Family-owned enterprise is a concept as old as the first-ever business transaction conducted between two parties. The origins of business are entrenched as transactions between families. Even in the era of barter trade, if one family grew maize and the other sugarcane, they would exchange their produce on the basis of need and profit-making. Business was always in the hands of families or in partnership between them. The corporatisation of business is only a few centuries-old phenomenon as against family-run business.
The oldest recorded company is slated to be the Kabushiki Gaisha Kongo Gumi, a Japanese construction company that was formed in the year 578 AD. This was followed by The Royal Mint in the United Kingdom, which was created in 886 AD. The Dutch East India Company was the first public company formed by the state. More familiar to South Asia is, of course, the East India Company, which was incorporated by a Royal Charter in 1600 AD.
The term ‘family business’ is not meant to conjure the existence of a mid-sized company alone; there are large family-owned organisations spanning world markets, some prominent ones being Walmart, Samsung, Toyota, Honda, Tata, Godrej, etc.
In the context of Pakistan, we have had our famously infamous 22 families that ruled the roost during the fifties and, more significantly, during the Ayubian era. This period was celebrated as the ‘Decade of Development’ a year before President Ayub stepped down. There is no doubt that the industrialisation witnessed then has not been repeated. The achievements were based on the unalloyed application of laissez-faire or crude and ruthless capitalism. The ‘Seths’, as they came to be referred to—an appellation they liked and are unwilling to shed even in the present day and age—indulged in wholesale exploitation of human resources, or more appropriately, the labour class. This attitude and situation was a powder keg waiting for revolutionary politicians to take advantage of. They did. The socialist programme of Z.A. Bhutto brought him into power, and he hastened to nationalise key industries, thus depriving the owners, who were seen and portrayed as blood-sucking leeches. A ripe environment prevailed for ZAB. The move, however, was disastrous.
The 22-odd families did not disintegrate only due to nationalisation, but several simmering factors relating to the peculiarities of family-owned businesses contributed. A tale of ‘power and wealth grab’. Traditionally, what normally continues to happen is that once the ‘great helmsman’ who formed the business, along with siblings, sees the induction of the second generation over time, ‘cousin rivalry’ begins, leading to the break-up of the family into several independent constituents. We see them operating even today as divided families—the process is a continuing one. History ruthlessly and lethally repeats itself; today, some of these businesses that began as breakaway satellite organisations are experiencing the same phenomenon from the next generation—what the father did to the grandfather is being done by the grandchildren to the father, asking for a split.
Corporate governance is a major challenge in family-owned businesses. It is more pronounced in our country due to different and challenging issues relating to moral values and cultural demands.The ‘Code of Corporate Governance’ is applicable to listed companies. Even those listed are not fully publicly listed in the sense that ownership is concentrated and still held by the initiators of business. This aspect of majority ownership permits them to indulge, flout, and circumvent all rules and regulations. With a maximum of two independent directors (who, in our culture of the real world, are extremely dependent) and the rest being either family members or friends, the functioning of such a ‘board’ remains under a cloud of doubt and suspicion. Such boards cannot even see the basic element of ‘conflict of interest’; they merrily award contracts to each other under the guise of corporate masking.
In the early nineties, when private banks and financial institutions were given permission, the promoters with a 51 per cent holding could nominate anybody on the board. Consequently, many female members of the family who were mostly innocent of banking, finance, and economics were put on the board. This era was of the Corporate Law Authority. This was a dilemma and nightmare to justify to international correspondent banks, who justifiably asked about their ‘fit for purpose’ criteria. It was much later that a stringent fit-and-proper criterion was enshrined, thanks to SECP. Even today, however, families have majority shareholding. With piddly capital contribution, the banking industry is possibly the most leveraged; access to large deposits from the general public. The current strict regulatory oversight, possibly by the central bank, is the best guarantee and not necessarily any form of expression of faith in the families owning financial institutions and other businesses.
By and large, family-owned businesses are bad managers of human resources. They remain in perpetual fear of an independent-thinking CEO or even senior management; they imagine corporate rebellion mostly when faced with a challenge to their own role in the organisation.
For the success of any family-owned business, the following aspects are critical: absolute clarity about roles and responsibilities—zero ambiguity; the decision-making process must remain transparent; communication lines must remain open and clear; a design must be in place to handle family squabbles and disputes, and above all, the succession process must be clear to at least a few members of senior management. A clarity must exist between ownership and management; both must remain within their regulatory permitted ambit.
Sirajuddin Aziz
The writer is a Senior Banker & Freelance Columnist.
