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Family, as an institution, dominates India—be it in culture, religion, politics or business. In politics, it takes the form of an elected dynasty; in business, it is dynastic succession.

The Indian mind relies more on traditional discipline than on systemic regulation. The idea of parampara (family tradition) is greatly valued; even an unknown person from a known family is trusted. Estimates show that 95 percent of all registered firms and 100 percent of some 42 million unregistered business units in India are family-owned businesses. They generate over 70 percent of the market capitalization, 75 percent of the GDP and 57 percent employment in the country.

Family-run and professionally-managed corporates are sharply differentiated. Companies listed as family-run are promoter-led, while professionally-managed companies are promoter-less. In India, most large listed companies are promoter-led and are very successful. But the high number of promoter-led corporates in India is not unique to the country. According to Professor John Ward of the Kellogg School of Management, some 80-90 percent of all firms in the world are family-owned, thus promoter-led. In fact, an IMD survey found that 99 percent of Italy’s businesses and 70 percent of Portugal’s are family-owned.

In all relation-centric societies—as opposed to contract-based ones—families dominate the corporate economy. In these countries, the family is a springboard of sorts for entrepreneurial growth. In the U.S., too, 29.5 percent of all startups, 16.9 percent of new firms, and 17.8 percent of all entrepreneurial firms are family-owned. Family businesses generate more than 70 percent of the world’s GDP and employment. This is true of all Asian economies.

So why does debate tend to undermine family-run corporates? Well, in the last couple of decades, the Anglo-Saxon business model has become the benchmark to evaluate the rest. However, the emergence of promoter-less corporates in the Anglo-Saxon world is not an autogenous evolution in business. It is the direct effect of the socio-cultural changes centered on individualism among the Anglo-Saxon people. This has impacted savings and investment models, leading to promoter-less corporates.

Three tectonic changes have occurred, particularly in Anglo-Saxon economies, in the last three to four decades. First, there was a large scale shift from safe savings to risk savings in stock markets. In the U.S., less than 6 percent of households held stocks in 1980; this rose to 25 percent in 1990, 49 percent in 2000 and to 52 percent in 2001. This increasingly led to the dilution of corporate ownership in favor of the public in the market.

Second, a change occurred in the character of investors from individuals to institutions; read funds. This development led to two more consequences: one, in large U.S. corporations, promoter managers got replaced by professional managers appointed by the funds; two, the fund manager became the boss of the corporate manager, both professionals. It turned into an all-professional corporate world.

Third, there was a shift from scrip-based to index-based trading in stock markets; with this, even the residual interest of the investor through intermediary funds declined. As a result, the ultimate investor supervision of the corporates virtually ceased. This divorce between ownership and control, celebrated as an unmixed blessing, suddenly became the very cause of crisis in the corporate world in the early part of this century—Enron and Worldcom.

Savings, which used to be dynastic earlier in the U.S. too, became purely a personal choice. Bosworth recommended that the U.S. should promote dynastic savings. But dynastic savings is a by-product of dynastic living. Dynastic savers generally seek safe, not risky, savings.

That is why, in Asian economies, the stock habit is far less. In dynastic living models, the propensity to save is more—regardless of the returns! And in the individualist Anglo-Saxon world, the propensity to spend is more.

The U.S. witnessed a huge erosion in savings in recent times, which many experts agree is the cause of the present crisis. In the year 2006, the U.S. household savings turned negative, with their spending exceeding their current income by $112.5 billions. Deepening social safety net substituting for the decline of supportive families as mutual cause and effect seem to have acted as a disincentive to save. But former U.S. Fed chief Alan Greenspan does not see anything wrong with this; in fact, he celebrates it.

But the truth is actually the other way around. Bosworth, not Greenspan, seems right. The dynastic Asian accounts for 2-3 of the global savings and the professional U.S. borrows as much out of the dynastic savings; this what leads to global imbalance. The global imbalance of today is not because Asians now save more or spend less as compared to their parents and grandparents; it is because the Americans, as compared to their parents and grand parents, now save less and spend more.

The result: global imbalance is cultural, not economic.

S. GURUMURTHY is a well-known columnist and chartered accountant. He is also the convenor of the Swadeshi Jagaran Manch.

©Entrepreneur October 2009

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family, family business, Gurumurthy, John Ward, Kellogg, smetv, succession