Economy highly dependent on family-run businesses’ destiny: Ramachandran3 min read . Updated: 14 Dec 2012, 12:52 AM IST
Kavil Ramachandran of ISB talks about complexities of succession planning and training the younger generation
New Delhi: Family-managed businesses are the backbone of the Indian economy, according to Kavil Ramachandran, Thomas Schmidheiny chair professor of family business and wealth management at the Indian School of Business (ISB).
Ramachandran spoke to Mint about the complexities of succession planning, professionalism and training the younger generation to take up responsibilities and avoiding the decline of such institutions beyond the third generation. Edited excerpts:
ISB has just launched a master’s programme in family business. Tell us how family-managed businesses are important in the Indian context and about the need for such courses?
We found that the contribution of family businesses to the national economy is very high. Over the past two decades, the performance of family businesses has been better than either a public sector or even multinational companies. At least half of the Nifty 50 firms on the National Stock Exchange are family controlled.
If you take top 500 firms in BSE, 73% of them are family controlled. And that percentage will rise if you include medium-sized firms.
This means that the Indian economy is highly dependent on the destiny of family-run businesses. At the same time, the majority of family managed businesses across the world do not survive the third generation for a variety of reasons. So we find that there is a need, opportunity, if we can do something to improve the performance of the family businesses, if we can do something to ensure that they survive and go beyond the second or third generation.
In that context, we found that one major challenge is to prepare the younger generation to take up leadership responsibilities... Therefore, we felt that we can develop a programme focused on the younger generation.
Succession planning and governance are key issues in a family business. As a researcher, have you developed a best model to follow?
If we look at a family business, it evolves. At some stage, there may be not only non-family executive but non-family investments. There is a set of three different stakeholders working together and that makes the challenges more complex. If the family members could be educated on the complexities involved in the management of family as well as management of business, because some of the rules of performance for the family are different from that of the business. Performance is rewarded in a business but there is nothing like a special performance reward in the family context. Family is more like a socialistic thing and business is like a capitalistic thing.
Therefore, issues like succession become important. What is good for family may not be good for the business and vice-versa. If we (can) provide enough education, and training to the family members to understand this and then develop policies to address this, I think, the family and business both will survive and grow. Our research shows that succession and governance are the major challenges. One major thing is families are not aware of the better practices.
You have said that nearly 94% of the family businesses decline by the third generation. This must be having a huge impact on economy. What’s the way out?
There are two dimensions to it. One is that, if there are 94% of family businesses dying down, it also means at the same time, there is a new pool of entrepreneurs coming who are creating family businesses and growing. The flow is continuous. The second aspect is if we can prevent some of these failures, deaths, so it is more like a health programme. If this 94% becomes 49% or lesser, it would be good for the family, business and the society.
Small and medium-sized businesses may derive the maximum benefit from such courses.
SMEs should learn from the experiences of the big companies. There are enough examples for the companies which started from scratch and became big. For instance, Dabur —it started as a small hospital arrangement and has now become a big business, five generations old. So they have been able to professionalize not only the management but also the governance. The annual report on governance talks about Dr. Reddy’s Laboratories. They are only second-generation but they have already started good governance within the family and in the business. If this kind of trend continues, it would be beneficial for all.
When you are wearing the business hat, you will have to remember that you are a professional, you should not bring the family emotions. Separation of these things is required, and it comes through training, introspection and thinking.