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October - November 2009
On the Path of Prosperity: The Changing Face of Indian Family Businesses
by Mita Dixit
India Inc. witnessed high drama events in some prominent business families in the early years of 2000, thanks to Ambani brothers, Bajaj cousins, and Mafatlal Bahus! In 2005, the great divide of Ambani brothers took place, Bajaj family feud started in 2002 and peaked during 2005. Disputes of Mafatlal siblings made catchy headlines in the same year. In the past, several illustrious business families such as Singhs of Ranbaxy, Modis and Shrirams have had famous family battles. Families owning international brands like Gucci, Fiat and Viacom have gone through bitter disputes, the current one being the L’Oreal family dynasty. Conflict in family businesses is a perpetual phenomenon across the globe.
Are these the signals of survival threats for family businesses? Is the centuries old foundation of family business weakening? Academic research on family businesses across the globe indicates a high mortality rate. Out of 100, only 44 percent businesses survive in the first generation and from those who survive, only 3 – 4 percent continue into the third generation. Despite such high failure rates, family businesses are the backbone of most economies in the world including India and contribute substantially to GDP, employment, and social upliftment of the country.
The paradox of remarkable economic contribution of family businesses and their high mortality rate leads to a pertinent question - what is the future of family businesses in India? What are the ingredients of longevity and fitness mantras for the institution of family business? Is there anything more to their success than just luck?
Family – The Backbone
To answer these complex questions, let us understand what a family business is. Family business comprises two overlapping systems: the family and the business. The family’s values, vision, and aspirations impact the business, its culture and decisions. At the same time, the business environment, policies, and long term objectives affect the family’s thinking and behaviour. Family businesses are usually termed so when two or multiple generation members have ownership and management control over the business.
Almost all family businesses start as entrepreneurial ventures and the most trusted, committed support is obtained from family members. “My family wholeheartedly supported my decision of setting up a float glass manufacturing unit involving huge financial risk. I was able to go ahead on the project because my family members were with me,” says Amrut Gada, Chairman and Managing Director of Sejal Architectural Glass Ltd. Unity of the family and longevity of the business are maintained when the family members have a common vision and agreeable goals, open communication, trust and confidence in each other, and familial bonding. These characteristics make family businesses unique from non-family businesses.
The Survival Challenge
Although there are clear indications of survival and sustenance of family businesses, Indian businesses are going through a paradigm shift. Economic reforms of 1990s have been a turning point for Indian businesses and more so for the family businesses. Onslaught of global competition, stress on performance and productivity, and adaptation to new technologies are creating tremendous pressure on the eco- system of family business. Many families are experiencing a surge in disputes and feuds affecting business performance and organization climate. Rancorous splits and break-ups of age old businesses are becoming common. Family businesses are facing four challenges which are significantly influencing and changing the pitch for survival and prosperity.
1. The Economic Front
End of License Raj and financial reforms have woken up cozily ensconced family firms in their small empires. Competition is fierce in all the industries with entry of global players having strong financial muscle and professional work culture. Many businesses have faced the situation of “change or perish.” Adaptability is the key to survive in a cut-throat competitive scenario, as quoted by Charles Darwin.
Along with competition, business opportunities for the risk takers have also increased. Advent of information technology has shortened distances, made communication easy across the globe and has created favorable conditions for new enterprises.
2. Socio-Cultural Changes
The change at socio-cultural front is eminent throughout the country. With urbanization, rise of nuclear families, influence of media, modern lifestyle and thinning boundaries of caste and religion, the joint family structure is almost extinct thereby affecting the business structure. Individualism, equal opportunity for both genders, participation of women in family businesses, are also influencing India’s socio-cultural constitution. Dr. Mohanbhai Patel, a renowned industrialist and philanthropist, quips with a slight grin, “Today’s younger generation is more independent emotionally and less enterprising than the older generation. Before individual choices and aspirations clash, it is prudent for the head of the family to decide the boundaries for each member working in the family business. In agriculture parlance we say that strong fences make good neighbors, and it is equally true for family management also”.
Succession to the next generation is a major cause of concern for family businesses. In most family businesses, succession is primogeniture, i.e. the eldest son is the natural successor. Large and organized business houses have adopted the process of succession planning for their heirs, but most of the privately held family businesses do not give importance to the fact that planning and grooming successors to take charge of the business in future is a serious agenda. The most common cause of family disputes and splits is the succession matter.
Succession is a long term process. “Children are sent abroad for higher studies and when they come back to join the business, they surely feel out of place. Father’s style of running the show seems outdated and they want to make quick changes. Here the seeds of conflict are sown,” opines Mayukhbhai Parikh, managing director of a leading paper trading firm in Pune. He believes that the younger generation members should be encouraged and trained from a young age if they are expected to join the family business. If their induction in the business is well planned and actionized, then there is no scope of serious differences and conflicts.
Succession is not an easy decision, as it is more emotional than rational. A recent survey done by ASSOCHAM indicates that despite the fact that a significant majority of companies recognized the importance of good succession planning, Indian companies rated themselves at 4 out of 10 for long-term planning and for grooming successors as heads of firms (Business World, Dec.2007). Well planned succession is the key to keeping the family together besides the continuity of the business.
Yet there is another side of the story. In India, business houses like Tata, Birla, Murugappa, and Dabur have survived over multi-generations and are still going strong. Long term sustenance is a characteristic of family businesses. The younger generation of family businesses is foraying into new industry verticals like IT, telecom, power, entertainment, retail, and media. Under the flagship business, new entrepreneurial ventures are taking shape. The institution of family business seems to stay here for many more centuries.
4. Family Governance
In the race of survival and growth, most of the family businesses tend to address the urgent issues rather than important ones. Decision-making is centralized and at times decisions are taken in favour of the family or the individual members rather than the business. Such situations warrant alert, especially when there are non-family shareholders in the business.
In western countries, the trend for family businesses is to separate ownership from management control so that the family’s objectives and aspirations do not clash with the business objectives and decisions. Indian business houses like Tata, Mahindra, and Aditya Birla group have taken measures to separate ownership from management. Non-family professionals are hired for top positions and decision powers rest with them. Family members are allowed in the business only if they are educated and trained to be at par in performance with the outside professionals.
Emancipated family businesses like GMR, Dabur, Murugappa Group and Godrej have developed systems and measures of family governance, a concept similar to corporate governance. The rights, responsibilities, and norms for family members to enter the business, their roles and performance evaluation, compensation and profit sharing, non-working family members’ involvement in the business, adherence to certain family values and practices et al. are defined in a family constitution as a part of family governance. Such a system improves communication and transparency among family members and reduces differences among the members.
According to Mr. B. G. Shirke, the doyen of low-cost housing construction in Maharashtra, “the business flourishes only if managed by qualified and competent individuals. The entrepreneur has the spirit of innovation and risk-taking ability, which is usually not found in the successors. Therefore, it is essential that not only the family members are educated and trained to take up the business responsibilities but also the professionals from outside must be hired to manage the business. Family would own the business but the management control should be in the competent hands, whether family members or hired professionals.”
Will the fortune telling crystal ball predict for us the future of family businesses? With the events of rampant quarrels, fights, and bitter separation of prominent business houses and not-so-known family businesses, how will the institution of family business survive in India?
“The secret of longevity is simple,” avers Jayantibhai Shah, the patriarch of 75 years old S K Group, leaders in bulk drugs industry. “Family ties are the strongest among all relations and a united family is the best social insurance one can have. If the family members have a common vision and respect for each other, then the business can survive any test of time. Our Indian culture and religious values inculcate a strong bond between the family members, and in difficult times one can only depend on the family to stay together and support.”
Indian family businesses are going through a challenging yet exciting time. The ‘change’ factors are making family businesses reevaluate their vision and refix the priorities. Family and business, two sides of a coin, are being redefined in the new millennium. The threats and challenges of family businesses are still outweighed by the entrepreneurial zest, family values and culture. There is no doubt that the family businesses are taking up the challenges and will thrive for a long time to come.
Mita Dixit is a Partner and Head – Family Business Advisory at Equations Management Consulting, Mumbai India.