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Tuesday, February 26, 2013

Russian business needs long-term thinking

This op-ed by Gregg Robins, managing director of UBS in Russia, a musician and a member of Marchmont's Advisory Board, was first published on Reuters.

Russia’s political developments make headlines, but it’s the country’s business development and demographics that are central to its longer-term prosperity. Russia experienced a massive, rapid ownership transformation in the 1990s and is undergoing another one today. Although more gradual than before, the current transformation exposes a profound problem: an emerging leadership gap in business.

The current generation of business owners is not thinking about how best to transfer control of their sizable companies, apart from selling them. And a younger generation is largely unwilling or unable to take over.

This lack of vision has serious consequences. The Family Business Institute notes that “family business failures can essentially be traced to one factor: an unfortunate lack of family business succession planning.” In Russia, succession is especially important because the country is experiencing its first major generational transfer, which should set the foundation for evolution. A shortage of buyers and leaders is a further blight on the future.

Russia will need to address this issue if it is to develop large family-owned business sectors, such as the German Mittelstand and the many world-renowned brands in Italy, such as Alessi, Lavazza and Zegna. Succession across generations has provided stability and its social and economic benefits to these countries.

Apart from Russia’s massive companies, such as Gazprom, there are many sizable businesses where private ownership is concentrated in individuals and their families. These are not “family businesses” in the American sense of corner stores or restaurants, but more akin to Mittelstand. A recent study by Campden Research , sponsored by UBS, explores attitudes of Russian owners of such $50 million to $1 billion businesses in manufacturing, technology, financial services, real estate, pharmaceuticals, mining and telecommunications. Ninety-five percent of these owners say they lack a succession plan.

That’s not surprising in light of the short-term horizons that prevail in Russia. Capitalism is still in an early stage, profit margins are high relative to other emerging markets, and uncertainty is rife. The short-term mindset emerged in the Soviet Union’s final years and persisted as markets opened further in the early nineties. Short-term thinkers – the most nimble and adaptable to the frequently changing environment — were the most successful.

Demographics shed further light on the problem. Three generations constitute at least three distinct Russias.

The older generation have largely not made the transition to the new Russia. They still adhere to the paternalistic Soviet ideology in which the state provides for citizens’ work, health, and cultural needs. Most are passengers in the new system, supported by the state and by their children and families, and not involved in business development.

The middle generation have successfully bridged the old and new systems through knowledge and connections, and have succeeded in many cases as entrepreneurs, some extraordinarily so. Many have diversified their businesses, assets and lifestyles, and found varying degrees of balance between Russia and abroad.

Many business owners want their children to have an “easier,” more “peaceful” life, perhaps in a place outside Russia. In many cases they feel potential business heirs are not well-versed in Russian business culture – partly by virtue of their education and experience abroad. A much higher percentage of Russian business owners wish to sell their companies, as compared with other countries, and they increasingly want private equity firms to take stakes.

As the middle generation shirks planning, the younger generation becomes critical to Russia’s business future. They are more global in mindset and experience than their parents, less ideological and more technologically savvy. They are more likely to have studied and lived abroad.

While this greater sophistication and worldliness should be all to the good, the young are also more often planning to settle outside Russia permanently. More than a million people, many of them young and capable, are estimated to have left over a five-year period. Yet for those who choose to stay and build their careers, evidence suggests that Russia’s traditional competitive advantage in higher education among emerging markets may be slipping. Russia ranked 26th out of 28 countries according to a recent PwC Family Business Survey based on family firms’ assessments of having the right skilled people entering the job market.

Both those trends portend a dearth of business leadership in Russia. The looming deficit is troubling since Russian companies depend a great deal on their managers to cope with endemic challenges, such as bureaucracy, corruption and other inefficiencies. These issues tend to create top-down rather than flat management structures.

Successful transfers of businesses mean higher growth rates, better products for consumers and higher tax revenues to pay for investments in education as well as pensions, critical for maintaining stability. Russia counts on a high oil price relative to other oil exporters to keep its budget in balance, and there is not a large margin for error. A recent report presented at Davos by the World Economic Forum underscores these inter-related factors as they affect Russia’s ability to maintain essential social cohesion.

Short-termism is nothing new in Russia, but a commitment to the continuity of Russian businesses is now urgently needed. The stakes are too high to get this wrong.

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