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Dynastic control without ownership

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Can business dynasties continue to exercise control over firms they founded, even when their ownership stakes become insignificant? Morten Bennedsen discusses the prevalence of dynastic-controlled firms among publicly listed firms in post-war Japan.

Image courtesy of interviewee. December 7, 2023

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This video video discusses the surprising phenomenon of "dynastic control" in family firms, where family members maintain governance despite minimal ownership stakes. The speaker gives examples, notably from Japan, emphasizing that ownership has traditionally been viewed as the basis for control in corporate governance. Research reveals that, contrary to prior beliefs, a substantial number of large public companies, such as Toyota and Suzuki, are controlled by families with very little ownership—often under 5%.

Toyota's case is highlighted, showing that the family, despite owning a small percentage of shares, was able to maintain influence through control of board positions and strategic governance practices, such as cross-shareholding with other firms. Similar trends are noted in Suzuki, where family members have historically retained leadership through innovative succession practices, including adopting talented CEOs. The analysis extends to Sysco, which had no direct family ownership yet benefited from strong family management.

This video video research indicates that traditional definitions of family firms focus heavily on ownership, often missing the complexities of control dynamics. The speaker concludes that the phenomenon of dynastic control is more widespread than previously recognized and has significant implications for our understanding of family firms across different cultures, especially in Japan and other similar contexts. Meanwhile, the dynamics in Western firms appear less stable due to more active corporate markets. The discussion encourages rethinking management strategies in these family firms, acknowledging the roles of board control, talent management, and succession planning.

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X-TIMESTAMP-MAP:LOCAL=00:00:00.000,MPEGTS=900000

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Is a phenomenon that, that we have discovered recently

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and, and we don't really believe that people have, have,

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discussed before.

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So this is the idea that the family firms,

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they exist firms around the world, which are controlled

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and managed and governed by individual families,

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but these families do, in reality,

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have very little ownership.

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And why is this interesting?

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We tend in corporate governance

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and in the study of firms to think

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that everything comes from ownership.

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It's, it's, you know, it's the ownership.

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When you own, x percent of Microsoft,

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you control Microsoft.

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So ultimately there can be a lot of deviations and,

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and variance of ownership.

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But, but we historically think that ownership is kind

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of the key to, everything when we talk about,

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corporate governance in general, and

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therefore we thought it was, it was, interesting.

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First we, we, we just, found a few cases and,

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and we said, you know, how can it be

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that this family always is the CEO of this firm,

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even though they don't look like they're,

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you know, a big owner.

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They're not among the largest tin owners, 20 owners,

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and some of them are not owners, half owners all,

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and they still keep on, you know, producing

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that control these family, family businesses

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and become future CEOs.

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And they make succession in the family.

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And we went back to the, and,

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and, you know, looked in deeply into

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what people have said in particular about family firms

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and ownership, during the last, decades.

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And we didn't really find any systematic

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thoughts of these things.

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I mean, people kind of knew

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that an exotic case once in a while.

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Um, and then we went from these cases,

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and then we asked ourselves, taking, taking one country

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where we have in particularly good, data,

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and that was Japan.

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And then we started to ask ourself, you know,

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are these just rare cases?

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And, and so we look back at all public traded

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companies in Japan during the last, you know,

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50 years basically since World War I, when, when,

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or the, the governance of public trade firms were reinvented

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after in Japan.

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And we saw that it's actually more common than,

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than we believe.

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Um, and, and we found that it was, you know, seven, 8%

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of all these large, you know, large trade firms in Japan

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where feminist seems to control the firm seems to have

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the key position either as, what we would call c

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president or chairman of the boards.

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Um, and that these families also were able to,

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you know, do success, right?

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It was not just the one powerful individual

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that were hanging around there for historical reasons.

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And the moment this person was, was gone,

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it was a non-family firm.

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It actually turned out that in, in many of these firms,

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the family were able to continue

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for generations almost without ownership.

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So if we take a few of these cases, the first one that comes

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to mind is, is probably Toyota, which is of course,

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the world's biggest car company and,

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and a super famous company.

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Um, people have

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for decades discussed if Toyota was a family firm or not.

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Um, and, in particular, I would say in,

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in the eighties and in the nineties,

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I think the consensual was that Toyota was not a family.

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It's obviously the, the family

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behind Toyota is called Toyota with a, with a D.

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Um, and, and the anecdote is that

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if you're writing Japanese Toyota

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with a t is is more beautiful,

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more symmetric than Toyota with a D.

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So that's why the company has a T

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and the family now, in the Toyota case,

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obviously the family used to own a lot of the firm,

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and it grew and it grew actually,

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the really old history is

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that it was not even a car company.

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It was actually a textile company, in the beginning.

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And it was only in the second generation that,

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that they started to produce cars.

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But the car company grew and grew and,

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and through that, the ownership

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of the family became smaller and smaller.

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And today we kind of, it, it's a little hard to just,

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'cause Toyota is a big conglomerate, and it has like,

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but you have three core companies, the motor company and,

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and, and a few other companies.

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Um, and we kind of believe that the family owns less than,

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definitely less than 5%, and probably around two, 3%.

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And it's not among the 10 biggest owners of, of Toyota.

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Um, and then, until 2000, for 18 years,

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they didn't even have a family, CEO

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and everybody was kind of saying, this is not a family firm.

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What happened in 19 90, 19 9 in

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2009 was that there was a big scandal, one

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of these car scandal where the brakes didn't work

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and the US family were killed.

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Um, and they had court cases,

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running about the security.

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And it turned out that all this professional management have

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done something, very short termism.

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And that's not really the, the,

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what we think about Toyota think is very safe car,

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maybe not, but you

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things.

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So, at that point, Toyota decided

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to bring in a Q Toyota, the, the guy, the president

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who just retired, spring.

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And, and there was the proof

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that it was still a family member, right?

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When, when the family was really suffering,

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they brought in the family member,

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even though the family didn't own very much.

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And, it was a tremendous, he, you know, the moment,

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there's a famous picture where he apologized for this

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and when disappointed and the stock prices wrote 3%,

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and he went three weeks after to the US

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and he said the very famous, statement that, you know,

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in a Congress hearing in the US hardly speaking English,

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he said, no, my signature is behind every car we sell.

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When the car is hurt or damaged, I'm damaged.

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And you know, this is only a family that that can,

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can use this trick, right?

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So he has been very, very successful.

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And, and today we all believe it's a family firm,

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but the family still own very little.

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You know, the 10 biggest owners of Toyota are probably

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or are, basic institutional investors

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and banks and these things.

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So clearly the family has been able

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to control the firm without a lot of ownership.

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And in this case, we kind of know,

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what the mechanism is.

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And the mechanism is very much through broad control.

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So as I said, there are a number of firms

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that cross own each other in the holder group.

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And when the families sit on the board, they,

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the board controls, of course

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the voting rights on the shares

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that one company owns in another company.

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And since the family controls the board, they control this,

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you know, corporate ownership,

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cross ownership in the board.

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And I think this is, we believe this is kind

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of the mechanism that actually gives the family control

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without having a lot of direct ownership.

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A second case, which is, even more

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interesting probably is, is,

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Soki, of course is also a very famous firm.

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Uh, and, and they also do, motor

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and, you know, small cars and, and,

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and, a lot of the related stuff to that, right?

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I mean, basically the Suki for many generation until very,

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very recently, always had a family member

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as the president, always.

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And they've done successions.

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And what is even more interesting is that,

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the founder only had daughters and,

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and the next generation only had daughters.

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And in this context of Japanese, traditionally

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family businesses, daughters could not run the firm.

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So for each of these CEOs have basically been married

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into the family and then have adopted their name

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into the Suzuki family.

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So all the CEOs have been Suzuki,

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but basically I think 3, 4, 5 of them have been adopted sons

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who then changed their name and become part of the family.

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But the interesting fact is that when Suzuki went public in,

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in, a few decades ago,

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the family diluted their ownership.

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So today they probably have, less than 1%,

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and they have had that for many, many years.

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And, and Suki is not that complicated, the firm.

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So you can say in the Toyota case, it's hard

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to challenge the family because they control the boats.

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But, you know, it's not clear

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that they have control from ownership at all.

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But we believe what they have ownership, the reason

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that they keep controlling the firm as they do is

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because they, they've been very, very successful.

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And that's because, you know,

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they used this adopted sons and, and, and arranged marriages

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and bringing in best CEOs.

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And then, you know, in, in this traditional system, the,

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the daughters did not have a lot of free choice, right?

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So basically what they did was they found the best CEOs out

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there and, and then they married them into the daughters of,

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of the Suzuki family and adopted them into the family.

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So you can say the, the reason the dynastic ownership,

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as we call it worked here, was

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because they kind of enlarged the,

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the tradition they were very creative in, in, instead

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of me having professional outside CEOs, they,

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they got professional outside CEOs, but married them

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and adopted them into the family.

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So they changed kind of the, concept of family.

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And then I would say that the third case,

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which is also a very simple case for companies,

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so Castio, who were first very famous, of course

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for the calculator in the seventies when,

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when we were kids, right?

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We all had a catch calculator.

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Um, they have basically 0% ownership

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and they never been, ownership.

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But they had also for, the founder was very successful

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and he had four sons.

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And each of these sons have been extremely

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contributing to the firm.

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You know, one of them was a product visa, one

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of them was a management visa.

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Uh, and I think the latest one has just retired,

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from being chairman of the board, in a very,

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very high age, a few years ago.

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And we can say here, it's, it's probably the case

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that these family CEOs

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and family, controllers have just been the best possible

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the leaders for this firm.

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And everybody could see that for generations right?

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Now, that doesn't mean that,

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that the family will keep controlling

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that company in the future

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because they are really dependent on,

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on delivering the goods.

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Um, so I would say these are three, in our view, very,

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funny and interesting cases and and famous cases.

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And to sum up, they have that in common that the family,

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when we just the ownership, they seem

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to have dynastic control

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or dynastic ownership in the sense that they have been able

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to, you know, keep controlling their firms,

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even though nominally they have very little ownership,

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but they do it in three different ways.

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So, so the Toyota is this fault control,

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and that would be hard to, you know,

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rest from the, the family.

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So Sugi has historically been,

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this extremely creative way of bringing in the best people

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and, and then, adopted them into family

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and married them to the daughters.

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And, and CAIO has just had this fantastic lot

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to have extremely talented family members over time.

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Now, one of the questions we ask ourselves when,

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when we start to look, because we really came from these

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cases, and then, then we realized it was 8%, right?

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And we ask ourselves, you know, now we, 40,

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50 years have been written about family firms.

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The research on family firms is very, very large.

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And, and there are hundreds of papers, not only in economics

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and finance, but management leadership, that journals

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of family businesses out there.

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And, and obviously we ask ourselves, we cannot be the first

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who this system dramatically.

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So we now, have and, did for the paper and,

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and we even extended afterwards.

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So we now reviewed basically 150 research papers,

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published on the topic of family firms.

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And the question we asked ourselves was, you know,

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how do people actually define a family firm?

13:47.615 --> 13:51.655
Because, you know, naively, most people think it's,

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it's a firm where the family owns the either all firm

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or two thirds of the firm or controlling ownership.

13:59.095 --> 14:02.495
If it's a public trade firm, maybe you just need 20%, but,

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but it's from ownership, the destination of family firms.

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And then we, we invested a lot of time,

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and resources in, in trying to look at

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how does the research define family firms?

14:15.795 --> 14:20.175
And, and that was a little bit of a shock, to say,

14:20.315 --> 14:23.455
you know, to conclude a short, the short statement would be

14:23.455 --> 14:26.015
that, that the definition

14:26.015 --> 14:28.815
of family firms is all over the place.

14:29.115 --> 14:30.735
You know, people get some data

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and then they try to find the, the definition they can.

14:34.555 --> 14:35.975
And let me elaborate a little bit.

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So, so the idea here is, you know, we have a,

14:41.585 --> 14:44.425
a huge of firms right?

14:44.925 --> 14:49.425
In the world, of course, and, you know, we wanted

14:49.525 --> 14:52.205
to categorize it into something we call family firms

14:52.305 --> 14:54.125
and something we do not call family firms.

14:54.705 --> 14:58.485
Now, we do understand that Toyota is a family firm.

14:58.585 --> 15:01.965
We do understand that all mud is a family firm, right?

15:02.425 --> 15:03.765
But you know, that's

15:03.765 --> 15:05.885
because the family is very clear ownership

15:05.905 --> 15:06.925
and management in these things.

15:07.625 --> 15:09.445
But if we have a thousand firms,

15:09.665 --> 15:12.205
how do we actually categorize these firms into this,

15:12.865 --> 15:14.765
you know, variable family firm or not?

15:15.465 --> 15:17.765
And actually, I'm, I'm not even sure this in,

15:17.945 --> 15:19.845
in the future would be very fruitful, right?

15:20.125 --> 15:23.605
'cause ultimately, however we do it, we will have a huge

15:24.215 --> 15:28.005
group of, of very heterogeneous firms we call family firms,

15:28.545 --> 15:30.685
and a huge group of very heterogeneous firms

15:30.745 --> 15:31.805
we call non-family firms.

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Because we, we really forced this

15:35.835 --> 15:38.325
dual definition down on a very,

15:38.325 --> 15:39.685
very broad group of firms, right?

15:40.465 --> 15:41.645
But that's what people have done.

15:41.945 --> 15:46.635
Um, and then we start to ask why, how,

15:46.665 --> 15:48.715
what are the dimensions that people have used

15:48.715 --> 15:49.835
to define family firms?

15:50.135 --> 15:53.875
And lemme just one step back here since they, you know,

15:53.875 --> 15:56.875
when, when we for some reason define family firms, right?

15:56.935 --> 16:00.195
We end up often to have, you know, the small mom

16:00.215 --> 16:03.035
and pop firm, which is clearly a family firm where,

16:03.215 --> 16:05.475
you know, the uncle is that bought or something,

16:06.415 --> 16:09.435
and the wife and the kids are there, right?

16:09.495 --> 16:13.275
And then we have it in the same group as Walmart or car

16:13.695 --> 16:17.195
or Ms, one of the firms in the world.

16:18.095 --> 16:19.515
And, and obviously we have to do that

16:19.515 --> 16:20.835
because we only have this family.

16:23.195 --> 16:24.735
And that in itself is a problem.

16:25.455 --> 16:27.375
Then we looked into how have people defined,

16:27.375 --> 16:28.535
because we were, you know,

16:28.535 --> 16:30.215
curious if people have defined it

16:30.215 --> 16:31.655
from anything but ownership.

16:32.515 --> 16:34.255
And there's no doubt about,

16:34.605 --> 16:37.935
that ownership is the necessary condition in all the

16:37.935 --> 16:39.575
empiric, as we say.

16:40.155 --> 16:41.215
So it's ownership.

16:41.235 --> 16:42.455
And something else,

16:43.195 --> 16:46.495
and this else can be that people have looked at,

16:46.675 --> 16:49.495
you know, is that ownership means is that family

16:49.755 --> 16:53.295
or individual that has owned, 50%

16:53.295 --> 16:55.295
or percent of the firm control the firm.

16:55.475 --> 16:58.175
If it's a private firm, probably more than 50.

16:58.175 --> 17:01.415
If it's a public listed firm, you don't need 50%

17:01.435 --> 17:02.615
to control the firm, right?

17:02.615 --> 17:05.495
Because there's a lot of small, owners.

17:06.765 --> 17:10.105
The second dimension has been that if a family

17:10.205 --> 17:12.785
or individual has, control

17:13.085 --> 17:15.785
and control could beyond direct ownership.

17:15.885 --> 17:18.585
So we have mechanism that gives you more control, right?

17:18.885 --> 17:23.345
We have things we call golden shares or dual class shares,

17:23.605 --> 17:26.545
or pre middle ownership somehow, where, where you

17:26.545 --> 17:30.105
with a relatively small state have much more control than

17:30.105 --> 17:31.385
just your nom shares.

17:31.485 --> 17:33.545
So this is very common for European family.

17:33.605 --> 17:36.425
For instance, shares which have 10 votes.

17:37.365 --> 17:40.305
And you and I vote shares, which have only one vote.

17:40.645 --> 17:42.865
Um, so that's why we call dual ownership.

17:43.945 --> 17:47.445
The third dimension is if the family are involved in

17:47.445 --> 17:50.805
management, you know, either controlling the board

17:50.865 --> 17:55.285
or the CEO and the fourth dimension, which is,

17:55.725 --> 17:58.525
actually I think the most interesting dimension is probably

17:58.625 --> 18:00.485
how much is the family involved in the firm?

18:00.585 --> 18:02.565
You know, do the family members work in the firm?

18:03.115 --> 18:05.405
What position do family members have?

18:06.465 --> 18:08.365
And the reason you go that way is

18:08.635 --> 18:12.155
because, you know, you can easily call, you know,

18:12.255 --> 18:15.115
not today, but, but you know, when, when, when,

18:15.225 --> 18:19.235
bill Gates was the biggest owner of Microsoft, you know,

18:19.235 --> 18:21.515
that's not a family firm, but Bill Gates had a

18:21.515 --> 18:22.835
controlling ownership today, right?

18:23.655 --> 18:26.075
Uh, so you want to have more than just ownership,

18:26.335 --> 18:27.795
and that could be management,

18:27.795 --> 18:29.275
that could be family involvement.

18:29.895 --> 18:34.045
Um, and then the last I dimension, is

18:34.045 --> 18:36.805
that some people say it's only a real family firm

18:37.395 --> 18:38.805
when there has been a succession,

18:38.945 --> 18:42.605
or at least the, the founder wants to do in succession,

18:42.715 --> 18:44.325
obviously something can happen, right?

18:44.545 --> 18:46.805
Get an offer, which is too good and you sell the firm.

18:46.905 --> 18:49.485
But, but the idea that you run the firm

18:50.075 --> 18:52.965
because you want to do a succession can be very,

18:53.355 --> 18:56.485
important in, in the literature and in the research

18:56.485 --> 18:58.925
because you know, you really want to separate,

18:59.305 --> 19:01.625
or some people want to separate

19:02.145 --> 19:04.265
entrepreneurship from family firms, right?

19:04.765 --> 19:06.865
So you can say, I'm a programmer.

19:07.385 --> 19:09.585
I start up my, my little programming company.

19:09.825 --> 19:12.905
I own everything. I may even put my wife,

19:13.585 --> 19:17.145
actually my wife, she, you know,

19:17.145 --> 19:19.825
you may put a family member in, in the board, right?

19:19.885 --> 19:23.145
And, and that would satisfy all these dimensions, right?

19:23.245 --> 19:25.985
But the only dream I have as an enterer is to sell it

19:25.985 --> 19:29.345
to Microsoft or somewhere of 8 million

19:29.995 --> 19:31.625
Crown China euro.

19:32.285 --> 19:34.545
Now, what we found interesting relative

19:34.545 --> 19:38.265
to this research was really that, that nobody,

19:38.765 --> 19:42.465
had actually categorized these dy owned firms, you know,

19:42.465 --> 19:45.625
because every definition we found started out

19:45.625 --> 19:46.945
with some kind of ownership.

19:47.605 --> 19:51.225
Um, so if there was no ownership, it could not be ation.

19:52.185 --> 19:54.445
The literature review was basically to say, has,

19:54.665 --> 19:56.685
has anybody started this phenomenon

19:56.745 --> 19:58.245
of the dynastic ownership?

19:58.295 --> 20:00.145
Right? And,

20:00.325 --> 20:03.945
and we realized it had not really been recognized in that.

20:04.375 --> 20:07.395
Yeah, a few cases had been discussed.

20:08.135 --> 20:10.075
And then, then we went

20:10.175 --> 20:11.515
and asked, the second question is,

20:11.615 --> 20:13.435
you know, how common is this?

20:13.495 --> 20:17.355
Is this just the Suzuki and Soto exotic cases and, and cash,

20:17.575 --> 20:18.595
or is it more common?

20:19.215 --> 20:22.915
And for that, we took, you know, the data of all,

20:22.975 --> 20:25.915
public trade firms in, in Japan,

20:26.815 --> 20:28.675
and we showed that it was actually more

20:28.675 --> 20:29.795
common than you should believe.

20:29.865 --> 20:33.075
It's seven 8% of, of the public trade firm.

20:33.075 --> 20:34.555
And these are very large firms, right?

20:35.475 --> 20:40.145
Which you can say in most studies of family firms have been,

20:40.405 --> 20:43.505
categorized as non-family firms, right?

20:43.565 --> 20:47.200
So, so as a researcher tell that,

20:47.555 --> 20:49.605
that we may have underestimated the number

20:49.605 --> 20:51.405
Of family firms because we put all these

20:51.995 --> 20:53.885
Into the non-family Category.

20:54.145 --> 20:56.165
If we go back to the Toyota case, actually a lot,

20:56.175 --> 20:57.885
there was a lot of media exposure.

20:58.065 --> 21:01.285
Now on the acute Toyota, the guy who came in

21:01.985 --> 21:05.845
has just retired, and they have picked a

21:05.845 --> 21:07.045
non-family, CEO,

21:07.385 --> 21:09.445
Uh, for the Next, and the media has kind

21:09.445 --> 21:11.605
of interpretated this as they go back to being

21:11.725 --> 21:13.525
A non-family firm and professional.

21:13.905 --> 21:16.845
And we, I had, I hardly agree with that.

21:17.515 --> 21:20.525
What happens in these Japanese firms is the next generation

21:20.825 --> 21:24.005
cannot be CEO before they turn 50 years.

21:24.385 --> 21:25.565
That's a cultural norm.

21:26.225 --> 21:29.165
You would never see, a family CEO in a public

21:29.165 --> 21:32.245
Trade firm in Japan being much less than 50 years.

21:33.145 --> 21:36.965
And that is a next generation there. And his 38.

21:36.985 --> 21:39.285
And there was the same with Ayo Toyota, when, you know,

21:39.285 --> 21:43.725
in the 18 years where there was no family, presidents

21:43.725 --> 21:46.325
before Toyota, acute Toyota was dead,

21:46.465 --> 21:48.205
and they were basically waiting on the right

21:48.205 --> 21:49.365
moment to promote him.

21:50.305 --> 21:53.485
And this is also what we see now that they put in a,

21:53.835 --> 21:55.445
so-called professional EO,

21:55.445 --> 21:57.605
but the guy has been 20 years in Toyota and,

21:57.705 --> 21:59.845
and is a very much a Toyota man,

22:00.625 --> 22:04.005
and what we call placeholder, CEO,

22:04.005 --> 22:05.925
which is another phenomen we're starting

22:05.985 --> 22:07.285
Now in these firms, that,

22:07.745 --> 22:09.675
That when you have this diagnostic ownership and,

22:09.735 --> 22:11.635
and you want the next generation to take over,

22:11.705 --> 22:13.395
what do you do when the, basically,

22:13.395 --> 22:15.235
when the next generation either is not there

22:15.895 --> 22:18.795
or is not 50 years is not ready.

22:19.865 --> 22:22.365
And what they do, these family firms to

22:22.995 --> 22:27.685
keep the diagnostic control is that they use this tool of,

22:27.825 --> 22:31.045
or these people that we call placeholder CEOs

22:31.905 --> 22:33.165
and my conjecture,

22:33.165 --> 22:34.485
but that's not what you read in the media.

22:34.625 --> 22:38.365
My conjecture is that the, you know, this new,

22:38.925 --> 22:42.325
CEO is a, is a placeholder, CEO, he would be there

22:42.655 --> 22:44.645
until the next, and I think the next generation is

22:44.645 --> 22:45.885
38 now or something.

22:45.905 --> 22:48.525
So, so my guess would be he would be there in 10 years,

22:49.065 --> 22:51.405
and then they'll promote next generation family member

22:51.535 --> 22:53.885
again, and the family controls the

22:53.885 --> 22:55.125
board still, right? And they

22:55.125 --> 22:56.565
Will keep on controlling the board.

22:56.745 --> 22:58.925
And that's kind of the excuse they, they used

22:59.225 --> 23:03.085
Say, you know, motor diesel

23:03.305 --> 23:05.005
man, gasoline man, right?

23:05.905 --> 23:10.445
Um, but I really don't think that the, and the same with,

23:10.945 --> 23:14.125
or cash, I think these two firms

23:15.935 --> 23:19.115
are more sensitive to how they perform the family,

23:19.115 --> 23:20.315
because they're the,

23:20.495 --> 23:23.155
You know, the control can easily be challenged,

23:23.155 --> 23:25.675
which it cannot in, in.

23:27.255 --> 23:29.515
Now in Japan, we're pretty sure that

23:29.745 --> 23:32.905
because they have these dimensions, you know,

23:32.975 --> 23:35.705
that they can use board control, they can use,

23:36.495 --> 23:39.745
it's in the family concepts, they can use, talent,

23:40.075 --> 23:42.785
these things that, that there's no reason to believe

23:42.785 --> 23:44.145
that this will diminish.

23:44.845 --> 23:46.045
So, so that's in Japan.

23:46.785 --> 23:49.045
Now, we also started to study a little bit,

23:49.645 --> 23:51.205
domestic ownership outside Japan.

23:52.455 --> 23:57.035
And, the, the, the continent, Japan, they have it

23:57.745 --> 23:59.075
also in, in significant.

23:59.375 --> 24:03.995
So this culture is

24:04.035 --> 24:05.155
very similar to Japan.

24:05.805 --> 24:08.075
Korea has it, their Korean firms also.

24:08.215 --> 24:10.075
Uh, now if we go to Europe

24:10.135 --> 24:13.625
and the us it's a little bit difficult.

24:13.775 --> 24:16.025
It's a little bit different. I mean, the cases exist.

24:16.405 --> 24:19.505
Uh, so, you know, we would say that Santander Bank, one

24:19.505 --> 24:21.865
of the biggest banks in the world, is actually a case where

24:22.885 --> 24:26.745
the very powerful, family member,

24:26.845 --> 24:28.825
but the family owns almost nothing.

24:29.085 --> 24:31.385
And, and he was chairman of the board,

24:31.525 --> 24:32.625
of course, for many, many years.

24:33.525 --> 24:35.745
And, and they managed to do succession.

24:35.885 --> 24:37.945
The, the daughter is now the chairman of the board.

24:38.685 --> 24:41.385
Um, but the family doesn't own

24:41.935 --> 24:43.705
more than 1% of the tender bank.

24:43.725 --> 24:46.305
The most think this is of course, very global bank.

24:47.445 --> 24:49.905
We have also seen quite a few cases in the us.

24:50.205 --> 24:52.225
Uh, but I have to say, many of these cases

24:53.115 --> 24:55.225
ended up being family exits.

24:55.485 --> 25:00.345
Um, so I think the more active,

25:00.945 --> 25:04.185
investor market and the more active corporate control market

25:04.245 --> 25:08.265
in the US makes this much more difficult

25:08.365 --> 25:10.025
to sustain the dy ownership,

25:10.045 --> 25:12.665
to sustain control without ownership.

25:12.805 --> 25:17.565
And, and we see, you know, in the uk for instance, one,

25:17.665 --> 25:21.005
one of my favorite family firms was,

25:21.425 --> 25:22.885
Capari the chocolate company.

25:22.985 --> 25:27.005
And Capari has such a fascinating history for, you know,

25:27.005 --> 25:30.125
being Quakers and being very social engaged and,

25:30.185 --> 25:31.565
and a religious family.

25:31.825 --> 25:32.845
And because all the,

25:32.865 --> 25:35.645
all big British chocolate companies like Fry.

25:35.705 --> 25:37.965
And, and in the end,

25:37.965 --> 25:40.645
because they were so social minded, they had given away,

25:40.905 --> 25:42.965
you know, there were many, many Kare family members.

25:44.265 --> 25:48.725
And, Adrian Kare, of course was the last family, CEO

25:48.745 --> 25:49.885
or president in the company.

25:50.865 --> 25:54.445
And in the end, the family didn't really own very much,

25:55.065 --> 25:58.045
partly 'cause all, all of these social funds have,

25:58.325 --> 25:59.805
divested, you know, they,

25:59.875 --> 26:03.085
they thought more about the security of their asset

26:03.785 --> 26:06.645
and party, of course, because grew so much and went public

26:06.785 --> 26:09.805
and investors, and,

26:10.185 --> 26:13.925
but I also have to thousand less this

26:14.545 --> 26:15.925
on side, right?

26:16.585 --> 26:18.765
And as we all know, it was,

26:18.765 --> 26:23.565
taken over in a hostile takeover, by modern craft.

26:26.345 --> 26:30.165
Uh, so that's another example on, on, you know, how the ship

26:31.625 --> 26:35.645
and lead to exit in, in the UK US environment.

26:36.305 --> 26:41.135
So I would say, you know, bottom line is that I think it's,

26:41.165 --> 26:44.565
it's sustainable in, in Asian countries

26:44.565 --> 26:49.515
and during Japan, Taiwan, Korea is probably less sustainable

26:49.615 --> 26:52.475
as the phenomenon in, in the European US context.

26:52.935 --> 26:57.275
So for me, it has been a big surprise, to see that that,

26:57.275 --> 26:59.315
you know, there's a whole new type of firm.

26:59.315 --> 27:01.675
There's not new firms because we knew the firms, right?

27:02.475 --> 27:06.145
But there's a whole new type of ownership

27:06.245 --> 27:07.345
and control that,

27:07.415 --> 27:10.025
that we hadn't really taken serious before.

27:10.285 --> 27:13.025
And, you know, this goes back to the famous Berlin means,

27:13.165 --> 27:14.945
and you know, we used to think about

27:14.965 --> 27:17.185
before Berlin means we had these concentrated ownership,

27:17.185 --> 27:19.905
and then we became public, but everything was generated

27:20.005 --> 27:21.385
by ownership.

27:21.765 --> 27:24.985
Now it turns out that you can actually have firms

27:25.035 --> 27:26.265
where you can control it

27:26.265 --> 27:28.105
for generations without having ownership.

27:28.205 --> 27:31.505
So that phenomenon in itself is super interesting.

27:32.165 --> 27:36.185
The second phenomenon, I think is, is also the, the kind

27:36.185 --> 27:39.745
of tools that you can substitute ownership with.

27:40.085 --> 27:41.625
And, and, you know,

27:41.625 --> 27:45.625
this can be the placeholder CEOs I talked about, you know,

27:45.625 --> 27:47.825
which are very different from professional CEOs.

27:47.825 --> 27:52.145
These are, these are, you know, typically experienced,

27:53.075 --> 27:56.385
loyal, non-family members

27:56.565 --> 27:58.425
who have worked in the leadership of the firm

27:58.485 --> 27:59.865
for many years, and they do exactly

27:59.865 --> 28:01.345
what the family would've done, right?

28:01.935 --> 28:03.025
It's the board control.

28:03.025 --> 28:05.705
This is the new dimension of board that, that, you know,

28:05.705 --> 28:07.545
in particularly when you have these cross ownership,

28:08.135 --> 28:11.305
that board control becomes very, very powerful

28:11.305 --> 28:13.425
because, you have cross ownership.

28:13.425 --> 28:15.625
So the board controls the big chunk

28:15.645 --> 28:18.105
of the ownership in the other firms, right?

28:19.255 --> 28:22.265
It's the, you know, extended governance,

28:22.605 --> 28:25.505
and it's the focus on, on talent, right?

28:25.705 --> 28:28.465
I mean, now the cash case is really the talent case.

28:28.485 --> 28:31.265
So I think all of these mechanism are able

28:31.265 --> 28:33.305
to substitute ownership control

28:33.305 --> 28:36.225
that we were really aware of before.

28:36.865 --> 28:39.065
I also think that a lot of the, you know,

28:39.065 --> 28:41.985
management books we have on Asian companies may have

28:41.985 --> 28:43.305
to be rewritten slightly

28:43.775 --> 28:46.845
because, you know, there've been written many, many studies

28:46.985 --> 28:49.405
of Toyota claiming, until 2009

28:49.405 --> 28:51.125
that it was actually not a family firm, right?

28:51.125 --> 28:54.805
And suddenly the family member comes back, right? So.

00:02 - Is a phenomenon that, that we have discovered recently and, and we don't really believe that people have, have, discussed before. So this is the idea that the family firms, they exist firms around the world, which are controlled and managed and governed by individual families,

00:27 - but these families do, in reality, have very little ownership. And why is this interesting? We tend in corporate governance and in the study of firms to think that everything comes from ownership. It's, it's, you know, it's the ownership. When you own, x percent of Microsoft, you control Microsoft. So ultimately there can be a lot of deviations and,

00:54 - and variance of ownership. But, but we historically think that ownership is kind of the key to, everything when we talk about, corporate governance in general, and therefore we thought it was, it was, interesting. First we, we, we just, found a few cases and, and we said, you know, how can it be that this family always is the CEO of this firm, even though they don't look like they're, you know, a big owner.

01:24 - They're not among the largest tin owners, 20 owners, and some of them are not owners, half owners all, and they still keep on, you know, producing that control these family, family businesses and become future CEOs. And they make succession in the family. And we went back to the, and, and, you know, looked in deeply into what people have said in particular about family firms and ownership, during the last, decades.

01:52 - And we didn't really find any systematic thoughts of these things. I mean, people kind of knew that an exotic case once in a while. and then we went from these cases, and then we asked ourselves, taking, taking one country where we have in particularly good, data, and that was Japan. And then we started to ask ourself, you know, are these just rare cases?

02:15 - And, and so we look back at all public traded companies in Japan during the last, you know, 50 years basically since World War I, when, when, or the, the governance of public trade firms were reinvented after in Japan. And we saw that it's actually more common than, than we believe. and, and we found that it was, you know, seven, 8% of all these large, you know, large trade firms in Japan where feminist seems to control the firm seems to have

02:52 - the key position either as, what we would call c president or chairman of the boards. and that these families also were able to, you know, do success, right? It was not just the one powerful individual that were hanging around there for historical reasons. And the moment this person was, was gone, it was a non-family firm. It actually turned out that in, in many of these firms, the family were able to continue

03:24 - for generations almost without ownership. So if we take a few of these cases, the first one that comes to mind is, is probably Toyota, which is of course, the world's biggest car company and, and a super famous company. people have for decades discussed if Toyota was a family firm or not. and, in particular, I would say in, in the eighties and in the nineties, I think the consensual was that Toyota was not a family.

03:54 - It's obviously the, the family behind Toyota is called Toyota with a, with a D. and, and the anecdote is that if you're writing Japanese Toyota with a t is is more beautiful, more symmetric than Toyota with a D. So that's why the company has a T and the family now, in the Toyota case, obviously the family used to own a lot of the firm, and it grew and it grew actually,

04:23 - the really old history is that it was not even a car company. It was actually a textile company, in the beginning. And it was only in the second generation that, that they started to produce cars. But the car company grew and grew and, and through that, the ownership of the family became smaller and smaller. And today we kind of, it, it's a little hard to just, 'cause Toyota is a big conglomerate, and it has like,

04:49 - but you have three core companies, the motor company and, and, and a few other companies. and we kind of believe that the family owns less than, definitely less than 5%, and probably around two, 3%. And it's not among the 10 biggest owners of, of Toyota. and then, until 2000, for 18 years, they didn't even have a family, CEO and everybody was kind of saying, this is not a family firm. What happened in 19 90, 19 9 in 2009 was that there was a big scandal, one

05:27 - of these car scandal where the brakes didn't work and the US family were killed. and they had court cases, running about the security. And it turned out that all this professional management have done something, very short termism. And that's not really the, the, what we think about Toyota think is very safe car, maybe not, but you things.

05:58 - So, at that point, Toyota decided to bring in a Q Toyota, the, the guy, the president who just retired, spring. And, and there was the proof that it was still a family member, right? When, when the family was really suffering, they brought in the family member, even though the family didn't own very much. And, it was a tremendous, he, you know, the moment, there's a famous picture where he apologized for this

06:29 - and when disappointed and the stock prices wrote 3%, and he went three weeks after to the US and he said the very famous, statement that, you know, in a Congress hearing in the US hardly speaking English, he said, no, my signature is behind every car we sell. When the car is hurt or damaged, I'm damaged. And you know, this is only a family that that can, can use this trick, right? So he has been very, very successful. And, and today we all believe it's a family firm,

07:02 - but the family still own very little. You know, the 10 biggest owners of Toyota are probably or are, basic institutional investors and banks and these things. So clearly the family has been able to control the firm without a lot of ownership. And in this case, we kind of know, what the mechanism is. And the mechanism is very much through broad control. So as I said, there are a number of firms

07:31 - that cross own each other in the holder group. And when the families sit on the board, they, the board controls, of course the voting rights on the shares that one company owns in another company. And since the family controls the board, they control this, you know, corporate ownership, cross ownership in the board. And I think this is, we believe this is kind of the mechanism that actually gives the family control

07:57 - without having a lot of direct ownership. A second case, which is, even more interesting probably is, is, Soki, of course is also a very famous firm. and, and they also do, motor and, you know, small cars and, and, and, a lot of the related stuff to that, right? I mean, basically the Suki for many generation until very, very recently, always had a family member as the president, always.

08:32 - And they've done successions. And what is even more interesting is that, the founder only had daughters and, and the next generation only had daughters. And in this context of Japanese, traditionally family businesses, daughters could not run the firm. So for each of these CEOs have basically been married into the family and then have adopted their name into the Suzuki family. So all the CEOs have been Suzuki,

09:02 - but basically I think 3, 4, 5 of them have been adopted sons who then changed their name and become part of the family. But the interesting fact is that when Suzuki went public in, in, a few decades ago, the family diluted their ownership. So today they probably have, less than 1%, and they have had that for many, many years. And, and Suki is not that complicated, the firm. So you can say in the Toyota case, it's hard to challenge the family because they control the boats.

09:36 - But, you know, it's not clear that they have control from ownership at all. But we believe what they have ownership, the reason that they keep controlling the firm as they do is because they, they've been very, very successful. And that's because, you know, they used this adopted sons and, and, and arranged marriages and bringing in best CEOs. And then, you know, in, in this traditional system, the, the daughters did not have a lot of free choice, right?

10:07 - So basically what they did was they found the best CEOs out there and, and then they married them into the daughters of, of the Suzuki family and adopted them into the family. So you can say the, the reason the dynastic ownership, as we call it worked here, was because they kind of enlarged the, the tradition they were very creative in, in, instead of me having professional outside CEOs, they, they got professional outside CEOs, but married them and adopted them into the family.

10:36 - So they changed kind of the, concept of family. And then I would say that the third case, which is also a very simple case for companies, so Castio, who were first very famous, of course for the calculator in the seventies when, when we were kids, right? We all had a catch calculator. they have basically 0% ownership and they never been, ownership. But they had also for, the founder was very successful

11:08 - and he had four sons. And each of these sons have been extremely contributing to the firm. You know, one of them was a product visa, one of them was a management visa. and I think the latest one has just retired, from being chairman of the board, in a very, very high age, a few years ago. And we can say here, it's, it's probably the case that these family CEOs

11:38 - and family, controllers have just been the best possible the leaders for this firm. And everybody could see that for generations right? Now, that doesn't mean that, that the family will keep controlling that company in the future because they are really dependent on, on delivering the goods. so I would say these are three, in our view, very, funny and interesting cases and and famous cases.

12:07 - And to sum up, they have that in common that the family, when we just the ownership, they seem to have dynastic control or dynastic ownership in the sense that they have been able to, you know, keep controlling their firms, even though nominally they have very little ownership, but they do it in three different ways. So, so the Toyota is this fault control, and that would be hard to, you know, rest from the, the family.

12:34 - So Sugi has historically been, this extremely creative way of bringing in the best people and, and then, adopted them into family and married them to the daughters. And, and CAIO has just had this fantastic lot to have extremely talented family members over time. Now, one of the questions we ask ourselves when, when we start to look, because we really came from these cases, and then, then we realized it was 8%, right? And we ask ourselves, you know, now we, 40,

13:04 - 50 years have been written about family firms. The research on family firms is very, very large. And, and there are hundreds of papers, not only in economics and finance, but management leadership, that journals of family businesses out there. And, and obviously we ask ourselves, we cannot be the first who this system dramatically. So we now, have and, did for the paper and, and we even extended afterwards. So we now reviewed basically 150 research papers,

13:39 - published on the topic of family firms. And the question we asked ourselves was, you know, how do people actually define a family firm? Because, you know, naively, most people think it's, it's a firm where the family owns the either all firm or two thirds of the firm or controlling ownership. If it's a public trade firm, maybe you just need 20%, but, but it's from ownership, the destination of family firms. And then we, we invested a lot of time, and resources in, in trying to look at

14:12 - how does the research define family firms? And, and that was a little bit of a shock, to say, you know, to conclude a short, the short statement would be that, that the definition of family firms is all over the place. You know, people get some data and then they try to find the, the definition they can. And let me elaborate a little bit. So, so the idea here is, you know, we have a, a huge of firms right?

14:44 - In the world, of course, and, you know, we wanted to categorize it into something we call family firms and something we do not call family firms. Now, we do understand that Toyota is a family firm. We do understand that all mud is a family firm, right? But you know, that's because the family is very clear ownership and management in these things. But if we have a thousand firms, how do we actually categorize these firms into this,

15:12 - you know, variable family firm or not? And actually, I'm, I'm not even sure this in, in the future would be very fruitful, right? 'cause ultimately, however we do it, we will have a huge group of, of very heterogeneous firms we call family firms, and a huge group of very heterogeneous firms we call non-family firms. Because we, we really forced this dual definition down on a very, very broad group of firms, right?

15:40 - But that's what people have done. and then we start to ask why, how, what are the dimensions that people have used to define family firms? And lemme just one step back here since they, you know, when, when we for some reason define family firms, right? We end up often to have, you know, the small mom and pop firm, which is clearly a family firm where, you know, the uncle is that bought or something, and the wife and the kids are there, right?

16:09 - And then we have it in the same group as Walmart or car or Ms, one of the firms in the world. And, and obviously we have to do that because we only have this family. And that in itself is a problem. Then we looked into how have people defined, because we were, you know, curious if people have defined it from anything but ownership. And there's no doubt about,

16:34 - that ownership is the necessary condition in all the empiric, as we say. So it's ownership. And something else, and this else can be that people have looked at, you know, is that ownership means is that family or individual that has owned, 50% or percent of the firm control the firm. If it's a private firm, probably more than 50. If it's a public listed firm, you don't need 50%

17:01 - to control the firm, right? Because there's a lot of small, owners. The second dimension has been that if a family or individual has, control and control could beyond direct ownership. So we have mechanism that gives you more control, right? We have things we call golden shares or dual class shares, or pre middle ownership somehow, where, where you with a relatively small state have much more control than just your nom shares.

17:31 - So this is very common for European family. For instance, shares which have 10 votes. And you and I vote shares, which have only one vote. so that's why we call dual ownership. The third dimension is if the family are involved in management, you know, either controlling the board or the CEO and the fourth dimension, which is, actually I think the most interesting dimension is probably how much is the family involved in the firm? You know, do the family members work in the firm?

18:03 - What position do family members have? And the reason you go that way is because, you know, you can easily call, you know, not today, but, but you know, when, when, when, bill Gates was the biggest owner of Microsoft, you know, that's not a family firm, but Bill Gates had a controlling ownership today, right? so you want to have more than just ownership, and that could be management, that could be family involvement.

18:29 - and then the last I dimension, is that some people say it's only a real family firm when there has been a succession, or at least the, the founder wants to do in succession, obviously something can happen, right? Get an offer, which is too good and you sell the firm. But, but the idea that you run the firm because you want to do a succession can be very, important in, in the literature and in the research because you know, you really want to separate,

18:59 - or some people want to separate entrepreneurship from family firms, right? So you can say, I'm a programmer. I start up my, my little programming company. I own everything. I may even put my wife, actually my wife, she, you know, you may put a family member in, in the board, right? And, and that would satisfy all these dimensions, right? But the only dream I have as an enterer is to sell it to Microsoft or somewhere of 8 million

19:29 - Crown China euro. Now, what we found interesting relative to this research was really that, that nobody, had actually categorized these dy owned firms, you know, because every definition we found started out with some kind of ownership. so if there was no ownership, it could not be ation. The literature review was basically to say, has, has anybody started this phenomenon of the dynastic ownership?

19:58 - Right? And, and we realized it had not really been recognized in that. Yeah, a few cases had been discussed. And then, then we went and asked, the second question is, you know, how common is this? Is this just the Suzuki and Soto exotic cases and, and cash, or is it more common? And for that, we took, you know, the data of all, public trade firms in, in Japan,

20:26 - and we showed that it was actually more common than you should believe. It's seven 8% of, of the public trade firm. And these are very large firms, right? Which you can say in most studies of family firms have been, categorized as non-family firms, right? So, so as a researcher tell that, that we may have underestimated the number Of family firms because we put all these Into the non-family Category.

20:54 - If we go back to the Toyota case, actually a lot, there was a lot of media exposure. Now on the acute Toyota, the guy who came in has just retired, and they have picked a non-family, CEO, for the Next, and the media has kind of interpretated this as they go back to being A non-family firm and professional. And we, I had, I hardly agree with that. What happens in these Japanese firms is the next generation

21:20 - cannot be CEO before they turn 50 years. That's a cultural norm. You would never see, a family CEO in a public Trade firm in Japan being much less than 50 years. And that is a next generation there. And his 38. And there was the same with Ayo Toyota, when, you know, in the 18 years where there was no family, presidents before Toyota, acute Toyota was dead, and they were basically waiting on the right moment to promote him.

21:50 - And this is also what we see now that they put in a, so-called professional EO, but the guy has been 20 years in Toyota and, and is a very much a Toyota man, and what we call placeholder, CEO, which is another phenomen we're starting Now in these firms, that, That when you have this diagnostic ownership and, and you want the next generation to take over, what do you do when the, basically,

22:13 - when the next generation either is not there or is not 50 years is not ready. And what they do, these family firms to keep the diagnostic control is that they use this tool of, or these people that we call placeholder CEOs and my conjecture, but that's not what you read in the media. My conjecture is that the, you know, this new, CEO is a, is a placeholder, CEO, he would be there until the next, and I think the next generation is

22:44 - 38 now or something. So, so my guess would be he would be there in 10 years, and then they'll promote next generation family member again, and the family controls the board still, right? And they Will keep on controlling the board. And that's kind of the excuse they, they used Say, you know, motor diesel man, gasoline man, right? but I really don't think that the, and the same with,

23:10 - or cash, I think these two firms are more sensitive to how they perform the family, because they're the, You know, the control can easily be challenged, which it cannot in, in. Now in Japan, we're pretty sure that because they have these dimensions, you know, that they can use board control, they can use, it's in the family concepts, they can use, talent, these things that, that there's no reason to believe

23:42 - that this will diminish. So, so that's in Japan. Now, we also started to study a little bit, domestic ownership outside Japan. And, the, the, the continent, Japan, they have it also in, in significant. So this culture is very similar to Japan. Korea has it, their Korean firms also. now if we go to Europe

24:10 - and the us it's a little bit difficult. It's a little bit different. I mean, the cases exist. so, you know, we would say that Santander Bank, one of the biggest banks in the world, is actually a case where the very powerful, family member, but the family owns almost nothing. And, and he was chairman of the board, of course, for many, many years. And, and they managed to do succession. The, the daughter is now the chairman of the board.

24:38 - but the family doesn't own more than 1% of the tender bank. The most think this is of course, very global bank. We have also seen quite a few cases in the us. but I have to say, many of these cases ended up being family exits. so I think the more active, investor market and the more active corporate control market in the US makes this much more difficult to sustain the dy ownership,

25:10 - to sustain control without ownership. And, and we see, you know, in the uk for instance, one, one of my favorite family firms was, Capari the chocolate company. And Capari has such a fascinating history for, you know, being Quakers and being very social engaged and, and a religious family. And because all the, all big British chocolate companies like Fry. And, and in the end,

25:37 - because they were so social minded, they had given away, you know, there were many, many Kare family members. And, Adrian Kare, of course was the last family, CEO or president in the company. And in the end, the family didn't really own very much, partly 'cause all, all of these social funds have, divested, you know, they, they thought more about the security of their asset and party, of course, because grew so much and went public and investors, and,

26:10 - but I also have to thousand less this on side, right? And as we all know, it was, taken over in a hostile takeover, by modern craft. so that's another example on, on, you know, how the ship and lead to exit in, in the UK US environment. So I would say, you know, bottom line is that I think it's, it's sustainable in, in Asian countries and during Japan, Taiwan, Korea is probably less sustainable as the phenomenon in, in the European US context.

26:52 - So for me, it has been a big surprise, to see that that, you know, there's a whole new type of firm. There's not new firms because we knew the firms, right? But there's a whole new type of ownership and control that, that we hadn't really taken serious before. And, you know, this goes back to the famous Berlin means, and you know, we used to think about before Berlin means we had these concentrated ownership, and then we became public, but everything was generated

27:20 - by ownership. Now it turns out that you can actually have firms where you can control it for generations without having ownership. So that phenomenon in itself is super interesting. The second phenomenon, I think is, is also the, the kind of tools that you can substitute ownership with. And, and, you know, this can be the placeholder CEOs I talked about, you know, which are very different from professional CEOs.

27:47 - These are, these are, you know, typically experienced, loyal, non-family members who have worked in the leadership of the firm for many years, and they do exactly what the family would've done, right? It's the board control. This is the new dimension of board that, that, you know, in particularly when you have these cross ownership, that board control becomes very, very powerful because, you have cross ownership.

28:13 - So the board controls the big chunk of the ownership in the other firms, right? It's the, you know, extended governance, and it's the focus on, on talent, right? I mean, now the cash case is really the talent case. So I think all of these mechanism are able to substitute ownership control that we were really aware of before. I also think that a lot of the, you know, management books we have on Asian companies may have

28:41 - to be rewritten slightly because, you know, there've been written many, many studies of Toyota claiming, until 2009 that it was actually not a family firm, right? And suddenly the family member comes back, right? So.

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