The Secrets of Hundred Year Old Family Businesses

Running a family-owned corporate entity is a double-edged sword – equal parts blessing and curse. On the one hand, many family owned businesses have very tight-knit management structures, and those at the top feel even more invested in its success. In a family-owned business it’s not just the bottom line, but also the family name at stake.

On the other hand, because many family own business CEOs want to keep the business in the family, it sometimes can be handed over to those who may not be the best qualified to run it. Historically, there have been a number of cases where successful companies have faltered after being handed over to the second and third generation.

One country that seems to be the exception that proves the rule is Japan, which has some of the oldest and most enduring family owned businesses. In fact, the two oldest businesses in the world, both dating back to the eighth century, have Japanese roots. This then begs the question – why is Japan succeeding where almost every other country in the world is not? The answer involves an ancient Japanese custom that remains to this very day.

Image: Project Bly

Understanding Japan’s Adult Adoption

This custom is known as Mukoyoshi, which is a centuries-old practice where a wealthy family adopts a son to marry their daughter and take over the family business. The adopted son drops his own family surname and takes on that of his new family.

So how prevalent is this custom? Japan is second only to the United States in the highest adoption rate worldwide. In 2012 Japan saw more than 80,000 adoptions processed. But what makes Japan different from any other country in the world is that more than 90% of those adoptions were adult males in their 20s and 30s.

Mukoyoshi dates back to the ancient Japanese Civil Code that dictates family wealth be passed along male lines. Japanese business owners did not have the option to will their estate to whomever they please. So for families with only girls, they begin the process of adopting adult sons good then legally take over the family business. Although this requirement was removed after WWII, it has remained a part of their culture and customary practices.

Just looking at some of the companies that have benefitted from this practice, it’s not hard to see why still continues today. Founded in 1909, Suzuki is now a top 10 car manufacturer worldwide. Its CEO, Osamu Suzuki is the fourth adopted son to run the company. Matsui Securities has been in the security trading services field since 1931, and the company’s fourth president Michio Matsui was an adopted member of the Matsui the family.

Family Legacy Meets Meritocracy

In their 2011 research paper Adoptive Expectations: Rising Sons in Japanese Family Firms published in the Journal of Financial Economics, authors Vikas Mehrotra, Randall Morck, Jungwook Shim, and Yupana Wiwattanakantang found that companies run by Mukoyoshis are “puzzling competitive” and generally outperform their competitors. They went on to say, “These results are highly robust and… suggest family control ‘causes’ good performance rather than the converse.”

The proven success of these companies shouldn’t be surprising at all. 19th-century industrialist Andrew Carnegie once noted that inherited wealth “deadens talents and energies” as he referred to the so-called “idiot son syndrome” where succeeding generations are unable to continue the family success it because they’ve been pampered their whole lives. Mukoyoshi is a way of side-stepping the potential hazard by combining family lineage with a meritocracy. For the Japanese families that choose to practice this, the businesses are handed down to those who earn it, which gives them a significant competitive advantage over those that do not.

If there were any speculation this practice may fade away, Japan’s declining birth rate has put an end to that. Many families only have one child, meaning there are millions of daughter-only families, many of which own businesses and are in need of a Mukoyoshi. Over the past few years, several matchmaking services have sprung up to fill this need. Clearly, this is a practice that will be a part of Japanese business culture well into the future.

Meet the Houshi Ryokan, the 1,300 Years Old Family Business