The Thomas Schmidheiny Centre for Family Enterprise at the Indian School of Business is a pioneer in research on family businesses in India. The Centre’s scholarship examines the managerial and governance challenges faced by family businesses in India and suggests ways to overcome them.
1. What are the managerial challenges faced by family businesses?
Kavil Ramachandran in his essay titled The Three Circles of Family Business (2018) points out that role conflicts and decision dilemmas are two managerial obstacles that set family businesses apart. As he argues (Ramachandran 2018),
“There are multiple overlapping roles for the various internal stakeholders that make the management of family businesses quite challenging. The three circles represent the major stakeholders in the family business. “
Interactions between those who wear a single hat and those who wear two or even three hats can be complex. This can lead to confusion in taking decisions (Ramachandran 2018).
There are several areas where family managers or their colleagues face decision dilemmas. The challenge is greater when the decision making involves non-family executives whose personal goals are career building and rewards. Their objectives are very often not in sync with those of the promoter family members.
Role conflicts and decision dilemmas are two managerial obstacles that set family businesses apart
The success of a business is dependent on its managers taking decisions objectively, in the interest of the business, even if it means penalising a family executive. Professionalism may get compromised if family managers take decisions keeping the interests of the promoters supreme.
2. How can professionalisation help family firms overcome managerial obstacles?
According to a study conducted by McKinsey in 2014, family-owned businesses may come to account for as much as 40% of the world’s large enterprises by 2025 (Ramachandran 2018). Yet, the majority of family firms fail to survive beyond three generations. Professionalisation of management is one of the decisive factors for family firms’ long-term survival and greater productivity, claim Navneet Bhatnagar and Kavil Ramachandran in their essay Professionalisation of Family Business: Managing Process and Governance Challenges (2017).
Professionalisation is a challenge for family businesses because it is a major transition for both the business and the family. For the family business leader, it involves the process of letting go of managerial control to professional managers, in most cases non-family professionals. With professionalisation, the organisation moves from centralised decision-making and a paternalistic culture towards a culture of meritocracy, decentralised decision-making, delegation, formal strategic planning and control mechanisms. According to the authors (Bhatnagar and Ramachandran 2017),
The prerequisites for a successful transition are:
- The leader’s clarity on the road ahead
- The team’s preparation for change
- The emotional preparation of the leader to define and adhere to role redefinition
- the willingness of the owner(s) to ‘let go’ or disengage from the operational control or day to day management of the business and move on to strategic roles.
The professionalisation process is inevitable for family firms as they scale up.
Professionalisation of management is one of the decisive factors for family firms’ long-term survival and greater productivity
3. What processes and governance mechanisms should family firms follow for effective professionalisation?
Navneet Bhatnagar and Kavil Ramachandran put forth some suggestions for family firms to successfully professionalise in the article Professionalisation of Family Business: Managing Process and Governance Challenges (2017). These are as follows (Bhatnagar and Ramachandran 2017):
- Firms should clearly define the roles and responsibilities of family and non-family managers to help minimise managerial ambiguity about their respective areas of control.
- Firms should bring on board the family’s elders, external advisors, independent directors or existing senior employee(s) as mentors and advisors to resolve conflicts and bring clarity in processes, rights, roles and duties of family and non-family managers.
- They should establish and invoke the active support of family council/board and business decision systems/processes to help both the family and the management transition.
4. How can the board of directors ensure proper governance of the family business?
As the family business develops into a professional organisation, appropriate governance mechanisms both at the level of the company and the family are necessary to ensure its sustained growth. The role of the board of directors in putting in place corporate governance mechanisms can hardly be overstated, contends Nabankur Gupta in the essay Corporate Governance, Business Growth and the Role of Independent Directors (2017)
The board of directors makes sure that the organisation’s vision and culture are safeguarded so that the organisation does not drift in pursuit of its goal. Gupta highlights the role of the Board of Directors (2017):
- Corporate governance gives the ultimate and total responsibility to the board of directors to manage the company, with the objective of adding value for all stakeholders.
- The Board is the custodian of the organisation’s vision and culture, always protecting them from direct or indirect pressures from various quarters.
- Once in place, the Board improves the quality of the decision-making process, resulting in long-term benefits for the company.
- It ensures continuity and economic growth, maintains investors’ confidence.
- It reduces the cost of capital, minimises wastages, corruption, risks and mismanagement.
Developing a family governance mechanism should ideally precede the creation of the corporate governance system. The two should complement each other. For instance, a family council or a family business board can work like a supervisory board that sets the direction for the business board.
5. Is family governance essential for the success of family businesses?
Kavil Ramachandran, John L Ward, Rachna Jha in the article titled Ensuring Family and Business Continuity at India’s GMR Group (2014) explain the importance of family governance through a case study of the GMR Group.
As the family business develops into a professional organisation, appropriate governance mechanisms both at the level of the company and the family are necessary to ensure its sustained growth
The famous Indian infrastructure builder, the GMR group was the first family business in India to put into place a formal family governance mechanism by drafting a Family Business Constitution. When the GMR group reached its pinnacle of success, its founder G M Rao wanted to safeguard the business and the family from all possible disruptions. By the turn of the millennium, India’s economy had opened up considerably, and consequently, became very competitive. He endeavoured to develop a sustainable coping mechanism that would help his family enterprise stay ahead of the race.
G M Rao knew that many business families faced bitter disputes and bankruptcy due to poor governance. To counter that problem, he resolved to create a governance structure and draft a family constitution “that would serve the purpose of an organisational blueprint for current and future generations”. It was a detailed document on the rights and duties of family members with respect to the business and matters related to succession. With the help of experts, the GMR group put in place a Constitution that reflected the purpose, core values and goals of the family and the business. “Keeping the family together, from generation to generation” was Rao’s personal credo, and he was convinced that such a formal governance mechanism would enable them to achieve growth and continuity in business (Ramachandran et al 2014).
Clash of interests and role conflicts among family non-family stakeholders and differences among family members can prove to be detrimental to the long-term sustainability and growth of the family business. They also affect the wellbeing of the family. Proper governance mechanisms, both at the level of the family and the business with well-planned goals and clearly defined responsibilities of everyone can mitigate such risks. This short guide provides some pointers on how families can govern their businesses well.