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Family businesses on the wane

Family businesses on the wane
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First Published: Tue, May 24 2011. 09 49 PM IST
Updated: Tue, May 24 2011. 09 49 PM IST
Ahmedabad: Family businesses are set to fade out in India over the next 50 years, if not sooner, according to Dwijendra Tripathi, eminent business historian and a former professor at the Indian Institute of Management, Ahmedabad. He spoke in an interview about how the term “family business” is increasingly becoming a misnomer with professionals taking over the running of such companies. Tripathi, the author of The Oxford History of Indian Business, is currently working on a new book tentatively titled History of Indian Business After Independence.
The 80-year-old historian recalls how colonialism and the lack of opportunities allowed Indian family-run businesses to thrive until the 1990s, although the domination of such concerns had begun waning almost a hundred years before that in the West. Edited excerpts:
How did family businesses evolve in India? Why has this concept survived in India even after it lost ground in the West?
The existence of family businesses is not unique to India. The world over, businesses have evolved from families, be it Ford, Mitsubishi, Mitsui or Unilever. And by family business I mean the ones that are owned and run by the family. In the West, the pressure on family businesses to bring professionals at the helm of affairs began building in the early 1990s. Indian businesses could not grow in terms of size or complexity; (for) that they would require outside assistance. And this did not happen till the 1990s. While in the West, where there was a unitary family, the concept of a joint family was very strong in India till recently. In the case of Ford, his brothers chose not to join him. Ford was running the show, although he had very able managers in 1900. It was not Henry Ford’s joint business, but it was his business. After his death, his company was run by professionals.
In countries like India, which were under the grip of colonialism, the market source was limited, and this limited the size of the organization. Finance from banks was a problem till independence. All the funds were managed by the family members.
The first family business, that is if we are talking about modern business, it was the setting up of the first textile mill by a Parsee family called the Davar family in 1854.
In terms of trading, it can be traced back to the sixth, or the seventh century, when traders from Gujarat went all the way to Java. There is a well-known saying in Gujarati which means that once you go to Java, you may never return. And if you do (return), you will have acquired enough wealth for generations to come.
What has led to the decline of family businesses in India?
As the famous historian Alfred D. Chandler said: “No family or family institution was large enough to staff the managerial hierarchies required to administer modern multi-unit enterprises. Because the salaried manager developed specialized knowledge, and because their enterprises were able to generate funds necessary for expansion, they ultimately took over the top level decision making from owners, financiers or their financiers. Family members, as a result, came to view their enterprises as rentors…” This holds true for Indian businesses as well.
Finance was no longer a constraint post-independence, and we have seen the emergence of LIC (Life Insurance Corp. of India), ICICI (Bank Ltd), etc. Some forces were taking shapes which were visible from a distance. The coming of the third generation was an important factor. Family solidarity was under stress post-independence. The emotional bond was not as strong as older generations. If Kasturbhai Lalbhai set up Arvind with his brothers, it did not continue with their children.
Research has proven that the third generation is the point when a family begins to break (up). Between 1970 and 1990, at least 30 big family businesses have been divided. After economic liberalization, the opportunity to do business became manifold. In the case of the Sarabhai family, except Ambalal Sarabhai, nobody seemed to be really into business. His two sons, including Vikram Sarabhai who called businessmen bores, were little interested in business while his third son died at a tender age. Indian family businesses maintained their hold till liberalization in 1991, not growing in size or complexity; that would require professionals. Had liberalization taken place earlier, the control would have gone earlier.
The first major shake-up was of the Ramkrishna Dalmia family in 1954. Dalmia and his son-in-law had a united business. They were among the top four business houses with the Tatas and Birlas holding the first two positions. Nobody then could have imagined that it would happen. Till today, nobody knows the real reason for the break-up.
According to you, which family-run business was the best managed, and why? Has separation always been a setback?
The Tatas and Birlas have been consistent all these years and been among the top 20 business houses all these years. There have been others like the Mafatlals, Dalmias, Thapars and Lalbhais who have managed well in the past.
I would pick Tatas as the best managed company, as the ethos of the house was more professional. One very casual explanation for this would be that they always looked to the West for a reference point, or source of inspiration. While setting up his Empress Mills unit in mid 1870s, J.N. Tata had planned to implement a management system that was the same as the one in England, wherein a managing director would be assisted by a board. He tried for two years and then gave up (because of) Indian realities.
How has the business scenario changed?
The Mafatlal and Thapar families went into new kinds of businesses and divided their assets. Players like Walchandnagar, the Thapars and Shriram have lagged behind from where they were in the 1950s.
A managing agency system prevailed earlier before professionalism took over. For instance, if you, as a chairman, have a share capital of Rs 5 lakh, you get Rs 2 lakh, and the remaining goes to your family members. The board of directors would pass a resolution that total management control would remain with the managing agency headed by the chairman and his family members. The managing agent firm is paid commission, and not salary. Also, you get a dividend on the money invested.
Today, most of the companies are professionally managed. Even if you take the case of Reliance, Dhirubhai Ambani and his brother Ramniklal Ambani (the brand Vimal was named after Ramniklal’s son) could manage the company, people and knowledge in the 1960s; but today it has become too complex for his sons to manage on their own. In the case of Tata, Noel Tata, who is the half brother of group chairman Ratan Tata, does not know for sure if he will replace him. An outside professional qualified for the post stands an equal chance.
Steel is one sector that has retained its vitality for over a century now. Ahmedabad was the textile hub till the 1970s with 73 mills, and only a handful have survived who concentrated on exports; others losing out (to) populist measures like janata cloth and the power loom. Alembic was the only big family-run pharma company that has remained intact for over 100 years now, although they were producing liquor mainly before independence. Family-run companies like Wipro and Dabur were nowhere in the picture till post-liberalization, and their rise has been exceptional. To say that division per se has led to the decline of family businesses is incorrect. In the case of the Goenkas, Birlas and Ambanis, the share prices shot up during infighting.
The older lions have disappeared and new sectors have dawned in the past two decades. Retailing was considered the job of a broker till Kishore Biyani made it a respectable business. Information technology (IT), automobile manufacturing, petrochemicals, power and port development have been the new growth drivers.
What is the future of family-run businesses?
Bleak. The term itself is a misnomer today if we talk about family members having a controlling stake and managing the company. The joint family concept is on a fast decline in India. Companies like the Oswal group, which started as a family-run business, have broken four times in 40 years. Professionalism is the buzz word. It is next to impossible for a family to manage finance for mounting a new business.
After half a century, and this is an overestimation, no one will talk about family businesses in India.
Respond to this series at familybusiness@livemint.com
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First Published: Tue, May 24 2011. 09 49 PM IST