Family Businesses Across Regions – Asrar Qureshi’s Blog Post #860

Family Businesses Across Regions – Asrar Qureshi’s Blog Post #860

Dear Colleagues!  This is Asrar Qureshi’s Blog Post #860 for Pharma Veterans. Pharma Veterans aims to share knowledge and wisdom from Veterans for the benefit of Community at large. Pharma Veterans Blog is published by Asrar Qureshi on  WordPress, the top blog site. Please email to asrar@asrarqureshi.com for publishing your contributions here.

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This blogpost partakes from INSEAD article by Alexandra von Stauffenberg and Claudia Zeisberger. Link at the end.

A business may be defined as Family Business in which two or more family members operate the company, and the majority of ownership or control lies within a family. 

90% businesses start as family business, as per the definition above. Family businesses also account for 70% of GDP in the global economy and 60% of global employment. When a family starts a business, they aspire to make it big in their generation, and then hand it over to the next generation who are expected to keep it running for many generations. Unfortunately, it does not happen in majority of cases. Gallup® estimates that less than one third of global family firms outlive the founder, and barely 12% make it to the third generation. Other data says that the average lifespan of a family-owned business is 24 years. About 40% of US family-owned businesses turn into second generation businesses, approximately 13% are passed down successfully to a third generation, while 3% survive to a fourth or beyond. 

These statistics are universal; however, studies have found variations in the longevity of businesses across regions, and the core factor decisive for longevity of business. 

It is common perception that transfer of a family business fails due to inadequate succession planning, and it is not entirely untrue. In Pakistan and many other countries, family feuds become the major reason for business failure. The sons mostly, and sometimes other members also fight to gain control and damage the business. I do not want to name though I can name many businesses in Pakistan which were split between siblings and were entirely lost. Some splits were more intelligent but not all siblings can run the business in the same way and the longevity of the business is hurt. Having said that, succession is still only one factor among others; even more important is what is termed as “institutionalization’. 

Institutionalization of Family Businesses

INSEAD’s Global Private Equity Initiative – GPEI has been conducting a global research study into the institutionalization journey of family businesses across various regions of the world. 

Institutionalization has been defined according to six main attributes:

1. Family ownership and succession – Assesses how the family engages with the firm as owners and leaders, and whether the family is aligned regarding the future of the firm. 

2. Intangible family assets – assesses the importance and strength of family values, connections, and heritage in the day-to-day operations of the family firm.

3. Corporate governance and leadership – assesses the composition and capabilities of the bodies and individuals that drive decision-making at the family firm.

4. Growth capabilities – assesses the family firm’s ability to identify and execute organic and inorganic growth strategies in the firm’s specific geopolitical context.

5. Organizational design – assesses the existence and effectiveness of the systems and formal policies used to govern the day-to-day operating activity of the business.

6. Access to capital – assesses the family firm’s ability to raise debt and equity capital current and future business operations.

It is important to mention here that internationally, even family businesses may take investment from private equity firms, while in Pakistan, no such thing happens. The business ownership is completely retained by the family. Private equity firms do not just supply capital, they sit on the boards also, and influence the family firm in many ways. Their advice is as good as command. They can do a world of good by providing expertise in various areas including smooth transition to next generation.

Variation Across Regions

Surveys done by GPEI may be briefly summarized as below.

• The institutionalization was most pronounced in Europe, between the second and third generation firms. European family firms tend to institutionalize faster than the firms in other regions. Consequently, greater percentage of European firms (24%) go beyond fourth generation. These firms have formalized most of the processes and made them system-oriented rather than being person-dependent. 

• From Asia-Pacific to Middle East, most firms were found to be low in institutionalization process. For example, only 26% have a professional board, only 37% have a written succession plan, and so on. On their journey of transition from first to next generations, most organizations falter during second or third generation. However, those surviving beyond third generation achieved a much higher level of institutionalization.

• Latin America posted a much better picture; from 1st to 4th generation the level of institutionalization increased steadily from 14.8 to 17.1, combining all six attributes. 100% of the well-performing firms have a professional board. 

There is a lot of data in these reports which is quite interesting and revealing. For our purpose, it is enough so far to make the point.

Sum Up

We know the situation in Pakistan, but applying this framework can help us understand the reasons and offer solutions. The key is institutionalization. Practically, it means that the firm owners encourage formalizing policies and procedures, discourage using discretion, promote participative decision making, and invite independent observation, view and advice rather than keeping everything in house.

Concluded.

Disclaimer: Most pictures in these blogs are taken from Google Images and Pexels. Credit is given where known; some do not show copyright ownership. However, if a claim is lodged at any stage, we shall either mention the ownership clearly, or remove the picture with suitable regrets.

References: 

https://knowledge.insead.edu/family-business/what-distinguishes-europes-family-business-champions-rest