Taiwan's Corporate Succession Crisis
Taiwan's 30 largest corporations represent a market value of NT$13 trillion. Yet 40 percent of them have not planned ahead for a smooth corporate succession. Should their millions of shareholders and employees be worried?
Taiwan's Corporate Succession CrisisBy Yi-Shan Chen, Hsiao-Wen Wang
From CommonWealth Magazine (vol. 431 )
It's been nine months since tycoon Wang Yung-ching, the founder of the Formosa Plastics Group, passed away without leaving a will. But the battle among Wang's heirs over the tycoon's multibillion-dollar estate rages on unabated. Wang's legal widow and some of the nine children that he fathered with two other longtime partners are suing one another in courts in the United States and Taiwan over the right to control his estate. The riveting Formosa Plastics Group family feud has been casting a shadow over Taiwan's largest conglomerate.
In traditional Chinese society, estate distribution and succession planning has always been a rather obscure, opaque affair. But as formerly privately held family companies have listed on stock exchanges and gone public, their succession planning also has become a matter of public interest. What used to be a storm in a teacup that only concerned the founder family now directly affects the financial interests of a large number of investors.
Based on CommonWealth Magazine's Top 1000 Enterprises ranking, Taiwan's 30 largest companies account for a market value of NT$13 trillion, a figure roughly equivalent to the island's entire GDP. Together they employ some 1.8 million people. If each of these employees has a family of four, the rise or fall of these 30 large corporations affects the livelihood of at least one third of Taiwan's entire population.
The first post-war babyboomer generation is already well on the road to retirement. As a result Taiwan's large corporations, which evolved during the economic boom after the war, also face the largest generational change in leadership in their history. The founders of several big high-tech enterprises have reached retirement age. Terry Gou, chairman of Hon Hai Precision Industry, and Tsai Ming-kai, chairman of MediaTek, will both be 59 this year. Quanta Computer boss Albert Lin will turn 60. Morris Chang, chairman and CEO of semiconductor maker TSMC, is a venerable 78.
In conventional industries, even octogenarian CEOs are not an exception. Chang Yung-fa, founder of the Evergreen Group, is 82 this year, while Kao Ching-yuan, founder of the Uni-President Group, celebrated his 80th birthday in May. In several family conglomerates even the second or third generation of leaders is quickly nearing retirement age. These include 68-year-old Douglas Hsu, boss of the Far Eastern Textile Group; Show-chung Ho, chairman of SinoPac Holdings and former boss of Yuen Foong Yu Paper Manufacturing, who is 64; and W.S. Lin, chairman and president of consumer product maker Tatung, 63.
Well-known stock analyst Sophia Cheng, former head of research at Merrill Lynch Taiwan Ltd., once said that one of her criteria in judging financial stocks is the second-generation premium for companies that have planned well for leadership succession. Cheng argued that most of Taiwan's financial holdings are still controlled by their founder families. If the second generation was trained well for taking the helm of the company or if the chosen successor can be considered a good choice, the target stock price for the said company can be adjusted upward. Correspondingly, downward adjustments must be made if there are problems with the successor generation.
"I feel that, aside from Acer, not a single Taiwanese high-tech company has planned well for a smooth succession," states one semiconductor analyst with a foreign company.
Indeed, with the advent of the global recession, Hon Hai's Terry Gou, Asus chairman Jonney Shih and Quanta Computer's Albert Lin came back out of retirement or postponed retirement to take charge of day-to-day management in order to steer their companies through the crisis. On June 11 the board of directors at TSMC reinstated chairman Morris Chang as concurrent CEO, a post that he had handed to Rick Tsai four years ago. And with that reshuffle one of the rare examples of a seemingly successful leadership transition in the high-tech industry went out of the window. Given TSMC's good track record on corporate governance, the sudden announcement triggered wild speculation and rumors. On the next trading day the company's share price temporarily fell by the daily allowed limit of seven percent.
In business circles it is generally agreed that a company founder needs a full decade to cultivate a capable successor. Smoothly handing over the reins of a big company is definitely not an easy job.
Three main factors can be said to indicate a corporation's state of preparedness for leadership transition: whether any disputes exist among major shareholders, whether the de facto top executive in charge of day-to-day business is over 60 years old, and whether a successor or a successor team has already been publicly announced. Measured against these criteria, 40 percent of Taiwan's 30 largest conglomerates face problems with leadership succession.
Twelve major Taiwanese corporations – Formosa Plastics, TSMC, Far Eastern Textile, Chinatrust Financial Holding, Quanta Computer, Yuanta Financial Holdings, Shin Kong Financial Holding, the ASE Group, Lien Jwa Industrial, Evergreen, the Kinpo Group, and Tatung – are facing various kinds of leadership transition problems.
Their uncertain futures affect the interests of more than one million shareholders, involve the jobs of 953,000 people and a combined market value of NT$5.7 trillion – or about half of Taiwan's GDP.
The Formosa Plastics Group, the No. 1 in terms of market value, had established a seven-member successor team before Wang's death. But since the "God of Management" did not bother to write a will, a fierce battle has now erupted over his vast estate. This family feud for control over the conglomerate might even affect its shareholder structure and throw in some obstacles to a smooth leadership transition.
As for TSMC, an insider who did not want to be named relates that the reason why Morris Chang returned to the CEO position is because during the four years of Tsai's tenure as CEO, all potential successors with comparable track records with Tsai left the company. Chang might have his own chosen successor in mind, but the person is not senior enough and does not have enough to show yet in terms of track record to directly take over from Tsai. Should this successor be promoted to the CEO position now, others from his peer group might again see their career ambitions thwarted and quit their jobs.
But the TSMC insider also does not exclude that Tsai has been shifted from the CEO post only temporarily and that he still is a successor candidate. Having nurtured Tsai as successor for ten years, the board of directors is not ready to give up on him. And after all, the June 11 board decision made Tsai president of the company's New Businesses division, which indicates that he is still in the race.
Looking at the age difference between Taiwan's incumbent corporate leaders and their offspring, management guru and vice president of National Taiwan University Ming-je Tang argues that "the second generation is not yet ready to take over."
Why Is Internal Succession So Difficult?
Why 20 years ago was Nita Ing able to succeed her father as president of Continental Engineering at the tender age of 31, but today's second generation finds it difficult to step into their fathers' shoes? Tang points out that Ing took over at a time when Taiwan's economy was dominated by business groups that owed their success to monopoly-like market positions and political connections.
In such environments, the personal networks of the founder families play a major role and are best maintained if a family member takes over company leadership. But while social capital counts among the factors that are crucial for a company's success today, enterprises have become more complex and operate on a bigger scale. In the high-tech industry, in particular, a family-business-like leadership transition is even less feasible, given that highly specialized technologies are involved.
In recent years, not only Taiwan's corporate giants, but also the owners of many small- and medium-sized enterprises have been looking to hand the baton to a successor or even sell their companies. Jim Hsieh, a partner at IMC Capital Consulting, notes that the financial crisis of 1998 was a watershed that changed the mindset among Taiwan's SME owners.
Before the crisis they were riding an economic boom and were not thinking about retirement. But when the crisis hit and making money became a challenge, more than a few began looking for a successor or considered selling their businesses.
The current period is no different. Amid the current global economic recession, more family-owned Taiwanese enterprises are pondering the succession problem.
Estate Disputes Undermine Family Enterprises
Taiwan's most prominent example for how estate disputes can harm a family-held business is the Shinkong Group, which suffered from a prolonged power struggle among brothers within the Wu family, which owned a controlling stake in the group. The Wu family originally hoped to bolster its business empire against spin-offs through cross shareholdings within the family. No one expected that over the years brothers Eugene Wu, Thomas Wu, and Eric Wu, would twice clash as they jockeyed for control of companies within the family's business empire.
Today, Eugene Wu is chairman of Shin Kong Financial Holding, Thomas Wu heads Taishin Financial Holding, and Eric Wu is the boss at Shinkong Synthetic Fiber. Instead of pooling the group's strength, the brothers and the companies that they headed within the group began to compete.
The Wu family ran three banks – Shin Kong Commercial Bank, Taishin Bank, and the Bank of Taipei – as well as two investment trusts. At one time Taishin Financial Holding was even planning to team up with a foreign insurance company to compete with Shin Kong Life Insurance.
As a result of the fraternal power struggle and due to the lack of a coordinated business strategy, Shin Kong Financial Holding and Taishin Financial Holding are now trailing far behind their external industry rivals Cathay Financial Holdings and Fubon Financial Holding in terms of market value.
"Using investment holding companies means planting the seeds for discord," warns Oliver Yu, director at accounting firm PriceWaterhouseCoopers Taiwan. He notes that Taiwanese enterprises should take note that the Rockefellers and U.S. electronics giant HP use trusts to ensure stable control over company management and to prevent estate disputes from affecting operations.
In his book The Leadership Pipeline – How to Build the Leadership-Powered Company management guru Ram Charan points out that a successor is best groomed and trained within the company. If an entrepreneur fails to find a successor, it means that something is wrong with the company's leadership development program.
Charan cites three main reasons why leadership succession might fail. First, corporate leaders fail to realize that not everyone has what it takes to become a leader. Second, companies fail to provide sufficient training and opportunities for self-improvement. And third, they do not provide the tough, complex challenges that a manager needs to go through before he or she can make the big step of assuming the post of CEO.
In Taiwanese companies insufficient leadership training of potential successors is the major obstacle to a smooth succession. Lee Ji-ren, professor at the College of Management, National Taiwan University, is currently assisting Hon Hai in setting up a leadership succession system.
He thinks that the success of Taiwanese companies in the past depended on division of labor, low-cost efficiency, and a high percentage of short-term performance-based incentives. They overemphasized specialization and compartmentalization. As a result they found it difficult to implement systematic job rotation throughout the company that would have helped staff gain a broad variety of skills and a good understanding of the entire business. Such a system will not produce leaders that are generalists. If a company lacks bench strength, leadership succession will become a matter of substituting whoever is available when a position becomes vacant.
Prof. Tang warns that outstanding managers who are directly promoted to CEO without having learned the ropes of leadership through job rotation often turn out to be dysfunctional. Computer maker ASUS is such an example. ASUS CEO Jerry Shen himself has more than once apologized to the media and shareholders that he "failed to be a good CEO" because he only had eyes for R&D, while neglecting less familiar areas such as accounting and sales, thus incorrectly assessing company operations.
A Second Generation that Dares Not Err
Given that specialized managers who take over as corporate leaders often suffer from "dysfunctionality," some Taiwanese entrepreneurial families painstakingly groom their offspring for future leadership tasks by rotating them through the family business. A case in point among Taiwan's 30 largest enterprises is Miao Hua-pin, the eldest son of Mitac-Synnex Group founder Matthew Miao, who trained under his father's watchful eye. The sons of Delta Electronics chairman Bruce Cheng, and Felix Ho, eldest son of Yuen Foong Yu's Show-chung Ho, also honed their leadership skills within their fathers' companies.
Henry C.T. Ho, vice president of Tung Ho Steel Enterprise, is widely rumored to soon be taking the helm of the steelmaker. At 38 he has already spent 12 years with the company, rotating from job to job in the fields of finance, human resources and sales, and also serving as deputy factory manager for two years. As a result, the company's professional managers have had time to get used to the junior boss and learn to trust him.
But quite a number of descendants from business families only serve as board directors. Hsieh of IMC Capital Consulting observes that it is popular among Taiwan's business families to place their offspring in the banking sector for training. The smarter ones get trained with investment banks, while the less talented serve as wealth management consultants in private banks. But as Hsieh points out, this approach has its downside, because the upcoming entrepreneurs gain only financial expertise while failing to gain a good understanding of real business. Only serving as a board director has the same drawbacks.
"Actually the situation of these kids from the second generation is truly deplorable. They don't dare to make mistakes, because of their parents' expectations and economic interests, and for image reasons. They can't allow themselves to make any mistakes," says Hsieh in explaining the emotional burden that weighs on these young execs. At the office most of them hide their emotions, because they are aware that their performance is closely watched often by fathers, uncles and other members of the family clan who have known them from childhood on.
"Sometimes the chosen successor must be allowed to hide to get a chance to build a track record before he surfaces as a successor," says Acer founder Stan Shih, who is widely regarded as Taiwan's model entrepreneur and has already been retired for several years. Years ago when Shih was grooming current Acer chairman J.T. Wang as his successor, he did exactly that, taking Wang out of the public eye by assigning him to a subsidiary.
Tang believes that if a company insists on keeping corporate leadership within the founder family, it will become unattractive for outside talent. For the company's long-term development, this is not necessarily a plus.
Acer's Shih does not favor either approach over the other. "It's hard to say which one is better. We can only say that succession by a professional manager is the more modern approach," he muses.
After the Enron scandal and the public outcry over million-dollar bonuses paid to executives of banks that were bailed out by the U.S. government during the financial crisis, people have begun to question whether professional managers are actually better for a company's fate than members of the founder family. There is, however, broad consensus that potential successors should be cultivated as early as possible.
Shih believes that at the present stage, people in Taiwan are not able to accept outside successors who are suddenly plucked out of nowhere. Therefore, it is even more urgent that companies set up a good system to plan ahead and train future leaders.
The abrupt resignation of Yuanta Financial Holding president Felice Chen on Sept. 15 after just three months in office again seemed to prove that outside successors do not fare well in Taiwanese enterprises.
As Taiwan's economy evolves, the island faces the inevitable challenge of addressing the unresolved succession of leadership at companies collectively worth NT$6 trillion.
Translated from the Chinese by Susanne Ganz