The Theoretical Analysis of the Allocation of Family Control Rights B Oc10/17 | Page 2

L. Y. Gu

members. The listing plan of Zhen Kung fu is stranded as the infighting. By now, we have not known what will
happen to Zhen Kung fu with the conflict between the founders. Nonetheless, the scramble for control rights
between family members raises the worry and lets them think about the effective control to the family firms.
Furthermore, it also influences the allocation of family control rights. Especially, the control rights market and
manager market in China are far from mature at the moment. The control mechanism based on guanxi plays an
important role in the allocation of family control rights. How to allocate the family control rights effectively is
an issue worthy of further research by the field of theory and practice.
Family control rights are defined as generalized control rights in this paper. It is a series of rights which is
mastered by the controlling family to decide each main policy in the family listed companies, such as strategic
decision making right, personnel remove right, investment right, finance dominating right, asset disposition right
and other rights that don’t set by the contract.
As the family control rights are a series of rights, every right can’t be measured one by one. Family control
rights mainly include two angles: the holdings of equity and the control of the managerial position. According to
this, we classify the family control rights into two parts: family equity control and family managerial rights control. Family equity control means that the family controls the share of the listed companies. Family managerial
rights control means that the family controls the board of directors and the managers of the listed companies.

2. The Analysis of Family Guanxi-Oriented Con trol Mechanism from a
Listed Family Company
The separation of companies’ ownership and control rights makes the allocation of control rights during the
shareholders, board and management. The allocation of control rights between the three main parts and the balance relationship between them constitute the overall framework of companies’ internal control rights allocation.
In the current China, the corporate control market and the manager market are far from mature. Different from
the market-oriented control mechanism in British and American, the guanxi-oriented control mechanism is a
significant feature in Chinese family business. When allocating the equity, arranging the board members and selecting the managers, the controlling family always prefers to choose people who have blood relationship, marriage relationship and quasi-family member relationship with them. The allocation of family control rights based
on kinship is called family guanxi-oriented control rights allocation.
Figure 1 is the family guanxi-oriented control structure of Busen Garments (SZ: 002569). Shou’s family is
the actual controller of Busen Garments. According to the Shou’s family members’ control relationship, Busen
Garments is controlled by thirteen family members together. The kinship between the thirteen family members
is complex. They may be brothers and sisters, parent and child, cousin, couples, brothers-in-law, nephew-aunty,
nephew-uncle and so on.
In accordance with the La Porta’s calculation method of ultimate control rights, the control rights of family
ultimate controlling shareholder is the accumulation of the minimum shareholding percentage of each control
chain. So the control rights of Shou’s family are 84.9%. Shou’s family absolutely controls the Busen Garments
in the equity stake.
In addition, five family members are the directors of listed company’s board. They account for half of the total number of the board of directors. One family member is the chairmanoftheboard. Three ones are directors.
And the other one is the board secretary. Moreover, four family members are the managers of the listed company. One family member is the generalmanager. The other three ones are vice-general manager. The Shou’s family controls the board and managers of Busen Garments.
Above all, the control rights of the Busen Garments are allocated between Shou’s family members. They are
kinship.

3. The Literature Review
3.1. The Internal Conflicts and Agency Problems in Family Business
Recent researches about family business control rights all suppose that family members are acting in concert.
The fundamental assumption in these papers is that all the family members have the same values and objectives,
and they can act like one person when managing the family business to reduce the agency costs [6]. However,
the assumption is the challenged by the reality. Under the assumption that there will be different goals between
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