World Colleges Information

A precipitous view on the Indian economy is enough to understand the colossal role played by family-run business in the country. Family-run business or in short family business is a global phenomenon with some of the biggest corporations in the world including supermarket biggies Wal-Mart to media powerhouse News Corp being run by families. The segment is of paramount importance in the Indian context. It can easily be dubbed as the lifeline of Indian economy, with the family business sector roughly accounting for two-thirds of the country’s Gross Domestic Product (GDP). More than 80 percent of companies in the country are family businesses including the big wigs Ambanis, Godrej, Birlas, Wadias, Mahindra, Munjals, Mittals, Jindals, Adanis, Ruias, Times of India, Murugappa, Ranbaxy among others. The list goes on and one and if you choose any industry and exclude the public sector giants, the family business houses eclipse every company around with consummate ease in terms of market cap or overall contribution to the Indian economy.

It is acknowledged in tacit terms, not without a fragment of hyperbole, that some of the crucial decisions about a certain company’s future including say plan for divestment or further investment is taken at the family dinner table rather than at the board meeting. The crux of thought behind the above statement is that family plays a significant or to put in a better way, dominant role in shaping the course of a business and the board just ‘ratifies’ those decisions.

• Emotional stake

Family business, even at the global level, stand for certain sacrosanct values attached to cultural roots, long-term commitment to all including customers and employees besides other core factors like dependability and relationship orientation. Evidently, the decisions and steps taken in a family-run establishment are less bureaucratic, with high levels of self-discipline and self-governance maintained.

These establishments often embrace a working mechanism or culture which is quite flexible. It is the vision of the family owner which runs the show, being the leading light while considering any business initiative as a matter of pride for the family. So the stakes here are more emotional rather than the monetary or profit aspects.

One of the prime advantages of family ownership business is its impregnable access to human capital, an invaluable asset to posses, in the form of family members.

It’s simply unbelievable how some of the family groups fought hard against all adversities to overcome red-tapism and achieve success at unprecedented levels. 

As per a PricewaterhouseCoopers’ Family Business Survey of 2012-13, 78 percent of Indian family enterprises support various community initiatives while a similar percent of the country’s family enterprises go out of their way to help and retain their staff in bad conditions. 

A majority of the Indian family business establishments mushroomed and took the baby steps in the one-and-a-half decade phase starting from 1980 and so can be safely categorised as relatively young ventures.

• Girl power 

In the last two decades or so, more women from the family are taking up reins in Indian companies, storming the former bastion of males. With the family going nuclear these days, families tend to groom daughters for the peculiar tasks. Moreover, the girls are armed with certain major amendments in the law, giving women the right to equal share of inheritance compared to the male siblings. The Bombay High Court ruling, pronounced a few months back, stating that the amendment to the Hindu Succession Act giving daughters equal rights is applicable even for girls born before the law was changed in 2005, is one of such legal changes that could usher in phenomenal transformation in the way how women are viewed and treated at family-run firms.

Isha Ambani, the only daughter of Reliance Industries chief Mukesh Ambani, joined global consultancy firm McKinsey in the United States earlier in the year and many industry analysts expect this as a stepping stone for the daughter to enter the father’s business empire. There were even reports of Isha attending the annual general meeting in 2013. Nisa Godrej and Tanya Dubash at the Godrej Group, Radhika Piramal, the Harvard-educated managing director of VIP Industries, Gursimran Mann, managing director of Simbhaoli Sugars are among some of the women’s leaders who have already entered the family business cauldron. 

To a great extent, women leaders and owners have silenced their doubters and it is likely that on course of transition, companies would be compelled to involve more women. Some studies show that women-owned business are likely to underscore the need of succession planning more while keeping up a lower percentage of family-member attrition. There are even cases when the families allowed women to steer the ship, they saved the family business.

There is resistance in some corners against the rise of women in family business with another line of argument going that women are hardly taken seriously in their family enterprises as they would be as professionals. In a patriarchal system, some traditional families running big businesses have openly stated that they don’t involve daughters in family business and would not do so in the future too.

• Tough tasks

There are more critical ways of thought that take a swipe at the family business, reading it together with anti-professional approaches, accusing it of nepotism and mismanagement. Some of the critics point out that hardly few family business establishments stand the test of time, supporting the argument with a liberal sprinkling of statistics and citing many examples of companies collapsing by the third generation of owners. Blending business, personal and home life interest can create a heady concoction which can halt the business’ productive growth and put its future under great peril. When the in-house secrets come out in the open and conflicts spill out into the streets, the requirement for a proper succession plan becomes quite evident.

The wide gulf between the line of thinking of old and new generations is a cast-iron challenge facing possibly many business establishments controlled by Indian families. According to Confederation of Indian Industry (CII) Family Business Network (India), “one third of business families disintegrate because of generational conflict”. The young generation will be eager to stamp their seal and is likely to divert away from the conservative approach followed by the preceding generation/s. A clash of varied cultures is likely to ensue with differences cropping up about style of functioning, policy towards employees among other issues.

Many of the ideas and strategies traditionally associated with family businesses have started to wane with new kind of conflicts coming up. The obligation to join the family business has certainly reduced now compared to say two decades back. The society itself is not wedded to tradition as it was the case some 20 years back. Too much stress on family too may prove counter-productive as prominence should be given to the business part as well. There are many who keep on playing the emotional card, arguing that an owner’s son, irrespective of his incapability or lack of talent, cannot be replaced by an ‘outsider’, a ‘mundane’ executive.

In case of an unavoidable break-up, both the parties must reach an agreement to pursue diverse operations and uncommon interests to safeguard the future of all the parties involved. The key should to make a name for yourself, create your own brand power and identity rather than blaming the other party being the imitator and poorer cousin.

If a conflict arises between two family members or factions led by the duo, in all likelihood a woman, mostly the mother in case of warring brothers, would step in as the mediator, trying to broker peace and save the assets accumulated. The classic case in the Indian milieu was how Kokilaben Ambani, the wife of late Dhirubhai Ambani, the founder of the massive Reliance conglomerate, chipped in to end ugly feud between Ambani brothers, Mukesh and Anil. A deal was reached at, reportedly under the blessings of Kokilaben, as the siblings split the assets to end one of the most acrimonious family fights in the Indian corporate arena.

The constant inflow of non-family employees too can create rifts in the managerial mechanism. Sometimes the culture developed in the company may become an impediment to treat the ‘outsiders’ in a respectful manner. Vice versa, at least in some cases, the non-family members find it difficult to adjust to the company culture. 

Now, many family-driven companies are gradually shedding their age-old image, readying themselves for the transitional phase.

• Embracing change 

Many of the family business are trying to innovate by inking strategic deals with other corporate, sometimes even at the global level. Slowly but definitely these family-maneuvered companies are coming out of the shell, acknowledging the value of entrepreneurship and innovative ideas. The new generation is keen to forge alliance with global corporate through joint ventures or bring in Foreign Direct Investment.

Also, more firms understand the need to have a proper succession plan, in order to avoid legal tangles and ensure smooth transition of ownership. With many Indian companies owning assets in foreign countries, succession planning becomes critical in a global setting as well. A proper succession plan would ideally outline when the baton will be handed over to the younger generation by the incumbent personnel at the top of the managerial tree. Some companies have planned carefully to upkeep their assets by creating Trusts or in some kind of escrow mechanism where other family members have the right of first refusal in the event of sales by a particular member of the family.

The companies have started thinking seriously about governance models and are in the process of evolving their own unique ways in management. Now, personal skills and management capabilities are given preference over family relationships, thus assigning responsibilities accordingly to capable persons. These companies have opened up a lot, considering inputs from various stakeholders outside their family purview as well. An outside professional can lend a fresh perspective to the entire management scenario, breaking away from the monotonous way of looking at challenges and opportunities.

A lot of companies have taken active interest and some have already initiated the process of involving professional teams in management by involving professional accounting firms, reputed legal teams as wells as respected investment banking firms. India’s business giant and prestigious family group Tata took the lead, appointing Cyrus Mistry as chairman two years back to head their empire, succeeding Ratan Tata and becoming the first non-family member to head the group. Mistry’s ascension reflected the meteoric rise of a down-to-earth industrialist as well as broad-minded approach of a elephantine conglomerate to free away from the chains of family tradition.

There should not be any half measures while selecting personnel for top brass management jobs and it should be duly acknowledged that every individual in the family is not manager material. It’s not just about the education they possess or the intelligence they own. Beyond all the blood relationship and family hierarchy, there can be issues with temperament and motivational level for a family member, which may affect the running of the company.

Some companies have followed the Western way, formulating family constitution besides creating more opportunities for constructive dialogue between family members.GMR, Godrej and Daburs are among the companies that have already brought out constitutions that govern the succession plans. By turning more professional in their approach, these companies understand the need to continually innovate while combining their fresh strategies to broader business goals.

Another point of interest should be the branding factor. There are certain companies, including prestigious Indian names, who have grown leaps and bounds over the years, surpassing the name and pride of even the family which originally created them. All must be done to ensure the brand value is at its peak and efforts to do so are at full throttle. There is that pertinent danger of family turning the tormentor if the brand value and strength are identified separately from family name and power. Any slip up on this front can swing the fortunes of a company downside, leaving the management to fret over lost ground and worrying days ahead.

• Classroom to glass cabin

Realising the need of the family business entities, several management courses have been developed for young business leaders with the course content customized to the priorities and requirements of family business, enabling the students to understand various scenarios that may arise during their prospective managerial roles. The courses are also designed to ensure that the students understand how to get through the transition phase smoothly and how to face cut-throat competition.

Each family business has its own tasks, unique environment and problems to solve. However, there is a common thread to all family-guided businesses and the management courses try to stitch up the similarities to produce course material and evolve theories relating to family management.

Harvard Business School, Kellogg School of Management and University of Nortre Dame-Mendoza College of Business are some of the reputed institutions globally who provide special training on management of family-controlled business. These academic programmes evaluate the dynamic nature of family business, handing it a touch of professionalism and deal with issues including manager-shareholder relationships, disputes among owners or conflicts arising out about succession plans and business strategies. In India, Indian School of Business has tweaked its family business management programme to incorporate the uniqueness of Indian companies besides covering general management topics like accounting, finance and marketing. When those who hail from families piloting businesses enroll for the courses, they possibly have a distinct advantage compared to the traditional management students. Naturally, those planning to test waters in the family business don’t face the pressure of job hunting and probably can focus entirely on the course with an eye on the future and how to incorporate the lesson learnt to their mode of functioning. A job guaranteed could also mean complacency creeping in and put you off the track. It requires high focus and tenacity to keep the flame alive to pursue you dreams and secure a bright future in family business. 

CII in collaboration with FBN (International) has founded the Indian chapter, aimed at creating a nationally representative body of members of families steering businesses in the country. Though there might be exceptions here and there, family business is here to stay in India, prolonging its legacy and stamping their pride in equal measure.

BUDDING MANAGERS

DECEMBER 2014 ISSUE