The Hindu Business Line : Helping family-run businesses

`These days, even small family businesses want to institutionalise certain practices. Especially those related to money and lifestyle and rules for succession'

PROF K. RAMACHANDRAN, Indian School of Business.

A family, whose profitable business went public, is now struggling despite generating profits year after year. Baffled? It so happens that the patriarch, who started the business, was in the habit of re-investing most of his gains back into the company. Things were fine as long as his children were young and their needs were few. Today, these children have grown up and want to pursue an MBA course, preferably in a foreign university. But the patriarch cannot afford it as most of his money is in the company.

He is in a dilemma because it is essential that his sons get that MBA degree to scale up his business. You may think he was naïve to have ever listed his company without setting aside a sizeable personal income, but what is the solution now? Call a consultant to sort out issues? But consultants often do not understand what a tangled web a family business can be, aside from the money involved. Untangling this web is another story.

This is where K. Ramachandran, Professor of Entrepreneurship, Family Business & Strategy at the Indian School of Business steps in. Having equipped himself with a PhD in family business studies in the 1970s, he has helped many families untangle their businesses. The New Manager spoke to him about issues facing family businesses today and what it is like to study them. Edited excerpts:

What are the issues that affect family businesses today?

There are different ways of classifying these issues. The major ones are succession and wealth management. Succession deals with who will make the business grow more — an outsider or a family member.

Wealth management deals with how to separate family wealth and business wealth. Often, people do not discriminate between the two and this leads to huge problems. Besides these there are issues distinct to small size companies and large size companies. Such as where do these businesses invest in? What is the kind of lifestyle that family members need to maintain?

The lifestyle part is interesting, especially in this time and age when businesses are going global and children from business families often have a foreign education. What changes do you see in today's family businesses?

I am at present working with businesses with a turnover of Rs 100-150 crore. The present generation of youngsters set to lead these companies are `big' thinkers.

They want to build and diversify business. So much so that there is peer pressure to send them abroad for an education.

All this is fine as long as it will benefit the business. But increasingly, more youngsters today want to split business empires and work only on projects of their interest.

Talking of splits, the widely held notion is that daughters-in-law are responsible for splitting a family business. How true is this and what role do women play in family businesses?

Not necessarily true. As part of my counsel, I have often spoken to the ladies of the house. Of course, this took some time. But once they got friendly with me, they were happy to share their views.

But what they would tell me was a revelation and helped me understand the basis of the family business.

Women can give you the true picture of the cultural, emotional and social implications if a family business broke up. A man can only tell you that there is a disinterest among family members to continue working or share some financial details of how the split will do minimum damage. But for a counsellor/ consultant, the non-financial aspect is also equally important while dealing with a family business.

Have you ever interacted with women-led family businesses?

Not yet (with a smile). But I am sure there would be other reasons for discontent.

So how are family businesses today coping with the pressures of disintegration?

Most of them are re-writing a `constitution'. This is like a will with a legal binding. It details all aspects related to the business including the lifestyle of the family members, their wealth, whether they would view themselves as a trust or a Hindu Undivided Family. Some of them even specify which car is to be driven by which family member, which airline class to travel in and how often, when and how often to take a vacation and even public behaviour.

Some of the large companies such as the Murugappa Group, GMR Group, Dalmia Group and some arms of the Shriram Group have brought in some kind of family governance. For instance, each family member will receive a salary depending on his role and position in the company. But the wealth of the family will be shared and maintained across all member families.

This way, a family gets a personal income, shares the comforts and lifestyle of a family business and members are challenged to perform better and expand the business.

Now, small family businesses also want to institutionalise certain practices. Especially related to money and lifestyle and rules for succession. They are also quite open about seeking help to clarify family vision and in brand building.

With consulting booming in India, do you think any special qualities are necessary to deal with family businesses?

Yes. Consultants cannot and should not treat family businesses on a transaction basis, as is done with other companies. One needs to build a relationship with the company through trust and understand the family ethos.

A consultant's work is to give suggestions and move on. But it is important to know if these suggestions have been implemented.

Sometimes, I call up businesses only to find that they had a problem implementing my suggestions. So I get back and work with them to solve it.

While one may do all that, it is important to set limits to one's empathy and look the problem in the eye.

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