Japanese family business | KPMG | CZ

Four rules we have learned from the Japanese regarding family businesses

Japanese family business

Many a word has recently been written about Czech family businesses and their growing succession issues. The inevitable change from one generation to the next, which is bound to occur in a few years’ time but with which Czech family-owned businesses established after 1989 do not have any direct experience, made us search for inspiration and examples abroad. In Japan we found family businesses with the longest tradition.

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Milan Bláha

Partner, Audit

KPMG in Czech Republic

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The Hoshi family business, a traditional Japanese spa inn called ryokan, was established in 718. One Japanese construction firm, founded in 518, was
even older but did not survive the economic turmoil of the 1980s and ceased to exist after more than forty generations. 

At KPMG we have drawn inspiration from the Japanese tradition and have prepared four rules that apply to family businesses and not only to the issue of succession. We used the Hoshi family’s experience and considered real problems their last generations had to face. We realised that succession in Japan is seen as a great responsibility and that nothing is left to coincidence. In contrast with Czech family businesses, we are talking about many generations that have invested all their energy into their family businesses, coping with constant pressures and high expectations. This is even more true about the Hoshi family whose tradition goes back 1 300 years. 

Rule 1: Succession must be planned from the successors’ early childhood

Every morning at quarter to seven 78-year-old Zengoro Hoshi sounds a gong. His guests sit down on tatamis around him, sip tea and silently listen to the Buddhist truths the inn owner has for them for the day. The speaker is none other than the descendant of a business that has been in his family for 46 generations.

The most important thing not to be underestimated is thinking through
all succession possibilities and raising successors in compliance with the
family business’s mission, values and ethics. It is quite wise to involve
descendants in the operation of a family business from their early childhood,
thus preparing them for their future responsibilities. If they become enthusiastic and strongly motivated to work in the family business early on, the risk that they will fail in their adulthood is much lower. 

Another important factor is proper education, ideally in the same line
of business in which the family business operates. Especially mechanical
engineering companies currently struggle with a lack of managers with adequate education. If a family business is engaged in the provision of services, its future successors should ideally study law, marketing, management or economics. The more the future successors know about the business their family does, the better for the family business and themselves. They may use their knowledge in practice, not leaving the family business for something they feel more strongly about.

The Japanese are traditionally very strict when it comes to raising successors who will one day assume the family business. In the Hoshi family, the father himself knows when his son is ready. The son then assumes the name of Zengoro and takes over the business. The current Zengoro is the 46th in line. 

Rule 2: Fathers must know when to retire

The Hoshi family tradition and principles are in many ways linked with the traditions of old Japan and Buddhism. Japanese ryokans are traditional inns known for their very close contact between guests and inn owners who often serve as mentors in Buddhist rituals and practices. Owing to these specific requirements, the preparation of future successors is long and elaborate, involving not only knowledge and capabilities but also beliefs and soft skills. These values are the Hoshi family’s principal commodity, which may be why the family business has survived to date. Czech HR specialists often talk
about the increasing importance of soft skills. The Japanese, however, have
known this for more than a thousand years.

Many say that if family business owners still sit in their director’s chairs at 80, they will also die in them. The recommended age for retirement is 75 at the latest. Why the older generation should quit in good time becomes apparent from a KfW banking group study showing that if managers get too old at their positions, they tend to lose their ability to innovate and adapt to market needs. Upon their departure, former directors usually accept positions in supervisory or advisory boards. 

The current Zengoro Hoshi would at his age like to enjoy his retirement but lost his successor a few years ago. His son Hiroshi, whom he had raised as his
successor, died unexpectedly of heart failure at 48, which caused many complications. Zengoro immediately began to consider other succession possibilities. He contemplated his sons-in-law but in the end opted for his youngest daughter, Hisae, whom he began preparing at once. 

Rule 3: Successors may sometimes be sought outside the family

In the Hoshi family’s history there were generations either without male heirs or with male heirs considered unsuitable to take over the family business by their fathers. In such cases, Japanese law used to allow the adoption of a son-in-law, i.e. the husband of a daughter, and giving him both the name and the family business. This option is no longer embedded in Japanese law. The current Zengoro Hoshi has thus been preparing his unmarried daughter, Hisae, who has been actively involved in the family business’ operations. In the long history of this firm, Hisae will be the first woman to take over the family business.   

More than one Czech family business is likely to deal with the problem of who will take over their business. The majority of them believe that it will be their offspring who will continue with the business. If there is more than one descendant, it is possible to demerge the business, which is one of the greatest risks. With this option, it becomes necessary to consult professionals who can manage the demerger either so that all parts of the business continue to be dependent on one another (if the family business owner insists on preserving the integrity of the business) or so that each part will be managed independently.

The Hoshi family does not divide its property on principle. The one who becomes the successor acquires not only the entire family business but also all other related family assets and wealth. In Europe we might think this unfair towards the other offspring and next of kin; but this practice has been proven by almost fifty generations managing the ever-growing business. 

English researchers have discovered that handing family businesses over to daughters may actually be smoother than to sons since daughters generally tend to build on the foundations created by their fathers. They do not want to pull the foundations down and are therefore much more willing to avoid intergenerational conflicts.

It is also possible to hand over the family business to professional managers, which would of course be unthinkable in Japan. This option does exist and does not mean the cessation of the family business. The business remains under family ownership but its management is carried out by professional managers until a new successor comes of age. This may therefore be the right solution for family businesses which lack experienced and suitable family members. This option may also have some advantages. Professionals may often be able to manage a business with a broader perspective, giving family members the chance to supervise activities from supervisory boards.

Rule 4: Preserve tradition and go on with the mission

Family businesses in the Czech Republic as well as all around the world put emphasis on long-term development. They do not usually make risky investments and do not like to be in debt. They anxiously protect their name, reputation and brand, which are the guarantees of quality and represent principal commodities. Owing to their stability, family businesses are also attractive employers.  

Stability and gradual development are also the principles of the Hoshi family. Their family motto, having been implanted in the minds of all successors, is a Japanese saying: “Learn from the water flowing down from a small spring”. Zengoro elaborates that the water stream is very thin but strong, gradually overcoming all obstacles and eventually turning into a mighty river.

To preserve tradition and simultaneously adapt to new customer and market requirements may sometimes be quite difficult. All new bosses have to decide what they can sacrifice from traditions without losing neither face nor clients. It is an ever-present dilemma that all family businesses have to deal with.

Hisae, who will take over the family business from her father, is sceptical about his old-fashioned ideas regarding the future development of their business. He wants to attract a higher number of young Japanese but is unable to react to their needs for greater comfort. Potential young clients would rather sleep in a bed than on a futon and rather drink wine than saké. It is therefore likely that the first woman in the history of this family business will introduce changes and new strategies as she knows very well that tradition alone will not suffice.

© 2017 KPMG Baltics OÜ, an Estonian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.

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