Family business in Pakistan | By Ikram Sehgal

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Family business in Pakistan

AS in most other countries, family business plays an important role in the national economy of Pakistan.

About 80% of our economy are created by family business. But family business seems to be in a kind of crisis today.

A huge chunk of Pakistan’s 22 richest family-owned businesses, tracing back to the 1960s and 70s like Hyesons, Bawany and Valika have lost in history and has vanished from the market.

During a conference dealing with the challenges to family business in Pakistan held by IBA Karachi in 2018 the reasons for this problem were discussed and it was established that had they incorporated corporate governance culture and set business rules among their members, there were high chances they would have continued to flourish until now.

Imrooz Group of Companies Chief Executive Officer Ameed Riaz told conference participants that his father had established Imrooz Group of Companies in 1949.

The third generation, however, is not keen to be a part of the business. “We (three brothers) have eight kids and none of them is interested in inheriting the business,” he said.

He stated that they are discussing the ways of dealing with the situation. “Obviously, we will not switch off the lights and shut the business down,” he stressed.

“We are planning these days how to face the situation. The company’s constitution allows hiring CEO from outside the family in case no capable family members fits the post.

And that is what will be done,” unquote. Thus, the instituting of good governance mechanisms can alleviate problems, and help companies sustain growth and overcome short lifecycles.

Good governance has a positive impact on the performance of companies and enables them to move into the next phase of the business lifecycle.

As companies grow and become more conversant with good governance, their ability to attract capital from external sources also improves, allowing them to expand, diversify, and acquire other businesses in a sustainable manner.

In a bit older study conducted by LUMS Centre for Management and Economic Research in 2007, Succession cases in family businesses of Pakistan were studied by conducting several case studies.

One of those was the Kart Limited company that was established in 1965 as a joint venture between the Hussain3 Group of Pakistan and Atlas & Ryan* of USA to manufacture and market construction material products.

Sheikh Akbar Hussain, son of Sheikh Zahid Hussain, started learning the ropes of his father’s business from an early age.

From childhood, he was exposed to the business environment; most of his holidays, summer or otherwise, were spent at Kart.

He used to visit different departments but his interaction with others, especially in the production and design department helped him cultivate skills in the production systems and processing functions.

During higher education abroad he always kept in touch with the family business working there during vacation.

After several years of work experience abroad he came back to join the family business working side by side with his father so that a gradual succession was achieved.

Other case studies revealed that a close relationship between father and son was the basis of a smooth integration of the next generation into the business.

Trust and an openness by the father for new ideas as well as a free hand in decision-making in the field of responsibility of the son have obviously contributed to a stressless relationship.

The personality traits were found even more important than good education and professional experience.

And merit rather than family belonging was the basis of successful performance of the next generation.

Another field of importance detected in the research was kinship culture. While some businesses maintained respecting and following biradri values and norms others respondents did not put any importance to it since the business had already been transformed into a corporate organization after its inception.

It seems that there is a gradual movement away from biradri- and extended family involvement towards a family business with a merit-based corporate organization.

Also, successful family businesses were listing themselves on the stock exchange to stop the division of the business during the succession phase.

Furthermore, separation of ownership and management of the business and business wealth sharing among family members was also observed within successful family businesses.

These interventions in family businesses helped in controlling the disintegration and division of the family businesses due to Islamic inheritance law and kinship culture.

Over 80% of the businesses in Pakistan are small enterprises which mostly are family businesses.

Nurturing these businesses and ensuring their sustained growth is absolutely essential for our economy.

We will have to overcome paucity of knowledge organising and managing these enterprises in rapidly changing times.

Most educational institutions in Pakistan are not facilitating the younger generations enough in guiding them on prudent business practices.

Young offspring’s are hastily inducted in to the family business without training them in a creditable institution on the specific family business.

If the business is managed professionally there is less likelihood of it going bust under new generation.

It is imperative to groom the younger generation properly otherwise years of hard work would go down the drain.

Most of the first-generation entrepreneurs come from a lower middle class or humble background and they want that their children enjoy the wealth they created and also expand it further.

Since the original builder of the business guides his first generation the success continues.

The second generation that is born in wealth becomes a little careless about their children and lets them enjoy life.

When responsibility is thrust on the third generation in the absence of professional management, they are usually not prepared for it and destroy the enterprise.

The main problem in family business after the second or third generation enters the company is to build consensus on decisions, delegating responsibilities, profit-sharing, etc.

The key decisions like marketing, and expanding should be delegated to the professional management as is done in developed economies.

Profit sharing decisions should have provision for keeping reserves for expansion. The SMEs usually fail because the mantle is passed on to the incompetent and ill-prepared heirs instead of streamlining the business on rule-based professional ground under supervision of experts.

The research conducted over the years and by different institutions shows that apart from good professional education and gradual integration of the next generation into the family business a good family climate based on trust is essential for securing the future of family business.

(This is the Fourth part of a series on “Family Business”, Ikram Sehgal gratefully acknowledges the research-in-depth by Dr Bettina Robotka).

—The writer is a defence analyst and security expert, based in Karachi.

 

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