CII-FBN INDIACHAPTER JOURNALmay 2011, volume 1, issue 3a journal on family businessFamily & Business:Matching InterestsFamily business has inherent strengths that can be optimallyemployed if the paradoxes are effectively managedFamily businesses unlike widely-held companieshave not only to stay competitive in business butalso keep the family together. The twin challengesnotwithstanding, Indian family businesses havemaintained an impressive track record. Nearly95% of all Indian companies are family run. Almost everybig business conglomerate in the country is family ownedand about half of the 30 companies on the BSE Sensex arecontrolled by their founding families. However, there areparadoxes in family business that mandate the close attentionof those at the helm of affairs to ensure business continuity.A question often asked is: can ‘family’ and business’support each other in the increasingly competitive businessInside This IssueMs Meher Pudumjee hasbeen elected as the newChairperson of CII-FBN IndiaChapter for Year 2011-12Cover story Pg 1INTERVIEW pg 5INTERNATIONAL pg 7EVENTS Pg 8environment. Addressing this issue at the recently held CII-FBN XIII International Convention on Family Business titled‘Family Business as Paradox’, Mr Farhad Forbes, ImmediatePast Chairman, CII FBN India Chapter and Director, ForbesMarshall Private Ltd, said that ‘family’ and ‘business’complement each other and do not necessarily function inan “either or situation”.Core StrengthsThe essence of family business lies in the unity of purpose.Stating this at the convention, Mr M V Subbiah, Member,CII-FBN India Chapter Core Group, Past President, CII, andAdvisor, Murugappa Group, observed that “family businessis much talked about but not adequately understood”.Portraying family business on a wide canvas, Mr Subbiahsaid that while individual aspirations are increasing rapidly,the spiritual capital residing in families is also fast eroding.These challenges could seriously undermine the continuityof the businesses. Families should take conscious steps tokeep the members together. In the Murugappa family themembers congregate on special occasions and offer prayerstogether. Mr Subbiah said that through these actions theyounger family members take to the family traditions moreeasily which augurs well for the family’s future.Focusing attention on the innate strengths of familybusiness, Prof. John Ward, Founder Chairman, FBCG, andClinical Professor, The Kellogg School of Management, USA,said that in the West there is a general assumption that familybusiness is not an efficient form of capitalism comparedwith widely-held companies. However, a closer examinationof the strategies and outcomes of family businesses hasrevealed that family businesses in the US operate on anaverage 25% higher profitability than non-family businesses.
Cover story1 21: Ms Annelie Karlsson, Executive Director FBN Sweden, at the convention.2: Prof. John Ward, Founder Chairman, FBCG, and Clinical Professor, The Kellogg School of Management, USA, conducting the workshop.2-3 times a year and discuss all of theissues that could possibly go wrongand work out the solutions. This waythe contradictions can be reconciledand synergies may be found betweenfamily and business. The question to beaddressed is: “How is the family betteroff for owning the business, and how isthe business better off being owned bythe family.”Succession planning is invariably themost demanding of all challenges thatmeet family business. Where businessis managed by people who believe theyare “stewards of business” successionis a relatively smooth process but inbusinesses where those at the helm ofaffairs are loathe to “let go off control”succession will be a major challenge,said Prof. Ward.In the instance of two friends whoformed a company and worked likea family, how will the successionhe handled? Ms Annelie Karlsson,Executive Director FBN Sweden, saidthat the children of the partners wouldbe more like cousins, hearing the samestories around the dinner table.Prof. Ward wondered how those involvedin the business 24x7 would feel aboutthose not actively involved in business.Also, when the family reaches the siblingsstage, is there a risk of the siblings creatingindividual fiefdoms. The axiom suggestedis: are we one family, one company or fourfamilies, four companies?It need not be axiomatic to joinone’s parent business but work in allthe businesses so that the experiencegained is that much more enriched,said Prof. Ward.When moving from siblings to cousins,the likely shift is from consensus todemocracy. Plan for a decision makingsystem that is less than consensus,noted Prof. Ward.Prof Ward said that to avoid fiefdoms,it would help if members graduatefrom individual verticals to corporategovernance. What is important is tohave one family, one business.Ms Karlsson explained that thegovernance of the business dependsupon the model of ownership. Itcould be a single owner, or a fewsiblings owning it, or a large numberof cousins having a share in the familybusiness. However, when it comes tofamily businesses the issues can bebroadly divided into three categories:family issues, ownership issues andbusiness issues. The family issues areusually resolved by the family council.The ownership council takes care ofownership issues and business councilhandles business related issues.She said the owners’ council assiststhe owners’ family with the governanceof its ownership; not with running theactual businesses. The role of theowners’ council is to clarify and definethe owner voice. The owners’ councilshould act as a link between the operatingcompanies’ supervisory boards and theowners, and not act as the supervisoryboard. The owners’ council is the forumfor succession planning and continuityof the business.The owners’ council is notconsidered a legal entity. However,advising, uniting, clarifying, engagingand providing helicopter perspectiveon shared wealth are the major roles ofthe owners’ council.The family council safeguardscohesion unity and continuity of thefamily. The purpose of the familycouncil is to keep the family together,promote the business’ name in society,contribute to the family’s socialresponsibility, sustain the family’sculture and traditions, and help thefamily members with education andpersonal development.Underlining the importance of familyconstitution, Prof. Ward urged theparticipants to share their experiencesin drafting their respective familyconstitutions. He said that in drafting thefamily constitution, family businessesshould (i) take time to put down theprocesses, and (ii) make the processtruly participative.Providing a broad perspective onfamily constitution, Mr Arun Bharat Ram,Member, CII FBN India Chapter CoreGroup, and Past President, CII, Chairman,SRF Ltd, said that a family constitutionshould not be limited to business mattersbut instead cover all aspects includingfamily values and culture.Prof. Ward added that there is needfor a good understanding of what ispersonal and what is collective. Howflexible can the constitution be? Hesaid that the main constitution shouldconstitute a (i) family agreement thattakes care of family concerns andinsecurities, and (ii) business agreementthat brings in meritocracy. This will laythe ground for best practices.Mr Arun Bharat Ram said that inhis family business reputation takesmay 2011 | CII-FBN India Chapter Journal 3
Cover storyA panel discussion in progress: (L-R) Mr Arun Bharat Ram, Member, CII FBN India Chapter Core Group, and Past President, CII,Chairman, SRF Ltd; Mr Sunil Kant Munjal, Chairman, Hero Corporate Service Limited; Mrs Pheroza J Godrej, Godrej & BoyceManufacturing Co. Ltd; Dr Naushad Forbes, Director, Forbes Marshall Pvt. Ltd.precedence over every other aspectincluding money. If there is a deviantmember, the family should help torehabilitate that person.Unconventional PathsIn keeping with the traditions andvalues, Indian family businesseshave functioned as highly sociallyresponsible entities. This is a majorcontributor to their business continuityand social acceptance. Touching uponthis subject, Mr Sunil Kant Munjal,Chairman, Hero Corporate Service Ltd,said that his family encourages theelders to experiment. They also allowseniors to partner with outside firms soas to build different perspectives. Wealways accept the difference, he said.Mr Munjal said that now there aremore than 200 members in the family;everyone has an individual perspectiveon how things have to be done in termsof business.Mrs Pheroza J Godrej, Godrej & BoyceManufacturing Co. Ltd, said that thefamily started giving back to society byestablishing hospitals and schools. Thefamily supports outdoor activities likeswimming and sailing. The family wasactively involved in the establishmentof the National Institute of PerformingArts. Now, the family is involved inenvironmental protection activities.Mrs Godrej said that forests are thewealth of the nation and tigers are thesymbol of it. Water, forest, tigers are allinterconnected. The family supportsCII–Sohrabji Godrej Green BusinessCentre. The center is a division ofConfederation of Indian Industry (CII),and is India’s premier developmentalinstitution, offering advisory servicesto the industry on environmentalaspects and works in the areas ofgreen buildings, energy efficiency,water management, renewable energy,green business incubation and climatechange activities.The family also introduced ‘Ganga’soap as a symbolic gesture in supportof cleaning of the Ganga River. “Weare not a family of activists, but we dosupport the social activities by givingtime and money,” she added.Dr Naushad Forbes, Director, ForbesMarshall Pvt. Ltd, said that when hejoined the family business in the mid-1980s the young generation wanted tomove fast but the managers were notin favour of that approach. However,the family provided the freedom to theyounger generation to take risks andmove faster. That younger generationis now heading the family business.“Failures taught us how to developproducts,” he said.ConclusionProf. Ward said that while it mightnot be possible to anticipate allevents, the question is how to createa system that handles new challenges.Also, it is important to note that theissues confronting family businessare paradoxes and not problems. Afamily constitution and the presenceof independent directors on Boardwill greatly address the paradoxicalsituations, he suggested.A blend of ‘business first’ and ‘familyfirst’ approaches will provide the Indianfamily businesses with the necessarystrengths to forge ahead in business. •4CII-FBN India Chapter Journal | may 2011
interview‘India has becomethe leader inthe world offamily business’Prof. John Ward, Founder Chairman, FBCG, and Clinical Professor,The Kellogg School of Management, USA, speaks about thechallenges and opportunities that meet Indian family business,in an exclusive interview. Excerpts:Prof. John Ward,Founder Chairman, FBCG, andClinical Professor, The KelloggSchool of Management, USAYou have been associated with Indianfamily business for well over 13 years.In the course of the annual conventionand through your other interactionswith Indian family firms do you seeany emerging patterns in Indian familybusiness?First of all the number of womenin the programmes has increasedsignificantly over the 13 years,particularly the number of youngerwomen. At this convention I was talkingto four young women all of whom aresuccessors to their businesses. I didn’tfind that as frequently before.The second major change is thatfamilies are able to organise theirbusiness in ways that are best forbusiness instead of merely taking careof family matters and expenses. Thisis because the Indian tax laws havechanged, and culture and habits havechanged. More families are making theeffort to separate business economicsand family economics.Family businesses are alsoincreasingly concerned about being toattract and retain talent has escalatedat a very rapid rate.The other big change is thatseveral family owners are beginningto believe that they don’t have to bethe operators. Young Indian familyowners, particularly men, are able tosay ‘I don’t need to be the managingdirector for my identity. I can dowhatever that is best for the family andfor the business’.I think we are seeing more examplesof family businesses owned by brotherswho are concerned about not wantingto repeat an earlier generation’s historyof partitioning. So we are seeing alittle bit more pro-activeness by siblingteams or brother teams to say howcan we hold this together rather thanhow can we separate this.I think the confidence of Indianbusiness people is soaring as theeconomy has become so strong, andas the respect for India as a businesscentre has grown. The self-confidence,pride, enthusiasm of next generationIndian business leaders has growngreatly.On the other side I am a littleconcerned that too much wealth isbeing generated too fast. I hope thatsome of the humility and the focus onbuilding an institution and not buildingare retained. That is a trend that I ambeginning to see. Building wealth forits own sake is beginning to be seenmore often.Would you say that capitalism has takenfirm roots?Yes, in many ways.may 2011 | CII-FBN India Chapter Journal 5
interviewThe other trend is that 13 years agowhen the children of wealthy familieswent overseas, to the US and Europe,there were questions about whetherthey would come back to India. Nowthey are saying, they want to comeback.The sophistication with whichbusiness is being led is growing.More family businesses are aware thatboards are not just things that youhave to have but that boards can bedesigned in a value added way. Thereis a lot of recognition of that.Most importantly, in the last 13years India has become the leaderin the world of family business interms of family business knowledge,family business interests, familybusiness study, and family businessconsideration.13 years ago it was unknown tohave family members come togetherand talk about family business issues.Today there are business schools thatoffer programmes on family business.There are the CII-FBN programmesthat are conducted in different partsof the country. So the whole conceptof India as a centre of family businessand family businesses coming togetherto support each other has come a longway.Some of the people who are part ofthe CII-FBN are so generous in termsof the care and compassion that theyshow for other family businesses.They support other family businesses,they visit each other’s factories andfacilities, and they talk to each otherabout personal experiences.From a global perspective is thereanything distinctly Indian about Indianfamily business? Are there any learningsfrom Indian family business that may beapplied in other regions?In the early years I used to think thatfor Indian family business to learnfrom the West about how to managebusiness had a lot of potential. But theWest has so much to learn from Indiaabout how to manage family, how towork together as a family and extendedfamily. Some of that comes from thejoint family tradition but not necessarilycompletely, by any means.So the way the Indian families havethought about family leadership -- theculture concept -- is very distinct andvery powerful. The way Indian familieshave organised families and developedbrother relationships, cousins andvery closely connected families holdskey lessons for the West and parts ofAsia.Today, is there greater knowledgesharing between family businessesacross geographies?FBN is contributing in a big waytoward that. Of course, India’s act ofleadership in FBN which integratesthe world of family business is active.India is getting very active in promotingresearch which will lead to sharing ofideas. We are beginning to see someevidence that Indian families areeager for their children to exchangeexperiences, and offer opportunitiesfor internships.There are regional differences when itcomes to the ‘business first’ or ‘familyfirst’ approaches. Is the ‘business first’approach finding more takers in India?That’s probably the trend. I don’t knowif it is more ‘business first’ than it is less‘family first’. My concern area is withrespect to the wealth motivation andnot in terms of business motivation.Indian business leaders have alwaysbeen thoughtful about the interestsof the business, so I don’t think it ismore of that. Instead there is lessbalance between business and focuson family.Are Indian family businesses opening upto independent expertise?Yes. There are people here who havebecome family business consultants.There are professional organisationsthat are developing family businesscompetence or interest. Law firms andaccounting firms too are entering thedomain. So there is a lot of expertisethat is being developed, and thereis growing interest in tapping thisexpertise.We know that family business accountsfor the bulk of business globally? But arethey able to attract the best talent?I think that is a challenge and I dobelieve that in some parts of the worldfamily businesses are seeking andattracting the best talent. We see inthe West more and more young peopleare interested in working for familybusinesses because they respect andappreciate some of the advantages.I think that in India, to some extent,mid-sized family businesses do notbelieve they can attract the best andso they set their expectations too low.Over time, I hope, they can do whatit takes to convince themselves thatthey can attract the best and retainthe best. It will call for some change inmanagement practices on their part.Do you think there is need forsensitisation programmes on theemerging opportunities for professionalsin family business?Family businesses who understandand appreciate the advantages offamily businesses are more and moretrying to educate their managementteams about the distinctiveness offamily business. The real key of courseis you have to walk the talk. If you arewalking the talk and reinforcing thatwith education and orientation, thatwill prove to be very valuable.The global business environment haschanged over time. Business is abouttaking higher risks. Are Indian familybusinesses up for the challenge andsufficiently geared to leverage theemerging opportunities?Indian family businesses think theyhave to leverage the opportunities. Wehave learned in other countries in earliertimes that family businesses tend tobe wiser if they grow incrementally.They don’t feel they have to chasethe biggest opportunities, all at oneswallow, but the temptation to do thatin India is high right now because somany people are doing it. But 10-20years later when we relook this areawe will see that family businesses thatdid this in a controlled way would havebeen more successful in the longterm.What is your message to the emergingsmall family businesses?To the small and medium familybusinesses, my message is, anticipateand plan. Plan for the future of thebusiness, plan for the future of thefamily, and plan for the role of thefamily in the business. •6CII-FBN India Chapter Journal | may 2011
INTERNATIONALStructuring a Transition PlanMany business owners unwittingly risk losingeverything by failing to adopt the optimal transitionstructure. Stating this in an article published inBangkok Post recently, Ian Pascoe, Managing Partner,Grant Thornton Thailand, wrote that more often familyownedbusinesses fail following the death of the founder.Unexpected events aren’t the only source of failure. Just 30%of family-owned businesses survive the second generation,12% the third generation and 3% the fourth, according toThe Family Firm Institute.Pascoe wrote that while the need for an effectivesuccession plan is best started early, it is often precipitatedby a shift in the owner’s outlook toward business and life. Insome cases, owners who were willing to bet the house ona new or rapidly-growing business become more reluctantto gamble with both personal and company assets as timegoes on. In other cases, the need for a new generation ofmanagers or a transition to the next generation impels thesuccession.External change, such as market dynamics, can alsobring an owner to a turning point. The business may neednew strategic direction to maintain competitive advantageand maximise shareholder value. “The first step is to reflecton what you want for yourself and for your business. It’scritical to establishing a personal agenda and identifyingcatalysts for change,” he wrote.This self-evaluation requires the owner to honestly answerquestions:• What are your personal ambitions? How long,for example, would you like to stay active in yourbusiness?• Are your personal aspirations aligned with the objectivesof your business?• What is your appetite for risk and is it aligned with yourcompany’s strategic direction?• What underlying challenges does your business face?• Do they require capital?• Is your management team capable of operating andgrowing the company?• Do you need any personal liquidity?Internal succession is the structure typically followed byfamily-owned businesses. Ownership and management areusually transferred to family members or to managementthrough a management buyout or an Employee ShareOwnership Plan (Esop).In either case, a governance committee, such as a boardof directors or family council, can smooth the transition froman organisation with a single owner to one with either aprofessional or family management team.On the flip side, external succession may be a betteroption if the family members aren’t interested in thebusiness or there’s a lack of confidence in the ability offamily members or the management team. Financing andliquidity requirements are also a determining factor. “Themost viable route for these situations is a triple-track processthat simultaneously explores structures for a strategic sale,financial sponsor-led recapitalisation or initial public offering(IPO),” he asserted. •Family Firms: Solution to UnemploymentMr Mark Stepek, Chief Executive of the ScottishFamily Business Association (SFBA), said in arecent interview to Herald Scotland that therewould be zero unemployment in Scotland if each familybusiness north of the border hired an extra three people.He also criticised the main Scottish political partiesfor failing to put the family business sector at the topof their campaign agendas as a way to help lead thecountry out of its economic difficulties.Mr Stepek, who now splits his time betweenresearching his book, the SFBA, and his role as a lecturerin ethical leadership, said that family businesses arefar and away Scotland’s biggest wealth creators – andthat the Scottish Government should introduce policiesto help foster their growth.As SFBA chief, he offers specialist help, support andskills to family businesses to enable them to grow andflourish over successive generations, and uses as a casestudy the failure of the Stepek family business itself. Hesaid: “More than 45% of the UK’s GDP is producedby family enterprises, and 50% of the entire privatesector workforce in Scotland is employed by familybusinesses. This is an enormous slice of this nation’seconomic activity and it tends to be overlooked.”He claimed the focus of the Scottish Government andtaxpayer-funded economic development agency ScottishEnterprise on high-growth companies is misguided andthat Scotland’s current unemployment level of around220,000 could be obliterated if more jobs were createdin the family business sector. “If each family business inScotland employed three more people, there would bevirtually zero unemployment here. The sheer numbersand the level of economic contribution of the Scottishfamily business sector needs to be taken seriously.”According to recent research conducted by EdinburghUniversity, 41 of Scotland’s Top 100 businesses arefamily-owned and 25% of the 100 largest businesses inEurope are family firms. •may 2011 | CII-FBN India Chapter Journal 7
About CII-FBN India chapterAbout CII-FBN India chapterCII along with FBN International has formed CII-FBN IndiaChapter with the aim of creating a nationally representative bodyof members of families owning and managing business in India.Membership for CII-FBN India Chapter is open to businessfamilies only.CII Members• For companies with annual turnover of above Rs. 100 crore• Primary Member Fees: Rs 25,000 per year• Additional Member Fees: Rs 5,000 per year• For companies with an annual turnover of less than Rs100crore:• Primary Member Fees: Rs 20,000 per year• Additional Member Fees: Rs 3,000 per year.Non–CII Members• For companies with an annual turnover aboveRs 100 crore:• Primary Member Fees: Rs 37,500 per year• Additional Member Fees: Rs 7,500 per year• For companies with an annual turnover of less thanRs 100 crore:• Primary Member Fees: Rs 30,000 per year• Additional Member Fees: Rs 4,500 per year(Service Tax - 10.3% is applicable on the Annual SubscriptionAmount).Academics and consultants are not entitled to fullmembership. Family owned consultants can be associatemembers without voting rights.About FBN INTERNATIONALFBN International is the world’s leading network of businessowning families, promoting the success and sustainability offamily business. FBN International unites some 1,700 familybusiness members representing small & medium sized andmultinational companies spread across 50 countries. FBNInternational organizes 75-100 events annually for familybusinesses worldwide.FBN International is committed to giving and sharingexperiences and insights in an atmosphere of confidentialityand trust. Located in Lausanne, Switzerland, FBN Internationalis a non-profit association founded in 1990 by family businessowners. It is a federation of chapters representing familybusinesses.FBN International is first and foremost a networkingorganisation. Its success in this regard is built on three pillars:Advocacy, Education & Research. •CII-FBN India Chapter Activity Calendar 2011Name of the Event Venue DateWorkshop on ’Building Stronger Business Through Strengthened Family Alignment’ Mumbai 16 July 2011Workshop on ‘Family Values – The Key to Legacy of Continuity and Success’Kolkata17 September2011Workshop on ‘Preparing your Family Business for Strategic Change’ Chennai 22 October 2011Workshop on ‘Family Business Governance – Maximizing Family and BusinessPotential’Sensitisation SessionsDelhi17 December2011Sensitisation Session Cochin JuneSensitisation Session Ahmedabad 8 July 2011Sensitisation Session Kolhapur 2 September 2011Sensitisation Session Jammu 26 November 2011Contact UsCII-FBN India Chapter SecretariatMr Rajesh Menon, Executive Director, CII FBN India Chapter, Confederation of Indian IndustryIndia Habitat Centre - Core 4A, 4th Floor, Lodi Road, New Delhi-110 003. Tel: 91-11-2468 2236 • Fax: +91-11-24682226 •Email: email@example.com • Website: www.cii.inDISCLAIMER: Information contained in this edition of CII-FBN India Chapter Journal is accurate to the best of our knowledge.CII-FBN India Chapter Secretariat will not be liable for any omissions, inaccurate data or subjective views and opinionsexpressed in the content.8CII-FBN India Chapter Journal | may 2011