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Family Businesses: Winds Of Change
Family run businesses still dominate corporate India, but many are now opting to let professionals run the show
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The succession issue at drugmaker Cipla had turned crucial recently. The 79-year-old chairman and managing director Y.K. Hamied, among the most respected generic drug industry veterans in India, could foresee what was in store for his family-run business. His nephew Kamil Hamied — an ardent football fan — was not really interested in running the company. His niece, Samina Vaziralli, was too inexperienced to take on the reins of the company and Hamied has no children.
After a successful run of 78 long years, Cipla decided to restructure its management by appointing a professional CEO and a team of non-family managers in senior positions in 2013. With the decision, Hamied, the family doyen, stepped down as managing director and let the professional team led by outsider Shubhanu Saxena run the company’s globally spread business. Although Saxena left the company in August and Vaziralli was made executive vice chairperson, the company remained under professional management, led by its new CEO, Umang Vohra, who was not a member of the family, either.
Cipla was just one of the many family-run companies that dominate the business scenario in India, to embrace the desirable shift to professional management because of a situational compulsion. But the trend is catching on. Promoter driven companies in India are in general in a state of flux and the transformation is turning into a trend.
Those That Stumbled
Many yesteryear champions like the Birlas (excluding the A.V. Birla branch), Nandas of Escorts, the Sarabhais and the Singhs of Ranbaxy, lost out either because of the division of the original empires and/or the next generation’s inability to take the business forward. But, many other great old family businesses, such as the Tatas, the Ambanis, the Mahindras and the Bajajs adopted professional management strategies much earlier and have grown in leaps and bounds.
Many more are now professionalising their business strategies for survival. Industry experts attribute this transformation to the promoter groups’ attitude towards adapting to necessities and new priorities.
“Economic liberalisation and rapid expansion in the industrial base in recent years have not only created growth opportunities for many, but have also tested their resource capabilities to respond to them; some have chosen to follow the role of a custodian of their existing wealth and followed the preservation route, while some others have followed more of an entrepreneurial route of exploiting opportunities with or without relevant resources, with mixed results,” notes a working paper on Indian family businesses and their survival by Kavil Ramachandran of the Indian School of Business.
“One of the key resources for all of them is their family and their prime concern is wealth and welfare of their family. A major dilemma many of them have faced, particularly in the last decade since economic liberalisation began, is to choose between combinations of risks and returns of business growth and conservation of wealth of the family,” Ramachandran explains.
According to economic historian Jayati Sarkar, the business groups that adapted to the new environment such as the 1956 industrial licensing or post-1991 market reforms, continued to grow, even as others fell off the radar. The fall of family businesses that could not adapt to the post-independence growth and the 1991 economic liberalisation, is also evident from a comparative ranking of the top companies in 1990 and then again in 2016.
Empires That Reign
Family-run businesses still dominate India’s industrial and commercial arena. As Sarkar points out, at least sixteen of today’s top 20 business groups are products of post-independence economic progress. These companies accounted for two-thirds of the combined assets and nearly 70 per cent of the combined revenues of the league companies in the 2016 financial year, according to an article published by Rediff in August.
As many as 14 of the top 20 companies of 1990 have been replaced by professionally transformed, or new generation companies in the 2016 list. The elevation of at least nine new names to the current list, including Vedanta, Infosys, Wipro, ICICI Bank, Bharti, Adani, GMR, HDFC and the Jaypee group, are undoubtedly the ones that could successfully use the opportunities of post economic liberalisation.
Even as groups such as the Tatas, Reliance, Birla (mostly the A.V. Birla faction), Mahindra and Mahindra and Bajaj, remained in the top 20 in 2016 just as they were in the 1990s aided by their adaptability factors, groups like the Thapars, J.K. Singhania, Mafatlal, Modi, Kirloskar, Shriram, M. A. Chidambaram, Walchand, Goenka, Ruia and Lalbhai, failed to retain the rankings they had in the 1990s.
Meanwhile, new opportunities like information technology, created another set of top league companies, such as TCS, Wipro and Tech Mahindra within the family owned business groups. As a matter of fact, TCS is currently the most profitable company in the Tata group, while Tech Mahindra is the second largest business in the Mahindra Group after farm equipment and automotive.
Apart from succession issues, increasing financial stress also often plays a key role in leading family-run businesses to the do-or-die situation. Many family-owned businesses were and are, under financial pressure because of high levels of debt and poor financial performance.
For instance, the rise of the A.V. Birla faction to the ranks of a conglomerate within the large Birla empire and the fall of other branches of the family, was in itself a clear case of a combination of all these attributes. While A.V. Birla could strive on the back of better financial support and capable succession, others lost out due to the division of the original empires and absence of capabilities in the next generation to fund the growth and expansion.
Conflict Of Interest
Family businesses are fascinating because of the mutual dependence of two ecosystems family and business that have inherently conflicting characteristics. But, research evidence suggests that these two ecosystems come under stress when their operating environment is under pressure.
An ISB working paper analysed case studies of six Indian companies owned by fourth generation families with diversified portfolios and managed jointly by family members and outside professionals. The paper says that growing interest in corporate governance has its positive effects on family governance too, especially in introducing a greater level of professionalism in business.