October 02, 2006	Monday	Ramazan 8, 1427

FAMILY-owned enterprises (FOEs) play a very important role in Pakistan’s economy, as indeed in any other developing country.

Almost the entire retail business, small manufacturers and even large corporations are family-owned and operated. Over 90 per cent of the registered firms are estimated to be family businesses.

Worldwide, there are around 200 family businesses with annual revenues of at least $2 billion each. Employing half the world’s workforce, they generate well over half the world’s GDP. In the United States alone, 24 million family businesses employ 62 per cent of the workforce and account for 64 per cent of the GDP.

Similarly, in India 95 per cent of the registered firms are family businesses and finally, Wal-Mart, the world’s largest company is also a family business.

Family-owned businesses have certain inherent strengths, such as the ability to withstand economic shocks. They are also good at making quick decisions, maintaining good business relations and enduring time-proven leadership qualities. Belonging to a single family-culture, FOEs have strong set of values which renders them a distinct identity.

Often, a long-term strategic thinking that results into prudent business decisions enables FOEs to become sustainable, which increases the chances of ‘succession from within’. In the wake of an ever-changing business world like technological advancements, new business approaches, managerial practices, emerging competitive norms and latest market trends, the FOEs generally remain flexible so as to adopt innovative technologies.

However, FOEs face several challenges: accessing capital; and balancing debt/equity; diversifying wealth, managing risk and providing liquidity’ and managing succession; appointing competent directors/ managers.

In general, FOEs find it hard to adhere to ‘separate business entity’ concept, isolate family and company relationships. Similarly, they stick to informal governance policies which are specific and limited to their own set-up. These FOEs must embrace a bit of corporate governance.

Another challenge facing FOEs is managing growth from generation to generation. In case of less capable hands, sustainability becomes a problem. It is a dilemma because stability and growth in profits is only possible if capable persons are managing the FOEs and incapable family members are replaced with capable non-family members when continuity in family management is missed out.

So, the owner-manager equation becomes more complex as the issue of succession surfaces. The enterprise has to induct non-family members. But this would again call for a formal system to be in place which is seldom there.

Experience shows that FOEs with ‘effective governance practices’ are more likely to do strategic planning and to do succession planning. On an average, they grow faster and live longer’, asserts Prof John L. Ward of Kellogg School of Management.

Succession planning is basically a very delicate issue in FOEs. Very few FOEs survive beyond the third generation. A study in the US shows that ‘successful family businesses are committed to good governance. Those that have endured for generations tend to include outsiders on their boards and base hiring and promotion on merit.

For this reason, good corporate governance practices ensure succession planning. Globally, managing succession has been one of the most ticklish tasks. In UK for example, succession has been a major challenge, where one out of six survives to third generation and one out of eight survives to fourth generation.

The owner-managers should be allowed to exercise sufficient control over the process of change. It should also be recognized that FOEs may arrive at their own ideal governance schemes. ‘Importing the Western model isn’t the answer,’ says Hsieh Tsun-yan, head of McKinsey’s Southeast Asia practice; ‘in fact, it can be dysfunctional.’

The recently launched Pakistan Corporate Governance Project of IFC is focusing a great deal on inculcating good governance practices in the local FOEs.

The methodology used by IFC, i.e. building a business case for corporate governance provides the much needed “business incentive” to enterprises who want to introduce good governance.

Also, as Pakistani FOEs reach the third and fourth generation of succession, IFC’s focus on “succession planning” is of much interest to the local entrepreneurs.