investments can support voluntary compliance. However, disclosure is only effective with business firms knowledgeable of the responsibility for disclosure and other stakeholders expect compliance from family-controlled business firms.

            Second are for improvement is better implementation of existing regulations providing corporate governance mechanisms for family-controlled business firms. In the case of disclosure and transparency through financial reporting implemented through regular reporting and random checks, these are important monitoring mechanisms. However, in Hong Kong, business networks are widespread, which means the need to ensure objectivity and neutrality of accounting firms auditing the finances of family-controlled businesses. Theoretically, accounting firms play the role of neutral parties taking responsibility for ensuring the accurate disclosure of financial reports of business firms and accounting of resource utilisation. In Hong Kong, the large family-controlled business firms utilise a small number of well-known accounting firms. Due to the strength of network connections, the neutral relationship could lead to issues in accurate reporting. This is a risk present not only in Hong Kong but also in other countries. The corporate governance problems experienced in the other countries such as the case of Enron in the United States and Northern Rock in the case of the United Kingdom although attributable to a number of failures in corporate governance also includes the role of accounting firms. In the case of Enron, the company was able to hide its true financial status for a long time without the knowledge of investors. The company is able to do this by tampering with its financial records, which falls within the responsibility of the accounting firms conducting auditing. In Northern Rock, the company engaged in a number of unscrupulous investment decisions by obtaining short-term loans from other banks and financial institutions and lending these payable in the long-term. The impact of this practice is subject to detection by auditing the financial resources of the company. Although accounting firms do not necessarily provide recommendations to business firms about their financial status, accurate accounting reports would show any lapses in resource allocation and utilisation. Hong Kong is already on the way to enforcing a disclosure-based regulatory regime, which means the need to reinforce implementation of mechanisms encouraging and/or mandating disclosure and transparency for family-controlled business firms in the context of strong family influence in management.

            Third area for improvement is the provision of incentives for voluntary compliance and self-regulation. The purpose of regulation is to ensure fairness and order in the business environment. This means that regulation does not serve to provide the limits of acceptable actions but rather to provide basic guidelines on rights and responsibilities of the parties as well as best practices to guide corporate governance adopted by family-controlled business firms. It is rational that the regulatory framework on corporate governance for family-controlled family businesses also depends on voluntary compliance and self-regulation. However, there is need to establish incentives for voluntary compliance and self-regulation. One form of incentive is strengthening the monitoring activities of regulatory authorities. Expectations of monitoring, especially random evaluations, keeps family-controlled business firms on constant guard to encourage compliance.  Another form of incentive is the imposition of stringent sanctions for violations upon investigation based on claims. Expectations of burdensome sanctions for violations of standards also motivate family-controlled business firms to operate by balancing interests, which is a best practice for firms. Lastly, developing a regulatory framework that strongly supports the development of corporate governance mechanisms based on best practices would also encourage voluntary compliance. Effective corporate governance offers a number of advantages for family-controlled business firms and having a stable regulatory framework is an incentive for voluntary compliance. The shift to disclosure-based corporate governance in Hong Kong builds a culture of transparency to support the development of Hong Kong business firms as global companies, the adoption of which encourages better corporate governance mechanisms.

            Fourth area for improvement involves the regular assessment of the regulatory framework to respond to developments in issues within corporate governance. Although existing regulations address specific issues and are thus have limited flexibility in covering newly emerging issues, regulatory bodies and other institutions in charge of developing regulations on corporate governance of family-controlled business firms have to be vigilant in recognising emerging problems in corporate governance and establishing guidelines for these problems. Regulatory authorities can determine best practices from its rich experience with an economy run by family-controlled business firms. Regulations can also find basis from lessons adopted from the experiences of other countries or regions including cases of corporate governance problems during the Asian Financial crisis, credit crunch in the United States, and the still developing financial crisis in the United States that is sweeping many countries that would eventually affect Hong Kong.  

            Overall, by focusing on these areas for improvement, the regulatory framework in Hong Kong should be able to enhance corporate governance mechanisms adopted by family-controlled business firms. The encompassing issue in corporate governance of family-controlled business firms in Hong Kong is balancing the family influence and the interests of other stakeholders, particularly for listed companies. Improving the dissemination of information on the regulations supports the achievement of balance by ensuring that the family controlling the business knows its responsibilities and other stakeholders know their rights and claims on the family-controlled business. Enhancing the implementation of regulations would also support the balance of interests by strengthening the impact of monitoring and evaluations on compliance with responsibilities for disclosure and transparency. Improving incentives for compliance also supports the balance by improving the relationship of various stakeholders of family-controlled business firms. This happens with company officers developing the perspective of favouring voluntary compliance to prevent problems in corporate governance and other stakeholders cooperating in the corporate governance mechanisms of the company with expectations that doing so would incur benefits to the family-controlled business. Benefits redound not only to the benefit of the family controlling the business but also its other various stakeholders. Enhancing the continuous assessment of the regulatory framework of family-controlled business firms also supports the achievement of balance in interests by ensuring that developments in corporate governance issues receive immediate regulatory coverage to support immediate resolution.

            C. Benefits of the Proposed Enhancement of Regulation

            Family-controlled business firms comprise the backbone of the Hong Kong economy and continue to be important contributors to long-term growth in Hong Kong. The business culture in Hong Kong revolves around the networking systems that emerged from family-controlled business firms to constitute the unique feature of Hong Kong business firms. As such, one benefit of enhancing the regulatory framework is to preserve family-controlled business firms by improving mechanisms for corporate governance to achieve balance in interests. By doing so, family-controlled business firms, especially the listed companies, would have guidance in balancing family and other stakeholder interests. Another benefit is to support the internationalisation of Hong Kong family-controlled business firms. Many of the large companies in Hong Kong are family-controlled firms and developing better corporate governance mechanisms with improvements in the regulatory framework would ease internationalisation, especially with regulations aligned with international standards on corporate governance.

            D. Downsides of the Proposed Enhancement of Regulation

            However, the proposed enhancement of regulations would involve change, implying the possible onset of problems and risks. One change is the closer relations between regulatory bodies and family-controlled business firms to support improvements and compliance with the enhancements in regulations. A problem is the commencement of the initiative in building collaborative relationships. Family-owned business firms may be hesitant because close working relations with regulatory authorities could be seen as burdensome. Another change is the shift to reliance on disclosure and transparency. This requires change on the part of the corporate governance of family-controlled business firms but again this change depends on the acquiescence of family-controlled business firms. The change could be perceived as having the effect of decreasing family control over the management of the business. The changes take time and involve the cooperation of regulatory bodies and family-controlled business firms, which means the risk that the recommended areas of change may not receive attention.  

            E. Weighing Options and Alternatives

            The regulatory regime in Hong Kong covering family-controlled business firms is better when compared to the regulatory regimes in the region. Nevertheless, there are areas for improvement. By considering the benefits and downsides of enhancing the regulatory framework for family-controlled business firms, there are a number of options. One is to maintain the status quo and wait for developments before making responsive regulatory changes. Another is to commence improvements as the regulatory framework shifts to a disclosure-based regime. The better option is to commence improvements since the impact of enhanced regulations takes time to take effect, which means the need for effective timing of the changes.

V. Summary, Conclusion and Recommendation

            A. Summary

            The paper considered the issue of whether to enhance regulation of family-controlled business firms in Hong Kong. This issue involves the balance of socio-cultural factors influencing management with regulations to ensure accountability and transparency of corporate governance. The purpose of regulations for family-controlled business firms is to protect the interest of other stakeholders based on the assumption that there is a tendency for family values and culture to overshadow the interest of other stakeholders. The investigation focused on Hong Kong because most business firms are family-controlled and family-controlled companies strongly contribute to economic growth and vibrancy, particularly the large listed companies, which is the focus of the investigation. Family-controlled business firms in Hong Kong are such because on the average, the family or a member of the family holds 53 percent of company shares resulting to majority controlling interest in the company.

            Consideration of the family-controlled business firms in Hong Kong shows that these experience a number of issues on corporate governance and other areas but with relations to corporate governance. First relates to corporate governance, defined as the means or mechanisms of controlling or managing the company. This encompasses a number of specific mechanisms including disclosure and transparency, decision-making, and management of shares. The issues linked to corporate governance revolve around the conflict in the influence and interests of the family with the interests of non-family stakeholders. Although both the family and non-family stakeholders commonly want the business to succeed, there could be differences in the manner of achieving this end. Often, the priorities of the family weigh heavily in decision-making because of the controlling interests residing in the family. This requires regulation to ensure protection of the interests of non-family stakeholders against possibly irrational or unscrupulous actions. Second pertains to succession referring to the mode of transferring executive leadership from one generation to another, which is a common occurrence in Hong Kong family-controlled business firms. Succession creates problems especially without an organised method of succession or successors are unable to meet leadership expectations. Third refers to conflict management and decision-making. This creates issues when there are differences in the priorities of the family and other stakeholders. In addition, the lack of or ineffective conflict management mechanisms in the company also fuels conflicts. Fourth relates to corporate social responsibility or the extent of relationship of the company with the community encompassing socio-economic and cultural links. This creates problems when there are differences in the perspective of the role of the business in the company as envisioned by the family and the perspective of other stakeholders on the role of the family in the community. Fifth is performance, which creates issues when there are differences in the performance expectations for the family-controlled business as well as the means of achieving target performance and the distribution of benefits.

            Generally, regulations for family-controlled business firms fall under statutory and non-statutory regulations. Statutory regulations pertain to the mechanisms for corporate governance provided by law for compliance by family-controlled business firms such as disclosure of minimum items in the financial report and limitations in the utilisation of insider information in the trading of stocks. Non-statutory regulations refer to the mechanisms for corporate governance provided by the industry best practices and guidelines from regulatory bodies. Most statutory and non-statutory regulations impose sanctions for non-compliance but varying in severity with statutory regulations imposing fines and/or imprisonment together with revocation of licenses while non-statutory regulations often impose fines and reprimands for non-compliance. Specifically, regulations for family-controlled business firms fall under the ambit of regulatory bodies, ordinances, and financial standards. On one hand, the various regulations address specific issues emerging from the operations of family-controlled business firms especially listed companies with stockholders. By developing regulations to address specific issues, these should provide corporate governance mechanisms for the resolution of commonly occurring issues of family-controlled businesses. On the other hand, by focusing on specific issues and providing varying obligations as well as mechanisms for the assertion of rights and remedies, there could be areas uncovered by regulation and existing regulations become non-flexible to new issues and developments in commonly experienced issues.

            The status of regulation of family-controlled business firms in Hong Kong has limitations in relation to the ability to balance interests and ensure an even playing field for stakeholders. As much as existing regulations address issues commonly experienced by family-controlled business firms and stakeholders, there are limitations. This means that there is room for improving the regulatory framework for family-controlled businesses in Hong Kong. First improvement is more widespread sharing of information to the public to ensure that firms know their responsibilities and other stakeholders know their rights. Second is better implementation of existing regulations providing corporate governance mechanisms for family-controlled business firms to balance interests. Third is the provision of incentives for voluntary compliance and self-regulation to influence the development of better corporate governance mechanisms. Fourth area for improvement involves the regular assessment of the regulatory framework to respond to developments in issues under corporate governance. There are benefits and downsides to these changes but enhancing the regulatory framework for family-controlled business firms in Hong Kong would lead to long-term benefits not only in preserving and improving corporate governance mechanisms of family-controlled business firms but also in ensuring sustainable growth for Hong Kong.

             B. Conclusion

            Corporate governance is an important consideration for family-controlled business firms in Hong Kong. Regulations ensure that family-controlled companies adopt basic or minimum best practices in corporate governance. While it is inevitable for many regulations to rely on voluntary compliance and action on the part of aggrieved parties in filing claims or complaints, enhancing regulations would make the corporate governance of family-controlled business firms more efficient. This means that for the family-controlled business firms in Hong Kong, there would remain a wide room for voluntary compliance and self-regulations. However, by implementing the improvements, business firms are better equipped with best practices and guidelines in developing their respective corporate governance mechanisms and other stakeholders have a greater understanding of their rights and remedies in the enforcement of their rights. The improvements empower the stakeholders of family-controlled business firms to become active participants in implementing and improving the corporate governance of family-controlled business firms. Enhanced regulations would provide all stakeholders with the means of influencing and participating in corporate governance mechanisms to achieve the balance of interests that would allow the business firm to actualise its goals.

            Enhancing the regulations pertaining to corporate governance of family-controlled business firms in Hong Kong is a sound option for a number of reasons. First, improving the corporate governance of family-controlled business firms would also support the continuous economic growth of Hong Kong. By improving the environment for the development of corporate governance of business firms, there would be ripple effects on better business relations and performance that would in turn contribute to economic growth. Second, effective corporate governance of family-controlled business firms in Hong Kong would ensure their preparedness for the impact of economic risks with the impending effect of the global financial crisis in Asia. Effective corporate governance could be attributed with the ability of many Hong Kong business firms to survive the Asian financial crisis so that improving corporate governance would enable Hong Kong family-controlled business firms to address the impending impact of the financial crisis developing in the United States. Third, improving regulations of family-controlled business firms would improve mechanisms for corporate governance that would in turn accrue benefits not only to the firm but also to other various stakeholders including managers, employees, customers, investors, and suppliers. One benefit is improvement in decision-making and performance by family-controlled business firms. Another benefit is the ease in internationalisation by capitalising on corporate governance to establish global competitiveness. Enhancing regulations on corporate governance for Hong Kong family-controlled business firms would result to benefits not only to individual firms but also to the vibrancy of the overall business environment.

            The results apply to family-controlled business firms in Hong Kong. Although the nature of family-controlled business firms in Hong Kong is unique because of the networking that are not manifest or not as strongly manifesting in other economies, the results could be subject to generalisations. One is the importance of corporate governance in the effective operations of family-controlled business firms. Another is the role of regulation or continuous improvements in regulations in supporting the development of effective corporate governance mechanisms.

            C. Recommendations

            The investigation has a number of limitations. One is the focus on family-controlled business firms in Hong Kong because of the proliferation of this type of business in Hong Kong. As much as the results have provided significant insights into the enhancement of regulations on corporate governance, a recommended future area of study is to compare regulations on corporate governance of family-controlled business firms in different countries to draw insights from the different experiences. Another is the focus on secondary research, which involves the collation of literature on the subject matter as source of data for analysis and interpretation. As much as insights were learned from using secondary research, a recommended area for expanding the current research is to utilise primary research to draw first hand information from family-controlled business firms. It is important to draw information on the current issues relating to corporate governance that these face as well as the manner that these issues develop in the case of family-controlled business firms. It is also important to obtain first hand information on the perspectives emerging from the various stakeholders of family-controlled business firms. Recommendations for further research include the use of the case study method to draw in-depth data on the dynamics of corporate governance in a family-controlled business or the use of interviews or surveys to collect first hand data from a number of family-controlled business firms in Hong Kong. Still another limitation is the consideration of existing regulations at the time of investigation. Since Hong Kong is shifting to a disclosure-based regulatory framework, continuing the study to consider the impact of this new regulatory framework is also recommended.    

 

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