Historically, family run businesses have been the backbone of Pakistan’s economy. Although over the years a number of families have opted to go public through listing on stock exchanges, there is no doubt that family businesses are still dominant in the economy. For a long time, family firms would claim exemption from corporate governance standards. There is no conflict of ownership and control, many would argue, since managers and owners are one and the same. But the tide is turning.
Much of interest in corporate governance is driven by competitiveness pressures. In recent conversations with CIPE, CEO of National Food Mr. Abrar Hasan commented on his company’s decision to go public: “Becoming a public limited company has enabled National Foods to develop a culture and reputation on par with the best multinationals. Listing has made the Board of Directors more focused towards various stakeholders.”
While promoting better corporate governance practices in family businesses over the past four years, I’ve noticed that many still depend on internal human capital. Although there is a recognition that going outside of the immediate family may yield better quality management, the obligation to provide employment to family members restricts many firms from hiring on the open market.
The older generation of leaders still places more trust into a seasoned Munshi (corporate caretakers) than a paid CEO. Similarly there is reluctance in using external capital to fuel the business expansion or diversification. Many family firms prefer to finance their capital needs through their own (often limited) resources, which hampers the growth and wealth creation.
During a recent workshop on the issue of governance in family firms organized by CIPE and the Islamabad Chamber of Commerce & Industry (ICCI) business representatives brought up as the major issue frequent family conflicts and the resulting disintegration within business. The reason for this, often, is the lack of succession planning and consensus on the name of a successor, which usually creates conflicts and threatens the continuity of business.
Such governance failures mean that there are few family businesses in Pakistan that make it into and beyond the 3rd generation. Those that do, realize the value of good governance and going beyond the immediate family to get the human capital needed to survive and compete in today’s economy.
Published Date: August 27, 2010