Joseph Fan: Succession Challenges for China's Private Enterprises

China's family businesses are struggling to implement effective governance systems and secure their long-term future.

Joseph Fan, a retired professor of finance and accountancy and former co-director of the Institute of Economics and Finance at the Chinese University of Hong Kong, has spent over three decades studying Chinese private enterprises. Known as the “pioneer in family business succession and governance” in China, Fan has identified succession as the single most critical challenge facing these businesses. (Think Succession, but with less financial glamour and more gritty factory-floor manufacturing.)

Fan’s extensive research into Chinese-founded private enterprises across the mainland, Hong Kong, Taiwan, and Southeast Asia attributed the succession crisis to shrinking family sizes, a lack of solid corporate values, and a patriarch stubbornly clinging to power. As a result, many family businesses fail to establish clear governance structures for leadership transitions, which, in Fan’s view, often spells a death sentence for these companies.

This has also been a topic repeatedly emphasised by the Chinese top leadership. On February 17, 2025, during a meeting with representatives of Chinese private entrepreneurs, Xi Jinping stated, “Private enterprises must build ‘century-old brands’ and become evergreen trees. To achieve this, they must have advanced management systems. In terms of governance structure, private enterprises…must also be bold in self-revolution, actively optimising and adjusting…They must place a high priority on cultivating successors, with targeted shaping and refining, ensuring the company has successors and can sustain healthy development.”

Fan delivered his remarks at the Chinastone October Management Forum 2025, hosted by Chinastone Enterprise Management Consulting Co., Ltd, on 30 October. A structured edit of his remarks was published on Chinastone’s WeChat blog on 9 November.

—Yuxuan Jia

Joseph Fan has kindly authorised a translation bur hasn’t reviewed it.

范博宏：我研究企业30年，没见过比民营企业接班更严重的问题

Joseph Fan: In My 30 Years of Studying Enterprises, I’ve Never Seen a Problem More Serious Than Succession in Chinese Private Firms

Dear guests, it’s a great honour to have the opportunity to speak with you today. For the past two decades, my research has focused on private enterprises founded by Chinese entrepreneurs, many of which have evolved into family businesses. Today, I’d like to share some thoughts on the management and sustainability challenges these businesses face.

This area of research is particularly challenging, as most of these enterprises are not publicly listed, making key information difficult to access. My findings have been built up case by case, including Chinese-founded enterprises in Southeast Asia, totalling around 300 cases to date.

Why focus on family businesses, especially when AI is dominating the spotlight? I want to talk about people and families because research shows that half of all founders of China’s listed private enterprises have involved family members as shareholders or managers. This figure is striking. China’s private enterprises developed later than in most countries—no more than forty years ago—but half of its listed private enterprises already involve family members. This clearly indicates that family businesses are not a fading organisational model; in fact, they are likely to become the mainstream of private enterprise, as they have in many countries around the world. In my research across several Southeast Asian countries, about 70% of privately owned, publicly listed enterprises are family businesses. For non-listed enterprises, the proportion is even higher, never lower.

Succession: a Great Challenge for Chinese Business Families

In my courses and consulting projects, the first question I often ask is: What are your family and business goals? I ask about the next three years, then ten years, and finally twenty. Many private enterprises in mainland China and Hong Kong need time to reflect before answering such questions. Most Chinese business families focus on solving immediate problems rather than looking ahead to envision the future twenty years down the road. However, when I pose the same question in Japan or Europe, most people—even the younger generation—can readily articulate their vision for how their enterprises will develop over the next fifty or even one hundred years.

From my observation, nearly every Chinese business family today faces the need to plan for both family and business succession, yet their mindset remains focused on the short term. The current economic and social environments, characterised by rapid and unpredictable change, have further diminished Chinese business families’ inclination to think long-term. Some have even abandoned the idea altogether—a tendency that is, in fact, deeply perilous.

I have tracked 227 overseas Chinese enterprises based in Hong Kong, Taiwan, and Singapore over the past two to three decades. By examining the founders, second-generation, and third-generation leaders over nine years—the five years before succession, the three years after, and the year of complete withdrawal—it was found that the value of these family businesses fell by as much as 60%, more than halved. In my more than thirty years of studying enterprises, I have seen no problem more severe than succession in Chinese private businesses, apart from outright bankruptcy.

People are often keen to talk about the future—about AI and other innovations—but if current research is accurate, many private enterprises that once made significant contributions to China’s economy and society may soon be unable to sustain themselves. The loss would be immense, for these businesses will have to start from scratch, resulting in tremendous waste.

Therefore, beyond preparing for the transformations ahead, it is crucial to also focus on how private enterprises that have already contributed to the country and society can achieve sustainable development—if they are worth preserving. In such a volatile and uncertain environment, if most private businesses cease to reflect on these issues and instead rush headlong into the next big investment trend, such as AI, the outlook for the foreseeable future will be far from optimistic.

A Case of Three Generations Managing a Family Business Together

Let me share a real case from my consulting experience. For privacy reasons, I’ll use an anonymous example, and the figures have been adjusted—but the story is true. This is a Chinese family business, run jointly by three generations, located not in a first- or second-tier city, but in a third-tier city in the Chinese mainland. The first-generation patriarch started the business about fifty years ago and is now nearly eighty years old, with extensive connections in both government and business circles. His wife is now in her seventies. They have three children, all between the ages of fifty and fifty-five, and all are married. The third generation includes six adult grandchildren, aged twenty to thirty-five, while the fourth generation includes four young children.

The family’s holding company oversees a diverse range of businesses. One of them is a publicly listed company in which the family holds a 60% stake. The others are wholly owned or majority-controlled private enterprises, along with an investment firm. What’s particularly interesting is the family’s internal structure. The first generation serves as chairman of the group and remains the ultimate decision-maker. All three second-generation children hold senior management positions within the group. Among the third generation, three work as managers in the group’s subsidiaries, while the other three are either employed elsewhere or currently between jobs. Those family members who work within the group receive fairly ordinary salaries, but the patriarch frequently provides financial support or subsidies for family housing, living expenses, education, and healthcare.

First of all, the family’s holding company has never paid dividends. Like most private enterprises, all profits are reinvested. The shares, nonetheless, have already been allocated: the patriarch holds 25%, while the remaining 75% is evenly divided among his three children. In other words, the shares are split into four equal parts, with the first and second generations together owning 100% of the holding company. However, despite this distribution, no dividends have ever been paid. This means that, although the second generation contributes to the business, their personal income, like their father’s, has never benefited from profit-sharing generated by the company’s operations.

Second, regarding the transfer of shares: as in most private enterprises, the holding company’s shares cannot be transferred. The chairman has further stipulated that the three children, each holding 25% of the shares, are not allowed to pass their shares down to the next generation. In other words, the shares of this family holding company are unlike those traded in the open market. While they technically carry transfer rights, in practice, the liquidity of family business shares is extremely restricted.

This poses a serious problem. For China’s private enterprises in the future, the precise design of share structures—not only the right to dividends but also the transferability of shares—will be a critically important issue.

The third issue is decision-making power. All four members from the first and second generations are on the board of directors, and they hold monthly meetings. When there are differing opinions, naturally, it’s the patriarch who has the final say on decisions. In family businesses, voting is never part of the process; the actual practice differs from the corporate governance framework set out in national law, which is a very common phenomenon. Even in publicly listed private companies, decisions are rarely made through a fully democratic vote at the board level. Typically, it’s the chairman or major shareholders who make the decisions, with voting serving merely as a formality. In emerging markets, shareholder decision-making power is often only partially implemented, but in family businesses, it is not implemented at all. While shares in these family businesses have been clearly distributed, the three critical rights—decision-making, transfer, and dividends—remain entirely unrealised.

What I’m describing is not a phenomenon unique to this particular private enterprise; it’s common in almost all private enterprises, and it’s a very dangerous issue. Because if the patriarch can no longer lead the company or hold everything together, how will the second-generation shareholders collaborate? How will they make decisions? How will they negotiate matters? How will they resolve conflicts of interest? These are extremely tricky questions. In the absence of a clear leader, second- and even third-generation shareholders, lacking the skills to handle and resolve conflicts of interest quickly and effectively, may cause the family to fall apart. The business will stagnate and inevitably decline. This is exactly what the patriarch fears. He knows there have been no problems with family members working in the group for many years, but there has never been any cooperation to make decisions when he is not around. This is a major flaw in the traditional patriarchal system. If the patriarch is no longer present, who will take charge of the company and the family? Who will make the major and minor decisions, and how? It is very likely that, when the leader falls, the rest will scatter.

Based on my experience advising over 30 family businesses, if there is no 10-year plan in place, the outcome is often the same: when the leader falls, family members drift apart, and the business is left in uncertainty—likely no longer controlled by the family, potentially sold to a third party, or left stagnant. This is truly a shame, especially for businesses that once made significant contributions to the country and region, flourishing under the leadership of the family. Yet, due to the family members’ inability to cooperate and unite, massive losses occur. It’s a huge missed opportunity. However, this problem cannot be solved overnight by hiring a consulting firm, because cultivating talent is not the same as introducing new technologies. Technology can be quickly adopted, yet developing talent takes at least 20 years.

This is one of the major challenges for family businesses when bringing family members into the company as shareholders or managers. However, their productivity is usually quite sufficient because the family members, centred around the head of the family, know each other well. The cost of communication is minimal, and it’s clear who is capable of doing what and who is not. The costs of supervision and motivation are low, allowing decisions made by the leader to be executed quickly. The reason first-generation founders of family businesses succeed is their cohesive and dedicated team, which doesn’t have to worry about distrust or betrayal. In contrast, while skilled professional managers can deliver short-term results and generate profit for the company, they often want to become their own bosses, as all Chinese people do. Once they have learned the ropes, they tend to want to strike out on their own.

At this stage, for Chinese private enterprises to retain talent, relying solely on incentives and compensation plans is far from sufficient. Chinese corporate culture has yet to be fully developed, and depending solely on money to bind people together is simply not enough. If a company wants to unite people without depending on financial incentives, it needs time and long-term accumulation. This is not something that can be achieved within a single generation. Building a genuine corporate culture takes time. And this culture is not just a slogan on a website, nor something that can be engineered simply through rules and regulations. It takes shape through daily interactions among colleagues, through leading by example—very much like how a family’s culture gradually forms through the mutual influence of its members.

The organisational culture within Chinese enterprises is still far from being fully developed, particularly during the high-growth period following the reform and opening up, when the “wolf culture” was enough to drive success. At that time, everyone was focused on seizing business opportunities, with little need for collaboration among colleagues. However, as China’s economy and society have now entered a new phase, making money is no longer as easy as it once was. Without a strong culture and effective systems in place, relying on past methods is simply unsustainable.

In the foreseeable future, family businesses will still have significant advantages. Their culture stems from the family, and as long as they can continue to have more children—though that’s another issue—family businesses have a natural strength. However, nowadays, Chinese families are getting smaller, especially in northern China, where small families are becoming the norm. Traditionally, extended relatives were seen as part of the family and were expected to unite. In southern regions like Fujian and Guangdong, where traditional family values are stronger, siblings, their spouses, and children are all considered part of the same family, which fosters a culture of cooperation within large families. In these areas, family businesses can thrive, but in other regions, success becomes more difficult.

Relying solely on professional managers, traditional manufacturing industries may likely revert to state-owned enterprises. On the other hand, high-tech companies are more likely to be driven by younger people, leaving little room for the development of family businesses.

Based on my observations and experience, it is reasonable to draw these conclusions. In other words, in an environment where family culture is in decline, only high-tech industries are likely to maintain influence both domestically and internationally, while traditional private enterprises will struggle to find space for development.

Future Development of Private Enterprises: Professional Management and Institutionalised Governance

Back to this case, the issue now is that many family members have become shareholders and managers, but they have not been trained to cooperate, either within the family or within the company. Additionally, the rights associated with their shares have not been fully realised. If this situation is not addressed, within the next five years, this family business is clearly heading towards dissolution. Regardless of past successes, the future looks bleak.

When interviewed, these family members all expressed their concerns. Although the first generation (the patriarch) is still healthy, he is getting older. Despite the shares having been allocated to his children, he fears they may not be able to cooperate effectively, and the younger generation may lack the independent business skills required. The younger family members often ask for funding for investments or entrepreneurial ventures, but are not held accountable for the outcomes of those investments.

The current family managers are performing moderately, with only a few individuals standing out. The patriarch is concerned that more and more unqualified family members will join the group or acquire shares. While several external professional managers have been hired, two of whom serve as directors of listed companies, these managers often merely follow orders.

The second generation feels that their father holds on to all the power. Although they own shares in the holding company, they have never received any dividends. Tensions and friction occasionally arise among family members, and the salaries within the group are low. Some of them want to start their own businesses but lack the necessary funds. They are also concerned about their children’s marriage and career prospects. Marriage choices can significantly affect career development, a concern that is particularly unique to business families. With only a few children, who these children marry can have a crucial and even core impact on the future development of the business.

The third generation often disagrees with their parents’ values and struggles with communication. They want to choose their own career paths but still hope for support from their elders. Family members who are not involved in the family business feel that their contributions to the family have not been adequately recognised. They hope to reduce misunderstandings and conflicts between family members, both professional and personal, and wish for more mutual support and care within the family.

Non-family professional managers feel that family employees are given preferential treatment and believe their career prospects within the company are limited, as the company ultimately belongs to the family. They also have concerns about the current performance evaluation system, arguing that their salary and promotion opportunities are unreasonable. I have interviewed several professional managers, and they all stated that if given the opportunity, they would leave the company. If it weren’t for the limited job opportunities in the third-tier city and their reluctance to leave their hometown, they would not be working for the company.

The governance of a family business is not solely about the business itself; it must begin with family governance. How a family member chooses a spouse is critical. Whether to have more children is also key. How those children are raised—whether they are educated domestically or abroad—is equally important. All of these factors play a pivotal role in shaping the future continuity and development of the business, challenges that non-family businesses do not face.

Many business owners later regret sending their children abroad, feeling that a good domestic education would have been sufficient, without the need to aim for universities like Harvard or MIT. Children who study overseas often have little intention of returning to take over the family business. Even when they do come back, their knowledge, social networks, and values can be so different from those of the previous generation that finding common ground becomes very difficult. Bridging this generational gap in values requires tremendous effort, and in many cases, it proves unsuccessful.

At this point, relying solely on professional managers is unlikely to succeed unless there is a 20-year commitment to cultivating a professional management system. This system must include strategies for attracting talent from the lower levels, training them to become mid-level managers, and selecting high-level executives, ultimately identifying a reliable successor. In China’s private enterprises, aside from companies like Midea, I haven’t encountered many such examples. He Xiangjian, co-founder of Midea Group, said that he spent 20 years designing and implementing the system for professional managers and corporate governance. The year he retired at 70 was the year he fully trusted the system. He reached a point where, after retirement, he no longer needed to worry about the decisions made by professional managers.

I asked him if he could write a case study, a Harvard-style case study, since this is one of the few examples in China where management rights and ownership are separated. His response was, “I don’t need to write it, because even if I do, people won’t learn from it.” He is the type of person who doesn’t see himself as a boss but as the designer of the company’s governance mechanisms. This contrasts with most leaders, who are more directly involved in decision-making. He, however, focused on designing the system and cultivating the people.

In the future, Chinese enterprises, especially private ones, must adopt a professional management approach. They may not be as large as Midea, but they must still embrace the principles of professional management and institutionalised governance to overcome the challenges posed by smaller family sizes and widening value gaps.

How was the issue mentioned in this case resolved? I spent a year guiding them through a coaching process. It wasn’t just the boss who made the decisions; instead, the family council and the company’s board of directors had to agree before the solution was finalised. They’ve been practising for three years now and are still refining it, aiming to fully implement it within five years. For a system to be effectively implemented, it needs at least five years, and often ten years, of practice. Based on my experience, fewer than 50% of companies survive that five-year period; most give up midway.

Due to time constraints, I’ll conclude my sharing here for today. Thank you, everyone!