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Spencer Stuart Perspectives | Family business— grooming an heir

Spencer Stuart Perspectives | Family business— grooming an heir
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First Published: Mon, Jul 14 2008. 12 47 AM IST

Anjali Bansal
Anjali Bansal
Updated: Mon, Jul 14 2008. 12 47 AM IST
Anjali Bansal
Dramatic stories about warring family factions, paternalistic and insular cultures and weak governance have given the family business a— sometimes deserved—bad rap. But the characteristics behind these criticisms— passion for the business and paternalistic and decisive leadership—have more often served as key strengths distinguishing the family owned company.
Indian family business groups such as the Tata group, Aditya Birla Group, Mahindra and Mahindra Ltd, Essar Group and Reliance Industries Ltd underscore the rich history of enterprise and innovation that has characterized the family business.
But, of the thousands of family businesses launched each year, many will not survive beyond the founder and a couple of generations because of the challenges related to passing the business from one generation to the next.
Also, with 17 of the 30 companies listed on the Bombay Stock Exchange’s benchmark index, Sensex, being family owned, succession planning is particularly critical—and, typically, more complex.
Globally, it has been seen that only three out of 10 family businesses make it from the first to the second generation. And only one of those three makes it to the third generation. India is no exception.
Illustration by: Malay Karmakar / Mint)
Findings from Grant Thornton Llp’s family business survey, in association with Kavil Ramachandran of the Indian Institute of Management, Ahmedabad, show that 80% of Indian family businesses felt the successor should come from within the family, and only 6% insisted that family members be trained in other businesses before joining the family business.
Why is succession planning a complex issue in family businesses? This is because, more often than not, there is a presumption in these companies that the next generation will assume management roles with the same dedication and drive as the current one.
Couple this with family businesses’ strong focus on maintaining the company’s unique culture and promoting from within, and the search for the “best and brightest” in management gets tougher.
Inherent strengths
However, all is not lost. Family owned businesses have their own strengths. First, with the family name and reputation on the line, the success of the company is personal.
Founders and their families, typically, have a passion for the business, and its success can be difficult to match in non-family companies, even with a generous salary and stock options.
Further, without a large bureaucracy to move or overcome, family companies can make decisions quickly and pounce on opportunities.
Another advantage is the family’s long-term financial interest in the company. With an eye more on long-term growth and profitability than quarterly swings in the stock price, family business leaders tend to reinvest in the company and make decisions with a view to sustaining the organization’s health and viability over the long haul. And because the management and, often, directors are so heavily invested in the company, they have an incentive to pay attention to the details and invest the necessary time in the company.
This passion and foresight can become even more effective drivers of growth with the right succession planning initiatives.
The Tatas embraced this logic early on, and today a powerful group executive office (GEO), comprising the top managers of the group, is the crucial decision-making body for the group as a whole.
At Dabur India Ltd, a family council (FC) was formed in 2001—which comprises 10 family members, and meets every quarter to discuss the business interests of the family. At least one FC member sits on the board of each Dabur company, a good example of following modern succession techniques.
The GMR Group has drawn up a family constitution or moral code that can act as a blueprint for emerging or future conflict situations; while structuring businesses within the group with clear leadership responsibilities has worked for Essar and the Jindal family.
The role of the board
In our experience, it is not that the top management of family businesses does not give thought to succession, but that it often fails to apply the same diligence to succession that it does to other key strategic issues.
Founders often have informal succession plans, perhaps an heir apparent in mind. But, if they have not secured buy-in from family stakeholders and the board of directors for their choice or objectively assessed whether the heir has the necessary skills and experience to step into the CEO role, their chosen successor may be unable to move smoothly into the top job, or may be set up to fail.
A strong, involved board of directors, particularly one that includes independent directors, can be invaluable in developing an objective process for succession planning—one that includes developing criteria for future leadership, benchmarking internal candidates and identifying skill gaps.
To ensure success, the board should establish a committee that is charged with ensuring that succession planning is top of the mind. It can also help mentor the next generation of leaders among the family, with individual board members taking one or more next generation family members under their wing.
The family council, which represents the family owners, is another effective solution, since it works to achieve family consensus on important company issues, including succession, before they go to the board.
Else, independent directors can also play a pivotal role in advising the family informally.
Comprehensive plan
Family businesses have played a large role in shaping the growth of the Indian economy, and are increasingly viewed as having some important advantages over their non-family counterparts.
At the same time, one of the most important jobs for the board and the CEO is ensuring an uninterrupted flow of capable management. To maintain continuity and prevent last-minute scrambles to identify the next generation of leadership, the board, family council and management regularly work together to develop CEO criteria that is closely aligned with the organization’s strategic objectives, ensure that likely internal candidates are benchmarked against the best-in-class and address any skill gaps.
And when they must consider recruiting an outsider, they need to take care to find an individual who not only has the appropriate leadership skills, but is also compatible with the organization’s culture.
The key to successfully recruiting an external candidate for CEO—or any senior executive—is identifying an individual who not only possesses the specific skills and expertise that are needed for the company’s particular stage and direction, but is also sensitive to the unique issues and dynamics of a family business.
Without this combination of skills, expertise and sensitivities, neither the outside CEO nor the family company he or she leads is likely to be successful.
Thus, to ensure that their inherent competitive edge is maintained over time, family company management and boards must be diligent about planning for succession. The long-term health of Indian business will depend on their prescriptions.
Send your comments to spencerstuart@livemint.com
Anjali Bansal is a consultant in Spencer Stuart’s Mumbai office, and leads the India practice for the firm.
The article contains inputs from an in-house white paper by Spencer Stuart consultant Jonathan White, USA.
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First Published: Mon, Jul 14 2008. 12 47 AM IST