Dear Colleagues! This is Asrar Qureshi’s Blog Post #712 for Pharma Veterans. Pharma Veterans welcome sharing of knowledge and wisdom by 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 firstname.lastname@example.org for publishing your contributions here.
This series of articles partakes from some material published in INSEAD Knowledge. INSEAD is in France and is highly ranked among the most prestigious business schools of the world.
INSEAD Professor of Economics and Academic Director of the Wendel International Center for Family Enterprises, Morten Bennedsen defines two major reasons for the floundering of family businesses: not defining corporate governance; and not bringing external executives in to manage the firm.
We have talked much about corporate governance in the previous posts. Three components of governance, as seen in many family businesses, are hurting their development. One, is the overriding concern for cost saving at all costs. It is most strikingly seen in staffing where unqualified staff are hired in inadequate quantity who would be driven entirely by the whim of the owner. Let me share a story of a pharmaceutical company. The MD (son) hired an Assistant Manager HR, thinking that the organization probably needed it. Few days later, the Chairman (father) spotted him and called him. He asked him who he was and what he was doing there. He told him he was AMHR and doing HR work. “Go away, we don’t need any HR” the Chairman told him. The poor guy ran to the MD and told him about what just happened. The MD advised him to hide for some time so that he could sort it out. This episode shows several things, but if a company employing more than two hundred employees does not want HR function, means that they have more interest in saving money than in improving governance.
Second component is the tendency to flout rules wherever possible. The emotion behind is to get away with doing minimum and maximizing profit. The CEO/Owner has the power to override quality parameters, policies, SOPs to get the job done. In 2006, use of diclofenac sodium was banned in veterinary drugs in Pakistan, India, and Nepal. The painkilling drug was widely used in veterinary drugs to ease the pain of injuries or diseases in livestock. It was found that the population of vultures was decreasing rapidly, and research linked it to the fact that when the vultures scavenged the carcasses of dead livestock who had received diclofenac, their kidney function was damaged, uric acid level rose and they died. Meloxicam was offered as the safe alternative. However, evidence shows that veterinary drug manufacturers in these countries were still using undeclared diclofenac long after the ban.
Third component is the lack of trust. It is a common discussion among business owners that employees cannot be trusted, and that no employees wishes to work except under coercion, and that the employees must be put where they belong, that is, in the powerless situation. Obviously, there is no concept of hierarchy because that would mean giving away some authority.
Professor Bennedsen recommends ‘professionalizing’ the family business to better survive and grow. He says, “Professionalization is about having the right leadership skills at any level in the organization and moving the family firm from a one-man band, from this famous creative person with very little corporate government structure, to the full symphony orchestra”. It may finally have an employee CEO and a Board. A handful of pharma companies in Pakistan have moved to this model, but the number can be counted on the fingers on one hand. He further comments that, “change is difficult, and allowing outsiders into a family enterprise can be a tremendous upheaval, often tinged with the ominous specter of mortality”. In Pakistan, we have tweaked it in a way that big managers are hired with fancy titles, are even given good money and benefits, but are not given independence to work the way they would like to work. These showpiece guys are also changed often on the allegation that they did not do much.
The Why, When, and How of Professionalization
The single owner carries a considerable personal risk. If anything happens to him to render him incapable of running the family business, the business may well be closed.
The next generation which the first owner wishes to train and induct may not come up to expectations. In fact, the stories of spoiled children of affluent people are too common to ignore. From a young age, they are wasting time and money of their family. There is a definite possibility that none of the children would be capable of taking over when the time comes.
Professor Bennedsen says that family firms professionalize when they face opportunities or threats. Opportunities may come from new business possibilities, technology, diversification etc. Threats may come from poor financial performance, and/or infighting among family or partners. It is better to professionalize when they see opportunities, rather than when they have their backs against the wall.
Once family firms understand and accept the need for professionalization, Professor Bennedsen recommends the following three steps. [Quote]
- Develop long-term agile and resilient business strategies based on strong family assets. Some family assets are intangible, such as the family name, a history of survival, values-based leadership, skills and quality. Bennedsen said, “One part of professionalization is to be clear about these business strategies. So, it goes from just the stark feeling of just one person to something that the whole organisation understands and will internalise.
- Develop strong corporate governance systems to incentivise and attract independent board members. The checks and balances associated with strong corporate governance can help diffuse key personal risk.
- Find, integrate and incentivise the right top manager. He described some of the benefits associated with working with a family firm as a sense of freedom from quarterly reports and often a healthy amount of independence. Firms need to focus on the rewards that working with a long-established family name can bring, as well as the salary and benefit package. [Unquote]
We shall continue with more recommendations from other experts in the next posts.
To be Continued……
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