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An Open Book-Transparency Matters in Family Business

An Open Book-Transparency Matters in Family Business

Recent developments on the Vijay Mallya saga have left more questions than answers on the extent of transparency that our corporates preach and claim to practice. Discussion on the need for transparency and governance in family businesses is nothing new. Conventionally, concerns of minority shareholders, systemic fragility and the cascading impact on the economy that opacity of firms create make a strong case for firms to be transparent. There is more to it. Our analysis of the Indian firms ranked high on transparency as per a survey by Transparency International of 100 multinational companies spread across 15 emerging countries, found unique characteristics for firms that score high on transparency. These firms have demonstrated capabilities of lasting multi-generational businesses.

The survey done by Transparency International focused on three dimensions. Explicit reporting of Anti-corruption programs, disclosure of company structures and holdings and the disclosure of key financial information on a country-by-country basis. Interestingly, all the nine companies in the list of top ten were family owned and managed. Six of these firms were from the TATA group. With the exception of Infosys, 14 Indian companies in top 25 of the report were family firms.

Unique Institution Building Features
What makes these companies different? What can the other family firms learn from these companies? We studied these 14 companies on various financial and non-financial parameters like innovation (research and development expenditure), profitability (return on capital employed), liquidity (debt-equity ratio and quick ratio), age of the firm, industry type, human resources practices, and promoters background.

Apart from regulatory compliance, there are five unique features that are common across the 14 family firms covered.

Code of Conduct- There is a defined code of conduct for the employees, directors, associated companies and other stakeholders like customers and suppliers. The document outlines the acceptable and unacceptable behavior of the stakeholders and the moral and ethical standards to which all stakeholders must adhere to, in letter and spirit.

Founder’s Vision and Values –  Founders of these companies have articulated a combination of audacious vision and strong set of core values from the beginning. Setting such high expectations and living the values themselves have enabled them to ensure practice of transparency as nothing unusual. For instance, the Tata group companies stay true to the philosophy of its founders of “improving the quality of life of the communities” and Dr Reddy’s Laboratories, of “drug discovery and making medicines affordable”.

Long-Term focus – Leaders of these organizations clearly believe in long term success of their ventures. They are not driven primarily by quarterly performance, but by their long term product – market strategy. These companies focus on upcoming novel areas of businesses, even if they do not result in profits for many years to come. Being majority shareholders, the owner-managers can afford to focus on the creation of wealth in the long run, without worrying about short term stock market gains and losses.

Early professionalization: Another overarching characteristic is that these companies practice professionalism from early on in their life cycle with professional CEOs running the company while the founder or his successors providing overall strategic direction and cohesiveness to the entire group. In some companies where the CEO is a family member, they are well qualified and have proven themselves as capable and suitable for the top job.

Effective boards: These companies have recognized the strong strategic and fiduciary roles their boards can play in synergistically building lasting empires. The boards are quite diverse, each member being very accomplished in their own right. For them, their boards are encouraged to think independently and bring fresh thoughts to guide the management in its efforts to inculcate institutional elements in the organization.

On a closer look, these traits are also some of the key traits that we notice in companies that last across generations. These building blocks are fundamental to their corporate success and sustained brand value in their journey of distinction. These companies have demonstrated fundamental characteristics of institutions that find their unique presence and space in any society. Any index of transparency is then a manifestation of the process and extent of institutionalization that our corporates practice. Family businesses that often aspire to build lasting enterprises should recognize the need to set high standards of transparency from the very beginning and link it to the above mentioned institutional building blocks.

Authors: Nupur Pavan Bang, Associate Director, and Kavil Ramachandran, Professor and Executive Director, Thomas Schmidheiny Centre for Family Enterprise.

Source: This article was first published in the Indian Management Magazine, October 2016, pp74-77.

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