Bridging the Gap for Sustainable Growth: Family Enterprises

Anurag Aman
Director, Family-Led Businesses, Aon Hewitt

Business enterprises that were started by the first generation entrepreneurs over 30-40 years ago have consistently seen the next generation entering at a managerial level. The second and third generation family members are entering business after studying at renowned business and technology institutions around the world and getting direct experience as apprentices. The area of focus has shifted from having an enterprising attitude to handle the license raj to a growth focus and building a sustainable organization. When five-year-old companies are beating the market valuations of almost 50-year-old organizations, and the next generation is acutely aware of this phenomenon, it is only logical that the focus would be on unlocking the potential of their own business. Sustainable Growth Given that less than 20% of businesses survive into the third generation of family members, it is worthwhile to understand what makes organizations sustainable and what makes them work. The crux of sustainable growth is innovation and talent. Very often one hears that professionalization is the path to sustainability, but reality could be different from what is commonly perceived external professional talent may not be the panacea to the survival or growth aspirations of a family-led enterprise. Additionally, the core values and culture of the organization would definitely mean a differentiated experience for a larger employee population.

A few of the challenges are as follows:
1) Capital required for expansion and growth, private equity and fund raising through market
2) External professional talent at senior levels for capability Family members need for direct operational control due to lack of robust management systems
3) Aspirations of family members to be involved in the running of the company

Implications
Investors or potential investors with a view towards unlocking long-term value are nudging family enterprises to develop a high performance culture and build a future-ready organization, which could mean questioning the capability of family members to run the business or a business unit. Very few family enterprises have been successful at infusing external professional talent at senior levels. Professionally qualified talent requires an environment that offers career opportunities, provides empowerment to take decisions in the interest of the business and organization, and most of all, is devoid of cross-wires of aligning with multiple family members in running the business.

One of the biggest challenges in a family-led business is to ensure that the right family member is handling the right role. It is critical to have a defined role and performance accountability. If a family member is in an operational or management role, the external professionals need to be reassured that their career growth will not be disadvantaged. At the same time, multiple members of the family in the business can cause unspoken competition and difficulty with holding a family member accountable in case of non-performance. One of the biggest challenges is the sense of 'entitlement' by virtue of being a scion or heir. Absence of fundamental rules and an appropriate family forum to manage conflicts that may rise can lead to disastrous litigations and business split.

Not many Indian businesses are ready to give a chance to an external professional over a family member. One particular study found that over 75% of family enterprises say that the next generation will enter the business in operational capacity. Although a few organizations have tried to segregate shareholder responsibility and management responsibility by having a shareholder director overseeing a few functions and businesses, this segregation is a thin line. This is not to say that family members should not be managing the day-to-day affairs of an organization – they absolutely should and should prove their capability. After all, who can manage a business better than someone who is emotionally attached to business, embodies the values and has the capability to manage the business? The right balance and approach can depend on the readiness of the enterprise and family members. Pidilite Industries has just announced that they will be bringing in a professional CEO from a global FMCG company to drive global expansion. Wipro has long been run by an external professional CEO. Organizations like Aditya Birla Group, Mahindra Group, Fortis, and Hero MotoCorp Ltd., are being run by family members along with professionals from the industry, which is critical for the sustainability of management capability and infusion of best talent.

How to overcome the challenges and build a futureready sustainable organization:

Building a future-ready organizational structure, with more than one next generation family member to share the controls
It's important to have a clear segregation of business portfolios. It is crucial to build skills and experience over a period of time in order to handle portfolios successfully

Transition of business controls: Typically, the next generation has moved into the organization in executive roles. Shareholding alone has not been the primary lever for keeping the control intact through the transition. A few family organizations have family members only play board roles, while the majority have family members with a direct role in running the organization. Planning and agreement on the transition of control are crucial.

Succession and grooming: As most family businesses have family members joining the business and operations of the organization, an immersion plan is critical. What should be the role of the successor/next generation? How long should the learning and shadowing phase be? Who should coach and mentor the next generation? This process can perhaps be more mature and can be made robust by a well thought out orientation and having clear accountability for chosen areas, as well as by giving family members opportunities to learn, build credibility and prove themselves. Based on education and aptitude, certain strategic management areas should be identified for the successor.

Family and professionals or family vs professionals: Many family businesses have not been able to give equal status to family members in executive roles and to professionals who join from outside. Indian family businesses have a long way to go in this direction. External senior professional executives have typically been kept on a short leash and find it hard to overcome the family dynamics. Despite the intent towards empowerment and towards the delineation of powers and accountabilities, this has not been successful in many organizations. Multiple lines of command and overlap in roles with family members would lead to obvious conflicts.

Family success framework
In order to make the success sustainable and to avoid family dynamics jeopardizing the business and organization, many family-led organizations like Murugappa, Mahindra Group and GMR have already created super structures. This allows them to ensure that the values and philosophy are aligned, the performance management of family members in business roles is transparent and equitable (sometimes through an independent team of eminent professionals), family decisions and business decisions are clear and demarcated, and differentiated performance is rewarded justly and equitably. All of these need to be done very carefully and transparently, and the principles and conflict resolution mechanisms need to be established in advance and accepted by all family members Organizations may have to understand this need earlier in their evolution curve and start working on building a family success framework for sustainability of the enterprise.