“Vocational Service Month” Meeting
Management of Business Succession
January 15, 2020
Mr. Akihiro Okumura
Professor Emeritus of Keio University
Family businesses flourish in Japan’s corporate landscape, being a home to about 30,000 businesses which have a history of over 100 years. Japan ranks the top in terms of numbers of family-owned businesses that have stood the test of time. Our country has 3,000 out of 8,000 companies in the world with a history of over 2 centuries. In the U.S.A., 37% of Fortune 500 companies are family-owned, while the ratio exceeds 50% in Germany. In France, majority of wine producers are family companies, accounting for more than 60%. It is noteworthy that family businesses generate over one-third of the GDP in Sweden.
I must say we are now facing a major turning point in this country where a large number of small or medium-sized enterprises (SMEs) suffer the risk of closure due to lack of successors. Only 10% of family businesses survive to the third generation. Out of 3.8 million SMEs, as many as 2.45 million will have owners over 75 years old by 2025. The Ministry of Economy, Trade and Industry estimates that 1.27 million SMEs could go bankrupt, leading to roughly 6.5 million job loss and economic damage worth 22 trillion yen of GDP. As majority of SMEs are family-owned, leadership succession is by far the biggest issue which can have serious economic repercussions. Today, I want to share some points as a scholar affiliated to the Japan Academy of Family Business.
Family business is defined by the three basic elements of “ownership”, “family” and “management”. There are various forms of companies that can be largely classified into four types: 1) as a typical type, family owns and manages the business; 2) when non-family member owns and manages, it becomes a shareholder-dominating general company; 3) a family owns a company but hires professional managers to supervise daily operations, often seen in European companies; and 4) family doesn’t own, yet participate in business management. Of the 3,000 listed companies in Japan, nearly 1,500 are classified as the fourth type, making it a predominant form.
A successful business succession requires meticulous long-term planning that takes all possible factors into account to address any unforeseen challenges or consequences. Those who succeed their family owned and managed business must strive for its expansion by successfully adapting to ever changing business environment. Business successors face a number of challenges, including how to fulfill the corporate philosophy and mission passed down from generation to generation, to maintain a relationship of trust with various stakeholders so as to ensure sound and sustained business growth as well as to manage business based on a long-term perspective and mitigate the impact of short-term stock fluctuations. One must keep a fine balance between preserving traditions and initiating innovative changes. We can ensure sustainable growth when the management has a clear vision on what to preserve and what to be changed.
In Japan, we are often taught that employees are the most important stakeholders of family businesses. We can retain long-term employees by building a trustworthy relationship, respecting our employees and providing an enabling work environment. It is worth noting that not a few employees join a family business following in their parents’ footsteps. We can also learn from history how the Omi feudal merchants enjoyed thriving businesses by maintaining good relationships with not only customers but also with local communities and generously putting their profits back into philanthropic activities that benefited the whole community.
Successful business succession can be compared to a relay race where it is critical to have the skills to pass a baton smoothly and efficiently. Successors tend to seek freedom to take independent actions and try to initiate innovative changes to keep up with the dynamics of globalization and technological advancements. This often makes the relationship with the predecessors complicated or strained, especially when they have a strong personality and stick to their own way of thinking and acting based on long-term experiences. Here, good communication between the two becomes of vital importance. It is also advisable for successors to listen and learn from what their predecessors have to say and share.
One major issue we face today is there is nobody to take over the business. In such cases, companies are obliged to find successors among family members and employees or decide to hire managers from outside while the family merely keeps the ownership. As a last resort, companies have to opt for M&A for survival. I must highlight the importance of training capable successors and formulating an effective screening procedure. Sending one’s successor to universities, business schools or other companies is beneficial to build a wealth of personal connection as well as to have first-hand experience that will be an asset in the future to base his/her business on a long-term perspective. As I conclude my speech, let me emphasize that business succession is a crucial element in management and even more so when it comes to family business.