A Primer on Family Business
A number of seminars and conferences held by business associations like CII over the last few years have been providing an opportunity for family business houses to come together to discuss and debate issues of common interest that could lead to directions for future growth and success of their enterprises. The issues have become particularly important given the need to compete, survive, and grow in a ‘survival of the fittest’ business climate coupled with an increasingly demanding internal family environment.
Traditionally, many family-owned and owner-managed businesses have been living with their problems either on grounds of ‘family prestige’ or simply because of a feeling of helplessness. Most successful closely-held family managed businesses with recognizable brand equity, whether local, regional, national, or global, which have emerged over the last 15 to 50 years have been ‘founder-managed’ or single family managed, to start with. With the traditional hierarchy of the single family in place (father and unmarried sons / elder brother and younger brothers) and with a good cash flow and mutual understanding, peace has prevailed. In most such enterprises, and particularly where manufacturing, and international business and trading are involved, the ‘family managers’ are well educated and business-competitive. Work and responsibility are shared informally with mutual understanding.
Over time, however, with the business track record being good, and with relative peace and mutual understanding within the family, complacency on the family front sets in. Mutual understanding is taken for granted, and problems if any between the family members in the business are pushed under the carpet, or postponed for future consideration, because business pressures on a day to day basis leave no time for attending to such issues. So long as the cash flow is good, ‘business is as usual’. But, below the surface, individual feelings do get bottled up. Even then, if the enterprise continues to be with the members of a single family, not much damage may be caused over the next few years.
The real issues begin to emerge with the growth and extension of the family with marriages, children, and concurrent increase in responsibility and commitment of each son or brother to their respective families. Internal pressures are now ready to take off. Pressures become more serious where the patriarch of the family has passed on. Once all the sons or brothers are married and have their own families, the enterprise is no longer ‘single-family owned’ – it is now owned by more than one family with multiple vested interests in the business.
When the third generation is ready to enter the business, and the business has not grown adequately to service the increase in numbers of potentially business-active members of the ‘families’, bottled up issues can become explosive. And the business can almost reach breaking point unless damage control exercises are carried through till an acceptable solution emerges.
Part of the problem is that family-owned and managed enterprises have been inducting into the business – as a matter of ‘duty’ - new cost-incurring but profit-sharing family members at a rate higher than their business growth rate. Each induction must necessarily result in value addition to the business. However, more new family members with higher standards of living but without concurrent value addition capability, dependent on a stagnant or slow-growth business, means greater chances of poor performance and sickness, and of conflict and stress.
There are many other issues confronting family enterprises today including induction of wives, daughters, daughters-in-law into the business, ‘leadership among equals’, and ‘professionalisation’ both in terms of attitude, knowledge, and result-orientation of family managers, and in terms of inducting qualified ‘external to family’ professionals who will require to be handled with care.In many family enterprises, there is actually a reluctance to induct proven, intelligent professionals. Many family enterprises, particularly the older ones, have continued to run their businesses internally with a feudal undercurrent that encourages subservience and consequent mediocrity in employee quality and performance standards. Unfortunately, functioning in such an environment every day over the years can lead family managers to attribute to themselves an exaggerated estimate of their own knowledge and performance capacities. This tends to be tested often in the tough market and the external world much to the disadvantage of the family enterprise.
The other important issue is ‘Succession’, which is really one part of the ‘planning for change’ process. Many seminars focus particularly on this issue. There are of course many other issues that could emerge during the day.
Looking at the seriousness of issues confronting family-owned-and-managed enterprises, and the extremely competitive business environment in which these enterprises have to survive and grow, the family enterprise is now entering into an inevitable phase of change:
1. Family enterprises need to plan for their future.
2. They need to ‘formalize’ their management structure of business-active family members/ partners/ directors of the enterprise in terms of role definition, functional responsibility, authority, reporting, accountability and performance appraisal, and the reward system.
3. They need to match the enterprise/business purpose, objectives and plans with the requirements both of the incoming younger generation as also of the existing partners to be able to cope with increasing complexities of running the family business in particular, and of business in general.
4. Evolve a solution package, with external assistance if necessary, that could include a ‘Partnership Pact’ or a ‘Governance Code’ to sustain the change process on a long-term basis.
Family Businesses by their very nature are entrepreneurial. They are necessary constituents of a dynamic society riding on a new economic wave. I will not be exaggerating when I say that India is now in the process of emerging into a spanking new entrepreneurial society where, paradoxically, it will be even more difficult to survive, if you have not done your homework, but if you do your homework, then it could be NIRVANA all the way! Many family enterprises across the country have already initiated the change process. There are also many examples today to prove that in an unsuppressed creative business environment, a flood of successful first-generation entrepreneurs is emerging with a multiplier effect.
The horizon of opportunity has widened like never before, truly into a “borderless world”. Family enterprises need to recognize this fact and initiate the change process. They have little choice, for markets do not wait. It is a race against time.
(End of article)
Traditionally, many family-owned and owner-managed businesses have been living with their problems either on grounds of ‘family prestige’ or simply because of a feeling of helplessness. Most successful closely-held family managed businesses with recognizable brand equity, whether local, regional, national, or global, which have emerged over the last 15 to 50 years have been ‘founder-managed’ or single family managed, to start with. With the traditional hierarchy of the single family in place (father and unmarried sons / elder brother and younger brothers) and with a good cash flow and mutual understanding, peace has prevailed. In most such enterprises, and particularly where manufacturing, and international business and trading are involved, the ‘family managers’ are well educated and business-competitive. Work and responsibility are shared informally with mutual understanding.
Over time, however, with the business track record being good, and with relative peace and mutual understanding within the family, complacency on the family front sets in. Mutual understanding is taken for granted, and problems if any between the family members in the business are pushed under the carpet, or postponed for future consideration, because business pressures on a day to day basis leave no time for attending to such issues. So long as the cash flow is good, ‘business is as usual’. But, below the surface, individual feelings do get bottled up. Even then, if the enterprise continues to be with the members of a single family, not much damage may be caused over the next few years.
The real issues begin to emerge with the growth and extension of the family with marriages, children, and concurrent increase in responsibility and commitment of each son or brother to their respective families. Internal pressures are now ready to take off. Pressures become more serious where the patriarch of the family has passed on. Once all the sons or brothers are married and have their own families, the enterprise is no longer ‘single-family owned’ – it is now owned by more than one family with multiple vested interests in the business.
When the third generation is ready to enter the business, and the business has not grown adequately to service the increase in numbers of potentially business-active members of the ‘families’, bottled up issues can become explosive. And the business can almost reach breaking point unless damage control exercises are carried through till an acceptable solution emerges.
Part of the problem is that family-owned and managed enterprises have been inducting into the business – as a matter of ‘duty’ - new cost-incurring but profit-sharing family members at a rate higher than their business growth rate. Each induction must necessarily result in value addition to the business. However, more new family members with higher standards of living but without concurrent value addition capability, dependent on a stagnant or slow-growth business, means greater chances of poor performance and sickness, and of conflict and stress.
There are many other issues confronting family enterprises today including induction of wives, daughters, daughters-in-law into the business, ‘leadership among equals’, and ‘professionalisation’ both in terms of attitude, knowledge, and result-orientation of family managers, and in terms of inducting qualified ‘external to family’ professionals who will require to be handled with care.In many family enterprises, there is actually a reluctance to induct proven, intelligent professionals. Many family enterprises, particularly the older ones, have continued to run their businesses internally with a feudal undercurrent that encourages subservience and consequent mediocrity in employee quality and performance standards. Unfortunately, functioning in such an environment every day over the years can lead family managers to attribute to themselves an exaggerated estimate of their own knowledge and performance capacities. This tends to be tested often in the tough market and the external world much to the disadvantage of the family enterprise.
The other important issue is ‘Succession’, which is really one part of the ‘planning for change’ process. Many seminars focus particularly on this issue. There are of course many other issues that could emerge during the day.
Looking at the seriousness of issues confronting family-owned-and-managed enterprises, and the extremely competitive business environment in which these enterprises have to survive and grow, the family enterprise is now entering into an inevitable phase of change:
1. Family enterprises need to plan for their future.
2. They need to ‘formalize’ their management structure of business-active family members/ partners/ directors of the enterprise in terms of role definition, functional responsibility, authority, reporting, accountability and performance appraisal, and the reward system.
3. They need to match the enterprise/business purpose, objectives and plans with the requirements both of the incoming younger generation as also of the existing partners to be able to cope with increasing complexities of running the family business in particular, and of business in general.
4. Evolve a solution package, with external assistance if necessary, that could include a ‘Partnership Pact’ or a ‘Governance Code’ to sustain the change process on a long-term basis.
Family Businesses by their very nature are entrepreneurial. They are necessary constituents of a dynamic society riding on a new economic wave. I will not be exaggerating when I say that India is now in the process of emerging into a spanking new entrepreneurial society where, paradoxically, it will be even more difficult to survive, if you have not done your homework, but if you do your homework, then it could be NIRVANA all the way! Many family enterprises across the country have already initiated the change process. There are also many examples today to prove that in an unsuppressed creative business environment, a flood of successful first-generation entrepreneurs is emerging with a multiplier effect.
The horizon of opportunity has widened like never before, truly into a “borderless world”. Family enterprises need to recognize this fact and initiate the change process. They have little choice, for markets do not wait. It is a race against time.
(End of article)
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