Family-run listcos: A smart investment decision, or 'clusters of long-term insiders'?

ON WEDNESDAY (Dec 22), Asti 575 announced the retrenchment of its chief executive Michael Loh Soon Gnee. The company, which provides various services to semiconductor equipment manufacturers, said it had commenced a retrenchment exercise in July in order to ensure its survival, and that Loh was the latest casualty of this exercise.

Loh is the single largest shareholder of Asti, with a 19.9 per cent stake as at May 11. He is also the company's chairman, and will remain so despite his retrenchment. Loh is contractually entitled to S$2 million as part of his termination, but the board said it will pay him just S$1.4 million.

Asti's latest development is unusual, but is merely the latest in a long list of issues the company has faced for several years. The company is currently on the Singapore Exchange's (SGX) watch list, and owns stakes in 2 other troubled companies.

Corporate governance advocate and NUS Business School professor Mak Yuen Teen cited Asti and its related companies - SGX-listed Dragon Group International and Advanced Systems Automation - as examples of tightly controlled companies that have seen "massive shareholder destruction".

"(And) there are others where minority shareholders are slowly bleeding to death through excessive remuneration and lack of dividends, even though they have not necessarily been in the spotlight for corporate governance breaches," he added.

"Minority shareholders are essentially oppressed in such companies, which are often also tardy in disclosures."

Part of the problem is that such companies are owned and controlled by their largest shareholders, in many cases individual entrepreneurs and their families. Over 60 per cent of Singapore-listed companies today are family-run.

While some of these companies have delivered good returns for investors, others have proven to be poor investment decisions. Market watchers said the differentiating factor often comes down to strong boards and transparent corporate governance structures.

Marleen Dieleman, an associate professor at the NUS Business School and co-chair of the family business group at the Singapore Institute of Directors, noted that decision making in Asian family businesses is "often concentrated in a cluster of long-term insiders" - typically a combination of family members and loyal managers.

"This makes scaling up beyond 'business as usual' more challenging, as the entire management team has similar business experience. Going to new industries or geographies often takes a toll on family leaders," said Prof Dieleman.

Concentration of decision making means it is imperative for a company to have a competent board with outsiders who can "challenge management and offer alternative views", she added.

It often falls upon independent directors to do the challenging.

Sylvia Chen, senior sustainable officer for Asia at asset manager Amundi, said: "To strengthen decisions made at board level, the presence of independent board members, who are not part of the family, is critical."

To ensure board effectiveness, Amundi is vigilant about the independence level of boards and likes to see environmental, social and corporate governance criteria included in management performance indicators.

But Asia head of BlackRock Investment Shinbo Won has often found that the systems and governance structure at family-run companies, particularly in their boards of directors, have "generally fallen short of investor expectations".

"These issues are usually magnified when it comes to the second or third generation with the visionary no longer in place," he said.

David Smith, senior investment director for Asian equities at Abrdn, also highlighted how problems can emerge on both the operational side and "family side" of things at family-run firms.

Family issues spilling into a listed vehicle are a "sure-fire way to find investors giving you a wide berth", he said, adding that a lot of work is required for a family business to produce "sustainable, and equitable, multi-generational wealth generation".

When evaluating family-run companies as investments, Smith said Abrdn looks at "interests the family has outside of the listed vehicle; family dynamics, including, for example, who from the family works for the listed company; and what provisions, if any, there are for family governance structures".

"What starts as a small family business can end with employment of brothers, sisters, aunts, uncles, cousins and so on; and so families need to be forward thinking about addressing this."

Among the largest of Singapore's family-run listed companies is property group City Developments Limited (CDL), which was in the headlines last year after a family member resigned from his position as non-executive and non-independent director, the cousin of CDL's executive chairman Kwek Leng Beng and the uncle of CDL's group chief executive and executive director Sherman Kwek, had stated in his letter of resignation that he disagreed with the board and management on the group's management of a China investment and its British hotel arm.

Some family-run listcos have introduced family members "not because they are qualified, but because they are family", said Prof Mak of NUS. There are also companies with family members holding roles in the company that are not clearly disclosed but have "generous remuneration" packages.

"That's when the trouble worsens," he added. "A good family business has the ethos that family members have to prove themselves to be qualified and capable before they can join the company, and they have to prove themselves in the company before they are appointed to key roles."

There are some positive examples in the Singapore market, said Prof Mak, such as Sheng Siong Group OV8 . The company has been generous in sharing profits with employees and treats employees well.

But he also warned that several family members are executive directors in the supermarket operator, which may not "tick the right box" from a conventional corporate governance perspective.

Other positive examples, he said, include restaurant operator Japan Foods 5OI, investment group Straits Trading S20 and fish breeder Qian Hu BCV .

Said Prof Mak: "Some may not tick all the boxes in terms of what are considered best corporate governance practices; but they are well run, and the good ones are mindful of minority shareholders' interests."