A little over one-third of the companies with a market value of at least Rs 5,000 crore on 31 December 2010 are still headed by a member of the founding family, according to Mint research.
The proportion highlights the importance of family businesses. It also helps define family businesses.
Provenance, ownership and control are all good measures of what constitutes a family business and what doesn’t, but management is the acid test. A company that is headed by a member of the founding family, no matter how eminently qualified that person is for that role, is a family business.
Under one roof: The Munjals, seen above circa 1997, are an extended family that has stuck together and almost all of the Hero group’s companies are managed by a family member. India Today Images.com
Chief executive officers (CEOs) who come from the founding families usually disagree with this definition. They believe they are where they are because of their abilities and not because of their surname.
That could well be the case, and most of these people do make good CEOs, but it’s debatable whether they would have become CEOs had they taken the route all professionals do. That’s because many of these CEOs start near the top (if not at it). And the few who start near the bottom have their careers not-so-mysteriously fast-tracked.
This, then, is the definition of family business that this newspaper will use for the purpose of this series. There is some subjectivity involved in this matter.
Unlike in the US, where a CEO is a CEO and a chairman is a chairman, in India, many chairmen are actually CEOs and not all managing directors (the post that corresponds to CEO) are CEOs.
The 38% proportion, interestingly, has stayed almost constant compared with a decade ago, according to Mint research. The universe was of the top 100 companies by average market value in 2000-01; the last company in this universe had a market value of around Rs 660 crore.
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This would suggest that large family businesses, while they may have inducted professional executives into their senior management, have largely remained reluctant to appoint a professional as CEO.
To be sure, there were more companies founded by first-generation entrepreneurs in the 2000-01 list. History shows that those first-generation companies that survive beyond the first generation have an equal chance of turning to the founding family for leadership, or finding a professional CEO. This analysis pertains only to companies listed on the stock exchanges (around 11,000, including those listed on regional exchanges).
Graphic: Ahmed Raza Khan/Mint
There are around 800,000 companies in India, according to the ministry of corporate affairs. A good number of these may be defunct and some will be companies founded and run by first-generation entrepreneurs, but the majority is likely to be family businesses.
There is no reliable data on this, but India’s most powerful industry lobby Confederation of Indian Industry claims around 70% of the companies in the country are family businesses. That’s a plausible estimate; according to the Organisation of Economic Co-operation and Development, nearly 85% of companies in the 33 countries that are its members are family businesses.
Some family-run listed companies have better boards and better independent directors than some professionally run firms. And some family-run listed companies have delivered better returns to shareholders over a significantly long period of time than many professionally run firms. This series, though, isn’t about whether family businesses are better or worse than other businesses (they aren’t either, just different).
Family businesses are interesting to study and difficult to manage because they have an additional stakeholder to manage, the family. And this presents them with some unique challenges—in succession planning, operational management, even strategy.
Over the next few months, Mint will look at these challenges, and the family businesses that have addressed them best.
With inputs from Ashwin Ramachandran.
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