The Economist’s Money Talks podcast had an interesting recent episode exploring the business succession issues that are underway in Asia today. Power is passing from the often elderly pioneers of 20th century business empires and their children, down to the third generation. The podcast is hosted by Mike Bird, Alice Fulwood and Tom Lee-Devlin. The episode also featured short interviews with Joe Studwell, author of Asian Godfathers and How Asia Works, and Kevin Au, the director of the center for family business at CUHK.

Some brief notes below (for personal reference, any mistakes are my own). The episode covers why the issue of succession has become such a big concern in Asia, then looks at some of the characters who are worrying about their legacy and, finally, how succession challenges can be overcome.

Something very interesting has happened in Asia since WWII in terms of the rise of these plutocratic families that are very different from the business dynasties people in the West are familiar with. Asia has a very large proportion of family owned firms, partly due to different social structures as well as a more extended family culture beyond the Western nuclear family. In some countries, politics has played a big role too, entrenching certain families when they have the approval of the local political leadership, but also damaging them if they lose that approval or the power shifts in a given country.

Many of these companies are now aging into their third generation, which is thought of as a perilous moment for family businesses (the cliché is that great families go from shirtsleeves to shirtsleeves in three generations). So what is it about the third generation that is so difficult? To some extent, this is a phenomenon about the age of the businesses, when they came into being and what they prospered in initially. Because we are often talking about the middle of the 20th century, these businesses were often concentrated in sectors like commodities, real estate etc. These are foundational things that take a big share of economic output when a country is relatively poor and growing quickly. The founders are now increasingly out of the picture, some have died and some are very elderly. That was not the case when their children were taking major roles, when the founders were still very much around to monitor. With the third generation, the founders/grandparents are increasingly out of the picture.

Sometimes the younger generations aren’t interested in running a business, they would rather take the money. As a result, you might see the dynasty split into smaller units, which can be a good thing. Sometimes, the best way to avoid succession issues is to break things up. Some of the worst outcomes come from disputes that don’t lead to an amicable break up, which can really damage the business. Another element in certain parts of Asia is the political links their grandparents made were crucial to the success of those business empires, and it isn’t clear whether the grandchildren have the same nous for local politics. 

Is there any hope of breaking the third generation curse? In many ways, the third generation is actually better equipped, at least on paper. Many are internationally educated at top universities and business schools, partly because they have more freedom to pursue the things they are interested in and are not expected to go straight into the family business in the way some previous generations might have been. It is also useful for the companies to get that exposure to the rest of the world, as they often have local power bases and limited operations outside of Asia. Gives these companies access to things the grandparents and parents didn’t have, which be useful when it is time to modernize and implement a younger generation of leadership. 

Conversation with Joe Studwell:

In terms of the original generation, what sort of people were they and what did they have in common?

You can go back to the 16th century and look at the earliest Persian, Indian and Chinese immigrants into Southeast Asia and the way they found patrons among political leaders and began to build businesses like that. If you go to forward to the first half of the 20th century, then capitalism scales up and access to capital becomes the key differentiator. The problem the local East Asian oligarchs had in that period was that all the banks were controlled by European power and didn’t really provide capital to them. The breakthrough doesn’t come until WWII, with the Japanese invasion of these countries and the displacement of the Europeans. Then you start to get the creation of locally run banks and that starts to accelerate in the 1950s. Once they have access to capital and the decolonization process moves ahead, they can really move to a new level.

What does he makes of the hero worship of that generation, and has that declined a bit over time?

On the one hand, these are very interesting people. Culturally, they have to turn on an axis in at least 3 directions: you have got to be seen to represent your own ethnic group, then you have got to acculturate to local political power and then also to colonial power. This produces extraordinarily interesting people, but by trying to be all things to all people, they are never quite anything. In terms of the lionization of them, this probably peaked in the 1990s when 8 of the 25 richest people in the world on the Forbes list were Southeast Asian tycoons. The counter to that is there has never been a lot of social mobility in this group and once they build up the capital, they are very hard to displace. Only displaced slowly over a very long period of time by equity dilution. Each time there is an economic crisis, they lose a bit of equity control of the business, although they usually find a way to maintain control even when they are in a minority equity position. The only times when you get people catapulted up into the top tier of the post-war era is when you get a political change that leads to new oligarchs being favored by political powers. 

What do you make of succession difficulties?

It is difficult because the economic oligarchy is always about male power. They retain control over their families. The kids know they will inherit, but while the old man is alive, they will often get very little. Some of the younger generation decide they are going to get out, but the prize is considerable if you stay in the game. In the post-war generation, it was very much about total, singular male power but going forward that will change because people have now come out of a very different background.

Conversation with Kevin Au:

How is the third generation different from their predecessors?

The third generation has usually been sent overseas to study, where they have learnt about modern technologies, governance systems, democracy and are opened up to many different perspectives versus their grandparents. In a way, the are usually more liberal because they are educated in Western countries. In most cases, when they are younger, they are also being told they can do whatever they want to do. They have this feeling they can pick their own path, only to sometimes find out that the freedoms they were given were not that big (e.g. usually when their grandparents or parents are facing some situation, they might change their mind).

New career paths?

Some of the younger generations use family resources to build new business lines. Traditionally, the ideal career path for a family business kid would be to finish their education, work outside for a brief while and then go back to pick up a a management role as quickly as possible. Later on, they may be able to take over the family business, after some nurturing by the family. Now, some members of the younger generation never go back to the family, they sometimes pick up the entrepreneurial spirit, set up their own start ups with classmates or friends, and try to become independent themselves. 

Challenge taking over from these huge heroic figures?

For the first generation, letting go is the major issue they have to deal with. These people have been very successful, they are in the public limelight and used to being respected. But time flies and people age, they come to understand that one day they have to step down. But they have difficulty handing over because it is their legacy. The second issue is how can they train someone to take over the business. A transition from the first to the second generation often has very different dynamics to a transition from the second to third generation. It can be really hard to find a good successor in any business, and when you limit your choice of candidates to one of your offspring, you can see why these things often don’t work out. Need someone who is both capable and willing to take on the role.