Get the latest financial, economic and market news, instantly.
Subscribe
My Readse-paperNewslettersIFSC Code Finder NewMintGenieFor You
Switch to the app Download App
e-paper
OPEN APP
Home / Opinion / Views /  Five distinctions of a family firm that executives must remember

Five distinctions of a family firm that executives must remember

Photo: iStock

Family businesses differ from others in significant ways that recruits must understand if they’re to have rewarding careers

Three hundred of the top 500 companies in India are family businesses. The promoter families typically own and manage these companies, or, infrequently, sit as activist-investors on their boards. Many of these companies are large, and most of the large ones are listed. Yet, the context and working environment of family businesses is different in some key respects from that of non-family businesses. The reason for the difference is simple enough: Much of the family’s wealth is tied up in the family business. As a result, even though many of them are listed, quarterly results are less important to them than long-term survival. They intrinsically think generationally, unlike a chief executive officer (CEO) of a non- family business with diversified ownership, where quarterly results often drive management behaviour. This is a powerful difference between the two. The other big difference is the influence of family dynamics on the business. Senior executives in family businesses must appreciate five implications of this distinction:

Three hundred of the top 500 companies in India are family businesses. The promoter families typically own and manage these companies, or, infrequently, sit as activist-investors on their boards. Many of these companies are large, and most of the large ones are listed. Yet, the context and working environment of family businesses is different in some key respects from that of non-family businesses. The reason for the difference is simple enough: Much of the family’s wealth is tied up in the family business. As a result, even though many of them are listed, quarterly results are less important to them than long-term survival. They intrinsically think generationally, unlike a chief executive officer (CEO) of a non- family business with diversified ownership, where quarterly results often drive management behaviour. This is a powerful difference between the two. The other big difference is the influence of family dynamics on the business. Senior executives in family businesses must appreciate five implications of this distinction:

The executives who join a family business join a family as much as a company. So, they should take time to understand the reputation of the family. This reputation is not hard to discover. They can check if the family business frequently defaults on bank loans, gets hauled up in court for regulatory or tax troubles, or has suppliers and dealers worried about getting payments. Such behaviour directly impacts the image and life of senior executives working in the family business.

The executives who join a family business join a family as much as a company. So, they should take time to understand the reputation of the family. This reputation is not hard to discover. They can check if the family business frequently defaults on bank loans, gets hauled up in court for regulatory or tax troubles, or has suppliers and dealers worried about getting payments. Such behaviour directly impacts the image and life of senior executives working in the family business.

Subscribe to Continue Reading

Similarly, executives should explore the treatment of employees by the family business. The family’s mental model towards its employees is important to discern. If there is a high turnover among top officials, if responsibility to employees is allocated purely on the basis of loyalty rather than merit, or if one hears of verbal harassment, then one needs to be careful. Such a culture could be pervasive, hard to change, and very unlikely to change during the tenure of a serving family- member CEO. This is because, in the end, it is the family’s business. The reverse is equally true, and executives should recognize and join companies that treat employees well.

In many family businesses, key executive positions, including the position of group CEO, are implicitly reserved for family members and held for their lifetime. Thus, non-family executives often face a glass ceiling in getting top positions. Often, they hold them only till the family’s next generation is ready. If other family members work within the business, managing them is not easy and must combine impartiality, apprenticeship and respect. Executives cannot confuse family members with regular employees. They are not. Yet, family businesses are acutely aware of their need to retain and reward top employees with a higher compensation package than what prevails in the wider industry. They create new positions of respect for loyalists once their next generation is ready. In most family businesses, the role of consigliere is one of great respect and influence, but is typically attached to an incumbent CEO.

Executives need to understand the nature of family relations, as conflicts among owners tend to affect the family business. They should understand the family ownership and power structure, and the influence of various family members on the business. When family relationships are bad, they have a deleterious impact on the business and its decision-making. Unsuspecting senior executives can get caught in the crossfire if they are naive.

The autonomy and authority of non-family executives can vary from one family business to another. In some senses, in non-family businesses, there are standard checks and balances, and also clearly-defined decision rights. In family business, executives can experience disparate levels of autonomy and authority at the same seniority level, depending on family trust. Family businesses manage capital, their brand (especially if it is the family name) and the recruitment of top personnel tightly. A senior family-business executive told me that once the allocation of capital is done, loyalists have the flexibility to act as they see fit in respect of operations, personnel and general management, with more freedom than in a non-family business. This, he asserted, is why family businesses have greater agility and speed in decision-making.

Family businesses sharply recognize the need for talent and seek out qualified professionals. However, it is important that managers who join family businesses understand the basic differences between a family and non-family business. These are important differences, and the better aware they are of them, the better they will manage to adjust and perform. Many spend rewarding careers in family businesses. In fact, one top executive I know said to me, “I will never work for an MNC (or multinational corporation). They are too slow. I like working for promoter-run companies where I report directly to the promoter. I feel like an entrepreneur, move fast and don’t waste time on processes."

Yet, I find one attribute common to executives who enjoy long careers in family businesses—they all live by the ‘serenity principle’. They have the serenity to accept the things they cannot change, courage to change the things they can, and have the wisdom to know the difference.

These are the author’s personal views. Saurav Mohanty of BCG assisted in this article.

Janmejaya Sinha is chairman of Boston Consulting Group, India.

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint.Download The Mint News App to get Daily Market Updates.