People@Work

What does it take for family businesses to last generations?

Chitra Narayanan | Updated on February 01, 2018

Jörg K. Ritter, co-leader, global family business advisory practice, Egon Zehnder

Eighty per cent of corporations around the globe are family-owned. However, only 3 per cent operate beyond the fourth generation. How can that be altered?

On Sunday, during the IPL auctions the spotlight turned on Aryaman Vikram Birla, son of business baron Kumar Mangalam Birla when he was picked up by Rajasthan Royals for ₹30 lakh. The conjectures resumed – with the son a professional cricketer, the elder daughter Ananya Birla launching her own startups (a microfinance business and an e-commerce luxury portal), will it be left to the youngest to enter $41-billion Aditya Birla Group?

Striking out on their own

“The trend is that the majority of next gen is interested in doing things not connected to their family businesses,” says Jörg K. Ritter, the Berlin-based co-leader, global family business advisory practice of Egon Zehnder. “We have seen this in Europe where the next gen just wants to take the money and start another business. Of course, some are happy to modernise their traditional family business, introduce digitalisation and so on, but largely the trend is they are interested in doing other things.”

Certainly, a lot of the millennials even in India seem to be doing their own thing. Kavin Mittal, son of Bharti Airtel chairman Sunil B Mittal, who runs Hike Messenger App, is a case in point.

Threats to longevity

Involving the next generation and preparing them to take charge is one of the big issues that crops up for family businesses. They also face many other challenges – transitioning to professional management, introducing governance among own family members, and so on. Building for perpetuity is a key challenge too. As Sonny Iqbal, Gurgaon-based co-leader of Egon Zehnder says, when they surveyed family businesses to find out their concerns, profit is often low down on the list. “Survival, sustainability, doing good, are often bigger concerns,” he says.

Eighty per cent of global corporations are family businesses. But according to the Family Business Institute, says Iqbal, only 30 per cent of these organisations last a second generation, 12 per cent remain viable till a third, and barely 3-4 per cent operate in the fourth generation or beyond. The reasons are multi-fold. Finding suitable successors, transitioning without losing vision and values, lack of governance can all derail companies. Not investing enough in innovation or digitalisation could be another.

But if you flip things around and ask why some family businesses are so successful, some common threads emerge. Says Iqbal, “ If the fundamentals of governance are solid, if the fundamentals of innovation are good and if the foundation has been laid in a thoughtful way targeting perpetuity, then usually there is longevity.”

Governance is key, both Ritter and Iqbal stress. And they are talking governance not just at the board level on company matters, but also at the family level. Explains Ritter, if by the fourth generation the family has some 600 shareholders, their roles, involvement, compensation and so on have to be spelt out clearly to everyone.

In 2015, Egon Zehnder conducted research among 50 of the world’s top family firms which were mostly in their third or fourth generations. This exercise led them to formulate a tool or measure called Family Gravity with which the firm now evaluates family-owned businesses to determine their performance and longevity.

Ritter explains that there are seven elements to Family Gravity

Values: Does the company have the right values? Are these values well-articulated and is a culture in place?

Vision: Is there a 10-year vision of what the business will be like, and thoughts on how vision can change from one generation to another?

Cohesion & family identity: When a family enters the fourth or fifth generation and becomes too large with over 200 shareholders, is there a shared or collective identity?

Communication & interactivity: How do the various family members communicate and interact with each other? What do they know about the business?

Family business involvement: How should owners of family businesses be involved? There are many owners who not only own but run the company, while many prefer to keep a distance and hand over the reins to professionals. Even they need to check in on a fortnightly basis.

Family and business governance: The governance structure of not just the business but of family members is a key determinant of how successful it is.

Sustainability of leadership: Is the company prepared for succession? How is it developing leadership skills to allow for a transition?

Ritter explains that the Family Gravity index can be used to evaluate companies. Depending on their level of gravity one can predict whether they have the dimensions to flourish in the future. However, the good news is that even if a business fares badly on the index, it can work on these seven indicators to strengthen the family gravity.

“For instance, a series of workshops can be conducted to bring out values, create a vision, work on leadership development and so on,” says Ritter.

Published on January 31, 2018

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