Family firm is the prevailing business model in Bangladesh. Our economy is mostly dominated by first generation local conglomerates, corporations and small & medium enterprises. These family-owned firms have driven the economic growth and employment generation in Bangladesh since her independence. As these businesses look to transfer their control and wealth to across generations as well as adopt modern business practices, they face the prospect of disintegration. This is a common phenomenon around the world, as various researches found the saying "Wealth doesn't survive three generations" has some truth to it. Around 30% of family businesses make it through the second generation, 10-15% make it through the third and 3-5% make it to the fourth generation. Thus, simply continuing the success and prosperity of a business beyond the current generation's lifespan is a challenge. If the local family businesses are to overcome this challenge, they need to address some common roadblocks.
Succession: Meritocracy vs. dynasty: The founding leaders of family firms are the ultimate entrepreneurs. They use their creativity, strategic insight, commercial acumen and leadership skill to build a thriving business with long term growth potential. Naturally, replacing them is a herculean task, especially when the candidates' pool is limited to offspring of the founding generations - as is the case with most Asian family businesses. Even when Asian family firms put non-family members in the helm, it often doesn't end well. An example of this is the case of Cyrus Mistri, who was the first non-Tata family member to serve as chairman of Tata Sons. Despite being handpicked for the position in 2012, he was unceremoniously evicted from the position within just four years due to a conflict of culture with Tata family members. Family owners in Asian cultures simply don't trust the idea of leadership beyond close family relatives.
Local family firms shouldn't limit succession within family members only. Doing so would diminish the probability of a successful succession. But if they prefer succession within the family, then the succession should be a continued process. Potential next generation leaders should be identified through a rigorous potential assessment and then groomed from an early age. Beyond learning, the potential successors should also be provided multidimensional exposure to the overall business. Some local family firms are sending potential next generation leaders to business schools abroad for superior management education. After completion of studies, they are put in the bottom rung of their businesses and then groomed from the below to the top to prepare them for the eventual ascendance to a top management role. More local firms should adopt such long term succession strategy.
Corporate governance vs. family governance: At a small scale, family owned business operations are naturally and effectively informal. However, it becomes a big hindrance when the firms grow up but the newer generation still hold on to the legacy practice of not having any system of rules, practices and processes.
Many family firms are run as personal fiefdoms of the family patriarchs. The family members concentrate all the power within themselves, and the managers are there simply to exercise the desire of the owners. Rather than being run by policies or processes, they are run according to the will of the family. Since the employees are not involved in the strategic business decisions, they eventually give up the feeling of ownership to their job. Managers don't take new initiatives and innovation gets stymied. Due to lack of external, non-family talent in senior positions, there's not much opposition when the family owners take erroneous decisions.
A case in point is a 2013 fatal gas leak at a semiconductor plant of a family owned conglomerate based in South Korea. One of the largest chip makers of the world, the conglomerate concealed two separate leaks of poisonous acid gas in their factory from authorities until a worker died from exposure and others were injured. The management of the company did not immediately report the leaks because they prioritized avoiding government scrutiny over workers' safety. If the top management were diverse beyond the family-managers or their underlings, such decision could have been averted due to internal resistance.
Keeping pace with technology and modern business practices: When the world is talking about big data analytics, alternative data metrics and the impending fourth industrial revolution; many local firms still maintain paper based record of daily business. This is just one field; adoption of modern business practices is slow in other aspects too.
Most local family firms are attempting to adopt modern technology and business practices, but progress has been slow in general. The key culprit in many firms is the nonexistence of integrated goal for the businesses. If you look through the websites of many local family businesses, the vision & mission statements you will find are most probably put there by the website developers as placeholders. In absence of a set vision for the businesses beyond profit motive, the modernization initiatives are haphazard, not holistic.
Such business reengineering initiatives also need proper follow through to be effective. For example, a Bangladeshi family conglomerate engaged external consultants for a five year vision planning exercise. Each department of the organization had their own five year target set after the exercise. In the initial years, all the unit heads were actively perusing the targets. However, when the family owners moved on to undertake new initiatives, the five year plan slowly lost importance. By the time the five years were over, the targets were all but forgotten and achievements against targets were not evaluated. To ensure successful adoption of new processes, ownership and responsibility of the initiatives should be given to the employees as well.
Attracting and retaining top talents: Family firms face a great challenge to attract & retain non-family talents. The widespread belief is that top management positions in family firms are reserved for family members - regardless of capability and qualification. Non-family talents expect to face a glass ceiling after a certain stage. As "Outsiders", they have limited opportunities to reach senior positions and influence the strategic direction of the business.
There is also the question of proper career growth and personal development. A HR Practices and Trends Survey conducted by Ernst & Young LLP in 2014 found that more than 55% of local organizations do not have any defined employee reward and recognition program. Due to lack of structured performance management, nepotism by the owners and connection to the family is more important to career progression than competent performance. Moreover, in many companies the HR departments don't implement modern HR practices and act more as traditional Admin departments working on behalf of top management as watchdogs on employees. Feeling suffocated and demotivated, employees eventually leave and others try to stay away. It's no surprise that many local family firms have a high employee turnover rate.
These issues prevent local businesses from attracting top talents, even at entry level. For example, one of the top export oriented textile conglomerates of Bangladesh hired 9 fresh graduates from one of the top business schools of Bangladesh. Despite providing competitive salary, all but one of them left the companies within 6 months. The company alleges the recruits lacked professionalism and competency; while the recruits argue their departure was contributed by lack of defined job description, proper induction & on boarding sessions, performance objectives and archaic business practices. Majority of them are currently working in Management Trainee roles in top multinational companies.
Designing optimal ownership structure: When a family firm transitions from founder's stage to sibling's partnership, chances of disputes surrounding control and direction of the firm is fairly low. However, by the scenario is different for the next stage of transition to the Cousins' confederation. By this time, the family members may barely know and trust each other. Their interest may no longer align, and successful transfer of value across generations becomes more difficult. A diluted ownership structure may remove incentives to take individual responsibility, and sometimes result in a deadlock between opposing branches of the family - thus eroding the potential of the firm. In such scenarios, optimizing the ownership control structure is crucial for maintaining a common purpose and avoiding fragmentation.
A successful optimization would positively affect the incentive, behaviours and ultimately the performance of family members, family managers and other stakeholders in the firm - even when the ownership is much diluted. More than 200 family members own the German industrial conglomerate Thyssen. Around 600 members of the Mulliez family own shares in the holding company that controls the giant supermarket chain Auchan, the sports retail chain Decathlon, and many other successful retail brands.
One way to maintain the integrity of a family firm in its third or fourth generation stage is placing its ownership in a trust. This is quite common in USA, where ownership of large businesses such as WalMart, Ford Motors, and the New York Times are placed in trusts. Trust ownership is touted as a powerful solution to the challenge that families face with respect to an increasing number of family members and deviating interests. Bangladeshi family firms should study such successful optimization of ownership structure and start designing a customized solution in advance to avoid dissolution.
Conclusion: All of these roadblocks are not common in all local family businesses, but different combinations of these are definitely present in all of them. To be fair, these issues are not unique to Bangladesh; family businesses around the world face similar challenges in their transformation cycles. To mitigate these factors, leaders of such family run organizations should take a step back for introspection and recognize if such issues exists in their businesses. The new generation leaders should be involved in this process as they can easily identify risk factors and can bring new ideas to the table. The external stakeholders, such as the government and academicians also need to play a role. Little research has been done regarding the impact family businesses had on the economic prosperity of Bangladesh and the challenges they face in their quest for growth. Many business schools around the world have knowledge centres dedicated to family businesses that bring attention on such issues and research on mitigation strategies - but no such centres exist in Bangladesh.
Internal introspection to identify growth inhibitors, studying global examples and external spotlight on this issue would be a good start towards achieving long term sustainability for local family businesses.
Nabid works as a Graduate Associate in a leading international bank.
All views are his own.
© 2024 - All Rights with The Financial Express
