Keeping it in the family

Wafiur Rahman
Thursday, November 2nd, 2017


 

Many family-controlled companies in Bangladesh have moved their ownership to the next generation. How are they faring?

 

The ancient Chinese sages used to say, “The first generation builds the company, the second generation lets it stagnate, and the third generation squanders it.” If one goes by recent research findings by McKinsey & Co., one of the world’s largest management consulting firms, this century-old adage may seem to hold true even today. According to McKinsey, less than one-third of family-owned businesses survive when they are passed on to the second generation; the survival rate drops to an even more dismal 13 per cent when the third generation takes over those businesses.

 

In Bangladesh, many family-run conglomerates, such as Square Group and Akij Group, have lately seen their patriarchs stepping down to allow a new generation of leaders to take over. At the same time, there remain many more companies planning to make a smooth transition to the next generation within a few years.

 

Do the cons weigh down heavily on the pros?

 

As a rule, a family business must focus on meeting two fundamental goals at the same time: showing repeated robust performance and allowing the family to maintain their ownership and interest in the business. Failure to meet either of these goals would mark the collapse of the company or the end of the family involvement. Upon initial inspection, the myriad of advantages presented by the family ownership seems to hide the challenges that every company is bound to encounter in balancing these two objectives.

 

The businessmen and entrepreneurs, who had spearheaded the country’s private sector over the years, are getting old or phasing themselves out of everyday business activities. Some of them have already gone into retirement. Their sons and daughters are in the process of either inheriting properties or taking over the family businesses. So the private sector is going through a transition of transferring one generation’s batons of sprint relay on to the successors.

 

Transitions in businesses often lack a pure professional approach, devoid of emotional attachment and claims of divine rights, particularly when they are owned by families. Most entrepreneurs, they themselves admit, do not want to realise that there is a big difference between a prince replacing a king and a son becoming CEO in his father’s organisation. As a result, the fathers place their children in top management without any due diligence followed and experience gathered. This may be the result of a feudal tradition that has etched into their psyche.

 

Are they prepared?

 

But, no doubt, the new generation is better skilled and well-educated compared to its predecessors, and also has immense potential with the advantageous position of being bigger and better. What it lacks is the much-coveted experience and wisdom to turn the tables in their favour, unlike their parents who proved their acumen during their journey in the business arena.

 

Niaz Rahim, Director of Rahimafrooz Bangladesh Ltd, stresses the importance of grooming the second generation for its tasks ahead. ‘We have to see whether they are ready or not. But it is also important to see whether we have groomed them properly or not.’ Rahimafrooz Bangladesh Ltd has been established on a set of values, he said. ‘The capacity of how my sons will work here is directed in the organisational structure. They may inherit this company by lineage, that may also be their privilege – but that does not make them company leaders by default.’ He explains, ‘My son works here on the company floor, not getting a penny more than what his peers are getting. That is how I have raised my sons. But that is not the case in the other companies. Serious discussions need to be raised to overcome such challenges.’

 

On the flip side, a Chittagong-based import company is now making unheard-of losses. In a number of well-known cases, family rifts are causing companies to break up into fragments. Some entrepreneurs are skeptical as to the actual number of second generation-run corporations that are successful.

 

Dr. Ahsan H Mansur, Executive Director at Policy Research Institute (PRI), says some second generation representatives are experiencing success, despite not being up to the mark. ‘I believe that they have what it takes to take business to the highest target growths. Today’s entrepreneurs are smarter, more educated and realistic. They will easily adapt to their respective business environments. What is needed for all this is professionalism in the institutions.’

 

The leapfrog to success post-Independence

 

By the 1990s, a trend of business being done by emulating business successes of others took over. The money-rollers and talented entrepreneurs both were uniform in their tendency to ‘not just work but provide work’. This had marked the 1990s as probably the most successful decade in terms of a flourishing of entrepreneurship. But the decade also gave way to the rise of political businessmen.

 

In fact, what started in the 1980s grew substantially in the 1990s. Given the constraints and bureaucratic red tape, the resilience of the businessmen overcame all challenges and turned Bangladeshi businesses into smart institutions. Many such institutions today are the brand ambassadors of Bangladeshi businesses.

 

Bangladesh has been gifted with Square, Beximco, AbulKhair, Akij Group, S Alam, ACI, Pran, Anwar Group, Transcom, Jamuna Group, Bashundhara, Partex, Summit, Orion, Envoy, Rahimafrooz, East Coast, Multimode, Karnaphuly Group, MGH Group, Bengal Group, Mohammadi Group, Mir Group, Hameem, Gemcon, Rangs, BRB Cables, PHP Group, Meghna, City Group, Pacific Group, Nurjahan Group, Nitol-Niloy group, Ifad, Dekko and plenty of other such corporations. Some might have begun before Independence, but they usually experienced success after 1971.

 

It is said that the state does not make entrepreneurs, except for providing support and incentives; they make themselves, in turn leaving their marks on economic development. In Bangladesh, the aforesaid business entities and thousands of others have been carried by the first generation and now the time has come for them to pass the responsibility on to the second generation.

 

The road to (further) transition ahead

 

Dr. Zaid Bakht, an economist at the Bangladesh Institute of Development Studies, said that there are no efforts visible to ensure a work and integrity balance in the companies. ‘The first generation businessmen disliked the idea of decentralisation, which ensures a professional decline in the long run, affecting goods and services delivery and its quality,’ he pointed out. If a company goes public in other countries, in Bangladesh the family interventions and participation increases. Most of the businesses here are of private and proprietorship models, running in pseudo-feudal practices. The owners’ say, as contrary to proper business practices, is the last word, unfortunately.

 

The companies must also get rid of ad hoc tendencies. Despite its limitations, Beximco is running in a corporate structure, as is Rahimafrooz, Square, Summit and a few other organisations. There are a few hundred companies, which have the bulk of the money to invest in future but they are still run and dominated by individual owners of the first generation. These businesses are likely to be divided among successors instead of being run as one corporate entity.

 

Engineer Kutubuddin Ahmed, Chairman of Envoy Group and one of first generation businessman, said, ‘If we are to possess Tata-Birla industries of our own, we must have faith in management. Owners will have to make way for professionals to yield profits. Not only is this needed for the long term benefits, but also for the growth of the businesses and industries as a whole.’

 

Niaz Rahim suggests that a weak family culture constitutes a weak business environment. ‘If entrepreneurs are to succeed, they need to have foresight, ambition and objectives, as well as imparting values, principles and ethics onto their children.’

 

Bangladesh may not have any Warren Buffett, Bill Gates or Dhirubhai Ambani, but it has companies that can be as successful as they are. Moreover, there are individual successes of entrepreneurs numbering hundreds of thousands. Some of them have led the growth of reasonably large companies. Still, their potentials are enormous and the second generation has to take up challenges to succeed.

 

How are they preparing themselves for taking over?

 

I’ve found things appearing more critical than I thought they would be

— Aminesh Kundu, who succeeded his father late Nitun Kundu in Otobi

 

When my father started Otobi, it was very difficult to start an entrepreneurial venture in Bangladesh. There was no upstanding infrastructure, and venture capital was very limited if not non-existent. Particularly for the furniture industry, the concept of organised retailing and material/design innovations were too futuristic. Everything had to be started from the scratch.

 

The base of the business was high level of design skills that my father had in him as an artist, and things that he acquired through his academic background in fine arts. It was more than the innovation in products or machinery. It was to a large extent the culmination of individual and collective human resource development. The company was doing business with, high level of design, due to the nature of the crafty products. Operational skills were needed at the production level. And intriguingly, that skilled manpower was developed from within Otobi. As the pioneer in the industry, Otobi had to create its own set of skilled workforce and manpower, extending up the ladder of management.

 

Coming fresh out of school, when I joined the company with an enthusiastic set of ideas for growth and diversification- and an acquired inclination towards institutionalisation, structure, and strategic orientation for the company- I found things appearing more critical than I thought they would be.  The heavy investment on developing manpower and set of operational skills over a very long period of time was giving yield. But the company was dependent on the owner in terms of direction, every bit of strategic nitty-gritty, and growth aspirations.

 

For the sake of sustainability and growth amidst the emerging competition that I saw while taking charge of the company, I faced my first big challenge. And that was to establish an empowering structure and to infuse brain down the muscle line of the company which was functioning almost all on motor-skills, relying heavily on the single brain on top. I took my sincere shot to re-strategise the business for growth, diversification, and sustainability. Along came a lot of challenges and I tried to overcome those with my own set of strategic standpoints. In business, a mistake is a strategy that did not pay off, and I had my mistakes too. This is an ongoing process and the effort to attain the long-term plan will go on.

 

The second generation needs space for independent decision-making

—– Nazim Farhan Choudhury, Managing Director, Adcomm Ltd

 

The elders look upon the next generation with a look of ‘what do you know?’ and similarly the successors, feeling the lack of space/independence, feel that pressure from them. That pressure often adds to the relationships. In our society we look upon our elders with respect, not going against their decisions, so there is a dichotomy working here.

 

Lots of companies today have figured out that professional management is the key to development. In our organization, Adcomm Ltd, the family members have the final say in board levels, but in business and day-to-day operations, we have operational heads who takes the business decisions for us. We have several endeavours, so in Adcomm Ltd, i.e, Mrs. Chowdhury has the final say, I have the final say in our radio station, and other such operational heads for the other concerns. They know what to do and how to take decisions. This is something which has not only worked for us, but also for major Bangladeshi companies such as Square. So the second generation has the element of vision to take their companies forward, but the space required for independent decision-making is a lot left to be desired for.

 

Many businesses have already moved on to our generation. I believe that it depends on how we are brought into the business. I grew up being in the office, finishing my after-school homework in office. I have been working for 20 years, out of which the first 10 years were spent on moving up the ladder from a management trainee to higher positions. After 10 years I became a deputy managing director, and became managing director five years ago.

 

Having a last name does not help, but the next generation does bring a lot of interesting ideas to the table. The first generation learned how to do business while doing business, which started from trading and then evolved into other ventures. There were lots of initial struggles, so the second generation grew up around some of those struggles. Having gone through proper education at foreign universities, they have learned elements which were exclusive to the West/India/Australia. Coming back home, they brought with them the ambition to carry those elements out in Bangladesh. So yes, our generation is ready to take the helm in our respective fields.

 

I am privileged owing to a vast network of capable personnel, whom I can recruit for every venture. That is something I credit my family lineage for. A leader is someone who will envision where the company has to go. Employees are those who will carry out those visions. We have a managing committee where everyone has a vote, I also have a single vote and decisions are based on committee votes. They will only look at the owners to set the guidelines.

 

I think what is important in business is value, not merely profit. We are all for the longer version of business. In 20 years, I have seen various individuals opting for quick profits, but they perish after a few years. The big agencies are the ones who sustain in the long run, thanks to their integrity.

 

I have worked with general employees on the floor for a long period of time

—- Faraz Rahim, Manager – International Business, Rahimafrooz Bangladesh Ltd

 

It is probably interesting to note how I got into the family business. Just as any other employee got recruited in this company, except for facing an interview board. But I have worked with the general employees on the floor for a long period of time, learning from them. Slowly I got promoted as a sales manager, and am now working as a manager for international business. I have not received any privileges of being from the family that owns this company. No one can become a board member of this company without having 15 years of experience. I may be a shareholder of the company, getting my year-end dividends – but at the end of the day I am evaluated just like any other employee.

 

On whether our generation is ready to take over the business, I would say, yes, we have been groomed accordingly. It is true that we lack the necessary experience to glide through and are subject to a luxurious lifestyle, but reality lends perspective. I have been taught by my family to take responsibility when the time comes. We are mentally prepared.

 

Taking through family lineage is a challenge for our generation. Without experience, being placed in the top management is disastrous. But I believe our families do that out of necessity, given the lack of loyal and professional employees. The ones who are efficient do not often turn out to be ready. So it is a matter of perspective, which we must get out of.

 

If the point of view is not professional, then it paves the way for corruption. It is imperative that the businesses embrace corporate structure. Capable personnel must be given their positions. The owners’ perspectives must also be changed, which is where we are ahead of our predecessors. We are aware about corporatisation, use of technology, globalisation, etc. Establishing institutional governance is also important for management development. Business is definitely about profit, but that has to be obtained through values. Profit without values is futile, but this lesson has to come from the families.

 

Successors of family businesses have exposure to better education

—- Navidul Huq, Director, Mohammadi Group

 

If you look globally, most businesses are family-owned. Control is not passed on to the next of kin, but rather through merit. It is privilege if the handover is on the basis of inheritance. Our generation is starting to come to business, and will keep on coming. It is not that risks are increasing as we are entering business. We have not failed completely; we have our fair share of successes. Many are conducting businesses successfully. On the other hand, very few companies here have been corporatised. Even though some institutes instill corporate management, the business decisions always come from the families.

 

We are in fact ready to take over businesses. We are more exposed to education and business. Successors have more education, especially business education. We are more culturally tuned. No one questions our authority, entry into the business, our merit, etc. It would have been good for business if the questions were raised though. Successors are accepted into the companies.

 

You see, we are exposed to family business from a very early age. We knew back then we had to take responsibility at some point. We have been groomed accordingly, becoming regulars in the company. Most of the successors like myself have the same experience. Even though we are in the company, we have not received complete authority. Our guardians cast their shadows over us, taking those crucial business decisions. So it would only be logical to judge us when we reach that position.

 

We need corporate structure, 100%. Otherwise companies will not grow, incapability will rise. Corporate structure is needed to increase organisational effectiveness and help run things smoothly. Both profit and value are equally important. But values take precedence in business. I do not want to earn money in any manner. This may not make my company the biggest, but rather can make it, the best.

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