Family business succession travails

Written by YRK Reddy | Updated: Jan 19 2008, 06:00am hrs
A McKinsey study concluded some months ago that family-owned companies run by eldest sons fell short in management performance considerably. The findings were on the basis of a survey and study of over 700 midsized firms in France, Germany, the UK and US. The study indicated that about 36% of the firms run by professionals had better scores over that of other companies. The study concluded that family ownership is not the issue as much as family management, especially by eldest sons. The call was for proper succession planning in family businesses that would favour professionals.

Family businesses deserve attention because they remain predominant in many countries, including India. It is estimated that more than 97% of all registered firms are family-owned. Most private firms in the BSE index are indeed family-run. In OECD countries, family-run businesses account for over 85% of the total, with nearly 250 of them notching up annual revenues of over $1 billion. In the US, about 30-40% of the Fortune 500 are family-owned.

At the apparent level, the conclusion that professionals other than family members manage businesses better may sound intuitively right, even in India. But a distinction must be made between firms that opt for family succession in the sole interest of the individual placed in the hot seat, and those that do it with meticulous planning in the interest of the firms future. Many small and mid-sized firms are often of the former variety and seem to be limited by smaller aspirationsthey look upon the companies as agrarian properties rather than tradable assets that can improve or decline dramatically in value. The patriarch or matriarch tends to instill business aspirations among children without analysing its impact and the tradeoffs for both the company and individual. This results in the anointed successor having a maintenance job rather than one demanding vision and verve for value multiplication.

Most small and medium enterprises indeed appear to be caught in this bind. On the other hand, some good learning is evident from some big business families that have planned meticulously to inculcate the necessary vision, values, education, skills, experience and competencies in the identified family members. Such families appear not to press the nextgen to take up family business as a default option, but examine if these individuals have aspirations to pursue other independent careers. They may promote wider thinking and not force business careers upon the unwilling, who may be happier to be relaxed owners more than harried managers.

Meticulous planners analyse the relevant propensities, priorities, proclivities and business-related competencies much in advance. If there is potential fire-in-the-belly to learn, develop and deliver, they are taken through the necessary education, exposure and grind. It is heartening that Indias current generation of young leaders has indeed acquired technical and managerial qualifications from world-class institutions and have been put through systematic experience before getting groomed as leaders. Some patriarchs have even pitted other candidates in competition with family members to ensure that the bar is set high enough for the company. They realise that if such a leader is weak, he/she lowers the bar, and thats that. For the competitive growth of any company, the bar needs to be set high enough to provide traction for all. Wise leaders ensure that the bar is not lowered by anointing family members. Instead, they often hive off some assets and get their family members to grow a business afresh, leaving the original business and loyalists to be led by others.

Most medium enterprises must take a leaf out of the succession strategies adopted by big corporations.

In this context, one may ask if the succession planning of the late Dhirubhai Ambani had been a failure. One cannot be sure at allthe conclusion could be different if one imagined that he indeed foresaw the aspirations and competitiveness between both successors and the hyper-growth potential of both independently.