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Past Issue • Oct-Dec 2012

Harmony and Sustainability in Family Businesses

A recent conference on family business at the ISB gave stakeholders of family controlled businesses an opportunity to share and learn from best practices and develop strategies to sustain their businesses and strengthen family cohesiveness over the long term.

Prominent members of the family business community and distinguished business leaders came together at The Fourth Asian Invitational Conference on Family Business, organised by the Thomas Schmidheiny Chair of Family Business and Wealth Management, to share valuable insights on achieving family togetherness and business sustainability. The theme of the three-day conference was “Built Forever – Outstanding Business Performance and Lasting Family Harmony”

Several speakers emphasised the need for strengthening family firms through better governance mechanisms and long-term strategic planning. The professionalisation of business and family governance figured prominently in the discussions as two of the major challenges facing Indian family businesses.

From Family to Business

Managing family harmony was the focal theme of one session. Speakers highlighted the importance of managing the aspirations of family members, various aspects of grooming the next generation and sustaining family cohesiveness. They advised family businesses to foster an environment of trust and openness where family members could openly share, discuss and sort out their issues. Separating ownership and management, aligning family and business decisions, and protecting, perpetuating and enhancing family values were essential for building lasting family business empires, the panellists observed.

Research findings on family togetherness presented at the conference indicated that there is considerable scope for improvement in the areas of developing a shared vision, role clarity, openness in sharing, cordial relationships and equitable distribution of rewards.

Preparing the next generation for business roles figured among the top priorities for family businesses. The common view that emerged in this regard was that the family members must earn their position in the company, rather than consider it their birthright. As part of the grooming process, family business managements were advised to expose young family members to project execution and other managerial assignments before taking up leadership responsibilities. Speakers advocated that next generation members gain work experience outside the ambit of the family business to get a better understanding of complex business challenges.

The challenges and opportunities of writing a family constitution aimed at improving family governance was another interesting topic of discussion. Developing the family constitution is an evolutionary and consultative process that takes time. Business families were advised to kick-start the process by formulating the core family policies and then continue to add elements over time in response to changing circumstances. The involvement of all family members in developing the family constitution adds to its richness and credibility, and improves its acceptance.

Family as Business

In another session on transition of family business to business family, panellists emphasised the importance of enduring values for family entrepreneurship.

During a discussion on professionalisation and governance, speakers advised families on how to build professional corporate also emphasised the importance of letting go and giving space and respect to non-family professionals at family firms. Goal alignment and mutual trust between family and non-family professionals, a shared vision of the future and an objective approach to managing business were considered essential for professionalising family businesses. The speakers advised family firms to implement delegation, not only in letter, but also in spirit and to seek the advice of mentors or professional experts in areas where knowledge gaps exist. Family managements must consider themselves as trustees of the business and hand over the reins to people who can run it most effectively, whether family members or non-family executives.

Developing the family constitution is an evolutionary and consultative process that takes time. Business families were advised to kick-start the process by formulating the core family policies and then continue to add elements over time in response to changing circumstances.

In several panel discussions, family business leaders and experts candidly shared their experiences and offered valuable advice on managing the challenges faced by family-run businesses. Wealth management was another key area of discussion. The speakers discussed various strategies for managing family wealth and preserving capital. Delegates were advised to diversify investments, plan for family requirements, manage risks effectively through a balanced portfolio and invest in high-growth sectors. Family wealth needs to be protected not only against erosion of value by inflation and taxation but also through leakages. Good governance and compliance in both the business and the family were considered crucial for protecting and growing wealth. Speakers also recommended the formation of a professional investment committee with clear investment objectives.

Advantage Family

The chairman of the Godrej group, Adi Godrej noted, “Family businesses were proven to be more resilient than their ‘professional’ peers due to their long-term focus, frugality, cohesion and awareness of sustainability issues.” Some speakers advised business to limit themselves to a product or industry, but to periodically redefine themselves and evolve with a grander vision to tap into changing business opportunities. They urged family firms to embrace the spirit of serial entrepreneurship.

Innovation, the experts declared, was instrumental for sustaining business growth. Harsh Mariwala, founder of Marico Industries Ltd said, “Family firms must be able to attract high quality talent and empower professionals to foster innovation.” Family businesses should develop a culture of meritocracy, risk-taking and a flat organisational structure with open communication channels, as all of these contribute to an environment that is conducive for innovation. Family business managements could generate new ideas and innovation by keeping a watch on developments in the external environment and regularly interacting with thought leaders, the panellists observed. They recommended that the top managements of family businesses promote continuous innovation to sustain a competitive advantage.

Philanthropy in Family Businesses

Addressing the delegates on business families’ responsibility towards society, former chairman of the Holcim Group, Thomas Schmidheiny, who also supports the Family Business and Wealth Management Chair at the ISB, said that managing philanthropic efforts for family businesses requires a strategy with long-term objectives and an appraisal mechanism: “There is an important difference between charity and philanthropy. Charity for me is giving to people in urgent need while philanthropy should have a strategy for a sustainable impact and demand accountability and transparency.”

Navneet Bhatnagar, Research Associate, Thomas Schmidheiny Chair of Family Business and Wealth Management, ISB, compiled this report for ISBInsight.

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