Unity is the best strategy a family business can adopt, states expert academic Prof. Kavil Ramachandran of the Indian School of Business
When it comes to studying a family business, few people know more than Prof. Kavil Ramachandran. He holds the honour of being Thomas Schmidheiny Chair Professor of Family Business and Wealth Management at the Indian School Of Business, Hyderabad. Prof. Ramachandran was amongst the Indian representatives who attended the U.S. Presidential Summit on Entrepreneurship held in April, 2010. The Summit was jointly organised by the U.S. Departments of Commerce and State and brought together more than 275 participants from over 50 countries around the world. In a tête-à-tête with The Smart CEO, he comments on strategies, challenges and various aspects that a family business must consider to scale success.
The most basic strategy for a FB to adopt is to perpetuate effectively. It is important for them to remain united and avoid fragmentation. By remaining united, they retain better control and are able to leverage resources in a much better manner. In order to grow big, a FB must also attract and retain professional talent that will take them to the next league.
Governance is the primary challenge for family businesses. They do not know how to prepare for when they grow big. For example, the context and communication within a nuclear family is very different from a joint family. As a result of unstructured governance, leadership often suffers. Ownership structures are imperative for wealth management, so there is a great need for clarity as to who owns, who succeeds, where the money comes from amongst others. What the Indian FB needs at the moment is transparency in everything it does.
They should follow the typical principles used to manage conflicts in any context – be it national politics or a corporate concern. In most cases, the smallest deviation from expected norms of behaviour leads to major conflicts. It is best to set down a code of conduct that leaves no room for discrepancy to creep in. The absence of such a written guideline that is agreed upon and followed by all, hurts many FBs. Prevention is certainly better than cure and at present, there are not many businesses that follow a preventive strategy. Having a preventive strategy is an important starting point for conflict resolution.
Outside mediation by a party that both sides trust and whose judgment will be respected, is another important route to resolution. In the case of a conflict, it is paramount to separate ego from the substance of the conflict. Somebody who can differentiate between the two is ideal to play mediator. Ultimately, care must be taken to ensure that goal in sight is not compromised.
The key here is to start early and, very often, this is not done. Succession in the case of a single heir is fairly simple, however, if there is more than one contender, assumptions on who the leader is cause confusion. Take the case of a current leader, say a father, who backs his son to take over. But, the son has other ideas. Such a situation must be handled through a discussion on the goals of the business itself. A business where the senior and junior generations have open discussions and a sustained dialogue on the running of the business sees a smooth transitioning. When the criteria to choosing a successor are clearly known, it eliminates all other assumptions and a leader emerges.
To-do list for the second or third generation of the family when they take over a successful FB
The first thing the gen-next must do is to identify what they want to achieve from the business. The things on their list could range from enhancing current reputation, bringing in professional advisors and furthering their wealth.
On the success of third generation FBs in India
One fundamental factor that contributes to their success is the joint family culture. Earlier on, growth opportunities were limited and performance standards of individual members was not taken into account. This kept even the mediocre members in the fold. It also allowed different members to specialise in different areas of the business.
Secondly, the businesses that have survived the test of time have adopted trusteeship which has served as consensus builders as opposed to aggressive business builders. This method takes into account the interests of everybody involved from employees to stake holders, apart from the family members themselves.
Importance of corporate governance in FB and its approach
The attitude towards corporate governance depends on the promoters – are they open in their governance and are they genuinely interested in listening to an expert from the outside? There are several examples of businesses in the Indian context that have done a good job of involving corporate governance like Aditya Birla Group, Dr.Reddy’s and Asian Paints, to name just a few. There are also some stellar examples such as the Murugappa Group where ex-chairman M.V. Subbiah handed over the reigns to a non-family member in 2004. That is showing ultimate respect for corporate governance.
Maintain the right balance between members of the family and professionals when it comes to business decisions
The ultimate objective of a FB must be to build an institution as opposed to building wealth. In certain cases, they might be reluctant to increase dependence on outside members for fear of their secret dealings being exposed. But, what these businesses need to remember is that by considering the interests of everybody involved, they are one step closer to building that institution. And who better to help them build than independent experts?
Further more, a FB must set a clear mandate to recruit top management from the outside. It does not stop there. This same top management must be respected for the expertise they bring and they must be given the freedom to make decisions, so long as it does not violate the business norms. As I often say, promoters of a FB need to leave their family hat at home and don their professional hat when they come to work.
In my opinion, a FB need not appoint an external board of directors. A family council is an ideal way of merging expertise from within the family with professional expertise in a process of discovery that leads to the building of a legacy.
Importance of organised philanthropy
Organised philanthropy is extremely important to a FB in India. Charity is a part of the Indian ethos and one engages in charity for no other reason than one’s own conviction. In the context of a FB, professional management of their philanthropy is very good indeed. The benefit goes beyond just giving, it builds a social identity and adds to existing repute.
Experience at the U.S Presidential Summit on Entrepreneurship
I was humbled by my experience at the Summit. I met far too many people who have done a lot in life having gotten past uncertainty and unfavourable conditions. For instance, I met this woman entrepreneur from Indonesia who currently runs an operation in hydroelectrics that benefits rural areas. She was previously captured by separatists and even imprisoned for a month, but, she set about getting her freedom. There were also other Indians present such as social activist and founder of education initiative Akanksha, Shaheen Mistry.
Social entrepreneurship seems to be catching on in a big way and this is a great step forward to tackle issues such as poverty and terrorism. There are enough people displaying interest, we now need platforms to come together and create success.