Adoptions help many Japanese businesses, and even business groups, stay family-controlled for generations, David McNeill reports.

Many of Japan’s traditional inns are family-run, and some have been in business for decades, but the Hoshi Ryokan takes the proverbial biscuit. Founded in the year 718, when its famous hot spring is said to have ‘burst from the earth’, the current patriarch, Hajime Hoshi, is supposedly the latest in a line of 46 owners, handing down the business from father to son.

Unfortunately for the Hoshi family, their eldest son passed away suddenly in 2013, potentially rupturing the 1,300-year line. A solution, however, may be at hand – adoption.

The 19th-century industrialist Andrew Carnegie famously said that inherited wealth ‘deadens talents and energies’, one reason why he gave most of his away to charity. Business research generally supports the Carnegie thesis: companies controlled by heirs underperform their professionalised competitors. Except, apparently, in Japan, where businesses and even some powerful conglomerates are family-controlled for generations.

Several studies find not only inherited family control still common in Japanese business, but one says family firms are ‘puzzlingly competitive’, outperforming otherwise similar professionally-managed companies. ‘These results are highly robust and… suggest family control “causes” good performance rather than the converse,’ say the authors of the paper, Adoptive Expectations: Rising Sons in Japanese Family Firms.

Hoshi Ryokan is probably the world’s oldest family-run businesses. Until it was taken over in 2006, construction company Kongo Gumi was operated for a record-breaking 1,400 years by a succession of heirs. Suzuki, Matsui Securities, construction giant Kajima and many other well-known business names break the rule of steady dynastic decline – some research suggests that fewer than 16 per cent of family-owned firms survive to a third generation. So how do Japanese firms avoid what is sometimes cruelly called the idiot-son syndrome? The answer, says the paper, is by adopting.

Japan has one of the highest rates of adoption in the world. The difference is that, unlike in America or Britain, over 95 per cent of Japanese adoptees are adults. A relatively simple procedure in Japan, the practice of adopting men in their twenties and thirties is often designed to rescue biologically ill-fated families and ensure a business heir, says lead author Vikas Mehrotra. ‘We haven’t come across this custom in any other part of part of the world.’

The 19th-century industrialist Andrew Carnegie famously said that inherited wealth ‘deadens talents and energies’

‘Adult adoption could invigorate Japanese family firms in several ways, which could explain their persistence and prosperity,’ says the paper. First, they solve the thorny succession problem. ‘A family that draws an exceptionally untalented blood son can recover by adopting a highly talented professional manager as a new son.’ As the old Japanese adage goes, ‘You can’t choose your sons, but you can choose your sons-in-law.’

Second, unlike their peers in foreign family firms, Japanese professional executives can aim for the top job of ‘son’, a prize not normally considered in discussions of Western family firms. Finally, blood sons, knowing adopted adult sons can displace them, dare not let their talents and energies be deadened. Just as the threat of a hostile takeover, more than its actual occurrence, spurs professional managers to efficiency, the threat of displacement by a ‘better’ son may well allay the Carnegie conjecture.

Hence, Suzuki’s chairman and CEO, Osamu Suzuki, is the fourth adopted son to run the car manufacturer. Many of the country’s corporate stars, including Toyota and Panasonic, have also used the tradition, historically a way for households that lacked male heirs to keep patriarchal lines alive. In many cases, the son-in-law takes the family name and runs the family business.

Finding suitable heirs, however, is not as simple as it once was. Japan’s population is declining; about a quarter of Japanese are over 65. The sliding birthrate has created many one-child families, and while daughters can manage the company’s back office, the face out front in this still chauvinistic country must often be male, says Chieko Date. She is one of several marriage consultants who bring together ambitious young men and the marriageable daughters of business families.

ADOPTED HEIR: Osamu Suzuki, chairman and CEO of Suzuki
ADOPTED HEIR: Osamu Suzuki, chairman and CEO of Suzuki

If the meetings go well, the men agree to drop their own surname and be adopted by their new bride’s family, becoming both the head of the family and its business. Date’s Ginza-based consultancy claims to have brokered hundreds of these marriages – known as mukoyoshi – over the last decade or so. Most of her clients are families who own small- and mid-sized businesses such as country hospitals, retailers and light-manufacturing firms. She insists her company is unique: ‘We believe that this cannot be just a business transaction.’ If the couples don’t like each other, the marriage and the business will fail.

Remarkably, some families have bypassed a biological son for an adoptee if they feel that nature has shortchanged them – something that occurs with ‘some regularity’, according to Mehrotra. This practice, shot through with a vein of ‘unsentimental pragmatism’, allows family businesses access to the same sized talent pool as a professionally managed firm, says his paper, and may even induce a greater work ethic among biological children.

Business adoptions, however, may be declining. In general, says sociologist Mariko Fujiwara, more Japanese parents are willing to accept the end of the family line. And women are increasingly stepping into managerial roles. Still, she adds, Japanese marriages will continue to be freighted with cultural and legal responsibilities, because the future of so many small businesses depends on who takes them over.

Japan is not the only country struggling with business succession. A 2012 survey of 180 leading family-owned enterprises in China warned that most will struggle to find heirs in the next decade. The average age of the companies’ founders is 52, according to Shanghai Jiaotong University, but just 18 per cent of their children are willing to take over. Could Japan’s unique remedy offer lessons to its prickly neighbour? It seems unlikely. Chinese businessmen who first came across the Japanese practice of mukoyoshi reportedly found it ‘uncivilised’.

The obvious losers in the cold calculations needed to continue Japanese family-owned business running are women. The pressures of keeping the 1,300-year-old Hoshi Ryokan open have fallen, for example, on the narrow shoulders of Hisae Hoshi, the patriarch’s surviving child. She worked as a doctor’s secretary in Kyoto before being pulled back to the family in the vacuum left by the death of her brother. The transition has been far from easy: ‘There are times when I wish I hadn’t been born into the family,’ she admitted in an interview with photojournalist Fritz Schumann.

As a carefree twenty-something woman, Hisae was looking for a partner, and keen to move out of her family’s orbit once she got married. ‘Now my parents introduce me only to men who can be adopted into the Hoshi family,’ she says. ‘Our thinking is far apart on this.’ If she finds a husband, he could become the fabled inn’s 47th owner. If not, she may break with tradition and run it herself. Her aging father now has just one priority: finding a successor. Some things, he says, are more important than individual desires. ‘Sometimes we have to sacrifice family.’

Dr. David McNeill writes for The Economist, The Irish Times and other international publications, and is co-author of Strong in the Rain, survivors’ stories from Japan’s 2011 earthquake, tsunami and nuclear disaster. He teaches media and politics at Sophia University in Tokyo. Previously he taught at Liverpool John Moores University.

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