Guard Group Financial Compensation for Family Members

Case-Let Family Business

Submitted by: Touheed Khalid 2012-01-0117 Muhammad Kasif Arshad 2010-01-0113

Guard Group of Companies Financial Compensation for Family Members

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Guard Group of Companies Financial Compensation for Family Members

Guard Group of Companies - Financial Compensation for Family Members

Mr. Shah Jehan Malik, Executive Director at Guard Group of Companies, reviewed the current compensation practices for family group members several times but found it difficult to justify. Guard Group, one of the leading business groups of Pakistan, is strictly limited to family members where all the major stake holders belong to second and third generation of the family. The growth of the firm was expected to be 15% - 20% in year 2012. Limited financials of the company have been attached as Exhibit 1. Mr. Malik felt that with the passage of time it would become increasingly difficult to survive in the highly competitive world of business without reforming the financial structure of the group. And, to begin with, there should be a formal remuneration structure for all family members, which was currently non-existent. He knew that it was an extremely complex job to convince other board members to have a standard payment structure across the board. For this purpose, he wanted to leverage his education and financial experience to make other family members realize the importance of a standard payment package. But he needed to finalize details to present a comprehensive plan in the next board meeting regarding financial remuneration of board members.

Guard Group Journey from a Humble Beginning to a Family Business

Mr. Shafi Malik, born in 1916, cleared his matriculation with a good score but abandoned the pursuit of higher education due to financial constraints. He began his professional life as a clerk in the office of Deputy Commissioner Lahore in 1940. Two years later he was selected for a clerical position in Army Headquarters and sent to Sanjoli State, Shimla. Later, he resigned from the job and in 1949, started his auto spare parts business in a small rented shop near Laari Adda (General Bus Stand), Lahore. Mr. Shafi Malik was a hardworking man, used to working 16 hours a day. Due to his honesty and the quality of service, his sales grew to such an extent that he

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Guard Group of Companies Financial Compensation for Family Members

shifted his business from a small shop to a multi-storey building in Badami Bagh, near General Bus Stand. Shafi Malik saw a potential in the market of auto spare parts since there was hardly any firm that manufactured auto parts and decided to get into auto parts manufacturing business. He thought of making auto filters for vehicles. For this, he required technical skills and trained labor. He sent his son Iftikhar Ali Malik to Europe to get some technical knowledge about filter manufacturing. In 1960, a manufacturing firm with the name of Malik Auto Industries (later changed to Malik Auto & Agriculture (Pvt.) Ltd.) was incorporated with Mr. Shafi Malik as Chairman and Mr. Iftikhar Malik as Managing Director. In the beginning, it was difficult to sell Pakistani filters in the local market, in competition with the established Japanese firms. In order to enter into the market, initially the Guard Filters management offered filters for free trials to transporters. The transporters found these filters to be cost effective and of good quality, thus, they started using them in place of Japanese filters. On one hand, the company was establishing its name in terms of quality and on the other hand it was striving for quality improvement of current products and increase in number of new products. In 1974, with the collaboration of a German Firm, Guard Filters added an automated plant for manufacturing filters. The Company established a separate R&D department under the supervision of Director Technical, Waqar Ali Malik, third son of Mr. Shafi Malik. The remaining two sons, Shahbaz Ali Malik and Shahzad Ali Malik also joined the family businesses in 1970s as Director Finance and Director Marketing respectively. In the mean time, the company took a step forward and instead of assembling filters from their parts, it started in-house manufacturing of related components required to manufacture a filter. This strategy not only proved to be cost effective, but also led to scheduling efficiency and continued quality in products. In the late 1970s, Guard Group started mass production of filters. Gradually the company added new products to its name. In 1985 it started supplying brake oil with its parent brand name Guard Oil. Another addition to the portfolio was brake parts. Till 2005, the company was producing more than 300 varieties of filters in the oil, air and fuel category. Currently it has a 70% market share in air and oil filter category while its close

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Guard Group of Companies Financial Compensation for Family Members

competitors are Malaysian and Chinese manufacturers. These filters are also exported to various countries. Also, in the lubrication category the company has a 70% share in the local market. In 1989, after 29 years of its inception, Guard Group thought of diversifying from its core business, i.e., auto parts business. There were some incentives offered by a Japanese firm to Pakistani businessmen, for installing an agricultural plant of their company in Pakistan. Some incentives were also offered by the Government of Pakistan in the form of tax exemptions and import duty exemptions for importing agricultural machinery. Management saw this as an opportunity and installed a rice plant in Pakistan. Currently Guard Group has 98% market share of total Packaged Rice market of Pakistan, which is 2% of total rice market. Currently company is also investing in R&D of Agriculture and trying to develop BT seeds for different crops. A summarized overview of Guard Group of Companies can be seen in Exhibit 2.

Family in Business
As the four brothers ran the business successfully for 61 years, their younger generation also got ready to enter into the family business. A family organization chart with respected designations can be seen at Exhibit 3. A family board, who has kept all the powers for key decision making with it, comprises of four brothers of second generation. All second generation members are called Senior Directors except Mr. Iftikhar Ali Malik, who is the Managing Director. Whether there is a question of introducing new management system in any of subordinate organization, or it is a call to invest in a new venture, all the decisions are made within this council. All of the third generation cousins have qualified from reputed universities of the world and some of them have also worked abroad. For example, Mr. Shahjehan Malik did his BS in Finance from Stern School, New York University, MS in Finance and Accounting from London School of Economics and worked for J. P. Morgan for two years as an investment banker, and then returned to Pakistan to join his family firm.

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Guard Group of Companies Financial Compensation for Family Members

The eligibility criterion to join the firm is simple. All the third generation cousins have to join the firm at the same level, i.e., Executive Director. Although Senior Directors encourage third generation to have a work experience in firms other than their family firm, it is not mandatory. The compensation package for all of the cousins is the same. All have equal salaries with equal perks.

Parchi System at Guard Group

As the firm grew from a single shop to a big conglomerate, financial systems were somewhat informal. Parchi system was one main example of it. Mr. Iftikhar Ali Malik realized that in order to have long term sustainable growth, among other things, one also needed to be well connected with the business community. In order to maintain business connections, Mr. Iftikhar Ali Malik remained actively involved in trade and business politics. He remained the chairman of Lahore Chamber of Commerce and Industry (LCCI). He is currently working as Vice President of SAARC Chamber of Commerce and Industry. Similarly, Director Marketing Mr. Shahzad Ali Malik, also got elected as president of LCCI. For these political activities cash was required. The practice in the past to withdraw cash from the company was to issue a parchi or a slip on a plain paper with the signature of any Senior Director. After the signature of any Senior Director, this parchi had the status of immediate cash. Whoever got this parchi, he had to deposit it in finance department to get the written amount or cheque of entitled amount. Senior Directors who were participating in political activities, had to donate money for different purposes related to chamber of commerce. This practice was not limited for spending on political activities. Other two directors also used to withdraw money for their personal or office expenses based on the parchi. As there was no formal entitlement of monthly withdrawal of money for any director, no mechanism existed to control these expenses. Business was doing well so no one was feeling the heat. Then, in year 2011, Director Finance, Mr. Shahbaz Ali Malik, a qualified Chartered Accountant, realized that with the ever expanding business, these overheads were also increasing. To counter the increasing overhead costs, and in order to establish a proper
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Guard Group of Companies Financial Compensation for Family Members

mechanism, he decided to consult with his brothers. He knew that this would be a difficult endeavor, because his family had continued doing business based on their old practices. To propose a change in the policy, especially one related to financials would require perseverance and conviction. To avoid any possible offense to his brothers he decided to involve two or three of the most senior employees of the company who held the trust of all the directors. It took him almost 6 months to convince his brothers to establish a formal system for cash withdrawals by senior directors. Under the new system, all directors were entitled to withdraw equal amounts. But still, there was not any upper limit for withdrawal for any director. For example, if one director withdrew X amount of money on parchi from the firm, the other three directors automatically became entitled to withdraw the same amount of money.

Strategy Ahead
Although the new system is better than having no system, parchis are still active in the company. Mr. Shahjehan Malik has worked with one of the leading banks of the world and knows the importance of proper checks and balances but does not know how to establish one in his family firm. He is also worried about the critical nature of family relations where a single reform taken by a younger family member can estrange the whole family.

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Guard Group of Companies Financial Compensation for Family Members

Exhibit 1: Guard Group of Companies Limited Financial Statement

Annual Sales Revenue Sales & Marketing Expenses Net Income Expected Growth

Rs. 6 Billion 2 3% 10% 15 20%

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Guard Group of Companies Financial Compensation for Family Members

Exhibit 2: Guard Group of Companies Business Structure

Guard Group of Companies

Automotive Industries

Agricultural Research and Services

Food

Filters (Air, Oil and Fuel)

Brake Parts

Lubricants and Car Care Products

Seeds

Machinery and Lab Equipment

Rice (Domestic and Exports)

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Guard Group of Companies Financial Compensation for Family Members

Exhibit 3: Guard Group of Companies Organizational Structure

Iftikhar Ali Malik Managing Director

Shahbaz Ali Malik Director Finance

Waqar Ali Malik Director Technical

Shahzad Ali Malik Director Marketing

Shahrukh A. Malik Exec. Director Finance

Shahjahan A. Malik Exec. Director Procurement

Shahzain A. Malik Exec .Director Student

Hamza A. Malik Exec. Director Filters

Shaheryar A. Malik Exec. Director Guard Auto Zone

Taimoor A. Malik Exec. Director Human Resource

Momin A. Malik Student

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Guard Group of Companies Financial Compensation for Family Members

References

http://www.guardfilters.com.pk/product_list.php?page=8 http://www.itifasia.com/itif2005/ShowDirectory2005_03.pdf http://www.dailypaperpk.com/urdu-columns/ammar-choudhry/112085/turning-point http://lcci.com.pk/shahzad_ali.php Mr. Shahjehan Ali Malik Executive Director - Guard Group of Companies

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