Family businesses need a framework to grow, says ISB prof

Our Bureau Chennai | Updated on February 26, 2014

Prof Kavil Ramachandran

Lack of it may lead to disputes

More families are inclined to writing down a constitution on how their businesses should be run. The framework covers issues relating to ownership, entry of family members into business, starting of new ventures, retirement and succession.

The families realise that it is better to have a proper framework in place as they seek to grow their business, generate and share wealth, and retain familial relationships, says Kavil Ramachandran, who specialises in family businesses at the Indian School of Business.

“The process of constitution-making is more important than the final document itself,” says Ramachandran. It is the process of putting in place the framework that allows the families to think of different scenarios.

Without a framework, differences may lead to disputes and from there to destruction.

A shareholders’ agreement is a must; whether a family member can sell his or her share outside or not and under what circumstances has to be clearly outlined.

Ramachandran, who is Thomas Schmidheiny Chair Professor of Family Business and Wealth Management at the ISB, said the ideal stage for putting in place the framework was when the second generation was ready to step in.

There were instances where family businesses had in place a written constitution as in the case of Dabur and GMR, and those that followed an unwritten code like the Murugappa group. The Dabur constitution was not as detailed as the GMR group, Ramachandran said.

He was presenting the findings of a survey done by the ISB to understand inter-personal ties among members of business families. Of the 276 respondents in the survey – made up of medium-size businesses with turnover of ₹50-500 crore – an overwhelming majority (ranging from 83 per cent to 91 per cent) was in favour of clear ethical standards, supporting other family members in difficulty and commitment to the well-being of all family members.

However, when it came to important factors such as existence of articulated and shared family values and family vision a significant number of respondents found these missing. A majority of the respondents – 66 per cent – were below 40 years of age.

Togetherness, Ramachandran said, was one of the unique family business resources and it resulted in benefiting from complementary skills, enjoying a network, willingness to share and long-term orientation. However, families needed to realise that togetherness was not uni-dimensional and that it was dynamic. The families needed to proactively discuss issues and ensure there was clarity in all matters. Issues pertaining to the overlap of business and families needed to be constantly addressed and ironed out.

To put the importance of family businesses in perspective, Ramachandran said nearly half the Nifty 50 companies were in this category, with the rest made up of State-owned units and others such as ITC and Hindustan Unilever. Across the world, he said, the long-term profitability was much higher for family businesses than non-family owned companies, because the former were not looking for short-term gains.

Published on February 26, 2014

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