The challenges in family business

ABSTRACT

Big families have carved up the big industries, even as the family business is forced to change to cope with competition, the role played by the family in the business must be rewritten too. Which old functions must it discard? What new responsibilities must it take on? And how should it manage the transition? A forecast. Around the world & in India business families are focusing too much on what to do and too little on how to do it. This paper attempts to substantiate its conclusions based on past and present experiences of global business families.

INTRODUCTION When you put up your own money and operate your own business, you prize your independence. It's MY business, you can tell yourself, in good times and in bad. In a family company, however, it's OUR business. When family members work together, emotions may interfere with business decisions. Conflicts may arise as relatives see the business from different perspectives. Those who are silent partners, stockholders and directors are likely to judge capital expenditures, growth and other critical matters primarily by dollar signs. Those engaged in daily operations are more likely to be concerned about production and sales figures and personnel matters. Obviously, there is potential for conflict. In some family companies, daily operations are disturbed by conflict; in others, the challenge is a high turnover rate among nonfamily employees. Growth also may be a dilemma if some relatives are reluctant to plow profits back into the business. Conflict in the business also can be raised by family members who have little talent for money or business. The manager of a family-owned business faces the same challenges as the owner-manager of any small company. However, the job of family manager may be complicated by relatives who must be reconciled to working together in a business. Family businesses constitute most businesses in India, as anywhere else. Economic liberalization and rapid expansion in the industrial base in recent years

have not only created growth opportunities for many but also have tested their resource capabilities to respond to them; some have chosen to follow the role of a custodian of their existing wealth and followed the preservation route, while some others have followed more of an entrepreneurial route of exploiting opportunities with or without relevant resources, with mixed results. One of the key resources for all of them is their family, and their prime concern is wealth and welfare of their family. A major dilemma many of them have faced particularly in the last decade since economic liberalization began is to choose between combinations of risks and returns of business growth and conservation of wealth of the family. This, of course, is intertwined with the missions of their businesses and Families.

Most challenges faced by a family owned business

1. Emotions. Family problems will affect the business. Divorce, separations, health or financial problems also create difficult political situations for the family members. 2. Informality. Absence of clear policies and business norms for family members 3. Tunnel vision. Lack of outside opinions and diversity on how to operate the business. 4. Lack of written strategy. No documented plan or long term planning. 5. Compensation problems for family members. Dividends, salaries, benefits and compensation for non-participating family members are not clearly defined and justified. 6. Role confusion. Roles and responsibilities must be clearly defined. 7. Lack of talent. Hiring family members who are not qualified or lack the skills and abilities for the organization. Inability to fire them when it is clear they are not working out.

8. High turnover of non-family members. When employees feel that the family mafia will always advance over outsiders and when employees realize that management is incompetent. 9. Succession Planning. Most family organizations do not have a plan for handing the power to the next generation, leading to great political conflicts and divisions. 10. Retirement and estate planning. Long term planning to cover the necessities and realities of older members when they leave the company. 11. There should be a specific training program when you integrate family members into the company. This should provide specific information that related to the goals, expectations and obligations of the position. 12. Paternalistic. Control is centralized and influenced by tradition instead of good management practices. 13. Overly Conservative. Older family members try to preserve the status quo and resist change. Especially resistance to ideas and change proposed by the younger generation. 14. Communication problems. Provoked by role confusion, emotions (envy, fear, and anger), political divisions or other relationship problems. 15. Systematic thinking. Decisions are made day-to-day in response to problems. No long-term planning or strategic planning. 16. Exit strategy. No clear plan on how to sell, close or walk away from the business. 17. Business valuation. No knowledge of the worth of the business, and the factors that make it valuable or decrease its value. 18. Growth. Problems due to lack of capital and new investment or resistance to reinvestment in the business. 19. Vision. Each family member has a different vision of the business and different goals. 20. Control of operations. Difficult to control other members of the family. Lack of participation in the day-to-day work and supervision required.

Stages of Family Business Development:

THE EVOLUTION OF THE FAMILY BUSINESS

MARKET - DRIVEN THE NATURE OF BUSINESS

. LEVERAGE DEVELOPED COMPETENCIES . SELECTIVELY ENTREPRENEURIAL IN NATURE

PROCESS-DRIVEN
. EXECUTE ACROSS CORE COMPETENCIES . COMPETE ON CUSTOMER SATISFACTION

FUNCTIONALLY-SPECIALISED
. GROWTH AND SCALE ARE PRIORITIES . CONTROL OUTWEIGHS FLEXIBILITY

ENTREPRENEURIAL
. CUSTOMER INPUT DRIVES PRIORITIES . NIMBLE IN EXECUTION TO END GOALS

THE PRIORITIES OF THE FAMILY

TIME

The Changing Roles of the Family

The family in business is prone to splits arising from battling siblings, between feuding fathers and sons, between warring uncles and cousins each intent on pursuing their own ambitions- leading to one or more cases of fission in the empire.

Owner or Investor?
For long has the family combined the roles of owner and control of its businesses, oblivious to the possibility of an alternative? That it had to be the (male) members of the family who would be the hands-on custodians of its ambitions was considered self-evident. Particularly since the classic skills needed for conducting business successfully in the pre-liberalization economy had far less to do with strategy or operations than with lobbying and liasoning for licenses, permits, financing and concessions. And virtually the only functions reserved for managers were those of following instructions. With the fortunes of the businesses resting largely on the networking prowess of their owners-which meant leveraging contacts culminating in the corridors of power-the family could not possibly adopt a hands-off approach. Today, however, those skills are no longer a fount of competitive advantage for businesses operating in a primarily unregulated economy. For the family to continue on its former trajectory in managing its businesses, therefore, is redundant. Just what, then, should its new mandate be? The single-most important choice must be between the familiar role of the CEO and the unfamiliar one of an investor. Heretical as it may sound, the involvement of the family in managing the business house must necessarily migrate from management to influence, from exercising the powers of the executive to invoking the rights of the sharehoder. The reasons? For starters, managing a company will need specialized skills that demand the complete attention and time of the persons discharging that responsibility. Whether or not the group is diversified and the focused business house appears more likely to survive than the sprawling one-the competencies needed to lead each business will become less and less portable across companies in the initial stages of the transition of the business house. Owners have to distinguish between managing wealth and managing businesses. The family may not be good at both. And yet, the family can scarcely afford to recede completely to the background, leaving the field entirely to professionally appointed managers. For, while that might create a portfolio of independent and high-performing businesses, it will not engender a group with

shared values and objectives. So as to retain its influence, therefore, the family must seek a different kind of role-which does not compromise the strategic and operational performance of the businesses, but enables it to stay involved in overall strategizing and goal-setting. The obvious mantle, therefore, is that of the highstake investor, who exerts pressure on the management for performance without getting embroiled in day-to-day operations. That involves reviews of strategy and of financial performance, validations of vision and missions, checks of ethical and law-abiding behavior, and control over financing plans-functions that are critical for a business house. Most important, the competencies that the family can leverage as investors can indeed be applied to diversified businesses. Today, it is wise to leave the day-to-day running of the organization to professional managers. The family should only provide directions.

Manager or Governor?
Having withdrawn from the hurly-burly, the second critical function for the family in guiding its businesses will prove to be able governance. Traditionally, the family-managed business has been accused of bending the rules, playing the system and conniving with a graft-friendly bureaucracy to betray a general lack of scruples in its pursuit of opportunities. So long as that led to no competitive disadvantage, it remained at the level of ill-repute. Today and tomorrow, however, as the business house finds itself competing for capital, people, and customers without special protection, the quality of its corporate governance will be a vital differentiator. And for the family business, in particular, shaking off its classic image will pose a challenge that only the family can surmount. In fact, setting benchmarks for norms of governance, especially those relating to financial management, will be possible only for the family, not for the professional managers involved in day-to-day management, precisely because the former are the owners. After all, tight governance, aimed at ensuring that the management protects and champions the interests of the investors through sound and honest strategy, systems, and operations, is necessarily the preserve of a detached group of people who, nevertheless, have a sizeable stake in the business. Or, as Lal analyses the issue: Owner-managers tend to be much more subjective. But when there are professionals running a company, it is much more objective. They can be questioned. Tomorrows actual tasks for the family, accordingly, will include the laying down of codes of conduct to be followed across every company in the group, instilling the values of transparency and accountability, and insisting on rigid conformance to ethical standards. Idealistic as they may sound, these are crucial strategic inputs to the survival of businesses today. For, following such practices

not only enables a group to grow an integrated cross-company culture, it also streamlines and improves the efficiency of the processes involved, such as accounting, goal-setting, and people management. JRD encourage so much that he often forgot about ownership. Like many businesses of its time, the promoter family did not own much of the Tata companies. At one point of time the Tata sons had only 3% equity stake in Tata Steel, while GD Birla held 5%. Institutions like LIC held over 40%. JRD never felt it was ownership. The basic principle is: professionals should look after the operational side of the business while family members should look after the entrepreneurial side.

Actor or Director?
If the family succeeds in implementing the bifurcation between managing and governance in its businesses taking on the latter and leaving the former to people trained for the task- it will also have to play the delicate role of managing the relationship between itself and the managers in a way that maximizes the benefits for all the stakeholders. A divergence of viewpoints between owners and professional CEOS can only hurt the business. So can a revolt in the ranks, as business family heads ranging from Tata Groups to the Jumbo Groups will attest. In this situation, the initiative in clarifying its expectations, its objectives, and its principles to the managers must come from the family. Crucially, this communication does not involve cutting in and taking over the reins personally since that will only undermine the effectiveness of the professional manager. On the contrary, the family must play a far more subtle role, influencing and guiding-but not dictating-the actions of its senior managers. In another era, such influence was easily achieved through the feudal relationship that existed between the owners and their employees. Today, however, the family must justify its stance to the managers not by pulling rank, but with business logic. As a result, its members must change the relationship of yore, replacing unquestioned loyalty with professional, reason-based interactions. And for that, the owners must also acquire the same analytical and business management skills that they expect their managers to have-but use them differently. For instance, although Anil and Mukesh Ambani, the sons of the Reliance Group CEO Dhirubhai Ambani, have MBA degrees from the Wharton Business School of the University of Pennsylvania, and Stanford University, respectively, they dont use their expertise to replace or overrule the ideas and efforts of their managers. Instead, they wield their knowledge as a tool for communication between intellectual equals, to weigh the merits of managerial decision-making, and to keep those decisions in sync with their own roadmap of the future of the

group Checks, counter-checks, and strong interpersonal bonds between the family representative and the top management is as important as autonomy.

Destroyer or Preserver?
With empirical evidence-in the form of research conducted in the US by the life insurance company Mass Mutual-suggesting that 67 per cent of family business houses normally split after the second generation takes over, with the proportion rising to 90 percent by the third generation, the chances of unity in the face of centrifugal forces seem low. While the need to accommodate the divergent aspirations of different individuals as always been a classic factor behind the family split, multiplying that impetus in post-liberalization. India is the fact that scions in their 20s and 30s are equipping themselves with skills and worldviews dramatically different from those of the previous generation. Complicating the situation further is so-called heiress factor, with daughters-and their husbandsstaking their claim for a share of management, a paradigm thats relatively new to the male-centric family business. All this is translating into a threat, for the business house, of a fracturing of a group, culminating in snapped synergies-such as there were-abandoned economies of scale, and crisis of leadership. With 62 percent of the countrys 50 largest business houses already having entered the second or third generation, anticipating, preventing-to the extent possible-and managing the fallouts of splits is, therefore, a major priority for the family. All the more so since this is a responsibility that just cannot be delegated to professional managers. The actual tasks, then, for the family in this context will include drawing up of a contingency plan for carving up the empire; creating alternative avenues of growth for different members of the family without endangering the core group; and apportioning functional responsibilities rather than charge of separate businesses between the inheritors. The idea is to give the organization a fresh
THE PAST

1. Success was a function of ambition and drive, not of market realities. 2. Striking connections and building reputations were essential. 3. Decision-making had to be opportunistic and instinctive. 4. Management involved interactions with the external environment. 5. Human resources were plentiful and not difficult to retain.

THE PRESENT

1. The roles of the owner and the manager must be bifurcated. 2. Skills acquired through professional training will be essential. 3. Decentralized decision-making will force the family to step back. 4. Liaisoning will be a behind-the-scenes activity, not a strategy. 5. Corporate governance will be a crucial responsibility.