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| Family-run businesses: risks and reward at same time |
| Press Trust of India / New Delhi Feb 05, 2012, 13:03 IST |
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Family-controlled large business houses may be strong pillars of growth for India Inc, but experts warn that their internal feuds and succession issues also pose significant risks -- not only for the groups themselves, but for the entire economy as well.
Many of the biggest corporate groups in India have their majority shareholding with the promoter families and the top management personnel of some of these businesses houses also include persons from the largest shareholder family.
According to a study conducted by global financial services major Credit Suisse, two out of every three listed companies in India are family-controlled, making it the country with highest presence of family businesses in Asia.
However, India has also seen a number of family feuds in the large corporate houses and their business interests have been hurt on many such occasions due to such disputes.
Another study by Barclays Wealth found that 40 per cent of world's wealthy population has direct experience of their family fortunes leading to disputes, but the percentage is even higher in India, where 61 per cent of the rich have seen relationships deteriorate into feuds over money.
"...Transfer of their (wealthy individuals) material, income-generating creations to their human, cost-incurring ones can be an extremely daunting proposition," it said.
Asked whether family feuds are inevitable given the huge fortunes being at stake, auditing and consultancy major Grant Thornton India' National Managing Partner Vishesh Chandiok told PTI that "family businesses are faced with unique threats that must be identified and addressed as they arise."
"Successful FMBs (Family Managed Businesses) carry out ponderous wealth creation over the years. However, feuding may become a cause of destruction of the created wealth," he said.
"While success of the business is affected, this is not the only loss. A threat to personal relations is a bigger loss which results from a lack of understanding of how the family interacts with the business and the rules within a family," Chandiok noted.
He said there are some well-established governance and communication structures in vogue in the West to address such issues and these are being replicated in India also.
Experts say that the promoter families can hire external professionals to lead the growth and further changes could be seen in coming years, given the trends like generational shifts and globalisation that mandate a higher level of corporatisation, transparency and competence.
According to Joseph Fan co-director of the Institute of Economics and Finance at The Chinese University of Hong Kong, family succession issue in Asia is "extremely challenging" as many dominant family-run firms are in transition period with the founders being very elderly.
"If family disputes lead to decisions that damage the businesses, this could cause broader damage to these economies," said Fan, who is currently conducting a research on what happens to the family-owned companies in Asia after their transition to the second generation.
"Some of the initial findings point to smaller declines in value for companies with better corporate governance structures during the transition period.
"For example, firms that recruited non-relatives to the board of directors after the founder stepped down typically fared better," he said in an interview published on the website of IFC (International Finance Corporation).
"As family businesses grow and achieve critical mass, owners are required to make important choices in order to balance risks and returns," Chandiok said.
Unlike the West, India seems to lack in "succession planning", but the trend is slowly changing as family businesses become more sophisticated, hiring of qualified non-kin to key posts has become essential, experts believe.
"As a business grows a family clearly can't physically occupy all roles, and would not even necessarily have the right skills to manage the growth of the firm," Chandiok said.
Besides, when too many family members are engaged in the business, which may not be too diversified, members of the family may be seen treading over each other. In such case hiring non-kin may help mitigate possible conflicts, he added.
In one of the much-awaited succession plans in corporate India, salt-to-software conglomerate Tata Group has named Cyrus Mistry as successor to chairman Ratan Tata, who will hang up his boots in December, 2012.
However, despite the fact that succession and wealth can be fraught with potential conflicts and burdens, the world's high net worth individuals still remain committed to passing on their assets to the next generation.
At hospitality major Oberoi Group, Vikramjit Singh Oberoi is reportedly being groomed as a successor to his father P R S Oberoi, once the octogenarian hangs up his boot as Chairman.
Aditya Mittal, the son of billionaire Lakshmi Mittal, has been serving as CFO at steel giant ArcelorMittal for quite some time.
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