A Primer on Family Business (Version – 3) (4 pages)
Written by Raju Swamy
(Original Version published in March 17, 2009/ Updated on August 28, 2014)
(An introduction to typical issues confronting Family-owned and managed business enterprises and suggestions on how we can resolve them.)
Attendance at Conferences on Family Business across India and across Asia show increasing interest particularly from family-owned medium-sized enterprises where the third-generation has just been inducted, or is just about to be inducted. These Conferences 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. ‘Family Business’ 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 ‘professionalization’ 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 very important issue is ‘Succession’, which is really one part of the ‘planning for change’ process. Many seminars focus particularly on this issue.
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. They need to evolve a solution package, with external assistance if necessary, that could include a ‘Partnership Pact’ or a ‘Governance Code’ or a ‘Constitution’ or a ‘Protocol’ to sustain the change process on a long-term basis as the Family Business grows, across many locations, and also as the number of Family Members in Business increases to a level where traditional and frequent interpersonal contact is no longer possible.
5. ‘Succession’ as a process must not be translated into an over-simplified exercise in which a single family member over-rides other equally capable family members just because people will have to suppress or squeeze themselves into a tight pyramid to maintain the peace or to enable a ‘smooth’ succession. In fact a good ‘Succession Plan’ will re-structure the enterprise to harness the leadership skills and potential of competent members of the family, and therefore help create new growth opportunities that will further enhance opportunities for progress of other family members, and of the family enterprise group.
6. Tax Planning as part of a Restructuring Strategy, consequent to Succession Planning, is necessary and important. However, Tax Planning must not over-ride the need to sustain Family Business Unity into future generations. To re-empasise, being obsessed with sustaining Family Business Unity is more precious than saving Tax as the primary motivation in restructuring.
7. Distrust within a Family Business/ Family Business Group multiplies proportionately to increase in scale of unaccounted business transactions, as Family Members in Business increase, within such a Family Business culture that has existed over time.
8. In most cases, feelings of financial and social insecurity among either less-advantaged or less competent family members, and of aging family members, in the enterprise, can result in ego clashes, mis-trust, destructive nepotism, and other obstacles to survival of the family business. To a very large extent this can be pre-empted by establishing family-constituted and professional advise-assisted entities driven by a family charter to ensure a process of common wealth management, of ensuring minimum economic support, of protection from unforeseen disasters and calamities, and of providing personal and social security into old age.
9. The ‘Family Office’ is the facilitator and administrator of this process of ensuring family well-being, and of peace within the family. Such a process, if properly planned and constituted, can promote meritocracy as the key driver as far as the Business part of the family is concerned. It is finally the ‘Business’ that will provide the resources for building family security and wealth, and of well-being, and of peace.
10. With positive intentions, there are many routes to the success of family business in perpetuity. Growth is the greatest driver, stagnation the greatest enemy. Space provides flexibility, walls suppress, physically and mentally.
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 – minus the passing hiccups – continues to be 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.
& Advisor to Family Business
PROMAG Consultancy Services
Apt. 206 Brigade Rathna
42 Ranga Rao Road
Bangalore – 560004 INDIA
Tel. +91-80-26676298/ Cell: 9845271498
Strengthening Family Dynamics for Family Business Growth…….since 1985