What happens when the heir to a family business isn’t up to the job? Not great things, apparently. But the Japanese have a solution: adult adoption. Rather than hand the firm to a less-than-worthy blood heir, Japanese families often adopt an adult to take over.
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America and Japan have the highest rates of adoption in the world – with one big difference. While the vast majority of adoptees in the U.S. are children, they account for just 2% of adoptions in Japan. The other 98% are males around 25 to 30. Mehrotra believes this is the key to one of Japan’s unique differences. Across the developed world, family firms under-perform professionally-run businesses. But in Japan, it’s the opposite. Japan’s strongest companies are led by scions, many of them adopted. “If you compare the performance under different kinds of heirs, blood heirs versus adopted heirs, the superior performance of second-generation managed firms is pretty much entirely attributable to the adopted heir firms.”
Mehrotra explains that adopting a scion is similar to a hostile takeover. Blood heirs are under the constant pressure of knowing that if they under-perform, they’ll be replaced.
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