Sunday, December 09, 2012

Adopted CEO

More companies in Europe and Asia are family-owned. Among them, performance of Japanese family-owned corporations shows higher performance than the others. 

How the Japanese corporations avoid the common fall-down of dynastic corporations? The Economist in the last week's issue proposed an interesting hypothesis: custom of adult-adoption keeps their successfulness. Adult adoption is more common in Japan: out of 81,000 adoption made in 2011, 90% of them were adult adoption. 

At a glance, the argument may seem absurd, but spending some time for contemplating on it, I now think the argument may be plausible due to three reasons: 

First, the adult-adoption works as a strong commitment mechanism. Usually, when we come up with commitment mechanism of ordinary corporations, we use stock options. Stock option works well to some extent, but influence on manager's incentives will be far stronger in adoption. It easy to imagine the reason: if you have no way to escape around, you would spend much more to make the company successful. 

Second, the custom may contribute to hire better qualified CEOs. Recruiting a right CEO is always difficult and time-consuming. The adult adoption mechanism helps corporations to take more time to find out the right person.

Third, adopted CEOs are fresh-minded outsiders and can bring about turn-around if needed. According to some studies, outsider CEOs are more successful when they are in corporations which are not performing well and need changes. 

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