The origins of family-owned business in India can be traced back to the 19th century, when Cowasji Nanabhai Davar set up India’s first cotton mill in Mumbai. Growth of the Indian economy is nurtured by small group of promoters and family business who are the ‘unsung heroes’ of the corporate sector. Through the decades, most family-run enterprises have emerged as acclaimed companies across sectors—paving the way for a strong business ecosystem that honed India’s economic and employment capabilities. Family-owned business have transformed and adapted themselves to suit the paradigm shifts in their respective sectors, global economic environment, indigenous challenges, and customer expectations. With multinational corporations setting-up their base in the country, they had to pivot towards strengthening corporate governance policies and practices. We have seen a steady growth of family-run businesses investing in corporate governance over the last decade. These companies are at a different maturity level, where some have already made changes to their Board and some are progressing to make the changes. While some companies may be doing this to comply with the laws, a lot of them are taking a more conscious approach towards governance.
Corporate governance includes balancing the interests of all the stakeholders of the company, such as stockholders, management, clients, suppliers, investors, government and the community. For this, it is important to regularly conduct shareholders meetings and family meetings to resolve conflicts, and have a better communication with the management and stakeholders. Communication is the key in a corporate environment and the same goes for a family-owned business. Hence, instituting formal communication channels that will allow them to share their thoughts, objectives and problems might help as well, and finally, to have open communication with minority shareholders and regulators on the objectives and decisions taken by the company. Diversity in the company Board is essential for effective corporate governance. Just like diversity is vital for smooth functioning of an organisation, a diverse set of Board members governing it can help empower the Board to use their knowledge, skill sets and experience to add new insights and perspectives.
Embracing corporate governance can enable family businesses to take a positive step towards corporate culture and create a sense of trust in the management, employees and their customers. The ‘tone at the top’ is the cornerstone for good governance. This top-down approach reflects in decision-making and strengthens the relationships within and outside the organisation. It lays the foundation not only for corporate governance, but also for an efficient and effective management of the business.
The Board plays pivotal role in setting the ‘tone at the top’ for different aspects of governance such as maintaining and monitoring business control, encouraging the right behaviour, and open and transparent communication among shareholders. Effective set up of processes to enforce these aspects requires the Board to apply the right risk lens to make an informed decision. Also, the Board needs to have experienced personnel in this journey, who are self-driven and inquisitive. They should also appreciate the risk landscape as well as legal and ethical responsibilities. Given that flexibility is one of the core strengths of a family-owned enterprise, innovation should be the second nature to their business processes. Hiring the right mix of talent and embedding state-of-the-art technology are quintessential factors to help companies stay ahead of competition. Furthermore, smart succession planning is important for smooth transition not just at the top, but also at mid and senior levels of the organisation. A proactive and forward-looking mindset could help ensure the setting-up of a strong structure for succession. Also, training in advance those family members or professionals from within the company who are slated to fill critical positions would help.
Strong corporate governance practices are not a mere function of the size and maturity of the organisation, but of the leadership and promoter mindset that can drive such initiatives. Contrary to the perception, family-owned businesses can establish strong corporate governance standards and practices as the promoters are aligned to the benefits. To summarise, in an increasingly volatile and competitive business environment, both in India and on the global turf, these enterprises must not be afraid to drive the required change.