Corporate Consolidation & Management 'Bandwith'

24 March 2002

Many family businesses in small locales typically started with one or two business activities and soon delved into a number of business lines; adopting the 'conglomerate shosho shogi' approach. This is similar to the "Hongs" - owned trading houses i.e. the Swires, Jardines etc. in Hongkong, the entities such as Mitsubishi, Mitsui, Nissho Iwai, C. Itoh etc. in Japan and the joint family 19th century - origins of the Tatas, Birlas and Mafatlals in India. The more familiar family names in this region such as the Kanoos, Al Futtaims etc. did bring in professional management to operate their businesses once their size and scales warranted this.

In some cases, like in some homes, when the children grow up, the elders are never quite sure and therefore unwilling / reluctant to 'let go'. Some family patriarchs tend to manage, control and micro-manage to the last detail. While this 'hands-on' approach characterises the 'A' type categories (the aggressive, ambitious and the articulate), some younger family members might even regard them as being autocratic. It is said that when God (the supreme manufacturer) fashions a genius, he often breaks the mould! Some of the scions of the high and mighty turn out to be timid, shy, uninterested and retiring; preferring to savour social delights rather than cultivate their commercial and business savvyness. Therefore the 'old man' can never quite retire and plods on looking for the worthy family member to inherit the business mantle. He does not wish to delegate entirely to the professional managers for fear of losing control, authority and power. In a sense, he is coy about putting the future course and fate of the businesses in the hands of the 'paid employees'. This fear shadow always lurks in the back of the minds in many of them.

Family-owned businesses globally are not the only ones suffering from management bandwidth problems. Another virulent form of corporate virus multiplying itself in a number of publicly-owned corporations is the mushrooming of special-purpose legal entities, trusts and a whole raft of 'shell' companies. It was reported the other day that a major U.S. multinational bank has over 600 subsidiaries, associates and affiliates. It must be mind-boggling just to meet the sheer number of legal and regulatory requirements i.e. holding board meetings and annual general meetings. Clearly in some instances, it is to avoid or circumvent the tax and regulatory impact. Special-purpose vehicles are formed as convenient arrangements to set up entities that can be swept behind the corporate veil. An outsider can pierce the veil only after a thorough forensic approach and armed with adequate legal authority.

Enron is a classic recent example of special purpose vehicles assuming larger than life roles and (as it is now alleged) was engaged in 'dodgy' pursuits and purposes. Advice from the best legal brains in the world underpin the efforts of major companies that set up trusts and offshore vehicles to shield some of their income from the taxman (and the regulatory predators, as they are sometimes called). Often this has to do with usurious pricing on the part of some. If there is a sense of balance and the taxman only expects to collect a reasonable tax and not at exorbitant rates, good corporations will gladly pay the taxes and play it straight. True some clever financial controllers always try to save the last penny by indulging in such 'sham' arrangements but their 'come-uppance' comes sooner rather than later!. Besides corporate focus on customers and markets becomes a first casualty when there are too many entities within a group. When businesses multiply with numerous holdings, then management bandwidth becomes highly stretched. Often they lack a robust middle management that can be fanned out to different organisations, so as to rely on their reports, trust them to deliver credible results and to take care of strategic interests. In some instances, professional managers move to other jobs. Where an entity enters into a line of business predicted on the strength of one individual manager, his contacts and his ability to run it, it can soon find that this then becomes a millstone around its neck, if that individual left the firm.

This may sound somewhat of an extreme situation but the corporate world is littered with such extreme examples. Of course greed and the need to quickly make money and gain market share can be fatal. In some instances, success begets success as everyone wants to do business with the most visible and viable i.e. the apparently most profitable and prestigious entities of the world; who end up like a bee-hive. But the sting is sometimes in the tail(s) and thereby hangs a sordid or sorry tale!

When times are bad, corporate thinking always moves towards consolidation, shedding staff and lines of businesses. The recent recession in the U.S. (that ran officially from March of last year for some ten months), triggered massive and widespread restructural and industrial surgery. Unfortunately during bad times, the knives and the wolves are out to chop and change in a somewhat adhoc and arbitrary manner. Much of that could well be done in a planned, proactive and purposeful way. This is where the sagacity of the board members and the owners come into play. Rather than dramatising each problem as a crisis, it is better to deal with the chronic maladies; in a sustained and systematic manner!

Very often, attention turns to bringing in 'white knights' to rescue the damsel! In some corporations, this takes the form of changing the CEO, and he becomes more or less the 'fall guy'. That again is not generally helpful because it remains rotten underneath and in the core. Nothing really changes except at the top and you may have just brought on a new perspective which might be valuable in itself but which would be limited unless the new broom sweeps clean. This of course is easier said than done because the new man wants to immediately bring his own team. The latter may not quite mesh well with the old team in an organisation and then there is an inevitable friction and in-fighting to the corporate detriment. If the new CEO does not deliver results quickly, the honeymoon period ends in a few years and it starts all over again with a change at the top. The crying need, often, is to maintain the quality of consistency and management bandwidth; so that it is able to cope, deal proactively, and attend to the critical company priorities. This syndrome is witnessed in many parts of the world but narrowing the focus again to this region, the GCC excels even in this segment!

There are innumerable distractions for the management of major corporate houses; given the constant pressure to juggle with a number of balls in the air and yet at the same time, ensure that the bottom line is ticking. Interestingly there is a big gap between the top man or the CEO and his next managerial layer, not only in terms of compensation but also in terms of authority. Everything tends to then revolve around the whims and fancies of the CEO. This in itself is not untenable or to be frowned upon as long as the CEO is able to devote time, share his best ideas and is prepared to listen to professional advice. When some of the ideas are unworthy or impractical, the professional managers should call a spade, a spade. But this situation does test the mettle of the managers and there is a tendency to crawl when asked to bend and to ask how high when asked to jump! This is partly to do with the cultural backgrounds of the multinational managerial team in this region and mostly to do with the vulnerability in terms of short term contracts and notice periods for such managers. Many just want to mark time and save their jobs, hoping for the contracts to be renewed. The long term interests of the organisation may be sacrificed at the altar of such fear and expediency. It would be wrong to generalise these as happenings that characterise the length and breadth of managerial contribution in this part of the world. Perhaps this is a classic product of the local owner / expatriate management milieu, now dominating the corporate landscape. On the other hand, there are many committed professionals who soldier on and do not mince words even at the expense of professional career growth. They need to be saluted for their unflinching corporate loyalty, quality and fearless espousal of ethical and professional standards. That loyalty itself would merit their employers rewarding them well but some corporations have a 'tissue paper' culture i.e. use the manager and discard / dump when the job is done. Such companies' management bandwidth cannot be stable as such organisations would be perceived adversely by prospective managers and key people within. To laud and reward managers as long as they serve a productive purpose and to drop them like a ton of bricks as soon as their useful productive lives come to an end, for one reason or the other, is typical 'trading' mentality or trait that needs to be shed; if long term institutions are to be built.. It can be highly demotivating for those remaining and will affect their work style and contribution so as to become a vicious cycle.

Much of such corporate degeneration is not, of course, unique or new to this region. It happens in the best of the markets. Some of the major multinational names of the past have experienced tumultuous upheavals within their corporations. Recent examples include Xerox, the tussle in HP (following its merger plans with Compaq) and ABB. In the corporate world, it stems as much from management weaknesses as from managerial bungling. Together they represent systemic risks that can be avoided through periodic corporate introspections and consolidations. Where the legal requirements are kept to a minimum and businesses are managed as divisions rather than independent entities, it will instil a certain discipline that need not stifle innovation and the 'feel good' factors within a large organisation. The travails of the major multinational banks of the world after the Enron and Allied Irish fiascos would appear to refute Tolstoy's classic axiom that "All happy families resemble one other. Each unhappy family is unhappy in its own way".

(The author (sureshk@emiratesbank.ae) is a General Manager in Emirates Bank Group. The views expressed in this article are not necessarily shared by the Bank.

Back

Top