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
A. Proposed Regulation of Family-Controlled Businesses
Family-owned 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-owned firms. Regulations guide and support the resolution of issues experienced by family-owned purposes to motivate these enterprises to improve management and operations as well as protect investors and other stakeholders.
B. Contents and Flow of the Discussion
In this light, the research seeks to look into the regulation of family-controlled businesses particularly in relation to corporate governance, which is the pervasive issue experienced by these enterprises. Hong Kong constitutes the jurisdiction in focus because of the unique position of family-controlled businesses providing a context for an insightful investigation.
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. However, 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 while 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.
B. Distinguishing Characteristics
Strategic control factors such as agency relations (Schulze, Lubatkin & Dino 2003) and resource control (Habbershon, Williams and MacMillan 2003) are some of the distinguishing factors for a family-owned business.
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. In addition, many Hong Kong residents, owing to their socio-cultural roots are hard working, competitive, and with strong commercial instincts resulting to the establishment of businesses. 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.
B. Statistical Trends on Family-Controlled Businesses
Lei and Song (2004) explained that insiders control 51.5 percent of the top 100 family-owned companies in Hong Kong. Cheng and Firth (2006) confirm this by stating that most of the listed companies in Hong Kong that are also family-owned are controlled by the families by retaining more than 50 percent of shares.
C. Role of Family-Controlled Businesses in the Economy
Apart from the fact that the leading large firms in Hong Kong are family-owned, 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-owned 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.
IV. Issues in Family-Controlled Businesses
A. Corporate Governance
Cheng and Firth (2006) described the 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-owned business firms to exercise good corporate governance. 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. This gives rise to the issue of regulation to obligate family-owned businesses to comply with regulatory provisions that 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 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-owned business firms for purposes of accountability. In Hong Kong, the Chairman of the board is commonly the CEO of the company, which means that person holding the position becomes accountable also to his person. This could create issues in effective corporate governance since accountability forms of regulations for family-owned corporations.
Lei and Song (2004) also mentioned transparency and disclosure as corporate governance issues in family-owned firms. Since majority of control rests in the owner family in many Hong Kong business firms, disclosure and transparency could become and issue, especially on the part of minority shareholders. 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.
B. Succession
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. Sharma and Smith (2008) also explained that conflicts in selecting the family member to succeed another family member could lead to problems such as when a number of family members compete for the position. This could divide the family-owned business.
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).
C. Conflict Management and Decision-Making
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 the 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 as an issue for family-owned 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
Niehm, Swinney and Miller (2008) explained that the corporate social responsibility practice of family-owned companies depend on three factors including commitment to the community, support of the community, and sense of community. 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 then benefits the company in terms of social and business networks. This means that family-owned firms usually developed a sense of good business practice based on 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 regulations for corporate governance.
E. Performance (Profitability)
Ng (2005) explained that family ownership affects performance following a pattern of ‘entrenchment-alignment-entrenchment’. This means that family-owned 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-owned 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-owned business firms. Many family-owned 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-owned business firms that adversely affect performance. This affects effective corporate governance indirectly since strategic planning has close links with corporate leadership.
V. Regulation of Family-Controlled Businesses
A. Assessment of Family-Controlled Business Regulations
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, items for disclosure, disclosure processes, and other related issues.
Assessment of these regulations in terms of impact and effectiveness would provide insight into regulations on corporate governance for family-owned business firms.
B. Proposed Regulation
This section provides a discussion of the proposed regulation for family-owned business firms in Hong Kong particularly the provisions and the areas of corporate governance affected.
C. Advantages or Benefits of Regulation
This section discusses the benefits of regulation to family-owned business firms.
D. Disadvantages or Downsides of Regulation
This section discusses the drawbacks of regulation to family-owned business firms.
E. Weighing Options and Alternatives
This section provides an analysis of issues felt by family-owned business firms in Hong Kong together with regulatory options and alternatives in the context of Hong Kong as well as in the general business context.
VI. Conclusion
A. Summary
This section summarises the discussion including all pertinent points raised in the paper.
B. Conclusion
This section considers implications for family-owned business firms in Hong Kong together with generalisations for all family-owned business firms.
C. Recommendations
This section provides recommendations on the limitations in scope of the discussion and areas for future study.
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