The great Indian family business

The Indian family business dates back to the latter half of the 19th century, which also marks the beginning of business in India. It is not surprising then that family-run businesses currently account for a whopping 95 per cent of all Indian companies. Considering that one-third of the companies listed in Fortune 500 fall under this category, including the currently second Wal-Mart, family businesses have indubitably cemented their place in the world ec onomy.

The Indian economy, currently in a state of rapid development, is burgeoning with innumerable small and medium-sized family-run enterprises. Family businesses in India initially started in the 1890s as a means to promote import substitution and attain economic freedom from the British. These enterprises were an integral part of India’s freedom struggle, and as part of the Swadeshi movement, got special treatment and subsidies from the government.

The businesses consolidated their positions as near monopolies under the protective environment of the licence raj and their inefficiencies did not get exposed to the indefatigable market realities. Some of the prominent business families during the 1960s were the Modis, Thapars, Shrirams, Singhanias, Birlas, Wadias and Godrej.
The new economic policy

In 1991, India’s forex reserves dwindled rapidly and the IMF extended help but at a price, forcing India to open its markets to the outside world. With the protection gone, the family business had to face stiff competition from both new domestic players and well-established international players who were better equipped both technologically and managerially and were backed by much deeper pockets. The business scenario was changing and a new breed of businesses emerged in the 1990s, with the focus now shifting from the manufacturing to the service sector with IT and consulting being the buzzwords.

The service sector exposed the business directly to the customer and it needed to be efficient and nimble in order to succeed. With the exception of the Tatas, who with TCS made a foray into the service industry, no other top family business enterprise ventured into this sector for a long period.

At this time of change, many big Indian business houses faced a crisis situation; either to change or perish. A handful of companies adapted well to the pressures of the new economic policy, while a greater share couldn’t cope up to the challenges of the competitive environment and struggled.
Change management

“Change is the only constant. Hanging on is the only sin”. Denise McCluggage made this statement almost 28 years ago, and she was a race car driver. These simple yet meaningful words used in the context of sports, look so apt in the case of the Indian family businesses, and highlight the basic issue faced by boards of family-run enterprises, that of change management.

The businesses that succeeded had the foresight to adjust according to the new conditions, professionalise their management and open up to new options, while relinquishing certain ideas which were losing favour.
InWARD-LOOKING

The ones that lost out were the business families whose boards didn’t carry the vision to think beyond, and had not put in place a potent governance structure to deal with the onslaught of liberalisation. The boards of these companies were too inert and inwardly focussed to address the need of the hour. The prime reason for the indolence of the board was the over representation of family members in the decision-making body and also the top management.

The roles of the board and the management had not been clearly defined and this resulted in frequent overlapping of interests amongst the two entities. Quite often the top board and management position were controlled by the same person and without a proper distinction of duties the whole object of separating the two got defeated.

Another issue faced by family businesses was the absence of qualified independent directors in the decision making machinery.

There were no independent directors in the board of most family enterprises, and with the top management posts also being filled up by loyalists, there was no one to provide an unbiased, outsider’s view that may have helped the cause of the company.

Independent directors provide a sense of sanctity to the otherwise myopic board, which is caught between the generally conflicting interests of the family and the business.

The Companies Act never mandated the presence of independent directors in boards, and even the new Clause 49 of SEBI which requires their presence, is not applicable to unlisted companies. A majority of the family businesses in India are closely held corporations and the presence of independent directors is needed more so in these enterprises.

The presence of independent directors is of little significance if they don’t have the right skills. The problem with most family businesses was that they stuck to the same boards without being open to fresh ideas, through all phases of the business cycle.
Lack of professionalism

The board is not where the problem ends; it carries on into the management.

For years, the owners of businesses had kept the top management positions either to themselves or at least within the family to exercise further control over the corporation. What they didn’t realise was that running a corporation is a professional’s business and qualified intellectuals should be hired for the purpose instead of confining it to the family.

Even if professionals were hired they were meant to be loyalists, who even though performing to the best of their abilities, never got the expertise of a well qualified and independent board. During the process of change most businesses which had a specialised management force in place sailed through, while many family managed businesses suffered the fate of their improvidence.

Apart from the governance issue, the Indian family enterprises faced another issue that of ineffective, ill-structured board and management performance reviews.

A large number of companies failed because of their inability to measure the performance of its personnel. The lack of scientifically designed appraisal techniques has cost Indian family businesses a lot more than ill designed governance structures. They paid the price for a people based management style and were slow to adopt the process-based approach.

The great Indian family business has seen many ups and downs; every few decades a new crop of family businesses emerges, but where are some of the names that existed in the 1960s? Did the board’s incapacities take its toll? Will we see some new names in a decade from now?

kumar deep shanker
PGDM IIIrd sem