Family-run businesses have enjoyed a lot of success in China over the last three decades, but many of the larger companies have begun the process of handing over control to non-family members. It's not an easy process, and some firms are handling it better than others.

He Xiangjian, 70, founder of the multi-billion yuan electrical appliance empire Midea Group based in Shunde, Guangdong Province, resigned as the group's chairman on August 25 from the company he started in 1968. He passed the torch not to his son but to Fang Hongbo, president of the group's flagship subsidiary, Shenzhen-listed Guangdong Midea Electric Appliances Co, a Midea Group press release said on August 25.

He Xiangjian will continue as the chairman of Midea Investment Holding Co to focus on development strategy, according to the press release, while his 45-year-old son He Jianfeng will be on Midea Group's new board, meaning the Hes will distance themselves from the group's daily operation and entrust it to non-family members.

Need for capital

"This is an important step for the internationalization of Shunde enterprises," Guangzhou Daily quoted Shunde Federation of Industry and Commerce President Luo Weiman as saying Friday.

Shunde has been a hotbed for pioneering private entrepreneurs in the Pearl River Delta since the reform and opening-up period began in the 1980s. Many of the first-generation Shunde entrepreneurs are now in the process of handing over to the second generation.

While founders of small- and medium-sized enterprises (SMEs) usually leave the businesses to their children to manage, firms that are aiming to become larger and stronger often avail themselves of the capital market, diversify their companies' shareholding and improve corporate governance, according to Luo.

Midea Group introduced two strategic investors in 2011 after recording 100 billion yuan ($14.1 billion) in sales in 2010. An investment unit of ICBC International Holdings and private equity firm CDH Investments bought a combined 15.3 percent stake in Midea Group in October 2011, Reuters reported.

The two investors both have seats on the board, and media reports have speculated that they would make a huge profit if Midea Group, including its logistics and real estate businesses, float on the stock exchange in the near future.

Midea already has three publicly listed subsidiaries in Shenzhen and Hong Kong, but it would be a rare case among family firms for it to become a completely public company, according to experts.

Many private firms in China are unwilling and unable to comply with the transparency requirements of the stock market, because of their substandard financial practices or connections with local governments, Liu Baocheng, director of the Center for International Business Ethics at the University of International Business and Economics, told the Global Times Friday.

"Almost every family enterprise in China has government officials holding some of its shares, or they allow officials certain advantages, such as a free car," Liu said.

Smooth transition

The family business model used to be considered efficient, because decision-making was simple and it was easy to respond to market opportunities. It also played a fundamental role during the takeoff period of the Chinese market economy, because many private enterprises were organized this way, Liu said.

Many private companies succeeded because of the founders' personal charisma and boldness when the market was in its early stages and without much regulation, Liu said. This success also reinforced the founders' idol-like position in the companies.

However, as the companies grew and as competition became more dependent on corporate structural advantages rather than market contingencies, the model has showed its weaknesses, he noted.

"Tan Chuanhua (founder of Carpenter Tan Holdings, a Hong Kong-listed wooden comb maker) once came to me for advice. He said he had to meet the family members and the company staff separately to make each decision," Liu said.

In China, family members often struggle for power, which can further complicate management, and shady corporate structures make it impossible for the firms to gain access to the capital market, he said.

The He family's pullback from the daily running of Midea Group has been carefully orchestrated for 15 years to smoothen out any potential conflicts of interest.

In 1997, when the company suffered a sharp drop in sales, He Xiangjian took the opportunity to persuade some of the founding members, including his wife, to leave the firm and he pushed ahead with promoting new blood, including Fang, to management positions, China Business News reported Friday.

The group has built a professional management team, a delegation system and incentive structures since 2001, the report said, citing Chen Chunhua, a business school professor at South China University of Technology in Guangzhou.

In 2009, He Xiangjian resigned from Guangdong Midea Electric Appliances Co, leaving Fang at the helm of the unit.

Changing to a modern corporation from a family-owned one is a trend for many major companies around the world, and He Xiangjian has set a new example for the older generation of businessmen, Luo from Shunde Federation of Industry and Commerce noted.

Founders vs managers

Midea has a unique team of professional managers compared with other private companies in China, Chen Chunhua told China Business News.

"Fang Hongbo and most directors of the new Midea Group board have grown up in Midea. They have cooperated with He Xiangjian for nearly 20 years, from the company having a few billion yuan in sales to over 100 billion yuan," Chen said.

This kind of long-term cooperation builds "trust and mutual understanding," Chen noted.

But in cases of a lack of trust between the founders and the professional managers of a company, internal feuds can happen as a result.

Yan Yan, a managing partner at private equity firm SAIF Partners, recently became involved in a high-profile dispute with Wu Changjiang, founder of NVC Lighting Holding, China's largest producer of energy-saving bulbs in Huizhou, Guangdong Province, a company in which SAIF has invested.

Wu was forced to resign as chairman and CEO of NVC Lighting in May as a result of a police probe, but is hoping to be able to reclaim his position. However, Yan, the current chairman, has demanded that Wu reveal details of the investigation and end all transactions outlawed by Hong Kong securities regulations before he can return, the Global Times reported on August 24.

It takes an "enlightened" founder, such as He Xiangjian, to really transform a family-run business, but professional managers also need to show more respect for the founders and the indigenous corporate culture, Liu told the Global Times.