ISBInsight: Family businesses are often in the media spotlight but at the same time, there are gaps in data about family business in India. How do you address some of these lacunae?
Kavil Ramachandran: When we started work on family business at the Indian School of Business (ISB) in 2003, there was hardly any interest within media about family business. The only thing that got reported were family disputes. As a result, a perception got created that family businesses were unprofessional and ill-governed. When we started our training programme in 2003 and I started researching and writing, we started engaging with the media. This is when the media realised the other side of family business. Family enterprise exists all across the world and family businesses often outperform non-family businesses. The media got excited about this new positive perspective and began to recognise the contribution family businesses made to our economy. Ever since, the response has been terrific to family business stories.
But the major challenge that we faced was in terms of research. Going beyond anecdotal evidence, we wanted to do in-depth, quantifiable research that would help us theorise and generate policy recommendations. In the emerging markets and especially in the Indian context, nobody had looked at family business in a systematic way. The data that was available to us at that time was the Prowess database of the Indian industry. We took that data as our baseline, cleaned it up a lot and fixed the gaps.
We apply two criteria to define a family business. One, the shareholding of the owner family is 20% or more. Two, there are two or more family members involved at the top management level or there are two members from two generations involved. We had to apply this definition and recategorise the data. Some of the data was incomplete and we wanted to go beyond the Prowess data. So, we had to blend it with the directors’ reports, retirement reports and so on. Creating this database took time, but the effort was worthwhile as we are now able to mine a wealth of information on Indian family businesses. We are already publishing white papers and research papers based on it. The family business database has become one of the major contributions of the Thomas Schmidheiny Centre for Family Enterprise at ISB to all researchers in this field.
In an era where entrepreneurship and digital technology are buzzwords, how does the family enterprise cope with these changes?
Let’s recognise that family businesses often start as entrepreneurial ventures. Across generations, they retain their entrepreneurial spirit. This means two things. One is constantly looking at evolving opportunities and maximising returns on existing capabilities and resources. The second is building a set of new capabilities and resources as newer opportunities emerge on the horizon.
Family businesses have repeatedly exhibited their ability to adapt to changes. For instance,1991 was a watershed year. The Indian economy opened up. This came as a rude shock to Indian family businesses. They were not prepared for such a drastic change. However, our data shows that within a short span of four years, Indian family businesses responded to this challenge. They became competitive by updating their technology and other capabilities. This is one evidence that reveals the inherent strengths of Indian family businesses.
Similarly, in present times the business environment continues to change rapidly. For instance, we are witnessing a shift towards digitisation and internet-based technologies. Within our social structure, joint families are giving way to nuclear families. Collectivism is giving way to individualism. There is more mobility and connectedness with globalisation. With these changes, family businesses are also changing. The Indian family enterprise is now hugely connected with the global economy.
Family businesses are adapting to digitisation. Interestingly, the younger family members are getting high-quality education. Their exposure to emerging technologies is phenomenal. They are effectively tapping into the financial and the network resources built over time by their family business. The family is providing emotional support for risk taking. We find that a large number of the younger family members are getting into new technology areas in their family business.
How can the family enterprise facilitate legacy building for the next generation?
It’s not automatic! We are living in an era where long-term orientation is giving way to short-term orientation. Product life cycles are shrinking. Businesses are focusing on quarter to quarter performance. In this environment, institution building is a big challenge.
Some researchers are finding that the quality of governance is built on shallow words and not inherent values. My recent research on corporate code of conduct with Professor Sougata Ray of the Indian Institute of Management Calcutta shows that many corporates are following the letter but not the spirit of the code of conduct. To go beyond words, you require the core values of institution building. One fundamental requirement is stewardship– the belief that one is doing this for building the institution. “I am only a trustee. This does not belong to me. I have the responsibility to pass it on not just to the next generation, but also to society”: this is the institution building perspective that is required to build lasting family businesses.
We need to build awareness and change the way people think. The purpose of business must not be limited to making monetary profits. It must create both material and spiritual wealth. Unfortunately, money making has become the prime motive and businesses need to evolve to contribute to the society in a more holistic way. Since the challenge is huge, the effort required is also going to be huge.
How did the changes in the Companies Act 2013 impact Indian companies, particularly family businesses?
2013 was an interesting year in which corporations were asked to contribute 2% of their net profits within certain guidelines towards corporate social responsibility (CSR). We have recently completed two pioneering studies on CSR in family business. A key observation is that family businesses are better prepared to meet the CSR requirement. That’s primarily because they have always been driven by the goal of giving back to the society. This is mainly because the owner families of these business organisations have a strong emotional connect with society. Helping the needy comes to them more as a natural duty than just a legal obligation to be fulfilled.
Second, some of the larger reputed family businesses have always been contributing more than 2% in CSR activities. Third, we find that many of the family businesses are tuning up to this, but they are missing a machinery to implement this. So, they are looking at the possibility of working with others to implement this now. India is the first country in the world to have this kind of legislation. This is just the beginning. A lot of policy refinements need to happen to make its implementation effective for focused investment.
Yet another change is the induction of women on company Boards. In another study that we conducted on women directors, we found that family businesses were responding much faster in inducting new women members on their Boards, maybe because it was easier to find women in the family who were earlier not formally involved with the business. Therefore, they could meet with the compliance requirement. But we also observe that this inclusion is largely symbolic.
Again, to follow inclusion of women in its true spirit, there should be an educational effort to tell the companies about its real purpose. There are two purposes: (1) bringing in a different perspective to the Board and (2) providing equal opportunities and another platform for women in society. Exclusively from the family business perspective, many women are not involved in family enterprise even though this is changing. The new requirement is also bringing a change from the family dynamics perspective. This new legislation can really become a change agent.
In order to ensure that compliance to this legislation doesn’t merely remain as a lip service, we need to find out how many companies have complied with this requirement over the past five years and whether this has led to any significant impact on the conduct and governance of these firms. Yet another study required is of the contribution of these women Board members.
We don’t have to wait for research outcomes for policy implementation, however. The Ministry of Corporate Affairs could take it as a responsibility to go beyond creating legislation and perhaps the Ministry can partner with institutions such as ISB to develop corporate education programmes. I believe that is the right way to achieve this larger goal and to have a really meaningful impact.
About the Interviewer:
Yogini Joglekar is Managing Editor of Management Briefs@ ISBInsight.