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The four challenges for family business groups

The four challenges for family business groups
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First Published: Wed, Feb 02 2011. 01 15 AM IST

Jayachandran/Mint
Jayachandran/Mint
Updated: Wed, Feb 02 2011. 11 01 AM IST
Jayachandran/Mint
There are challenges that all companies face: competition, the regulatory environment, the fight for talent and capital, the burden of compliance, and the ability to manage vendors and dealers. And, in addition to these, there are unique challenges that family business groups face, largely arising from family dynamics and ownership. It is near impossible to understand why these businesses do the things they do, and perform the way they do, without understanding these challenges. While the challenges are not new, they have become even more in-your-face since 1991, when India openly articulated a new open-market approach that it had been flirting with since the 1980s. To be sure, after some initial missteps, many family businesses have successfully addressed, or are in the process of addressing, these challenges. Some haven’t, and in future issues of this series Mint will look at the successes, the successes-in-the-making and the failures.
Now, on to the challenges. There are many, but almost all can be categorized under one of four larger issues.
Paying for advice is one thing, listening, another
Telecom, retail and finance are synergistic businesses and Bharti’s diversification into the latter two would appear to be prompted by sound business logic, not the desire to find something for a family member to do. Ramesh Pathania/Mint
In the 1990s, most large family businesses in India felt the need for advice that could help them negotiate the suddenly competitive environment in which they found themselves. Most hired consultants. Ballarpur Industries Ltd (the Thapar Group), the Mahindra Group, the Murugappa Group, the Lalbhai group, and the RPG group were among those that did. With the benefit of hindsight, it is evident that the consultants probably gave the family businesses which hired them good advice, at least 50% of the time. For instance, one suggested that the RPG group focus on retail because organized retail would be big in India; this was in the early 1990s, when Pantaloons was still an apparel maker and not Pantaloon Retail (India) Ltd, India’s largest listed retailer. If not all the family businesses benefited from the advice, blame it on two factors: one, some had hired the consultants in the first place to validate their own decisions and were unwilling to listen to anything else; and two, many simply didn’t follow through adequately. As for the other 50% of the time, when the consultants didn’t proffer good advice, it was largely because they knew little about India and less about the businesses the group that had hired them was in.
Hiring professionals is one thing, professionalizing, another
Through much of the 2000s, Wipro chairman Azim Premji would invariably get asked a question on succession at interviews, and he would respond by saying the board had a plan. Now, it’s highly likely that his son Rishad Premji could succeed him. Hemant Mishra/Mint
Through the 1990s, many family businesses went out and hired professional managers. They were willing to pay top dollar, so they managed to attract good managers. However, in many cases, the managers left after a few years. That’s because many of these business houses didn’t understand the difference between professionalization and hiring professionals. The former requires the founding family to define a role for itself in the business. More importantly, it requires the business house to adopt high standards of corporate governance (starting with the composition and role of the board). The few that did this, such as the Mahindra Group, reaped significant benefits.
Entering profitable new businesses is one thing, doing so to find a job for someone, another
This is a peculiar challenge that faces family businesses where almost all adult family members want to be involved in the business. And unfortunately, the heads of these groups believe that this is only fair. Consequently, in the 1990s and even in the 2000s, many family businesses diversified into new businesses with the primary intention of finding something to do for a member of the family. In contrast, some companies such as Bharti Enterprises first identified new businesses to enter and then put a member of the family in overall charge of these (even as they hired professional executives).
Succession in ownership is one thing, in management, another
Bajaj Auto’s managing director Rajiv Bajaj, a bit of a greasejock, played a leading role in the revival of the company’s fortunes. AFP
Generally, it makes sense for a family that founded a business to continue to be associated with it. This ensures stability, continuity, and, in most instances, a constancy of values that’s good for business. In ideal circumstances, this association should take the form of ownership, not a manager. Most family businesses in India do seem to realize the benefits of this. Yet, even the few that appointed a professional executive to replace an outgoing family member as head of the business did this as an interim measure, while a younger family member was being groomed to take over (caveat: it would be erroneous to assume that all professional executives make better managers than family members). Thus, in the case of Ranbaxy Laboratories Ltd as well as Eicher Motors Ltd, a young family member did take over from a professional executive. And, although the company has said nothing to the effect yet, it is quite possible that three or five years from now, the same thing happens at Wipro Ltd.
This is the second in an ongoing series on family businesses. In the next few weeks, the series will feature case studies of family businesses, and interviews with experts as well as the heads of family businesses to better understand the issues that face them.
sukumar.r@livemint.com
Respond to this column at familybusiness@livemint.com
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First Published: Wed, Feb 02 2011. 01 15 AM IST