A Rip in the Sea - Bülent Eczacıbaşı

Conversation with
YILMAZ ARGÜDEN and ÖZLEM YILDIRIM-ÖKTEM

YILMAZ ARGÜDEN

Holder of a BSc in Industrial Engineering from Boğaziçi University and a PhD in Policy Analysis from the RAND Graduate Institute, Yılmaz Argüden later founded ARGE Consulting and today serves as its CEO. The company is a B20 Knowledge Partner for Governance and Sustainability and is recognized by the European Parliament as one of the top three companies “shaping the future” through its commitment to corporate social responsibility. Published in several languages, Argüden has undertaken numerous international posts including Member of the International Finance Corporation Corporate Governance Groups Advisory Board and Vice-Chairman of the Public Governance Committee of the Business and Industry Advisory Committee at OECD (BIAC). Argüden has served on the boards of more than 50 companies in different countries as well as Chairman of the Rothschild Investment Bank in Turkey and the Global Chair of Local Networks at the UN Global Compact Board. The non-profit Argüden Governance Academy he has founded operates under the auspices of the Boğaziçi University Foundation. As the Chairman of the Turkish Quality Association, he initiated the National Quality Movement. He has also founded and/or led a number of non-governmental organizations such as the Turkish Education Volunteers Foundation (TEGV), Corporate Volunteers Association (CVA), Boğaziçi University Alumni Association, the Turkish-American Business Council, and the Turkish-Canadian Business Council. He currently serves as management consultant to many local and international businesses on strategy, business excellence, institutionalization and sustainability. Recipient of many prestigious strategic leadership, distinguished citizenship and career awards, in 1999 Yılmaz Argüden was named amongst the World Economic Forum’s 100 Global Leaders for Tomorrow for his commitment to improving the state of the world.
ÖZLEM YILDIRIM-ÖKTEM

After attending Kadıköy Anatolian High School, Özlem Yıldırım-Öktem received her BA in Business Administration from Koç University and an MA in International Economics and Management as well as a PhD in Management from the Bocconi Business School (Italy). Upon returning to Turkey she conducted research on family holding companies and institutional governance as a post-doc at Sabancı University’s School of Management. She joined Boğaziçi University as a faculty member in management and strategy in 2012. Her research interests in sustainability in family businesses, globalization, management boards, senior management, and transfer of authority between generations have led to numerous contributions to eminent local and foreign journals. For nearly a decade, she has taught strategic management, human resources and research methods in Boğaziçi University’s undergraduate and graduate programs.

BÜLENT ECZACIBAŞI

Thank you for joining us here today, Professor Özlem Yıldırım-Öktem and Professor Yılmaz Argüden.

Let me begin by considering my position with regard to family business; as you know, I represent the second generation in a family company, where I currently serve as chairperson of the board. I’m familiar with numerous beleaguered family companies and others struggling to cope with the issues of handover between generations. Some of them I know very well because their founders, founders’ children, or executives are among my close friends. I suggest that we start our conversation by touching on the issues of family businesses.

Family companies have attracted a great deal of interest of late, or am I mistaken? Was there always so much interest in them worldwide? There’s new research on them, new associations, new courses at business schools, and countless conferences and seminars focused on the issues of family businesses. I receive frequent invitations to deliver speeches.

There was a time when well-known multi-shareholder corporations seemed to be more prominent. Maybe fewer people were aware back then that family businesses formed the backbone of many countries’ economies. Awareness aside, the fact is that family businesses produce a large share of output in many economies. That’s why they’re considered to be important for economies and countries.

We know that family companies also have their own special problems. One concerns lack of longevity, in particular the losses that occur in the transfer of leadership between generations. For a variety of reasons, family companies fold in the transition from the founder to the second generation, and more crucially, the third generation. The reasons appear to stem from the unique structure of family companies. Increasingly, private equity funds are acquiring troubled second or third-generation family businesses and restructuring them in order to create value. On the other hand, family companies also have special strengths. Their longer-term management perspective enables them to pursue goals far beyond short-term gains. They are much more concerned about the sustainability of their business and the need for a healthy handover to future generations. They can forego short-term advantages in order to prioritize their contribution to society. Family companies can be very successful provided they embrace agility and adaptability. With this in mind, I’m actually quite optimistic about the future of family companies.

There are two points that I find particularly intriguing. The first concerns the capacity of family companies in Turkey to cope with the ailments specific to their kind; how successful are they in dealing with them, and how prepared are they for the problems that await them? What, in your view, could be done to improve governance in family companies?

And the second is, are there conditions specific to Turkey, stemming from the culture for example, that exacerbate the troubles of family companies and make them virtually insurmountable? Take the problem of mistrust that is prevalent in our society and which we frequently talk about; does it create an obstacle to handing over to professionals, for instance?

ÖZLEM YILDIRIM-ÖKTEM

You’re absolutely right; academic interest in family firms has been growing. Over the years, there’s been a marked increase in the number of articles that focus on family businesses in reputable academic journals, as well as in the number of academic journals focusing solely on family companies. Articles on family businesses appear in journals not only on entrepreneurship, but also on management, business, and various social sciences. The curriculums of several leading business schools abroad include courses on family businesses.

The main reason why this field attracts scholars and business schools is that family companies play a major role in the economies of many countries. Well over half the publicly traded companies in America and Western Europe are controlled by families, for instance. A major portion of the firms on the S&P 500 and Fortune 500 are also run by families. And it’s not just the developed countries either; business groups known in Turkey as “family holdings” are the major actors in the economies of late industrializing countries such as Argentina, South Korea, India, Malaysia and Taiwan. As we know from similar business groups here, a major feature of this organizational form is that shareholding is dominated by the family, and family members play an active role in management.

You’ve made a very good point: You mentioned trust when you spoke about the management of family companies. I agree that family companies in Turkey generally embrace management models based on trust relationships. This is an aspect that partly stems from the collective nature of Turkish culture. Individuality ranks low, so trust and loyalty outrank talent and competence in recruitment and promotion. Relationships eclipse professionalism. Kinship and origin are enormously important in small and medium-sized enterprises (SMEs). Their relatively small size allows for reasonably competent management by family members in terms of the number of people needed and their knowledge and experience.

Non-family employees stand little chance of rising to senior management in small family firms, even less if they’re women. Family-owned business groups, on the other hand, are organized differently, being both very large and operating as they do in a wide range of sectors. In this case, there simply aren’t enough members of the family, nor would it be reasonable to expect family members to have the necessary knowledge or experience. Families try to maintain control by holding key positions and serving on the boards of several subsidiaries simultaneously, but senior management inevitably includes non-family managers. Even at that level, length of service in the family business appears to be no less important than training and talent. Reaching the top level of management in family business groups is arguably predicated on trust, knowledge about the group, experience and relationships.

YILMAZ ARGÜDEN

I’d like to add a few more points.

One of the main reasons why institutional development, that is, the move to professional management, has become a topic of interest is timing; we’ve entered the phase in Turkey’s industrialization process where family companies are transferring leadership to the second or third generation. Sensitivity about family company issues has increased because these companies are encountering these problems for the first time. Families that observe success and failure stories in their circles pay closer attention to the matter of institutionalization. Family companies have both major advantages and difficulties.

The second reason is that the long-term perspective of family companies has become more valuable today. For example, families that have given their family name to their businesses have more reason to take a long-term perspective and prioritize sustainability and reputation. Long-term perspective is enormously important today because the impact of business on the world’s resources and their stakeholders has become quantifiable, leading to increased social sensitivity and responsiveness. All of this encourages longer-term thinking. And indeed, the increase in the number of companies embracing the UN Sustainable Development Goals is a good example of progress in this area.

The worst trouble for family firms is caused by the blurring of relationships between shareholders, management and family. If we could treat them independently, we could resolve the majority of their problems. It won’t be enough on its own, but I think it’s the crux of the matter. Founders generally wear all three hats at the same time, which unfortunately saddles subsequent generations with similar expectations. The senior member of the family, being the founder, is also the largest shareholder. As the original entrepreneur who successfully built the business from day one, he or she is the top executive and most powerful. However, the likelihood of one individual succeeding in all these roles decreases down the generations. In fact, it’s even quite rare for founders to maintain their success in every role throughout their lives, and family traditions may delay recognition of this situation. The more heirs there are, the more potential there is for discontent, as they may wish to assume more responsibility and authority than their competence dictates.

ÖYÖ

Especially from the third generation onwards… By that stage, cousins are managing the companies. Intense competition among cousins, particularly those close in age, may come into play – and that may even fracture a company. We’ve seen it happen in some large family holdings in recent years.

The element of trust is hugely important in Turkey. Sadly, we tend to trust individuals rather than institutions. Yet the longevity and development of any institution – family business or not – requires systems that facilitate trust. The single greatest obstacle here is our society’s culture: We don’t have a culture that is both adequately questioning and supportive of collective decision-making.

Do whatever you’re told to do by your dad at home, your teacher at school, the commander of your military unit, and your boss at work; that’s the prevailing attitude. In time people lose their capacity for independent thinking; they don’t question enough, and if they do, they don’t do it openly or transparently. It takes the form of gossip instead. So, our collective decision-making skills don’t develop sufficiently. That’s why executive boards seem to be dominated by the decisions of the boss instead of considering matters from different viewpoints. Everything goes to the boss, which increases the risk of error and jeopardizes sustainability.

In short, culture is an important source of problems for family companies. Difficulties can also come from outdated habits acquired during the founder’s days and from lack of preparation for dividing and reassigning roles.

ÖYÖ

Family firms may hinder rational decision making, and not only in matters of recruitment. For instance, sentimental attachment may make family companies reluctant to let go of early enterprises that formed the core of the holding company, even if they’re dormant. The family may fail to make rational decisions about internal processes or, more importantly, about strategic issues. That said, considerable academic research has demonstrated that being a family business does not inhibit performance, growth or even internationalization. So, we can’t say that having family in management damages the company; family members can also make significant contributions to the business. Their psychological and social capital is higher than that of non-family managers. Since the business carries their name, family members think much longer term and have much greater motivation to advance the business. They can rank the interests of the company above their own. Non-family managers can hardly be expected to adopt similar long-term views or to prioritize the interests of the company over their own. The family’s social capital is also far more powerful than non-family executives’. Over the years, they’ve built relationships of trust within the company and with external stakeholders. Both internal and external stakeholders regard family members as permanent and prefer to conduct their relationships with the company through them. In cases when institutions aren’t functioning well, relationships are enormously important. The family’s social capital, therefore, constitutes a major asset for the company.

I’d like to highlight two additional points. The first is how to choose the professionals you hire. This point isn’t just for business; it matters in all kinds of choices. In our society, loyalty is more important than competence in two respects. The first is the attitude sometimes prevalent in firms run by bosses who aren’t entirely certain or haven’t planned fully what to do: “Whenever I make a decision, it must be obeyed immediately and without question; do as I say!” Consequently, those who think, “I’d better pick loyal managers to prevent divisions and make sure my decisions are carried out without question,” will choose loyalty over competence. Yet, it’s quite hard to pick the best in terms of competence even when this mentality is not present because it requires a determination of “good” and “the best.” Not everyone or every company has the skill to do this; if you don’t know what needs to be done, you cannot define what “good” means.

Assuming you’ve defined what you want and which skills you need to achieve your purpose, the crucial process of selection comes next. You’ll cast your net wide by letting as many people know as possible. You’ll be inundated with hundreds or even thousands of CVs, which you’ll have to sift through in order to pick the best; you’ll have to invest time and energy in this process. Otherwise, you might ask three friends if they know anyone with the traits you’ve defined; one of them might come up with a name from their community or family. You’ve therefore picked someone who’s a relative, neighborhood friend, or schoolmate of someone you know. We need to be aware that this approach weakens both institutions and society at large. Firstly, it hinders the development of competence in companies, and this is very serious. From a sustainability perspective, it’s important that companies invest time and energy in ensuring that their recruitment processes are based on competence; otherwise, they’ll never get the quality they want. The second is the damage done to social progress when the message the public receives is “it’s whom you know” instead of “it’s what you know, so develop yourself if you want to succeed.”

One reason for turning to acquaintances is the fear that the new recruit might exercise unquestionable, exclusive authority. But any company with good governance practices can easily manage this situation. In other words, the problem stems from underdeveloped governance mechanisms. There’s a saying, “Power corrupts; absolute power corrupts absolutely.” Hence, no one should have sole authority, not even the boss. If you’re not of this view and you say, “I’m the boss, I founded this business, I can do whatever I want,” then you naturally worry about how you’re going to control the person you’ve empowered to run the company in your place, leading to the approach of: “I’d better appoint my son, my niece, or my acquaintance.”

So, I think the root of the problem lies in both the recruitment process and the inadequate system for checking, monitoring and directing people once they’re appointed.

I wonder whether it would be useful to clarify certain concepts that you’ve also used, as we’ll refer to them frequently. One of these is institutionalization and the other is governance.

Now, would you all agree with the following definitions? Institutionalization, as far as I understand, means the stage when an institution is able to survive and flourish without the presence of specific personalities. Companies can start up and develop without institutionalization, but their longevity depends on its successful implementation. That’s what we’ve observed to date, at any rate. Institutionalization allows companies to develop methods, structures and processes that do not depend on specific individuals, thereby creating an infrastructure that ensures continuity regardless of who’s in charge. Obstacles may stand in the way, of course. My observation is that the greatest single impediment is the absence of rules defining the relationship between family members and corporate management. What are the rules and principles defining the appointment of family members to positions in the company; how are they promoted, how do they leave their jobs or even sell their shares? Failure to establish such rules stands in the way of institutionalization and causes numerous complications.

One of these is the great uncertainty caused in the work environment by a lack of institutionalization. Professional managers don’t know the rules, since they haven’t been defined or written down and thus vary from one person to the next. Some family companies prepare family constitutions in order to overcome this obstacle, and I think they’re very useful. I also know it’s easier said than done. These constitutions lay out the principles and rules as agreed by the entire family and regulate the behavior of family members and their relationships with the company after the founder’s departure. The greatest challenge here might well be the timing. It’s not something you can do at the drop of a hat. Or more precisely, the more shareholders or family members actively working in the business, the harder it gets. The most appropriate time is during the lifetime of the founder. Founders who use their authority in the family to create a family constitution do a great service to both the business and the family. Miss that opportunity, and it might be missed for ever, no matter how much I hate to say it…

It gets harder.

Much harder. Because the establishment of these balances may not please everyone equally.

Founders essentially use their authority to get everyone to agree to family constitutions. It probably makes sense, therefore, to make the following recommendation: Family firms should prioritize this matter, prepare the relevant documentation, and implement their guidelines in a timely fashion.