Issues in Family Businesses

Dr Arif Iqbal Rana,

Professor, Al-Qadir University

July 27, 2023 .

 Dr Arif Iqbal Rana
 Professor & Associate Dean, Al-Qadir University
 Consultant/Trainer, Family Business
 Founding Director, Scholastic (Faith-based School)
 LUMS (30+ years):
 Taught: Operations Management, Supply Chain & Retail
Management, Family Business, Project Management, and Decision
Making.
 Research Initiatives: Family Business, SME Pulse, and Textile
Productivity
 Director: Entrepreneurship Small and Medium Enterprise Centre
I- Family Business:

A family firm is a firm dominantly controlled by a

family with the vision to potentially sustain family
control across generations.—T. Zellweger

Traditional View:
 ‘relics of an earlier era’
Why the ‘Seth’ is Indispensable?:
 Family Firms: 70-90% of Firms;
 Employment and GDP: 40-70%
 India, South Korea, and China {45, 40, 20}/50 Largest companies
Modern View (The Worst AND The Best):
 Stewart and Hitt 2012: (50 studies)
 public family firms > nonfamily firms > private family firms
 public family firms with more professional practices
experience higher performance. {ownership concentration
and governance’}
II- Types of Family Businesses
Cousin
Consortium

Sibling
Partnership

Owner Controlled

5
Special Challenges for Cousin Partnerships

‫َو ِإَّن َك ِثيًر ا ِّم ْن اْلُخَلَطاء َلَيْبِغ ي َبْع ُضُهْم َع َلى َبْع ٍض‬
‫ِإاَّل اَّلِذ يَن آَم ُنوا َو َع ِم ُلوا الَّصاِلَح اِت َو َقِليٌل َّم ا ُهْم‬
 ٢٤ ‫سورة ص‬

…And, verily, many partners oppress one

another, except those who believe and do
righteous good deeds, and they are few;
(38:24)
Pre-requisite for Staying Together:

‫و‬
‫َتُك َن‬ ‫َأن‬ ‫ٓاَّل‬‫ِإ‬ ‫ِل‬ ‫ِط‬‫ٰـ‬ ‫ٱْل‬ ‫ِب‬ ‫م‬ ‫ُك‬‫َن‬ ‫م‬ ‫ُك‬ ‫َل‬ ‫َٰو‬ ‫َأ‬ ‫۟ا‬ ‫ُل‬ ‫ُك‬‫ْأ‬‫َت‬ ‫اَل‬ ‫۟ا‬
‫و‬ ‫ُن‬ ‫ا‬ ‫ي‬ ‫ِذ‬‫َّل‬‫ٱ‬ ‫ا‬ ‫ُّي‬ ‫َأ‬‫ٰٓـ‬
‫َب‬ ‫ْي‬‫َب‬ ‫ْم‬ ‫ٓو‬ ‫َن َء َم‬ ‫َه‬ ‫َي‬
‫ِب‬ ‫ا‬ ‫َّل‬ ‫ل‬‫ٱ‬ ‫َّن‬ ‫ِإ‬ ‫َأن‬ ‫۟ا‬ ‫ُل‬ ‫ْق‬ ‫ن‬ ‫ٍۢض‬ ‫ا‬ ‫ن‬ ‫ٰـ‬ ‫ِت‬
‫َه َك َن ُك ْم‬ ۚ ‫ِّم ُك ْم َواَل َت ُت ٓو ُفَس ُك ْم‬ ۚ ‫َج َرًة َع َتَر‬
٢٩ ‫َرِح يًۭم ا‬

O believers! Do not devour one another’s wealth

illegally, but rather trade by mutual consent. And do
not kill ˹each other or˺ yourselves. Surely Allah is
ever Merciful to you. Nisa: 29
In the Family

Sibling Partnership Cousin Consortium

Have the same parents and

Have different parents and
grow up in the same
grow up in different homes
household.
Share common life
Have varied life experiences
experiences.
Live close to one another as Are more diverse
adults geographically
Feel less responsibility toward
Look out for one another.
one another
 In the Business
Sibling Partnership Cousin Consortium
Cousins may inherit considerably
Shares are likely to be equally
different sized ownership stakes in
distributed among siblings
the family business
More family members are A smaller percentage of family
employed in the business than members are employed in the
not. business
Family members hold most of More non-family executives rise to
the top leadership positions. the key posts
Siblings may receive equal pay Cousins’ compensation is based on
and be treated equally in other market rates and merit; equal
ways treatment is no longer viable
 Governance Transitions

Sibling Partnership Cousin Consortium

If any, very informal and Formal system based on merit

Evaluation
based on work style and results

A program run by the family

Preparation On the job, after the fact council before selected to
governance roles

Family Defined positions and formal

Ill-defined; informal
Leadership selection

Democracy—including outsiders
Decision Making Consensus
(non-family)
Governance Structures: BOD

 To be selected by the Shareholder’s Council (and

reviewed annually)
 Three family directors and 1-2 non-family
(independent) directors.
 The CEO will be appointed by the BoD itself
(performance to be reviewed annually)
 ‫ۡو‬ ‫ۡك‬
‫ا‬ ‫َف‬ ‫ى‬ ‫ًّم‬ ‫ُّم‬ ‫ٍل‬ ‫َا‬ ‫ى‬ ‫ٰٓل‬‫ِا‬ ‫ٍن‬ ‫ۡي‬ ‫ِب‬ ‫ۡم‬ ‫ۡن‬ ‫ا‬ ‫ا‬ ‫َذ‬‫ِا‬ ‫ا‬ ‫ۤۡو‬ ‫ٰا‬ ‫ۡي‬ ‫ِذ‬‫َّل‬ ‫ا‬ ‫ا‬ ‫ُّي‬‫َا‬‫ٰۤي‬
‫ـ‬
‫ُتُب ُه‬ ‫َج َس‬ ‫َد‬ ‫ُت‬ ‫َي‬ ‫َد‬‫َت‬ ‫ُن‬ ‫َن َم‬ ‫َه‬
‫ؕ َو ۡل َيۡك ُتب َّبۡي َنُك ۡم َك اِتٌۢب ِباۡل َعۡد ِل َواَل َيۡا َب َك اِتٌب َاۡن َّيۡك ُتَب َك َم ا‬
‫ۡب‬ ‫ۡك‬ ‫ۡل‬ ‫ّٰل‬
ۚ ‫َعَّلَم ُه ال ُه َف َي ُت‬
]2:282 ‫[اْلَبَق َرة‬

O you who believe, when you transact a debt payable at a

specified time, put it in writing, and let a scribe write it
between you with fairness. A scribe should not refuse to write
as Allah has educated him. He, therefore, should write. …
 Governance Structures:
New Business Development

• Final Decision making body for New Projects

• All New Project proposals must be accompanied
by ‘Detailed Feasibility’
• Shareholders will also have the right to ‘sell’ their
shares to other Shareholders
• Share Transfer Price to be decided by a
Committee of Shareholder’s Council
13
Development Plan:
‫َق اَلْت ِإْح َد ٰى ُهَم ا َٰٓي َأَب ِت ٱْس َت ْٔـِجْر ُهۖ ِإَّن َخ ْيَر َم ِن ٱْس َت ْٔـَج ْر َت ٱْلَقِو ُّى ٱَأْلِميُن‬
[28:26 ‫]اْلَقَص ص‬

One of the two women said, Dear father, hire him; the best man you can hire is
someone who is strong, trustworthy.

‫ُد‬ ‫َو ُد ْن َّق‬ ‫ْن َت ًر ْن‬ ‫َر‬ ‫َد‬ ‫ُد ْن‬ ‫َل‬
‫ن‬ ‫ن‬
‫َقا ِإِّنٓى ُأِر ي َأ ُأ ِكَحَك ِإْح ى ٱْب َنَتَّى َتْيِن َعَل َأن َتْأُج ِنى َثَٰمِنَى ِحٍجَج ۖ َفِإ َأْتَمْم َعْش ا َفِم ِع ِد َك ۖ َمٓا ُأِر ي َأ َأُش َعَلْيَك ۚ َسَتِج ِنٓى ِإن‬
‫ٰٓى‬ ‫َٰه‬
‫َن‬ ‫َن‬ ‫َء‬
‫َشٓا ٱلَّلُه ِم ٱ َّٰصِلِحي‬
‫ل‬
[28:27 ‫]اْل َقَصص‬

He (the father) said (to Musa), .I wish to marry to you one of these two daughters of mine on
condition that you act as my employee for eight years. Then if you complete ten (years) it will be
of your own accord. And I do not want to put you in any trouble; you will find me, Insha‘allah
(God-willing) one of the righteous.

 Family Members working for the family business will not engage in another ‘business’ unless and
until approved by the Shareholder’s Council.
Compensation (an example):
 ONLY three ways: salary, bonus and dividend.
 Family members will only be hired for a position in the family
business if they fulfil the minimum education requirements for that
slot. Family employees will be monitored and mentored by the
Shareholder’s Council in alliance with the HR department.
 Family CEOs will also be entitled to a performance-based bonus
(bonus and targets to be decided by the Shareholder’s Council).
 Shareholder dividend will also be declared and distributed at the
end of each financial year by the Shareholder’s Council.
 Family members will also have a right to assistance for medical, or
other perks and privileges, as outlined in this constitution.
 The Directors will consider business finances as sacrosanct and
have no other financial rights on the business other that what has
been outlined in the constitution.
Questions/Feedback?