Markets have little respect for grieving families. After the death of Cho Yang-ho was announced last week, shares rose sharply in Korean Air, which he chaired and his family controls. It was a telling rebuke to the Cho family and to the wider network of family-linked conglomerates — or chaebol — that dominate the South Korean corporate economy.
The 70-year-old patriarch, whose five-day funeral ceremony ends on Tuesday, was on trial for embezzlement and breach of trust. Investors had taken the unprecedented step of voting him off Korean Air’s board in March.
Other family members have earned notoriety, too. Cho’s daughter Cho Hyun-ah caused a scandal in 2014 by berating a crew member in the first-class cabin for the way they served macadamia nuts and ordering her flight back to the terminal. Such stories have contributed to public anger in South Korea at failure to reform the chaebol.
The Korean family conglomerates stand at one extreme of family business. Family control is the most common form of ownership globally. Even among listed companies, families oversee some 15 per cent by market value. At the extreme, family companies are either lauded as linchpins of stability and long-termism or attacked for having become a festering hive of dysfunction. The chaebol were the former — credited with helping to rebuild South Korea after the Korean war — before some of them turned into the latter. It is worth learning from their weaknesses.
The most fundamental lesson is that family companies should encourage and promote honesty and transparency. As the Korean Air example shows, listing shares is not on its own sufficient to shed light on how a family-controlled group is run. The danger is that families seek protection from outside scrutiny in complex structures — the chaebol’s cross-shareholdings, or the cascades of “Chinese boxes” that Italian families assembled to keep a hold on their business empires in the second half of the 20th century.
Second, families need to be even better than their listed counterparts at succession planning. It is no coincidence that a version of the expression “clogs to clogs in three generations” — from poverty to riches and back again — exists in multiple languages.
For a while, the management orthodoxy was that families should always appoint professional managers as control shifted down the generations. But as one adviser to family companies has put it, “the mistake families often make is hiring a CEO based on résumé and not on psyche”, storing up friction between owner and manager. Some groups now recognise it may be better to search for managers among family members, who recognise the cultural sensitivities and strengths of their clan.
Finally, family businesses must strive to make money. Feeble returns ultimately doom family groups, either because they incite intra-familial strife, or because they encourage outside bidders to try to wrest control from feuding family members, or both.
US activist Elliott Management has been trying to install new directors at Hyundai Motor and its parts affiliate Hyundai Mobis, part of another South Korean chaebol, to pep up flagging sales and improve governance. Elliott failed to win enough investor support in a vote last month. It may yet return to the battle. But the outcome suggests an important underlying truth about family-run businesses. Around the world they generally command far more trust from employees and the public than non-family groups. Given that faith in business is still in short supply, it is criminal of family owners to squander such a built-in advantage.
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