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Succession Planning Challenges at Chinese Pharmaceutical Companies, Part 1

February 2018

As the founding generations reach retirement age, most private Chinese pharmaceutical companies are now reaching the time to pass the baton on to their successors. Originally published in E-Medicine Executives, we offer A Guide to Succession Planning for Chinese Pharmaceutical Companies. Part 1 of the series focuses on the challenges these organizations face. Click here for the Chinese translation.

Most Chinese pharmaceutical companies are family businesses that were set up in the 1980s, and nearly 90 percent of them are currently led by founders aged 50 and older. With the retirement the founding generation on the horizon, the issue of leadership succession is at the forefront for many organizations. The sweeping disruptive changes and unprecedented challenges facing the industry call for new leadership skills, making the upcoming transition even more critical. Who is best able to enable a future of continuous growth and drive the transformation from generic drug maker to leading innovator?

When asked about challenges that keep them awake at night, all the pharmaceutical entrepreneurs I have talked to over the past few years would rank succession planning among their list of top concerns, along with innovation, product launches and market access.

Some of them are not entirely convinced that their successors are ready to steer the business toward continued growth. Others have no idea to whom they should pass the reins because their children are not interested in the family business or even if they are, chances are they may still lack the medical training needed to lead the organization into a new era. This is not only about CEO; the succession of the entire slate of the CEO’s direct reports has become a source of concern for founders.

The timing of succession

It is universally acknowledged that a smooth leadership transition is vital to business stability and sustainability. Developing an effective and standardized leadership succession system has become a pressing and challenging priority, particularly for Chinese pharma companies.

This is in part because most family businesses in China were set up after the 1980s and succession planning is still at the initial stage. Some companies have yet to develop a well-defined and standardized succession plan, leaving succession decisions largely to the sole judgment of the chairman. Even for companies with succession plans in place, the plans tend not to be rooted in fact-based assessment or executed in a structured way and are only practiced when necessary, for example, upon IPO, capital injection or unexpected events. An inherent risk of current succession processes is that trust is enshrined as the paramount concern during candidate selection. Admittedly, there is nothing wrong with choosing a trusted candidate, but it can be problematic if trust becomes the only criteria, outweighing concerns for capabilities and personality, which is unfortunately the case with most Chinese companies.

Instead of aligning succession planning to their long-term goals and strategies, many Chinese pharma companies cling to oversimplified, shortsighted views of successor selection, regarding the process as a quest to find a savior who is able to end all current pains once and for all rather than evaluating their business operations, development and market environment and communicating effectively with teams within the organization. Another problem is that many cannot provide clear answers to key questions, for example, how ready the current leader is to depart, when the succession process will begin, or whether the company is prepared for a new leader.

Several years ago, a U.S. private equity fund invested in a private Chinese pharmaceutical company. When talking about the biggest risk of the investment, the investor noted that what seemed to be an investment in a company was actually a bet on one person — the company’s chairman of the board, who also served as the CEO. The fund wanted me to persuade the chairman into giving up his executive role and hiring a professional management team. When the chairman and I got to know each other over time, I asked directly if he was really going to step down. For a moment he hesitated, and then said, “I feel like I am doing a good job.” This really put me in a quandary. I managed to talk to his direct reports, only to find that they were not ready for a new leader either. The result was that the new CEO appointed at the investor’s request left only four months after taking over.

In 2016, the chairman of another private Chinese pharma company turned to Spencer Stuart for guidance on leadership succession. What he expected was to quickly zero in on CEO and CFO candidates and count entirely on them to navigate the business out of the bottleneck the company was stuck in after 15 years of rapid growth. However, our assessment of the overall business performance showed that it was not the right time for leadership succession. Transferring leadership at that moment was as counterproductive as planting a tree in inappropriate soil. Instead of hiring professional managers directly from outside, we advised to start with creating favorable succession conditions, developing a sound management system and improving the competencies, strength and culture in the organization. After several months, the organization saw the fruits of its efforts, reinforcing that the optimal timeframe and process of succession greatly depend on how prepared the corporate culture is and which stage of growth the business is.

Despite the challenges, some private Chinese companies still successfully managed successions over the past few years, honoring the legacy of their treasured corporate cultures while securing a future of sustainable and healthy business. For example, Vanke, China’s leading property developer, saw its chairman and founder, Wang Shi, hand over the reins to new president Yu Liang earlier in 2017. This smooth transition came as a result of Wang Shi’s long-planned succession program. He stopped managing the company and began to groom Yu Liang as a potential candidate in as early as 1999, and decided against heavy opposition to appoint Yu Liang as the general manager later in 2001. It was under this well-framed succession planning that Vanke could power through recent struggles for boardroom control and retain its leading position in China’s real estate industry.

Identifying a successor

Some private Chinese pharma companies have been ahead of their peers and completed the succession process under plans that developed years ago when the successors were still young. According to our research, among the 50 private drug makers on the list of top 100 pharmaceutical players in China, 15 companies have crossed the finishing line of succession, including Tasly, Yangtze River Pharmaceutical, Salubris, Buchang, Kelun, Hubei Enwei Ling Yue, Xiuzheng and Yiling.

Take the example of Tasly. On March 27, 2016, the company’s board appointed a new executive chairman — Yan Kaijing, the son of its founder Yan Xijun — a move that marked a smooth leadership transition. This succession is typical for a first-generation, founder-stage business transitioning to the second generation. Here are some takeaways from its transition.

The succession process was structured and executed under carefully prepared favorable conditions. As is the case with most private pharma companies in China, Tasly’s founder planned to hand the business over to his son far before the transition. This offer was willingly accepted, heralding a package of training plans developed to prepare the candidate with not only necessary skills, but also key understandings needed to carry forward the company’s cherished culture and values.

Since as early as 2009, efforts have been made to gain support throughout the organization for the new leader and his mandate, laying the groundwork for transition. Systematic trainings were tailored to develop the future leadership team, including the CEO candidate, for strengthened strategic, innovation, operation and leadership capabilities and global perspective. The company also optimized the corporate governance and operational management systems, as part of the efforts to smoothen the succession process. In addition, a talent pipeline had been developed to support an orderly intergenerational succession — after all, it takes a team of people in different leadership positions to make the business successful for future generations.

At Yangzi River Pharmaceutical, Xu Haoyu, son of the founder Xu Jingren, now serves as vice chairman and deputy general manager. The company’s succession efforts began with instilling an understanding of underlying business values in the mind of the young candidate. When Xu Haoyu joined the company, he was hired as a salesperson before working his way up to a senior role. Such hands-on experience not only helped him gain market knowledge and develop necessary business acumen and skills, but also provided a valuable period of time for partnering and mentoring between the two generations, ensuring that the successor would be in sync with the founder’s vision and values when adapting the business to the evolving industry landscape. For example, Xu Jingren is against mergers and acquisitions (M&A), public listings and investment in industries with which he is unfamiliar; while Xu Haoyu believes that IPOs and M&A are essential to business expansion, he agrees with his father on the need to limit such activities to fields the company has a stake in. For all the differences in their business ideas, they work toward a common goal and jointly maintain the momentum in the company.

Salubris offers another example of long-planned succession, where the founder Ye Chenghai, aged 74, is the chairman of the board, and his 43-year-old son, Ye Yuxiang, serves as director and general manager. A Yale-educated MBA graduate, Ye Yuxiang is expected to lead the transformation toward a specialized pharma company that stays competitive in the evolving industry. He was promoted from manager assistant in July 2004 to general manager, and then to the dual role of director and general manager in June 2007, overseeing the company’s daily operations and M&A activities.

In November 2014, Salubris purchased two biotech companies, Chengdu Jin Kai and Suzhou Jinmeng as its subsidiaries, and Ye Yuxiang became their chairman. The acquisitions were part of the efforts to prioritize biomedical innovation, including in high-end chemical drugs and biodrugs. Under Ye Yuxiang’s leadership, the total revenue and profit of Salubris in 2016 stood at RMB 3.83 billion and 1.65 billion, up by 10 percent and nearly 11 percent, respectively.

Such examples of smooth business successions are few and far between. With founders still holding leadership roles, succession remains a great challenge for most private pharma companies in China. Although most next generation leaders are internationally educated start in a junior role before working their way up to a senior position and bring valuable global perspectives, they still face the challenge of preserving the culture. This generation must be able to balance the organization’s legacy with the need for innovation.

Leaders in foreign pharma companies are often trained medical professionals, passionate about investing in R&D activities for improving health. By contrast, most business successors in China’s pharma industry have no medical background, and are potentially less willing to fund research, raising the question of whether. The new generation can successfully lead the transformation from manufacturing low-end medicine to developing high-end innovative drugs.

Compared with their foreign counterparts, Chinese entrepreneurs are more likely to hand over their businesses to internal successors and most often, their children. If they are not interested or ready, parents will transfer ownership interest to them and executive leadership to professional managers, a practice that will likely become more common. Many Chinese businesses still prefer someone they trust, i.e., internal candidates. Some of them may turn to external hires, either following the practice of multinational pharmaceutical companies and offering two years of training before promoting outsiders to a leading role, or directly recruiting an outsider CEO. The latter is most effective when a radical reform is needed. If non-family professional managers are chosen as successors, the best practice is to provide them with an ownership interest. Their relationship with family members also requires proper handling.

Over the next five to seven years, we expect to see a wave of leadership transitions in businesses established after the 1980s. It remains to be seen how many next generation leaders can transform the business and create a culture that helps ensure future success while preserving the values of the founder. Success depends as much on the leader’s capabilities as on the support from the founders and boards. One problem is that after years of commitment, the founders may be reluctant to let go of the company. This requires effective communication and deep understanding between the two generations of leaders. It is also critical to develop a powerful core management team. A structured and systematic succession plan is the surest way to navigate these challenges and transition the organization to the right leader.