Family businesses usually fail when the third generation inherits them: experts

November 8, 2018

In Pakistan, over 80% of the companies listed on the Pakistan Stock Exchange are related to family businesses. However, many fail during the succession process, which is why there are barely any multinationals with roots in Pakistan.

“Successful family businesses are like small countries. They need to have their own constitution and rule of law if the family members are to live in harmony and continue to be successful,” IMROOZ Group of Companies’ Ameed Riaz said during the Family Business Conference 2018 at Mövenpick Hotel on Thursday.

Addressing a large gathering of business leaders, mostly from family-managed businesses (FMBs), Riaz said the ‘family constitution’ should be made before the third generation is ready to inherit because that is the stage where most FMBs fail mainly due to disputes that erupt among members.

What Riaz said of FMBs has been proven time and again. Before the third generation takes over, most family businesses go bust and data backs this.

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“Despite the extraordinary longevity of some individual family firms, the average life span across family businesses is three generations,” one of the world’s largest professional services firms PricewaterhouseCoopers (PwC) says in its global family business survey 2016, noting: “Typically, only 12% make it that far.”

However, Riaz says the FMBs that formed a ‘family constitution’ progressed well.

Family members make laws with detailed family policies and agreements. These family policies define the rules of business. For example, what the retirement age or policy for appointments of siblings will be and how a CEO will be hired. There are guidelines to resolve disputes among family members.

Other experts seemed to agree with Riaz.

“Most challenges that FMBs face are family-based rather than business-related issues,” said Aysha Anas Iftikhar, who is Director of the FMB Programme at the Center for Executive Education, IBA.

Since they combine family and business, FMBs are different from other businesses, the director said. As FMBs evolve, they become complex. The transition from the first generation to the second and third presents a number of questions related to governance and sustainability—and this is primarily the issue the Family Business Conference is meant to address through its platform.

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In its second year, FBC is an independent forum to recognise distinguished and prestigious family businesses in different sectors of the economy. With some of Pakistan’s most successful corporate leaders on board, the conference provides a platform for an exchange of ideas and experiences with family business leaders (the next generation, board members and CEOs). This will make them understand how good governance may transform their business. Going forward, the initiative is aimed at introducing family business awards, according to Pervez Iqbal, the organizer.

FMBs hold high importance in economies around the world but are not properly covered in the media.

In most economies, FMBs account for two-thirds of businesses, contributing up to 90% to the global GDP. They create 50% to 80% of jobs worldwide and contribute significantly to national income, growth, and employment.

Citing research, Iftikhar said that if a structured approach is not employed during each transition, there is a likelihood that FMBs may not achieve their full potential and succumb to competition as a result of infighting among members.

“FMB governance structures are needed to ensure the business is healthy, sustainable and thriving,” she said.