Success after succession

Please remember that the value of an investment can fall and you may not get back the amount invested.

In 1903 the Ford Motor company was founded, the Tour de France was staged for the first time and the Wright brothers took to the sky in the world’s first motor-operated flight. It was also the year in which Kane Tanaka was born, a supercentenarian and the world’s oldest person until she sadly passed away earlier this year at the tender age of 119. Her story reignites the issue of aging and demographics within Japan, a country where a quarter of society are already over the age of 65.

In addition to a shrinking and ageing workforce, this demographic creates succession risk for a bulging silver c-suite: the single biggest cohort of business owners in Japan are 69-year-olds, with two thirds of CEOs now over the age of 60. Some are even doubling the duration of the average working life by powering on well into their 90s. Last year at age 95, Nobutsugu Shimizu stepped down from Life Corp after six decades at the helm (5 years older than Warren Buffett, the oldest head of a US listed firm). A year earlier, Shintaro Tsuji the 92-year-old founder of Sanrio, the company behind Hello Kitty, also reluctantly handed over the reins.

As long-term growth investors, we tend to gravitate towards firms that are founder-led, for these are often the most entrepreneurial and ambitiously run, with clear planning and passion for the future. However, this exposes us to key man risk and the pronounced problem of succession, as recently illustrated by world leading miniature motor manufacturer Nidec, a company that is quickly becoming the dominant third-party supplier of e-axles for EVs in China. At the age of 77, founder Shigenobu Nagamori has, for the second time, subjugated and side-lined his successor. Of course, Nidec is not alone. Howard Schultz of Starbucks and Michael Dell are all examples of so-called boomerang CEOs, famous for regaining the reigns. There are also examples closer to home of other founders that have been reluctant to relinquish control in the first place: Masayoshi Son (now 64) of Softbank has flirted with plenty of successors, as has Uniqlo founder Tadashi Yanai (aged 73), and Yoshitaka Kitao (71) of SBI Holdings.

This issue reflects the difficulty of replacing successful, long-serving founders/CEOs, a problem that is beginning to plague plenty of Japanese companies. Some leaders may even exacerbate the issue – with the flexibility to decide their own departure date, many may choose a propitious moment of perceived peak profitability (take Sir Terry Leahy of Tesco). It may also seem an insurmountable challenge to replace a person that has come to personify the organisation they leave behind. However, there are obvious examples to the contrary: take Satya Nadella of Microsoft, Jack Welch of General Electric and Tim Cook of Apple. Many will be praying for the same successful shift with Andy Jassy at Amazon. The question companies, boards and we as investors must ask and understand is what the likely source of a successful succession should be. Should a company recruit from within the ranks, or seek external expertise to avoid carbon copies? The former seems sensible if the company is presently pursuing a profitable path, however dominant CEOs are often egomaniacal and unwilling to nurture potential proteges. The aforementioned extroverted electronics entrepreneur Nagamori-san may present one such example given the company website still offers access to a manga-style comic book to tell his story, painting him as a Japanese Superman titled in Kanji as ‘the man hotter than the sun’. Nintendo, Fanuc and Keyence are examples of some of Japan’s leading businesses that have made the transition from founding family to internal heir successfully. This approach may seem especially apt for Japan, given the corporate propensity towards creating salaryman insiders. However, introducing outsiders and upsetting the apple cart may be necessary if a different approach is required. Before he became a wanted man, Carlos Ghosn successfully spearheaded major structural and cultural changes at Nissan and reversed their sinking fortunes, as Sir Howard Stringer did at Sony. His tenure was later viewed as a pivotal prelude to the company’s broader corporate restructuring.

Global leading businesses, that invariably become outlier investment opportunities, are often run by visionary individuals. If plans are not put in place for their eventual departure, their organisations will often suffer in their wake – as Manchester United fans will undoubtedly be feeling with regard to their seventh manager following the success story of Sir Alex Ferguson. Boards and leaders themselves have a responsibility to mentor the next generation and manage succession to ensure successful continuity. Like investors in Japan, supercentenarians such as Kane Tanaka and her cohort may suggest that we simply have more time to tackle this inevitable issue.

Risk factors

The views expressed should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.

This communication was produced and approved in June 2022 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.

Potential for profit and loss

All investment strategies have the potential for profit and loss, your or your clients’ capital may be at risk. Past performance is not a guide to future returns.

This communication contains information on investments which does not constitute independent research. Accordingly, it is not subject to the protections afforded to independent research, but is classified as advertising under Art 68 of the Financial Services Act (‘FinSA’) and Baillie Gifford and its staff may have dealt in the investments concerned.

All information is sourced from Baillie Gifford & Co and is current unless otherwise stated.

The images used in this communication are for illustrative purposes only.

Important information

Baillie Gifford & Co and Baillie Gifford & Co Limited are authorised and regulated by the Financial Conduct Authority (FCA). Baillie Gifford & Co Limited is an Authorised Corporate Director of OEICs.

Baillie Gifford Overseas Limited provides investment management and advisory services to non-UK Professional/Institutional clients only. Baillie Gifford Overseas Limited is wholly owned by Baillie Gifford & Co. Baillie Gifford & Co and Baillie Gifford Overseas Limited are authorised and regulated by the FCA in the UK.

Persons resident or domiciled outside the UK should consult with their professional advisers as to whether they require any governmental or other consents in order to enable them to invest, and with their tax advisers for advice relevant to their own particular circumstances.

Financial intermediaries

This communication is suitable for use of financial intermediaries. Financial intermediaries are solely responsible for any further distribution and Baillie Gifford takes no responsibility for the reliance on this document by any other person who did not receive this document directly from Baillie Gifford.

Europe

Baillie Gifford Investment Management (Europe) Limited provides investment management and advisory services to European (excluding UK) clients. It was incorporated in Ireland in May 2018. Baillie Gifford Investment Management (Europe) Limited is authorised by the Central Bank of Ireland as an AIFM under the AIFM Regulations and as a UCITS management company under the UCITS Regulation. Baillie Gifford Investment Management (Europe) Limited is also authorised in accordance with Regulation 7 of the AIFM Regulations, to provide management of portfolios of investments, including Individual Portfolio Management (‘IPM’) and Non-Core Services. Baillie Gifford Investment Management (Europe) Limited has been appointed as UCITS management company to the following UCITS umbrella company; Baillie Gifford Worldwide Funds plc. Through passporting it has established Baillie Gifford Investment Management (Europe) Limited (Frankfurt Branch) to market its investment management and advisory services and distribute Baillie Gifford Worldwide Funds plc in Germany. Similarly, it has established Baillie Gifford Investment Management (Europe) Limited (Amsterdam Branch) to market its investment management and advisory services and distribute Baillie Gifford Worldwide Funds plc in The Netherlands. Baillie Gifford Investment Management (Europe) Limited also has a representative office in Zurich, Switzerland pursuant to Art. 58 of the Federal Act on Financial Institutions (‘FinIA’). It does not constitute a branch and therefore does not have authority to commit Baillie Gifford Investment Management (Europe) Limited. The firm is currently awaiting authorisation by the Swiss Financial Market Supervisory Authority (FINMA) to maintain this representative office of a foreign asset manager of collective assets in Switzerland pursuant to the applicable transitional provisions of FinIA. Baillie Gifford Investment Management (Europe) Limited is a wholly owned subsidiary of Baillie Gifford Overseas Limited, which is wholly owned by Baillie Gifford & Co. Baillie Gifford Overseas Limited and Baillie Gifford & Co are authorised and regulated in the UK by the Financial Conduct Authority.

China

Baillie Gifford Investment Management (Shanghai) Limited 柏基投资管理(上海)有限公司(‘BGIMS’) is wholly owned by Baillie Gifford Overseas Limited and may provide investment research to the Baillie Gifford Group pursuant to applicable laws.  BGIMS is incorporated in Shanghai in the People’s Republic of China (‘PRC’) as a wholly foreign-owned limited liability company with a unified social credit code of 91310000MA1FL6KQ30. BGIMS is a registered Private Fund Manager with the Asset Management Association of China (‘AMAC’) and manages private security investment fund in the PRC, with a registration code of P1071226.

Baillie Gifford Overseas Investment Fund Management (Shanghai) Limited 柏基海外投资基金管理(上海)有限公司(‘BGQS’) is a wholly owned subsidiary of BGIMS incorporated in Shanghai as a limited liability company with its unified social credit code of 91310000MA1FL7JFXQ. BGQS is a registered Private Fund Manager with AMAC with a registration code of P1071708. BGQS has been approved by Shanghai Municipal Financial Regulatory Bureau for the Qualified Domestic Limited Partners (QDLP) Pilot Program, under which it may raise funds from PRC investors for making overseas investments.

Hong Kong

Baillie Gifford Asia (Hong Kong) Limited 柏基亞洲(香港)有限公司 is wholly owned by Baillie Gifford Overseas Limited and holds a Type 1 and a Type 2 license from the Securities & Futures Commission of Hong Kong to market and distribute Baillie Gifford’s range of collective investment schemes to professional investors in Hong Kong. Baillie Gifford Asia (Hong Kong) Limited 柏基亞洲(香港)有限公司 can be contacted at Suites 2713–2715, Two International Finance Centre, 8 Finance Street, Central, Hong Kong. Telephone +852 3756 5700.

South Korea

Baillie Gifford Overseas Limited is licensed with the Financial Services Commission in South Korea as a cross border Discretionary Investment Manager and Non-discretionary Investment Adviser.

Japan

Mitsubishi UFJ Baillie Gifford Asset Management Limited (‘MUBGAM’) is a joint venture company between Mitsubishi UFJ Trust & Banking Corporation and Baillie Gifford Overseas Limited. MUBGAM is authorised and regulated by the Financial Conduct Authority.

Australia

Baillie Gifford Overseas Limited (ARBN 118 567 178) is registered as a foreign company under the Corporations Act 2001 (Cth) and holds Foreign Australian Financial Services Licence No 528911. This material is provided to you on the basis that you are a ‘wholesale client’ within the meaning of section 761G of the Corporations Act 2001 (Cth) (‘Corporations Act’). Please advise Baillie Gifford Overseas Limited immediately if you are not a wholesale client. In no circumstances may this material be made available to a ‘retail client’ within the meaning of section 761G of the Corporations Act.

This material contains general information only. It does not take into account any person’s objectives, financial situation or needs.

South Africa

Baillie Gifford Overseas Limited is registered as a Foreign Financial Services Provider with the Financial Sector Conduct Authority in South Africa.

North America

Baillie Gifford International LLC is wholly owned by Baillie Gifford Overseas Limited; it was formed in Delaware in 2005 and is registered with the SEC. It is the legal entity through which Baillie Gifford Overseas Limited provides client service and marketing functions in North America. Baillie Gifford Overseas Limited is registered with the SEC in the United States of America.

The Manager is not resident in Canada, its head office and principal place of business is in Edinburgh, Scotland. Baillie Gifford Overseas Limited is regulated in Canada as a portfolio manager and exempt market dealer with the Ontario Securities Commission ('OSC'). Its portfolio manager licence is currently passported into Alberta, Quebec, Saskatchewan, Manitoba and Newfoundland & Labrador whereas the exempt market dealer licence is passported across all Canadian provinces and territories. Baillie Gifford International LLC is regulated by the OSC as an exempt market and its licence is passported across all Canadian provinces and territories. Baillie Gifford Investment Management (Europe) Limited (‘BGE’) relies on the International Investment Fund Manager Exemption in the provinces of Ontario and Quebec.

Israel

Baillie Gifford Overseas is not licensed under Israel’s Regulation of Investment Advising, Investment Marketing and Portfolio Management Law, 5755–1995 (the Advice Law) and does not carry insurance pursuant to the Advice Law. This material is only intended for those categories of Israeli residents who are qualified clients listed on the First Addendum to the Advice Law.

21719 10010420