This isn’t unusual, according to others who have spent time in family operations. A professional CFO will often remain outside the circle of decision-makers. The family may turn to the finance executive for help in carrying out some transactions, but rarely for advice. “The CFO position is a more real position than most,” says an equity analyst with experience working for several family companies. “But don’t think that the guy goes in with his discounted cash flow model and says to the board, ‘I would take project one, not project two.’ He’s told, ‘We’re doing this. Can you fix up the money?’”
This lack of financial advice can result in some strange decisions. At one company, family managers unexpectedly purchased a plot of land and built a new facility on behalf of the local business unit. But the divisional manager, who had not been consulted, didn’t need the extra capacity. Instead, he complained, the result was just to push down the operation’s return on assets.
Predictably, trying to achieve meaningful change in such an environment can be frustrating. “I feel like my hands are tied behind my back,” says the European finance executive.
However, there are times when the mix of an outside finance executive — albeit one with ample willpower and a dose of good luck — and a headstrong boss can produce a more rational family business. At Joincare, a Shenzhen-based pharmaceuticals company, this happened after the firm’s near-death experience.
CFO Alan Zhong joined the company as head of investments in 2001, shortly after the company’s listing on the Shenzhen Stock Exchange. He spent several years working closely with the founder and CEO (whose wife also works at the company) on acquisitions, including one major deal that propelled Joincare into the front ranks of Chinese pharmaceutical companies.
In 2005, the founder decided to take himself out of day-to-day management by hiring a professional chief executive and becoming chairman instead. It was an unfortunate decision. The new CEO, full of determination but lacking experience in pharmaceuticals, made a series of blunders that set the stage for the company’s first-ever loss.
First, seeing that the company worked with 800 distributors, the CEO saw a chance to save money. He quickly decided to cut the smallest distributors and keep only the 180 biggest. He didn’t know, however, that only the small distributors reached China’s smaller cities — suddenly the company’s products were available only in the big markets.
Next, the CEO devised an incentive to spur sales whereby if shops ordered more products, they would receive a rebate. It seemed to work well to begin with as orders rose in the first few months. But he hadn’t considered the effect of another decision. During store visits a few months before, the CEO saw that Joincare’s products were reaching their expiration dates. His solution was to allow stores to return goods at any time to ensure freshness.
The store owners saw an opportunity and pounced. They ordered as much of the company’s product as they could, waited for the rebate cheque, and then sent it all back. In 2006, the company posted a loss of 80m yuan (€7.4m) on revenues of 207m yuan. “It almost killed us,” says Zhong.