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Corporate Governance of Family Owned Listed Firms in Asia

By: Vidhu Shekhar, CFA, Country Head, India, CFA Institute India Private Limited

Corporate Governance of Family Owned Listed Firms in Asia

In the year, 1999, OECD created a forum called the OECD-Asian Roundtable on Corporate Governance. It was envisaged as a forum for exchanging ideas and experiences on corporate governance among Asian countries, and in the process to promote best practices and corporate governance reforms in these countries. India has been a leading member of this group and hosted its annual regional meeting twice, in 2002 and 2014. Apart from country representatives, the forum also contains specialist institutions with expertise in this area. This year, the forum, together with CFA Institute, published a report called Corporate Governance for Asian Publicly Listed Family Controlled Firms. The report is unique, in the sense that it has managed to capture the experiences of fourteen Asian countries. It is also valuable because, for the first time, a report of this kind has combined a broad literature survey, a comprehensive framework for analysis, and a set of case studies that highlight particular aspects of corporate governance in listed firms in Asia.

According to the report, around 43% of India’s market cap belongs to family owned listed firms. This is in line with other Asian economies – 54% of Singapore domestic market cap, and 49% of Taiwanese market cap are from family owned firms. In Philippines, it goes up to 83%. China brings up the rear with 11%, but there (as expected) the market is instead dominated by state owned firms.

Asia has been the world’s growth engine for the past two decades, and family firms have been vital to this growth. However, family owned listed companies bring their own set of challenges that investors and policy makers must pay attention to. The most familiar challenge is that of succession. Survey data as well as statistics indicate that family owned firms struggle when ownership is transferred to the next generation. According to a widely quoted Hay Group survey, 70% fail to survive the second generation, and 90% do not make the transition to the third. Investors as well as promoter managers have taken note of these issues, and forward looking firms have created systematic programs for dealing with issues of succession.

When it comes to family owned firms, Europe is closer to Asia than to USA. According to the report, of the largest 500 family owned firms by revenue, 50% are European, 27% North American and 16% Asian. The primary agency problem in USA is the conflict between shareholders and managers, whereas the primary conflict in family owned firms is between controlling shareholders and minority shareholders. For many years, the research literature on corporate governance focused on the shareholder-manager conflict. This had an impact on regulations that were often borrowed from the American experience and therefore less relevant for investors in family owned firms. There is one aspect in which Asia is unique – family owned firms are able to influence control with a much smaller share of the company. The average family ownership in North America and Europe is 73 and 74% respectively, while it is only 53% in Asia.

Regulators in India have recognized these issues and have incorporated a number of regulations to protect minority shareholders. These include rules regarding related party transactions, and rules on who can be an independent director. The Companies Act, 2013, and the subsequent Listing Obligations and Disclosure Requirements (LODR) issued by SEBI are already changing the landscape.

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