Working with family-run businesses

Mumbai: Family-run businesses are often perceived as local businesses with mediocre quality sales or services and not the best people employers or value creators for stakeholders. Yet some of the biggest businesses globally, such as Wal-Mart Inc., Toyota Motor Corp. and Samsung Electronics Co. Ltd, are family-run.

Family-run businesses have survived multiple generations and created multi-billion-dollar organizations. They are more resilient than professionally managed organizations, have leaner cost structures, are in businesses for a long time and even have lower rate of attrition, said Adi Godrej, chairman, Godrej Group and chairman of the board of Indian School of Business at a family business conclave in Mumbai on Monday.

To be sure, there are no rubicons to differentiate a family-run business from a professionally managed one in India; yet, their contribution over the last 100 years to India’s freedom movement, economic freedom, philanthropy and spirit of entrepreneurship stands out, said Godrej.

Family-run businesses also operate with a higher level of trust as is demonstrated by the Palanpuri Jains who control 50% of purchases of rough diamonds in India, said Godrej.

Yet, the survival of family-run businesses is not guaranteed. To ensure survival, they have to ensure corporate governance. Moreover, corporate governance is more complex in these organizations as there is the complexity of family interactions above business practices. And these increase at the time of generation change in the organization, said Godrej.

While there are many ways of defining corporate governance, according to Godrej, corporate governance within companies should ensure it’s for the long-term good of the company and it should be principle-based rather than rule-based.

One challenge is not having succession planning. A way around this is to discuss and document succession change, said Godrej.

At the Godrej Group, there are nine family members involved in various businesses. One of the ways the Godrej Group manages succession is to ensure that family members entering the business are appropriately qualified. If they are not, then they can just be shareholders, said Godrej.

Additionally, the group, which currently has members from the fourth generation also at the helm, has institutional practices which includes weekly lunch meetings with every member of the family above the age of 16 and also an annual meeting of the board. These meetings are solely for business discussions which the family tries to then avoid having at the dinner table, said Godrej.

The family, which also has professionals at the helm of most its businesses, tries to keep the family member roles to functions that span across companies like strategy and branding.

Other areas of challenge for family-operated businesses include dilution of equity, delegation of authority to professionals and even matching expectations of investors and promoters.

One investor concern is the distinction between personal wealth and business. “It’s often grey,” said Amit Rathi, managing director, Anand Rathi, a financial services firm covering the entire gamut of investors. He said at the conclave that when an investment is made in a company, it is made on a basic underlying understanding of the business and the company should create a separate individual trust to fund its other expenses and businesses that were not a part of the fund raising.

Also, as companies get funding, it is important for them to have a strong second line and third line of managers which includes functional heads like human resources, finance and logistics. Just having promoters at the helm with no professional qualification is not conducive for growth of the company and a big deterrent for the investors, said Sanjay Nayar, chief executive officer at KKR and Co.’s India arm KKR India Advisors Pvt. Ltd. Nayar said it is a big challenge for companies to get professionals on board. When KKR made its first few investments in the country in 2010, it had not assessed those companies for management and that has now changed with the private equity firm insisting on the companies getting the professional talent upfront prior to the investment, Nayar said at the conclave.

However, it is not easy to get on board professionals and align them to the family values and culture. For instance, a year after joining Micromax Informatics Ltd, a home-grown mobile phone manufacturer, Sanjay Kapoor, former chief executive at Bharti Airtel Ltd, quit. “Companies have to work hard to integrate the professional hires into the system and they can’t be on the go from day one,” said Sonny Iqbal, partner, Egon Zehnder International Pvt. Ltd, while noting that this can often be a year-long commitment to handhold.

Another area of concern is fudged accounts and valuations, said investors at the conclave. However, fudged accounts will sooner or later be known and such companies won’t be able to attract another round of funding and hence, it is better to have clear corporate governance practices.

Also, differences between promoters and investors often emerge when promoters want to make long-term investments and investors are looking at exit. A way to work around this is to involve the investors and get consensus, said Yogesh Kumar Mahansaria, founder and chief executive officer, Alliance Tire Group (ATG) which has private equity investors on board.