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Professor Kavil Ramachandran, the Thomas Schmidheiny Chair Professor of Family Business and Wealth Management at the Indian School of Business, Hyderabad, in an engaging talk with Ankush Chibber.

Q: India has a high concentration of family-owned businesses. What are your thoughts on this trend and how does it compare to
other economies?
KV: There are multiple dimensions. In terms of ownership structure, a high percentage of all businesses in India are family-owned. The same is also true for a western economy like the U.S., where almost 60 to 70 percent of all businesses are family-owned. But it is even higher in India, to the tune of 80 percent.

Take a look at the Nifty. If you take out the PSUs, half the companies listed on the bourse are either family-owned or family-controlled.

Comparatively, family interference and control in business operations in India is extremely high compared to western countries.  In some ways, this is a cultural pattern that you will find across the Arab states, South Asia and South East Asia. This pattern comes from the social thinking that since you are the custodian of the family, the money is your responsibility, and hence you need to be fully involved. There is also a line of social thinking that believes the business skill and expertise is in the family  itself, rather than outside it. Hence, more family control and involvement is okay. You will see this thought pattern from Egypt to Japan.

There is also a status value attached to identifying yourself with a successful business. As a concept, the idea of selling a company is a very, very new to India. Indian families would not set up businesses with the intention of selling them later. So, the son or daughter ended up inheriting the business and the chain of family control went on.

Q: Are there any disadvantages to a family-controlled business?
KV: The concept and practice of family governance is still at a nascent stage, and the lack of it can harm a family-run business. This has multiple dimensions to it.

Now, the quality of management in family-run businesses is not always the best. Just because the son did an MBA from some foreign university and is back in India, he is appointed VP or MD of the company, even when there is somebody better available on the outside. This is not always necessarily beneficial to the company and its prospects.

Secondly, there tends to be overcrowding. By this I mean that there is no clarity in decision-making. With family members at multiple levels, there are too many egos, too many voices, too many differences. Also, new business ideas may get pushed forward or back even when they may not be feasible. Just because my son has a good idea cannot always be reason enough to enter a new business. Go Air is a good example. The son wanted to start an airline and it was provided for by the father. It may or may not become a success, but it was not necessarily the best idea for the parent company to enter this vertical.

Q: What impact can inefficient family governance have on a company’s decision-making process?
KV: I have just completed a study on the impact of family control on investment decisions. We studied the case of Tata—arguably one of the best-run family businesses in India. Their decision to take over Corus affected all the smaller group companies, all of which had a holding in the parent group company. They took over Corus saying that this was good for the entire group. So the protection of external shareholders’ interest is not always a priority for family-owned businesses.

Q: Is it true that investors and funding agencies do not look favorably at a family-run SMB unit?
KV: It’s true, but the concern here is not family ownership, but the quality of governance associated with it. Many PE and VC firms have told me that they are interested in investing in SMBs in India, mostly because they have great indigenous technology, great competitive advantage, unique relationships and passion.

Q: What is your take on family succession practices in India? ?
KV: I compare it to a relay race. In a relay, the baton change cannot take place immediately; it has to start gradually. Before the second guy takes the baton, he must start taking slow steps to gain momentum, while the first guy must slow down and pass the baton at a steady time. It is only after the baton changes hands that the second runner should speed away.

There is also the issue of social acceptance. In India, if the father passes the baton to the eldest son, it is considered socially accepted behavior. Thus, the entire succession affair does not materialize, as there is no common ground to meet on. In a nut shell, not planning your succession in advance can be the biggest back breaker for family-run businesses.

Q: What are the issues family-run SMBs should keep in mind?
KV: Their biggest problems that family-run SMBs currently face have to do wit professionalizing the business, delegating and decentralizing control. To do this, they must take note of a few facts. They should realize that it’s possible to build lasting businesses across generations, as long as internal governance is proper. They should realize that there are mechanisms available today to address any challenges they may face in terms of governance and succession. And they should practice these mechanisms.

Finally, they should keep communication channels open across generations. In the realm of internal governance, they should anticipate and respond to the changing times. And for that, communication is very important.

©Entrepreneur October 2009

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family, family business, Family Business and Wealth Management, Indian School of Business, Kavil Ramachandran, smetv