Mr Abdul Razak Dawood, eminent entrepreneur and head of a family business, delivered the keynote address on ‘Challenges of Family Business, Growth, and Succession’ at the English Speaking Union of Pakistan on June 4. In his speech, he discussed in detail the challenges and efforts impacting family-owned enterprises. Towards the end of his talk, he referred to entropy as a realistic explanation for why, when and how family businesses implode.
FAMILY BUSINESS
Mr Abdul Razak Dawood, eminent entrepreneur and head of a family business, delivered the keynote address on ‘Challenges of Family Business, Growth, and Succession’ at the English Speaking Union of Pakistan on June 4. In his speech, he discussed in detail the challenges and efforts impacting family-owned enterprises. Towards the end of his talk, he referred to entropy as a realistic explanation for why, when and how family businesses implode.
Entropy, in simple terms, is described as “a measure of disorder or randomness in a system. It's also a measure of how much energy is unavailable to do work.” Delving deeper into the concept, he emphasised that cohesion is paramount, achievable only if family members cultivate a shared understanding. To that end, he stressed the importance of instilling good governance within the business ecosystem.
Mr Dawood highlighted three forms of capital that family members must consider seriously, as diversity of opinions and priorities can plant the seeds for eventual entropy -- both within the family and the business. He drew a clear distinction between accumulating riches and creating wealth, noting that true wealth is a combination of human, intellectual and financial capital.
All family members must work towards preserving this wealth. This can be pragmatically achieved if family members accept and commit to some form of social contract. The long-term benefit of such an agreement would be the increased likelihood of keeping the enterprise on course and preventing it from descending into disorder. Otherwise, the resulting chaos could disrupt family traditions and culture, as blame-shifting, internal conflicts and disagreements can poison the environment.
Many eminent family groups in Pakistan, including those identified as the ‘22 families’ by Dr Mahbub ul Haq, split into sub-families, each setting up their own enterprises, while some withered away from mainstream and some migrated. Some of them excelled and created their own business empire and succeeded much more than when they were a united family.
A poignant reason for their success was that the decision-making was directly in their domain instead of creating consensus among group directors. Entropy happens when either the elder or some director is uncomfortable with the proposal, has a limited vision, or is unable to accept the risk factor. Another disturbing reason is that family values restrain the younger directors from demanding that the family's elders take a back seat as advisors and mentors and allow the new generation to usher in a new vision.
A proactive leader can mentor others on identifying the sources of entropy, improving their performance, and navigating the complexities of the business environment
Businesses have suffered tremendously from the communication gap, misaligned objectives, continuing with outdated technology -- and even the possibility of some directors engaging formidably in the enterprise's work. Entropy can be a bigger problem for enterprises that do not have redundancies built in. Then there is the situation where the range of intelligence among the family directors may not be the same level. As the saying goes, some are more equal than others.
In this particular case, it is incumbent upon the others to accept such deficiencies all for the good of the business and survival of the family. This calls for sacrifice because the sense of sacrifice keeps the enterprise and family bonded. Disruptions in this scenario affect the structure and lead to a situation where the enterprise becomes some sandcastle about to be washed away by the sea or becomes a neglected garden with weeds growing everywhere.
Not all family enterprises go down and break up. Family businesses survive many generations, but that happens when an ecosystem of good governance is structured well initially. The parameters of positions, finances, responsibilities, controls, decision-making and even intra-family relationships are structured well in the beginning, or at times, when a situation arises that dissonance among members may shatter the business and the family.
That is when all accept a written agreement of good governance, which eventually results in a happy, healthy and harmonious family environment. History is replete with stories of families destroyed because of personal ego, dominance by one member, belief in disinformation, and discord among senior and junior generations or within the same generation.
The strong resolve, sincere partnership, and long-term vision of family members serve as formidable assets in shaping a business's future and mitigating much of the impending disorder. These qualities enable members to focus on scaling up operations, reducing inefficiencies, enhancing quality, minimising waste, introducing modern processes, planning product diversification, establishing new ventures, and optimising resource allocation. Such progress is possible only when there is harmony and unity, allowing a wealthy family to become even richer and more secure.
Another key ingredient for success is strong leadership: a leader who is empathetic rather than autocratic and possesses a clear vision. A proactive leader can mentor others on identifying the sources of entropy, improving their performance, and navigating the complexities of the business environment. This earns the respect of other members and unites the family in its pursuit of progress and prosperity.
This unity is essential, as inertia tends to set in when there is excessive reliance on routines. As Mr Dawood noted, “Only 30 per cent of family businesses survive the first generation, 12 per cent survive the second generation, and only 3.0 per cent survive the third generation. History is not on our side; families implode, and this is a reality.”
The writer is a former president of the Employers Federation of Pakistan.
