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Family Governance - the Path of Progress for Indian Family Businesses

Mita Dixit

Author: Mita Dixit

Date: Fri, 2016-11-25 15:20

India Inc. is advancing to be at the forefront of the global economy. The backbone of the economy is Small and Medium Enterprises (SMEs). Their contribution is exemplary in terms of jobs creation, exports, and overall GDP.  

Almost 92 to 95 percent SMEs are family owned and managed businesses, not to forget that almost 70 percent of top 500 listed companies are family owned. Large family owned business houses have always been in the limelight. The reasons could vary from being innovative to antiquated, superlative growth to bankruptcy, philanthropy to feuds. Whether Ambani, Bajaj and Mafatlal families’ splits or Godrej and Murugappa families’ four and five generations old lineage, family businesses are the foundation of our socio-economic culture.  
 

The Paradigm Shift

While India is on its path of becoming the youngest nation by 2020, as a Family Business researcher, I  am observing a visible change in the family business domain. Two and three generations old businesses are changing their Avatar from “lala companies” to “professionally managed” companies. The younger successors from families are educated, suave, have a broad vision and global aspirations. As the future leaders, this brigade is getting ready to change the fabric of traditionally managed culture. They prefer operating businesses with modern management techniques, build competent teams, and create transparent systems and processes. Instead of getting stalled in family conflicts, disputes, and non-productive practices, the younger generation prefers to create a professional work culture.

The Big Question

Family owned and managed businesses operate with the ethos of “Family First”. Business decisions are taken while keeping the family’s wellbeing in focus. With changing preferences of the next-generation successors, can the family businesses survive with the spirit of “Family First”? Is it possible to balance the family’s philosophy, culture and personal needs with business performance, profit, and transparency? Can growing families of cousins, in-laws, and relatives work together without disputes and ego clashes?  

 Family Governance – the Path Ahead    

Prudent families who have built their businesses as long lasting institutions such as Godrej, Murugappa, Burmans of Dabur and GMR have developed a culture of good governance in the family. These families have developed guidelines and policies for family members to address complexities of family issues in terms of different aspirations, conflicting roles and goals, emotions, values, and matters of inheritance.

Taking a cue from reputed, long lasting family businesses, sensible owner families from the SME segment have also started pondering about the issue of Family Governance. For the businesses at the threshold of transferring their leadership and ownership to the next generation, developing a culture of family governance is the need of the hour. Family governance is a mechanism, a process, that is developed with the help of a family business advisor or an expert outsider. It fosters the culture of open communication among family members by sorting out differences and focusing on strengths of individuals. Through various policies and norms, the family can develop transparency in dealings, clarity on business roles and rewards, create a prudent succession plan, and ensure the family’s wellbeing in the long term

The paradigm is shifting for family owned and managed businesses. Their survival is threatened if they do not change their gearing with the changing environment and the new generation at the doorstep. Those who are farsighted and have ambitions of becoming business houses are at the vanguard by becoming professionally managed, family owned businesses. May they lead India Inc.’s progress in the decades to come!

Originally published in Maharashtra Chamber Patrika on April 2016 Vol. XXXXVII No. 1

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Ma'm, I am well aware of "Corporate Governance". Today I have learnt the new one - 'Family Governance'. I think this concept need to be taught to Politicians also. If it could have done, we might not have witnessed the Political stirr in Samajwadi Party of UP.

Very important & relevant feature for sustained Business. Many good business houses could not continue their business due to the family issues. Even big companies should always take care of succession planning of their associated business/channel partners to avoid any risk of losing market.

As you mention about prudent succession plan, having a clear succession plan as part of Family Governance is important now in Family Managed Business more than ever, especially when the youth today have wide carrier choice. There is nothing like working for oneself, but young minds like to make their own choices rather than be burdened with family name and pressure of performing in an area that doesn’t interest them. A succession plan can keep people in the management prepared about the way forward.

Young India wants opportunity to grow in transparent working environment, if there is appreciation on near to real time basis. In developing India no one has time to wait & watch for growth. So, gen next believe in fast results. This may be the region of the paradigm shift in family owned businesses. Young generation of India believe in professionalism that is the same reflection coming out of the society. Currently 70% start-ups are owned by individual youngsters. One more point is coming out very prominently that decision making is very fast by Next Gen professionals. End of the day family owned business revolve around the family only. They always try to be professional for outer world but it reflects always at higher value for family first. Senior management or leadership team always witnessed these kinds of behaviour in India owned family businesses. May be in current scenarios they are selecting or training to create better choice within the family members for business head positions whereas lot more option available around them which will give more stability & growth for future. I find somewhere emotions are not controlled by Indians to take extreme steps. Most of the family owned Indian businesses are not revived due to lack of right choice of leadership. Most of the India population believe in transferring the legacy to their own next generation. We need to start believing on one life one dream instead of multiple life multiple dreams to break the barrier of emotions. It may help current generation to grow more in all direction not limited to individual or family only.

Thankyou Prof. Dixit for writing on an issue which was seemingly insignificant earlier but has now grown exponentially in importance and criticality. Family governance and succession planning have become indispensable in the current landscape of family managed businesses. According to a survey conducted by the Family Business Institute, approximately 88% of current family business owners believe that five years down the line, their businesses will be controlled by the same family. However, actual numbers suggest an altogether different story. Only about 30% of family and businesses survive into the second generation, 12% are still viable into the third generation, and only about 3% of all family businesses operate into the fourth generation or beyond. Thus, there is a gross mismatch between expectations and reality and this can be largely attributable to lack of family succession planning. I would now like to share some situations I personally know of. I am currently doing a live project with a surgical care equipment manufacturer. He is a mechanical engineer from the best college in India and then went on to do his MBA from a premier business school. He started this venture during his college days with his elder brother who is an optical engineer. The interesting part here is that his family already has a well-established business in surgical equipment. On probing further, he told me that the dynamics of his working is drastically different from that of his family business. Moreover, he wanted to make a niche in high quality equipment comparable to international standards but this flexibility was not available to him in his family business. Although he acknowledges the fact that his startup got tremendous support from his family business in setting up distribution channels, he prefers to work independently. Another trend that I have seen in the recent past is that the younger generations do not wish to do business at all, no matter how well established and cash rich it might be. I would now share the story of a 60-year old Marwari businessman. He is one of the biggest marble manufacturers in Kolkata. However, he is facing issues in succession planning. His only son wants to be a novelist and holds no interest in business. What should the businessman do now? Should he pass on the reins of his business to external hands? Should he have tried to mold his son’s interests towards business since an early age? These are some of the questions that contemporary family business succession planning should answer. It is interesting to note the stark similarities that exist between political dynasties and family businesses. Both need similar governance of the family to be successful and sustainable in the long-run. Let’s take the example of the fault lines created within the Samajwadi Party of Uttar Pradesh. It was clearly a power-struggle between an older and younger generation in a dynastic party experiencing generational change. It is the perfect example of how poor planning can destroy decades of goodwill.

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