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Japanese companies -- the (adopted) son rises

Business families profit from adult adoption and arranged marriage

| Japan
Suzuki Motor Chairman Osamu Suzuki is one of Japan's most prominent adopted-heir chief executives and was the carmaker's fourth in a row.   © Reuters

Japanese business families have developed an answer to an age-old headache facing family-run businesses -- the fact that the founders rarely produce children as talented or determined as themselves.

Japanese entrepreneurs with enough discipline to overlook the claims of their own children go outside the family for next-generation talent. Those with daughters often favor arranged marriage and choosing an appropriate son-in-law to lead the business. Those without suitable daughters follow another technique -- adopting an adult man as their future company chief. (While the practice would work equally well with daughters-in-law and adopted daughters, in reality Japanese companies are largely run by men).

Japan is hardly unique to practice arranged marriage, even if the custom is declining. But adult adoption is rare in the world. Moreover, both traditions are very well established in Japan, going back to pre-industrial times, when wealthy families were equally motivated to recruit suitable heirs.

Crucially, the idea that non-blood heirs perform better than natural sons (daughters have rarely had the same chances) is more than just folk wisdom. At least as far as companies are concerned, our research shows that, in Japan, non-blood heirs generally do make better managers. The data gives food for thought for other family-run companies around the world.

At the National University of Singapore Business School, we looked at 1,433 nonfinancial companies listed in all stock exchanges in Japan from 1962 to 2000. About half were still partly owned by founding families.

We split family-linked companies into those run by the first-generation founders (46%), and those run by three kinds of next-generation managers -- blood heirs (32%), non-blood heirs (4%) and hired professional chief executives (6%). The founders did best. Among the next-generation managers non-blood heirs -- typically sons-in-law and adopted sons -- not only beat blood heirs but also did better than the hired professionals.

In terms of profitability as measured by return on assets (ROA), non-blood heirs outperformed blood heirs by about 6% and outpaced professional chief executives by around 10%. Indeed, the non-blood heirs did almost as well as companies run by first-generation founders.

All this explains the sense in the old Japanese adage which celebrates the joy of a business family at the birth of a daughter: "You cannot choose your sons, but you can choose your sons-in-law."

Meanwhile, the adult adoption is a contractual arrangement between consenting adults, in which the adult male adoptee agrees to carry forward his new family's name in return for an inheritance. He voluntarily severs most ties to his birth parents and swears fealty to his new father and mother.

It is crucial that, in Japanese society, both arranged marriages and adult adoption have remained acceptable. Even an adopted son, who might in other countries experience all kinds of resentment, can be given the lion's share of the inheritance even when the family has a natural son, one that they have judged to be insufficiently competent.

Since the Second World War, about 10% of successions in business families have seen control transferred to a son-in-law, adopted son or adopted son-in-law -- all non-blood heirs.

A high-profile example is Suzuki Motor, the vehicle maker, which has relied extensively on adopted sons for the top job, which is currently held by Osamu Suzuki. Born Osamu Matsuda, he was adopted at the age of 28 by the patriarch Shunzo Suzuki, married one of his daughters and took the Suzuki name. He joined the board at 33, became the president at 48, and assumed chairmanship when he was 70. His ascension in management as the adopted son and son-in-law follows a long Suzuki tradition. Osamu is the fourth in a succession of adopted-heir chief executives. In turn, he designated his son-in-law as his heir, bypassing his blood son. Unfortunately, the premature passing of the son-in-law led Osamu to eventually hand over the presidency to his blood son, Toshihiro Suzuki, in 2015.

Suzuki Motors is not alone. Other well-known Japanese family businesses that have practiced adopting sons to carry on the business include Panasonic, the consumer electronics group, Taisho Pharmaceutical and contractor Kajima.

It is no surprise that companies run by the founder do best, outperforming others on criteria including ROA, sales growth and employee growth. Founder companies are young, small and the stock is narrowly held; while heir-run firms tend to be old and large. Moreover, companies that list during their founders' lifetimes often make spectacular gains in asset valuations.

Further analyses show that ROA performs best after non-blood heirs take over, and drops most after families hire professional chief executives but remain large shareholders. We observe that when a family business is run by a professional, there is higher sales growth. But with lower ROA, it is possible that such managers pursue unprofitable expansion.

Why do non-blood heirs outperform blood heirs? It is possible that non-blood heirs are more talented. We find that non-blood heirs are twice as likely as blood heirs to have degrees from elite universities, with merit-based admissions. Also, non-blood heirs are chosen from a larger pool of talent while blood heirs are born into the family. It is also possible that non-blood heirs are hungry and motivated to prove their worth, while blood heirs have led a more charmed life.

That blood heirs perform better than professional management may come from the fear that they could be possibly displaced later by professionals, so spurring them to work harder. Professional management, not owning part of the family business, may have less at stake.

Past studies have shown that dynastic control erodes company performance. Business history suggests that professionalism raises efficiency. Yet, in the case of Japanese business families, using adult adoptions and/or arranged marriages to acquire talent has produced better performance.

None of this would be easy for companies in other countries to follow, given deep-rooted differences in societies. But companies in other countries where business families practice arranged marriage to recruit talent, including elsewhere in Asia, can take comfort from this research.

Adult adoptions may be too hard to introduce in countries where it does not already exist. But one of its key features can be mimicked. The adoption gives the adoptee a (very) long-term stake in the business. In this sense, it is not so different from family companies elsewhere -- in the U.S for example -- which give long-term stock options to professional chief executives.

Yupana Wiwattanakantang is associate professor of finance at the National University of Singapore (NUS) Business School. The opinions expressed are those of the writer and do not represent the opinions of NUS.

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