Family firms have been a part of the social and economic fabric of India even before the advent of British rule. Families and communities organised themselves to counter the institutional voids in access to capital, labour and protection of various rights.
Family firms gained further prominence during the times of the managing agency system. They had substantial economy-wide influence due to sound financial positions and diversified activities. Efforts to curb the concentration of wealth in the hands of a few ‘business houses’ post-independence did not dent their prosperity.1
Belying worries about their ability to withstand the rush of competitive forces in the economy post liberalisation in 1991, family firms have registered remarkable growth in the past quarter century. In fact, the removal of restrictions and controls after liberalisation unleashed their entrepreneurial spirit. Taking advantage of the changing business landscape through the 1980s and the big bang reforms of 1991, family-firms built businesses in all industries including in areas otherwise reserved for the public sector. Today, more than 90% of the listed firms in the country are family firms and they constitute a quarter of the GDP of India, as we reported in a co-authored report.1 Many of them have adapted and changed. They have proved resilient to the test of time. Yet, globally, we know that most family businesses rarely survive beyond the third generation.2
Belying worries about their ability to withstand the rush of competitive forces in the economy post liberalisation in 1991, family firms have registered remarkable growth in the past quarter century
In 2003, the Indian School of Business embarked upon an ambitious journey to enhance research, training and create platforms for the exchange of insights and knowledge among diverse stakeholders of family businesses through conferences, workshops and forums. The Thomas Schmidheiny Centre for Family Enterprise in 2015, established through generous support from Thomas Schmidheiny, Founder and Chairman of Spectrum Value Management, Ltd, Switzerland, is a result of the sustained and passionate efforts of Professor Kavil Ramachandran, the team and the entire ISB community. The Centre has connected with the lives of many family businesses – family as well as business- prompting them to think about adopting best practices in governance, professionalisation, succession, wealth management and much more. This issue is another effort in the same direction.
The Centre holds its flagship Asian Invitational Family Business Conference once in every two years. The conference has gained immense popularity over the years in India as well as other neighbouring countries. Our last conference was held in February 2019. The conference saw 27 prominent family business leaders and experts share their wisdom, experiences and valuable advice on diverse sub-themes relevant to family business, such as: building family business as a lasting institution, proactive governance, professionalisation, developing next-generation leadership, redefining the role of women in family business and leadership and continuity in a changing world. The conference was attended by over 372 delegates from Sri Lanka, Malaysia, UK and Japan besides India.
The learnings from the conference, and more, are being collated in this issue to reach a wider audience and to sensitise and build capabilities in family businesses globally. The topics covered in the issue relate to sustainability, family governance, seeking external advice, gender equality and the social changes in demographics that the family businesses face.
Is Longevity a Myth?
The average age of the listed family firms in India is about 35 years. While some of them are still helmed by the founder, some are at the cusp of a transition to the next generation and some are being managed by the second, third or even the fourth generation. Only about 1.2% of firms are more than hundred years old. These 1.2% firms prove that longevity is not a myth. Founders and scions of family firms in India will find Ajay Bhalla and Aneesh Banerjee’s analysis “Life after 100: A Leader’s Guide to Resilient Family Business”, useful. It collates learnings from five British companies that have lasted for more than 100 years.
Source: Prepared by the author from data extracted from Prowess and using proprietary classification of family firms from the database prepared by Thomas Schmidheiny Centre for Family Enterprise, Indian School of Business
The German pharmaceuticals and chemicals company, E Merck KG, is 350 years old. Professor Dr Frank Stangenberg-Haverkamp, the Chairman of the Executive Board and Family Board of Merck spoke to Navneet Bhatnagar about the 350-year long journey of Merck and the family and corporate governance practices that helped the company’s longevity.
Family businesses deeply rooted in good governance — both corporate and family — and values find it easier to navigate through difficult times, whether the challenges are external or internal.
Building the Nation
Long-lasting family businesses reflect the socio-economic changes that a nation goes through, as the family business changes and adapts to the transformations in the economy, industrial and technological progress and social changes. It is this ability to adapt, to focus on the long-term and tap opportunities along the way that makes them the agents of nation-building.
It is this ability to adapt, to focus on the long-term and tap opportunities along the way that makes them the agents of nation building
Dr Thomas Schmidheiny spoke to Prof. Kavil Ramachandran about the trends shaping the global business landscape in “Literacy for the 21st Century: Reading the Global Business Environment”. This is the terrain that family businesses need to be ready to navigate. Even though HDFC is not a family business, the story of “HDFC: A Journey in Banking” is a lesson in resilience, narrated by Deepak Parekh, who has been associated with HDFC for 41 years, including as the Chairman.
When we think of long-lasting family businesses in India, the name of the Tatas is the first to come to our minds. Shashank Shah’s The Tata Group: From Torchbearers to Trailblazers, reviewed in this issue, traces India’s development journey through the house of Tata and the businesses that they ventured into.3
Lydia Kulik’s article, “Indian Diaspora and Family Business in the United Kingdom” illuminates the role of family businesses in developing political, business and cultural ties between two nations.
While all businesses manage business challenges, family businesses face an additional test in maintaining a balance between family and business. With changing social demographics, this balance can become even more difficult to navigate.
Choosing between family members and talented professionals? Can issues between family members impact the quality of business decisions? What is the effect of whimsical or forced decisions by the eldest in the family? These are just a few examples of how family dynamics can affect the business. Other changes come from changes in society: joint families and ownerships are giving way to nuclear families, collectivism in thinking is disappearing. There is a growing sense of individualism. Most importantly, equality of gender and educational opportunities are making it necessary to disregard conventional gender roles when making decisions with regards to succession, ownership and inheritance.
How women are carving out a role for themselves in family businesses in a largely patriarchal society? Yashodhara Basuthakur and I discuss this question in the article “Redefining the Role of Women in Indian Family Businesses”. Women in family businesses are well-suited to leading the way towards wide-ranging changes in infrastructure, processes and mindsets in their own companies. In turn, that will trickle down to larger society and make it more gender inclusive, we hope.
Governance is not a Choice
In recent years, many Indian family businesses that have been in the news have demonstrated the lack of governance at both the corporate as well as the family level. It is clear that if governance is not in place, downfall is imminent.
If governance is not in place, downfall is imminent
Governance at the family level is very tricky. Maintaining a balance between logic and emotions in all parts of family life is not easy but good governance calls for it! Most families fail to adhere to policies for ownership transfer, employment in business, rewards, retirement and wealth distribution. Several of these areas are interconnected, making developing and executing policies even more difficult. In our article “Family Governance – Proactive Strategies”, Simran Senani, Anil Sainani and I explain the steps followed in creating a formal family governance mechanism so as to align the family’s interests with the business’s interests and to bring clarity and focus amongst family members.
Family governance guides, removes ambiguities and ensures decision making based on meritocracy and processes rather than on the whims and fancies of one or more family members. Lack of family governance results in sibling rivalries and discord amongst family members. It poses a threat to family togetherness and destroys the family and other shareholders’ wealth due to sub-optimal decision making at the family and business level. Before the death knell, or rather as early as possible, it is advisable for the family to approach a family business advisor or a mediator who can help them handle the situation in an unbiased way.
Help from Outside?
Many family businesses approach external family business advisors and experts to help them draft the family constitution or to mentor and coach the next generation members, to help set up a family office or to resolve disputes. In her article, “When negotiations fail: the mediation solution”, Tara Ollapally writes that mediation is a confidential dispute resolution solution that avoids family reputation being torn to shreds when a dispute goes to court.
Mediation is a confidential dispute resolution solution that avoids family reputation being torn to shreds when a dispute goes to court
The family resource basket gets bundled with the firm-level business resources, making the combined basket of resources unique. In spite of such an advantageous situation, most family-controlled businesses fail to remain united and grow over generations. It is only natural to conclude that family businesses in India need to adopt best practices in governance and management from their counterparts in the American and European nations to increase their chances of survival in addition to increasing their footprint in the Indian economy.
There is increasing interest amongst family businesses in India in bringing in strong family governance that will help address the challenges of the family’s involvement in business, including the assumption of treating business as an entitlement. Detaching earlier from the business enables families to think more rationally, allows the professionals to do their work and provides wings to the business to grow.
Similarly, many family firms are now systematically planning for succession by nurturing talent in a systematic way, both family and non-family members. Family firms seem all set to continue to be an integral part of the Indian economy. In essence, family businesses will continue to play a dominant role in the economy, though with new challenges that will call for strong governance approaches appropriate to the times.
Family firms seem all set to continue to be an integral part of the Indian economy
We hope that this issue — “Family Businesses: Spreading Roots and Wings” — inspires family businesses to strengthen and deepen their roots, spread their wings and soar high on the horizon of legacy.