“King Lear Problems”: Corporate Governance Issues During the Succession in Family Corporations-Peking University HSBC Business School(PHBS)

“King Lear Problems”: Corporate Governance Issues During the Succession in Family Corporations

2016-12-27 09:59:21

by Sang Yop Kang, Peking University

Wednesday, December 21, 2016 | 12:45pm-2:15pm | Room 763, HSBC Business School Building

Abstract

In terms of investor protection, family-controlled corporations (and the presence of controlling family shareholders) have been long considered inferior to widely-held corporations. Indeed, controlling family shareholders in emerging countries engage in many conflicted transactions to the detriment of non-controlling shareholders. The reign of controlling family shareholders, has, to some extent, however, positive aspects. Since controlling family shareholders stay in corporations for a long time, they can be repeat-players in transactions with investors in the capital market. Accordingly, rational controlling family shareholders, who are far-sighted, attempt to optimize the long-term utility of the family and refrain from total plundering. In short, controlling family shareholders do not kill a “golden goose,” but take “eggs” periodically. Nonetheless, a family corporation’s self-regulatory mechanism has limits, particularly problems arising during the course of family inheritance. I refer to these problems relating to dynastic succession in family corporations as “King Lear problems.”

With respect to investor protection, this study covers a variety of “King Lear problems” such as: (1) tunneling for succession; (2) lack of managerial capacity of the second generation; (3) excessive risk-taking of a controller’s children who compete for the next throne; (4) family feuds relating to the inheritance; and (5) dividing a corporation in the next generation. This study also discusses family law issues, such as divorce, a legal guardian system, legal reserve of inheritance, and irregular cases of multiple spouses—in the corporate governance context. In addition, this study explores the one-child policy in China. When “King Lear problems” are serious and affect family corporations adversely, it is possible that investors may wonder whether family corporations are really repeat-players. If so, a “final period” of games between a family controller and non-controlling shareholders can be set, and thus the “backward induction” may occur. Radical changes in a family corporation during the course of the inheritance can interfere with “cooperation” between a family controller and non-controlling shareholders.

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