Passing the Torch-The next generation taking over family businesses

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Many Bangladeshi business entities that thrived on individual initiatives have come a long way, and are now facing a transition. Are the successors ready to lead the businesses to the next stage or how would a transformation be possible?

By Saiful Hasan

Translated by Wafiur Rahman

Generation gap as a widely known concern of human society, is a bit more relevant to business people, given the distinct nature of challenges of each age and the importance of credibility that an entrepreneur has to earn himself/herself. A potential communication gap between parents and their children poses risks to the sustainability of the businesses, sometimes involving conflicts within the family. So, handing over responsibility of family firms to the next generation remains a tricky issue as difficulty in succession can hardly be predicted.

Bangladesh is currently undergoing a transition on its social, political and economic fronts after four decades of its independence. The businessmen and entrepreneurs, who had spear-headed 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 to 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. It’s a turning point of almost like ‘make or break’.

A 2012 family business’s survey by ‘PricewaterhouseCoopers’ found that 41% respondents intended to pass on the management of the business to the next generation, a further 25% the ownership, and not just the management. But more than a half of them were unsure whether their children had either the skills or the enthusiasm to do this successfully.

However, the survey report titled ‘Bridging the Gap’ said, ‘there’s no doubt in the ambition of the next generation who has decided to go into the family firm.’ Of the respondents, 86% wanted to do something significant and special when they take over, and 80% have big ideas for change and growth. ‘Some want to launch new products or ventures, or make changes to where and how the business operates; others want to invest in new technology, and explore new approaches to marketing using social media,’ it added.

In a country of short history of entrepreneurship like Bangladesh, the new generation businessmen have to answer some critical questions the moment they intend to join business, or are in the process of taking over family businesses. Apart from equipping themselves with necessary skills and attaining leadership capacity to withstand pressure, they have to look at the overall business environment including the visible and likely changes for taking prudent business decisions.

 

Are they prepared for the job?

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, 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.

But, no doubt, the new generation is better skilled and well-educated compared to their predecessors, and also has immense potential with advantageous position to be bigger and better. What they lack is the much-coveted experience and the wisdom to turn the tables in their favour, unlike their parents who acquired skills and knowledge from experience.

Some first generation entrepreneurs, acknowledging the reality, observed that the country lacks skilled, capable and professional executives who could run business on behalf of the entrepreneurs. Trust and credibility are something – as required for corporatisation of business entities – that is still broadly missing. In fact, most business organisations suffer due to corruption and governance crisis despite the best wishes of the authorities concerned. In such circumstances, the owners of businesses tend to rely on their own blood relatives. In Bangladesh, the common notion of mixing family with business always persists. That is exactly why blood ties take precedence over experience and ability.

Aziz Khan, Chairman of Summit Group, has a difference of opinion in this regard as he is optimistic about the success of the second generation entrepreneurs and businessmen. ‘Their world is much bigger than ours,’ he said, ‘they have access to technology, which they also know how to use. I know that our children will go beyond our successes and go far.’

Niaz Rahim, Director of Rahimafrooz Bangladesh Ltd, stresses on the importance of grooming the second generation for their 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 that, ‘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 away into fragments. Some entrepreneurs are skeptical as to the actual number to 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.’

Rubana Huq, Managing Director of Mohammadi Group, echoes the same sentiment. ‘I feel that they are still not ready to take their rightful places,’ she said. ‘We must get out of the mindset that our children will be the torch-bearers of our companies. If we live under this illusion, then we will be stuck indefinitely in an abyss.’

 

Looking back

Steve Jobs had once said that the entrepreneurs are the real heroes in any economy, who do not change themselves only, but also what is around them. They are different from others, and positioned well above the rest.

Prior to the independence, the people of this region lacked in the business acumen needed to succeed. The disadvantageous position was also attributed to the oppression by the West Pakistani rulers. After Independence, the challenges and potentials to succeed economically became enormous. The need to do business, apart from searching jobs, was becoming popular among the lower-middle people, and of course in the middle class mind. This was also accelerated by the privatisation in the 1980s, the boom of the garments industry which turned from Sri Lanka to Bangladesh. It is largely due to the successes of the RMG and agriculture sector that helped Bangladesh become a nation of entrepreneurs.

The first-generation relied heavily on trading, where it was popular to import goods and sell them in local markets (it is still the case though). Many of today’s successful industrialists had begun through trading as well. They tried to venture into the unknown, in niche businesses. They had realised that if they did not take initiatives to establish themselves, employment generation, economic development and sustainable business would remain distant dreams. Their far-sightedness enabled them to invest in other industries. As agriculture was overshadowed by industrial output – an expected trend in time of economic take-off – the services sector, too, came to the fore as the next destination for making investment. Since the 80s, pharmaceuticals, banking, insurance, real estate, cement and other industries had started off modestly, but grew in course of time. This is how the backward linkage industries of the RMG sector were established.

Many businessmen thought of business as only trading in the late 80s. But some businessmen took exceptions and proved them wrong. They were perceived to be risky, but their resilience silenced many critics. Many say that if risks were not taken in the RMG sector back then, there would have been no business in Bangladesh today. The common notion of ‘business bringing profits’ was taken over by the ability to take risks, persevere, create employment, take responsibility and then reap maximum benefits. Many opine that it took more than three decades to get rid of the primary illusions.

 

The leapfrog in the 90s

Investment is required to kick-start any business, be it formal and informal investment. It may be individual or joint ventures. By the 90s, there was a trend of doing business by emulating business successes of others. The money-rollers and the talented entrepreneurs both were uniformed in their tendency to ‘not just work, but provide work’. This had marked the 90s as probably the most successful decade in terms of flourishing of entrepreneurship. But the decade also gave way to the rise in political businessmen.

In fact, what started in the 80s grew substantially in the 90s. Given the constraints and red tape bureaucracies, the resilience of the businessmen overcame all challenges and turned Bangladeshi businesses into smart institutions. Many of such institutions today are the brand ambassadors of Bangladeshi businesses. The democratic environment for doing business played a very conducive role in terms of accelerating economic growth. Both M Saifur Rahman and Shah AMS Kibria, finance ministers of the BNP and the Awami League regimes respectively, took initiatives to support and expand local businesses. The combination of business resilience and state incentives and inspiration, according to economists, surmised the 90s era of doing business.

Bangladesh has been gifted with Square, Beximco, Abul Khair, Akij Group, S Alam, ACI, Pran, Anwar Group, Transcom, Jamuna Group, Bashundhara, Partex, Summit, Orion, Envoy, Rahimafrooz, East Coast, Multimode, Karnaphuli 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 providing supports and incentives; they make themselves, in turn leaving their marks in the 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.

It is always challenging to hand over the responsibility from one generation to another, or in other words to take over the charge of business by children in a world different from the one of their parents. So, are the representatives of the second generation capable of taking the helms and ready to face the unforeseen challenges and continue to contribute to business and national development?

 

Professionalism out of comfort zone?

According to an article in Wall Street Journal, two areas in particular seem to hold the most potential for missteps in the life of a family business: getting family members into the business and working out successions in leadership.The Economist magazine wrote: ‘Of course, the second and subsequent generations have a choice. Keeping the family in the business may mean continuing both to manage and to own it—or the family may own the business but play no part in its management.’

However, there is a lack of good governance and the private sector is not immune and allegations of corruption are there, too. In family-owned businesses, some owners may have the luxury to consider their corporations as their personal kingdom – whatever they say will constitute as rules of the company. Such attitude demotivates employee and creates a sense of insecurity among them. The point of accountability for both employers and employees in a healthy manner becomes non-existent. Experts recommend a proper corporate culture, something which is still not present in most companies even today.

Dr. Zaid Bakht, an economist at 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.

Even though companies have mushroomed in the last four decades, the number of bonafide organisations actually needs to be counted, according to Zaid Bakth. The ones in Bangladesh are more into achieving profits, rather than strive for organisational development. Without investing in management, it may be possible for one generation to sustain their businesses, but it would become difficult for the next. The biggest challenge of the Bangladeshi businesses is to get out of the feudal business practices and opt for professionalism, for the sake of the economy and the entrepreneurs themselves.

‘Serious problems relating to family business ownership tend to be less common when the firm is first-generation owned and managed,’ explains Jeremy Shulman, founder and senior partner at Leeds-based solicitors Shulmans LLP. ‘Problems often arise when second-generation family members enter the business or when ownership needs to be transferred.’ He observed that most owners do not have a plan to hand over responsibility of firms to the next generation. ‘Some struggle with the very idea of letting go of the reins. But in family businesses it’s often easier to plan succession, because ownership stays within the family,’ he added.

The Tatas, the Birlas, Mittals, Mahindras and Ambanis in India have all sustained due to their embracing of change. They have allowed people outside of their family to take over company leadership. None of Mahindra’s children are in business, even though the Ambani brothers have split their businesses being run by career professionals. Dr. Ahsan Mansur says that business-related transformations in Bangladesh have begun only recently. Integrating corporate structure and employee ownership in the companies are catching up. If leadership is not instilled among the employees in a company, it would effectively disappoint the workers and demotivate them. A professional leader is enough to bring the highest yields. ‘If the employees of company do not feel this passion as passed on from the leaders, then the leaders need to be asking, why not?’ said Steve Jobs.

The companies must also get rid of the adhoc 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.’

Rubana Huq says that businesses may be increasing, but organisational structure is not expanding. ‘Corporate governance is a must for a company’s sustainability. Companies usually do not invest in mid-level managements, which are highly unfair, as they are the spine of any organisation. They are making huge losses for this regard as well.’

 

The road to transition ahead

Many companies have been established in Bangladesh during the last 43 years, but there is dearth of companies whose turnovers are worth billion dollars. A reputed business daily had reported a year back that only two companies were close to the $2 billion mark, and 3-4 companies in the $1 billion mark. But economists say that there are no billionaire companies in Bangladesh, but existence of billion dollar loaned-companies are there.

However, if these companies are nurtured and can sustain their business in the long run, the entrepreneurs would see a bright future of Bangladeshi businesses ahead. Dr. Zaid Bakht is a bit pessimistic about the future. ‘Joint ventures with foreign companies would have ensured a better prospect of growth and sustenance but the one-man-run companies can hardly make us optimistic about their prospects. I am not sure if the second generation would come out of that kind of psyche,’ he added.

Dr. Ahsan Mansur differs, saying that there is a shortage of age old companies around the world, and examples of family-run firms taken to the highest level of success are very rare. He foresees a lot of mergers and acquisitions in the second generation businesses and said, ‘Times has come to think about the businesses to run by the second generation.’

Aziz Khan also admits that time has come to change the mindset of the local companies.He says that the children of business owners cannot work elsewhere, or do not want to. ‘They cannot do so because the society does not view it in positive light. Nobody questions where Warren Buffet’s or Bill Gates’ children are, but if my daughter works elsewhere, both she and I will be subjected to unnecessary questions‘.

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.’

Only 12% of family firms make it to a third generation, and the moment of transition often proves to be the moment of truth as well, observed the ‘PricewaterhouseCoopers’ survey report, which added that bridging the gap ‘requires clarity, communication, and above all, thorough planning’.

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.

 

 

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