Indian family firms confront the challenges of growth
On a recent visit, I found that many family business issues were the same as those faced in the U.S. But there were differences, too.
By Wayne Rivers
I recently spent a week in India meeting with local entrepreneurs, conducting workshops and helping to get the new Asian Institute of Family Business (AIFB, www.aifb.in) off the ground. I delivered workshops in Ahmedabad, Baroda, Surat, Kolkata and Mumbai to audiences averaging 100 entrepreneurs.
My companion for most of the journey was Dr. Abhijit Bhattacharya, the director of AIFB. Dr. Bhattacharya, who was a visiting scholar at Harvard University in 1989-90, is an alumnus of Moscow’s Patrice Lumumba University, where he completed his Ph.D. in economics and master’s degrees in physics and mathematics. He worked for several years at the Entrepreneurship Development Institute of India, where he did research, training and consulting for family businesses. He also served for four years as International Chair Professor in Entrepreneurship and director of the Centre for Entrepreneurship at what was then the University of Natal in Durban, South Africa.
Dr. Bhattacharya and I were very interested in comparing and contrasting Indian family and closely held businesses with their American counterparts. We were able to draw some broad conclusions.
The similarities
We were, frankly, surprised by the fact that the differences among family businesses in the two nations are relatively few.
Family businesses both in India and in the U.S. struggle with the following issues:
• Intergenerational management succession.
• Intergenerational ownership -succession.
• “Fair” vs. “equal” treatment for employee and non-employee -children.
• Clarifying roles and responsibilities via accountability systems.
• Establishing healthy communication and conflict resolution systems.
• Strategic business planning (in the U.S. for survival and re-emergence; in India, for many businesses —particularly in a place like the state of Gujarat—to cope with the issues of explosive growth).
The differences
On the other hand, we found four areas in which Indian and American family firms differ substantially.
1. Reverence of the senior generation and deference to their wishes. I was struck by Indian families’ extreme reverence of the senior generation and deference to their wishes. This in no way implies that American families don’t love and revere their parents and grandparents. However, Americans seem to have a much greater streak of irreverence and are willing to challenge the senior generation without a great deal of reservation. In India, family culture usually makes this taboo. For example, in our two lectures to next-generation Indian family business leaders, we fielded many questions about how the younger generation might prevail on their parents to offer them different roles or different directions inside or outside of the family business. There seemed to be almost a desperation among these young people; they were struggling for independence from their families while also wishing to maintain the ties that bind. This is an issue in many American family businesses as well, but Indian culture places a much heavier requirement on next-generation leaders to respect and adhere to the wishes of the senior generation.
2. The role of women. Gender equality has advanced farther in the U.S. than in India. While this is less of an issue today than it was a generation ago, finding a meaningful role in the family firm is still quite a challenge for many ambitious Indian women. Indian tradition follows the ancient directive of primogeniture, whereby the eldest son is favored in inheritance issues. When it comes to succession planning, next-generation daughters are often slotted for support roles to their brothers rather than viewed as viable candidates for top leadership posts. It must be acknowledged, however, that a few of the leading Indian family business groups, like HCL Technologies, have recently made very bold initiatives by placing next-generation daughters in top-level positions.
3. The presence of a “death tax.” There is no federal estate tax in India (although death taxes are levied in some states). In fact, an Indian consultant actually lamented the fact that the country doesn’t have an estate tax! He certainly is no fan of property taxes, but he views the estate tax in America as a catalyzing force that prompts family businesses to do at least some planning for succession. Given the appalling state of family business ownership succession planning in the U.S. today, it’s frightening to think that planning would be at an even worse level if it weren’t for the galvanizing effect of the estate tax! Indian family businesses enjoy this blessing while their American counterparts have only a one-year respite in 2010.
4. Biggest current challenges. As Dr. Bhattacharya puts it, “American businesses are currently dying of starvation; Indian businesses are threatening to die because of indigestion.” The lack of business opportunities in today’s American economy is causing historic turmoil in the small-business area. According to the Bureau of Labor Statistics, about 4 million small businesses—most of them family-held—have shut their doors since the recession began in December 2007. By contrast, Indian family businesses are dealing with the Indian economy’s explosive effects. It has come to be expected that the Indian economy will grow at a double-digit pace every year. In 2009 the country’s GDP grew “only” at a rate of 6.1%, and, amazingly, the Indian business media are predicting a “recovery” in 2010! How Indian companies will cope with this unprecedented growth remains to be seen.
Of course, there are many other, more subtle differences between family businesses in the two nations. Indian culture is far more regionally varied and diverse than in America, which tends to be more homogeneous irrespective of region. In India, it is not unusual to see a gleaming 2010 Mercedes-Benz stalled in traffic beside an oxcart pulling goods to market in the same fashion as the driver’s 16th-century forebears traveled.
According to a research report, with less than 50% of India’s population having a bank account, the number of financially excluded households in the country is among the highest in the world. America, on the other hand, is characterized by its massive middle class, whereas in India the gap between rich and poor is more stark and vivid (although the absolute size of India’s middle class is about 60 million people and expecting 40% growth in next two decades).
Converging cultures
As the Indian economy matures, its family businesses and the issues that challenge them are likely to align even more closely with American family companies and other family firms around the world. For example, with more economic opportunities for next-generation business owners, Indian family businesses, like their counterparts in the West, will have to grapple with the acute problem of succession. More than 90% of Indian businesses and about 70% of the top businesses, including 18 of the 30 Bombay Stock Exchange companies, are family-controlled; therefore, the importance of serious research and planning around succession in India cannot be underestimated.
The well-publicized succession war in India’s largest family business house, Reliance, made many potential investors in India’s energy sector nervous. Although family-owned businesses constitute the largest segment of the Indian economy, research on and resources for them are still somewhat lacking. As is true elsewhere in the world, academic institutions, the media and professional associations tend to focus more on organizations that do not operate on a kinship basis. There is tremendous potential for developing practical models for growing and sustaining Indian family businesses.
It was most intriguing to find that the similarities—like strong adherence to democratic values, a sound legal system and an entrepreneurial culture—far outweighed the differences between family firms in the two countries. The needs of family businesses in India parallel very closely the needs of family businesses in America—and in other countries around the world.
Wayne Rivers is the president of The Family Business Institute Inc. FBI’s mission is to deliver interpersonal, operational and financial solutions to family and closely held businesses (www.familybusinessinstitute.com).
Family business leadership training for India’s next generation
With rapid changes in the social and economic climate, India’s family firms must focus on preparing their future successors.
By Abhijit Bhattacharya
It may not be grossly incorrect to assert that relinquishing the power of a CEO requires a higher degree of resolve than is needed to acquire that power. Hence it would also be fair to suggest that Indians cannot really blame the leaders of their family businesses if they are generally not keen to entertain any thought of renunciation—even though renunciation of power and materialistic pleasure has been so glorified in Indian traditions and public pronouncements. Some of these businesses have struggled very hard to take their companies to almost Fortune 500-level organizations. However, one can still argue that since most of them also have a natural human desire to leave something long-lasting for their offspring, it is in their selfish interest to implement a succession plan that can ensure that the empire is in safe hands.
A survey of Indian family-owned businesses conducted by a team of scholars from Baylor University found that about 52% of CEOs wanted to remain in their posts until death. This was rather high compared with 16% of American family business owners who have a similar desire.
If we consider that more than 90% of Indian businesses and about 70% of our top businesses—including 18 of the 30 Bombay Stock Exchange benchmark companies—are family-controlled, then the urge to reign until death cannot be taken lightly because of its far-reaching consequences on governance and investment. For example, the public spat among the Ambani siblings of Reliance, India’s Fortune 500 family-run conglomerate (possibly now settled), had ramifications for the country’s crucial gas sector. On the other hand, it must be mentioned that recently a few leading Indian companies have taken bold initiatives to put the younger and better-educated successors (which also includes daughters) at the top.
Optimists may say that sibling feuds are not necessarily bad and can produce outstanding results. The fierce battle between the Dassler brothers, who ultimately divided Germany’s Gebrüder Dassler into two separate companies, gave the world two of the largest athletic-shoe brands—Adidas and Puma. Unfortunately, there are few such examples. Worse, the chances of passing the baton to the next generation probably are getting even bleaker as the world enters an era of disruptive innovations and high uncertainty.
A changing economy
In the good old days of a relatively stable business environment, when technological changes were mostly incremental and businesses grew at a moderate pace, early planning for succession was never a priority for family business owners. The founders could adapt satisfactorily to the slowly changing environment and remain effective till the firms became large, and they, old. But even in those days there was a noticeable difference between high-growth and low-growth companies.
A 1992 study by G.C. Rubenson and A.K. Gupta of 54 Fortune 1000 firms founded between 1945 and 1983 revealed that founders of relatively slow-growing firms had stayed at the helm an average of about 24 years, while the figure for fast-growing firms was only 13 years. In India —which before the opening up of the economy in 1991 was defined by the Hindu rate of growth (low annual growth of about 3.5% with per capita hovering around 1.3%), sluggish innovation, and protection from global competition—founders of family businesses generally ruled till their physical incapacitation. Also, transfer of power normally appeared to the general public to be a smooth affair.
Social capital
There was also another reason for smooth intergenerational transfer of power. The joint family structure, still holding ground in many parts of India, should be credited for this. The extended family and community system could create a kind of social or relational capital that usually prevented internal tension from exploding into full-scale family feuds between siblings or generations.
But the social environment is now undergoing rapid change. With the strengthening of nuclear families, family businesses’ relational capital is depleting. High uncertainty, rapid growth and fierce competition are putting pressure on family relationships.
Without strong relational capital many family businesses, particularly small to midsized enterprises operating in knowledge-intensive sectors, may find the transition to the second generation difficult unless a detailed roadmap for succession is put in place right from the beginning.
Relinquishing control
Charles W. Hofer and Ram Charan once wrote that most causes of business failure were problems encountered in the transition from a one-person, entrepreneurial style of management to a functionally organized, professional management team. Ordinary logic suggests that succession must occur when the founder’s utility has dropped below some minimal level. But founders are not ordinary executives.
In India, where the older generation controls the destiny of the next generation in every aspect (what to study, whom to marry, when to marry and so on), leadership transition is never easy in terms of real control and changing the course. The founder, usually male, cannot imagine his life without taking full responsibility for his organization and its strategic directions. His role remains central to the organization’s purpose, and he allows little scope for disagreement. The command-driven and remote-controlled growth culture established by the founder, though often motivated by the desire for a built-to-last company, ironically makes the entrepreneur the greatest single liability for organizational rejuvenation.
More research is needed
Though family-owned businesses constitute an important segment of the Indian economy, research on them is still in its infancy and significantly underrepresented in the management literature. Most Indian organizational development scholars do not incorporate variables reflecting family relationship, and relatively little research has been done so far on developing robust models for growing family businesses.
The stage-wise models suggested by some scholars may provide some useful guidance on how to work with the next generation right from childhood and monitor at different stages of a successor’s life the critical variables for making him or her leadership-ready. Such models must also incorporate variables that reflect cultural variations in different parts of this vastly diverse, multicultural and multilingual country.
The rapidly developing knowledge sector of the economy is further complicating the process of succession. With a high rate of knowledge obsolescence, family businesses are now forced to increasingly employ a highly educated workforce. Seam-less integration of management -succession processes for family members and non-family managers has become a huge -challenge for all family-owned businesses. The complexity of the problem often leads to procrastination, which will turn out to be suicidal for many family -companies.
Technology and knowledge obsolescence demand swift decision-making ability in order to replace the existing business models with newer ones. This is possible only for family and non-family managers who are not hindered by past experiential bias. FB
Abhijit Bhattacharya is director of the Asian Institute of Family Business and dean of Globsyn Business School, Ahmedabad, Gujarat, India (ab@globsyn.com; director@aifb.in).