New Delhi: “Almost all companies start out as family businesses, but only those that master the challenges intrinsic to this form of ownership endure and prosper over the generations. The work involved is complex, extensive, and never-ending, but the evidence suggests that it is worth the effort for the family, the business, and society at large.”

—McKinsey Quarterly, January 2010

Preparing business scions for a professional role is a complex affair, especially given the myriad concerns that crop up regarding—ironically enough—continuity.

Parents may underestimate the child’s ability to maintain or build the business. Or, they may have unrealistic expectations of their children. They are also concerned about the pressure (or the lack of it) on the child. They want the interests of the child to be compatible with those of the business, but they also don’t want the child to take the easy way out by joining the family company. They worry about the level of the child’s maturity and genuineness and whether the passion depicted by earlier generations is alive. They worry about their children being able to command the respect of employees, customers, partners and vendors. They worry that the dynamics in professional relationships they have taken years to cultivate may change because of this new entrant from the family. They wonder whether the younger generation will have the tolerance and patience required to work efficiently with the older generation.

Moreover, will they stay the course for not just a year or two, but for a decade or two. “The real challenge in a family business is not passing the baton, but working together in it for a substantial period of time,” said Parimal Merchant, professor at the SP Jain Institute of Management and Research (SPJIMR).

Globally, family businesses create an estimated 70-90% of world gross domestic product (GDP) annually. In North America, family firms comprise 80-90% of all business enterprises. Family-owned businesses contribute 64% of GDP and employ 62% of the workforce in the US. In India too, as this Mint series has reported, “a little over one-third of the companies with a market value of at least Rs5,000 crore on 31 December 2010 are still headed by a member of the founding family”.

From the child’s perspective, there’s the doubt about whether the parent-guardian will allow a free hand. Will the older generations be open to new ideas and innovations and investments? What will be the risk appetite of the older generation in terms of entering new businesses, getting financing from outside and relinquishing control?

Issues of style, management, capability and ambition are more pronounced in family businesses than in non-family-run enterprises and things become even more complicated in joint family businesses where uncles, nephews and grandparents are involved. Preparing and grooming the younger generation not just in sectoral competence, but also in areas of management and culture is, therefore, a top concern of the older generation. Given the multidimensional nature of the issue, founders of family businesses do realize that “it takes a village”—to borrow a term made popular by Hillary Clinton—and a lot of help from the outside to successfully train the next generation and transfer the business within the family.

Harsh Mariwala, chairman and managing director of Rs2,660.8 crore Marico Ltd, faced some of the complications that arise from working in a third-generation joint family business when he decided to part ways with Bombay Oil Industries in 1990 at 40. He started Marico with the spun-off consumer division of the family business where he had spent 20 formative business years. Though his family name “cut ice” with the business community in Bombay, the family, he said, “would not have permitted the risk-taking, speed and agility that he desired and that was needed to start, for instance, Kaya Clinic, a health and wellness brand under the Marico umbrella”.

There are other family businesses that support the younger generation in starting something new, which also frees them from running the existing family enterprise. The Murugappa family has had younger generations start new businesses as group companies.

The Burmans of Dabur took a collective decision some years ago that the family’s executive involvement would come to an end. They remain as Dabur’s founder family, but with a professional executive team. To that end, Aditya Burman, one of scions of the family, started his own cancer diagnostic company, Oncquest Laboratories Ltd, with the support of the family.

Experts such as Merchant of SPJIMR categorize family businesses into the small- and medium-size range—typically under Rs1,000 crore in size—and enterprise-sized or larger ones, which are greater than Rs1,000 crore. Larger family businesses take a more systemic approach to grooming the next generation than smaller- and mid-size businesses (SMB). “Youngsters in SMBs are pushed into an early induction as they can get their hands into the local situation. The owners, typically the fathers, are already neck deep in running the operations,” Merchant said. First-generation business owners who have had to build their network from scratch don’t want their children to have a similar handicap. They ensure their kids join the most-sought-after institutes and academic programmes from the elementary school level, going on to premier institutes in the West, including Ivy League schools in the US.

Once they join, the large business houses usually make an orchestrated effort to get the younger generation maximum exposure and training. The youngest, third-generation member of the family board of the Rs8,500 crore JK Organization, 24-year-old Shrivatsa Singhania, participates in senior-level strategic discussions, vendor negotiations, monthly operating reviews as well as top management conferences. The objective is to expose him to key decision-making processes and even seek his input.

When he isn’t engaged in these discussions, he’s performing a hands-on operational job at the plants of JK Paper.

A balanced approach is needed to handle these differing roles. Hari Shankar Singhania, group chairman and patriarch of the family, himself started at the grass roots in the 1960s as a young man in his 20s. He was sent at the time to remote Raigarh in Orissa to start the first JK Paper manufacturing plant for a few years by his father Lala Lakshmipat Singhania.

“More so in medium- and small-businesses, it is the duty of the son to take forward the family business—there is no other option,” said Merchant, who has taught the younger generation of some 1,400 small- and medium-family businesses over the past 15 years.

Culturally, Western business families allow more freedom in this regard. However, while family businesses may place fewer obligations on younger generations in the West, they can be more mercantile as well in transferring family businesses.

“Success cannot be claimed when, as a result of the transfer plan, the business is so financially impaired that the long-term likelihood of the business survival is doubtful,” Steve Parrish wrote in the May 2009 The Journal of Financial Service Professionals, regarding the monetary element in transferring businesses. “For example, if the terms for selling the business from parent to child are so onerous that they burden the child’s ability to operate the business, the plan is a failure.” In the West, a business is sometimes sold to one or more children.

Family constitutions and written rules are more a western model. “Rules are not common here and this is where Indian family businesses need to reflect as to what they are grooming the next generation for: a job or the CEO position, to build the wealth of the family or to perpetuate the business,” said K. Ramachandran, professor, Indian School of Business. “Having a clear road map is necessary, whether it is for three or 10 or 30 family members.”

Larger business houses such as GMR, which has an elaborate family constitution, Dabur, Godrej and Boyce, and Murugappa Group are changing that pattern.

Though far from equitable, the role of women in family businesses is gaining prominence. Merchant recalls just one girl in his first batch of 16 for family business students in 1997. Today, around 20% of the intake each year is of female students.

“Earlier, joint family businesses would typically have three to four brothers involved. Now more family businesses, especially within small- and medium-businesses, involve just the nuclear family. Should something happen to the husband, the wife needs to be in the know about debtors, creditors etc., or else the business becomes very vulnerable,” Merchant said.

Also, with women making strides in every field, even conservative business owners are seeing the futility of excluding a valuable talent resource. Husband-wife duo Vijay and Sushma Berlia, who run the Apeejay Stya Group and the Svran Group, are a case in point. Though both inherited their respective businesses—pharmaceuticals and education, respectively—from their fathers they have merged and grown the joint business.

For the Berlias who have been inducting their two sons, the older in the pharma business and the younger in education, more by default than by design, it is important to perpetuate the same culture and values in the organization as prevalent in the house. “The two are always linked to the family in a family business,” said Sushma Berlia, president of the group.

While there’s no formal family constitution, Berlia has envisioned a document to guide future generations of the family. They are entitled to deviate from this so long as there’s an explanation for doing so. “The document will highlight what we as a family believe in as an essential core and the parameters by which we should judge what we are doing,” she said.

Primary considerations

Whether a formal contract is adopted or a simple analysis of the family situation is performed, the owner must consider the psychological aspects of the family-owned business. For most family-owned businesses, the primary considerations are:

• Control—Who’s in charge, both in the family and the business?

• Equity—How will family members be treated equitably when they have different positions in the business?

•Jealousy and loyalty—What are the family and business politics?

• Conflicts and disruptions— What situations could cause confrontations, and how can they be avoided or resolved?

Extracted from ‘Successfully Transferring the Family Business: A New Methodology’ by Steve Parrish

malvika.c@livemint

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