T Thomas: Survival of family businesses

Family businesses have distinct advantages over professionally-managed companies

Now that we have seen how some of the largest Indian family firms face conflicts between siblings, we may be tempted to assume that all family firms are ultimately doomed.

Several people may also wish that they perish because of the manner in which fortunes were initially built by ruthless founders. But contrary to these expectations, family firms in fact tend to survive for several generations.

It is therefore worthwhile identifying the factors that enable them to do so. These can also serve as lessons for newly emerging family firms that want to ensure their long-term survival.

The founder of a successful business family should establish a kind of family council consisting of the first generation of brothers. This should meet every three months or so in an informal setting. The brothers will behave almost as they did when they were adolescents.

In one family, one of the brothers preferred to be lying down during the family council meeting, which usually lasted for hours! Another brother was in the habit of dozing off and even snored while important matters were being discussed. No one minded. There was no formality. The key factor was that they were together as the "family council".

In most cases daughters and in-laws are not inducted into the family council to avoid dilution of interests to in-laws. Some brothers may not have sons and they may want to nominate their daughters or sons-in-law to the family council.

But if it is done for one brother, that privilege must be extended to the daughters of all brothers. The inclusion of daughters could in fact make the family council a stronger institution because girls usually have a greater sense of loyalty to their families than boys.

However, in most Indian families daughters are not yet equated with sons. Hopefully it may happen in the future.

The second feature of successful family-managed companies is that after the death of the founder one of the sons is recognised and anointed as the head of the family by the founder. Usually it is the eldest son.

However, while this role may be seen to the exercised by the eldest son, in practice the ablest among the sons will guide the eldest son, who will then act as the symbolic leader.

In other words, age by itself does not confer real leadership even in a family business. But age cannot be disputed and does command deference and respect in India.

Therefore, there is usually no dispute, especially if the eldest son is wise enough to allow others to participate in decision-making and clever enough to be seen as a symbolic head.

A third feature is that a business family will take care of all members of the family, irrespective of their level of education or competence. This is done by giving paid employment and income to as many of the family members as possible within the family-managed companies.

There can be a monthly salary paid to each member of the family, irrespective of whether he is working or not. There is no retirement age. Depending on the size and success of the family business, the members can be provided with additional perquisites like cars, houses, etc. Even dowries may be paid from the family kitty.

The money for all this is usually arranged through private companies set up and operated by the family, or with cash collected through discounts from suppliers, sale of scrap, benami companies supplying materials or services, etc.

The whole idea of rewarding generously members of the wider family is to bind as many members as possible to the family and its controlling group through a web of such obligations.

Problems could arise when the first generation of sons passes on and the next generation takes over. Even if "wills" are written, rivalries and problems can arise, as has been evident in recent cases.

In successful families, the family council will in most cases continue to be presided over by the eldest among the sons. But the individual business units will be managed by the family member who is best experienced and successful in that particular business.

But over a period of time all companies under the family's control will not be equally successful and disparities are bound to arise. Here again the family council will ensure that the more successful companies support the lesser companies in the group.

As generations pass the circle will get wider and filial bonds could get weaker. To counter this, it is necessary to have family get-togethers which are more in the nature of bonding sessions rather than business sessions of the family.

The family council could become a Family Conference. But there should be a core group that continues to act as the family council. Weddings provide another important opportunity for such bonding because the celebrations last for a couple of days in a relaxed atmosphere. The other major occasions are when a member of the family is seriously ill.

It is a tradition in India to keep vigil at the home or hospital when someone is seriously ill. The family council will also initiate the steps to be taken following the possible demise of that member. This uniquely Indian tradition helps to bind them even closer to the rest of the extended family.

What is unique in most Indian families is that although there is no explicit recognition of meritocracy; over a period of time merit does get recognised and family members look up to those who have shown performance and achievement.

If such individuals come forward with proposals to set up new businesses, the family will give priority to them, by-passing the traditional hierarchy.

Based on my experience in both camps, I have observed that family-managed businesses have some distinct advantages as compared to professionally-managed companies.

First, unlike professional managers a family member has a distinct sense of ownership and commitment. Stock options given to top managers in large, professionally-managed companies do not evoke the same commitment.

Secondly, in a family business one can pass on the ownership and the potential growth of the business to one's children. This is a powerful incentive to work hard and make the business successful.

Thirdly, a family member has a different degree of pride in the success of his family's business as compared to a professional manager. Whilst the latter may enjoy a great deal of reputation while he is at the helm of business, once he retires the power and glory pass on to his successor as head of the business.

In a few years time the retired CEO's contributions are either forgotten or overtaken by his successor's. In a family business there is no retirement age and the reputation and achievements of an individual at the helm endure for a much longer period""till he chooses to retire or dies. This longer time recognition within the company is another powerful motivation.

Disputes within leading business families provide a soap opera for the media, partly because family businesses have a longer shelf life. Similar disputes and rivalries do exist in some of the professionally-managed companies.

But they do not attract the same publicity because there will be a controlling shareholder (say, a multinational) who will force the two parties to reconcile their differences or remove one of them. In any case one or both of them retire and go away within a stipulated time.

In a family-managed business such termination is made much more difficult, as ownership and management are more intertwined and there is no definite time limit for the service of a family member.

That is why a dispute in a family business acquires a life of its own and appeals so much to the media and the public. In most such family disputes, eventually the members are compelled to realise that the family itself will be hurt and then wiser counsel prevails.

However, if one side or the other is pushed into a corner, it could behave irrationally. This can lead the whole group to ruin. In such cases one can only say with Shakespeare that "those whom God want to destroy""he first makes mad!"