Family businesses all over the world play a significant role in the economy. Globally, as well as in India, family businesses contribute to over 70 percent of the GDP of most developing and developed countries and employ 60% of the global workforce. According to research by Boston Consulting Group, globally more than 30% of large companies are family-owned and the number of family businesses in emerging markets with revenues exceeding $1 billion is growing rapidly.
India ranks third on the list of countries with the highest number of family-owned businesses according to the 2018 Credit Suisse Family 1000 report based on a study of 1,015 companies with $250 million or more in market capitalization. The country has 111 family-owned businesses, with a market capitalization of $839 billion, after China ($159 billion) and the U.S. ($121 billion). The report also states that more than 50 percent of the top 30 best performing family-owned companies in Asia, excluding Japan, are from India.
Family businesses span across generations and hence are more resilient. They prefer looking at business as a marathon, rather than a sprint. In fact, according to a study by the Kellogg School of Management, family businesses in India are less impacted by the Covid-19 pandemic compared to their non-family business counterparts. The study states that family businesses are not worried about their survival after the pandemic because most of them have lower debt, diversified portfolios, and long-term vision. Family businesses also lay a greater emphasis on adhering to principles while conducting business. Their objective is to build an organization known for its social commitment and value system.
On comparing family businesses with non-family businesses, it is observed that there are many similarities between family businesses and non-family ones in certain aspects like operations and strategy. However, family businesses have unique challenges when it comes to governance due to their organizational structure. The key challenges faced by family businesses are:
As per Deloitte 2019 Family Office Trends, the greatest hurdle most family enterprises face is ensuring a smooth transition from the current generation to the next generation. Founders should avoid the common mistake of assuming that the transition will take place naturally in due course. The survival and growth of the business depends on the succession plan. When it comes to succession planning, the earlier the businesses start putting it together, the better it is. Long-term planning ensures that the new generation gets enough time to learn different aspects of managing the business from the previous generation. Succession planning not only involves picking the right person to take over the business but also grooming him and ensuring the company’s values are passed on to him. One of the ways to simplify the process is hiring family business advisors who guide the family through various things involved like taxes, liability, ownership stakes, voting rights, etc.
Wealth management is difficult because personal and professional wealth is intertwined in the case of a family enterprise. Most founders fear that the next generation may not recognize the value of hard work put in to earn the assets and will take the inheritance for granted. On the other hand, members belonging to the next generation fear that they will not receive their rightful share of the inheritance and will not get an opportunity to take responsibility of their family wealth and grow it. This is a topic fraught with emotional complexities. One of the ways to navigate this tricky territory is to have an upfront discussion about it with all family members. This ensures that there is transparency in the division of wealth. Another common practice to avoid disputes is to set up a trust to manage the wealth. The advantage of setting up a trust over following a traditional method of writing a will is that unlike wills which are often challenged before the court, trusts may be executed during the lifetime of an individual. This helps to reduce contentious litigation amongst family members, and also allows the individual some control over the family’s assets.
Professionalism is a challenge because most family organizations do not have good corporate governance policies in place. One of the ways to promote professionalism is to take active steps to have strong processes in place that ensure the same levels of accountability for family and non-family members. Having a clear demarcation of all roles and responsibilities within family members is necessary to avoid conflicts. Attracting, developing, and retaining great family and non-family talent is also important. Respecting management hierarchy while empowering employees to take decisions leads to the transition of family businesses into professional organizations. It takes trust and commitment to allow decentralization of decision making and building these values is something that the businesses must focus on.
4.Participation of Women
Increasing the participation of women in leadership roles is another area where family businesses face roadblocks. While there are some great examples of women-led family businesses, these are few and far between. According to PwC India Family Business Survey 2019, women average only 15% on the board and 13% on management teams in Indian family businesses, compared to 21% on the board and 24% in management teams across the globe. Mentorship plays a key role in ensuring greater participation of women. Founders of the organization should groom the women in the family in a way that they will be empowered to take strategic decisions for the growth of the business. The organizations must have gender agnostic performance systems. This is necessary to have parity in the ratings of all employees.
5.Adapting to Change
Lastly, family businesses find it a challenge to adapt quickly to change. In most cases, the founders believe in the practices that the company has been following for years and want to continue with them, while the next generation is eager to experiment and implement new ideas. In such a scenario, they should strike a balance between tradition and modernity. While dealing with change, it is crucial to keep all channels of communication open between the two generations. Conflicts are bound to arise, but the key is to deal with them in an open and flexible manner. The organizations should adopt the method that is the most suitable to the business interests at that point in time.
To summarize, every business has to deal with problems, but in the case of family businesses, the issues are compounded because of the underlying family dynamics. These entrepreneurs have to walk a tightrope while meeting business goals and managing family relationships. Family businesses have a lot at stake while dealing with these challenges because they have to ensure that the legacy, they have built over the years is not damaged. However, with effective communication, transparent processes, the presence of a strong independent board, prudent planning, and strong value systems family businesses can overcome these obstacles and emerge stronger.
(Sanika Tapre is a Youth Fellow at MCCIA)