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Reflections on Family Business in India

Senior Editor John L. Ward recently keynoted India’s first family business conference, sponsored by the Congress for Indian Industry. More than 110 members of business- owning families participated, several of them recounting their own case histories. John had the opportunity to observe how the country’s history, culture and religions affect the structure and character of its family firms.

  • Since most Indian families don’t include their daughters in their businesses or their estates. While this practice may be beginning to change slowly, it limits the number of inheritors and the number of shareholders in the family business.
  • Sons are usually expected to join and provide leadership for the business. As a result, ownership is typically restricted to males leading the business who act as “family managing partners.”
  • Because most firms were founded in this century by relatively small families, third- or later-generation businesses tend to be owned and led by teams of cousins.
  • The “family managing partners” concept is compatible with the Indian culture which stresses consensus, no explicit conflict, compensation equality, and mutual dependence. One of the most popular metaphors is of the hand -- while each of its fingers is different, all are important to its functioning.
  • Many older Indian family businesses resemble “holding companies,” but few have group CEOs. Typically, each cousin or “partner” runs his own business. While ego and status differences are minimal, portfolio divestitures and resource allocation decisions are very difficult. Indeed, until recently, “holding companies” were not permitted. Family firms in multiple businesses were really a web of cross-owned, separate companies.
  • Each cousin running his “own” company tends to employ his own sons, creating business fiefdoms that become sacred ground, making business success a very personal affair. Consequently, performance is usually accepted by the group, regardless of quality. As global competitiveness requirements intensify, a future question will be whether the culture will permit selective entry into the business and selective business leadership choice that tough market conditions demand.
  • Family structure is deeply affected by the “Hindu joint family” concept. Daughters move into their husband’s families. Brothers, with parents and children, are very cohesive, often living together in compounds as a family unit. Consequently, business is talked all the time. Family interaction dominates social life. According to Indian behavioral scientists, family members can feel stifled and locked in. Family stress can be great.
  • A strength of the Indian family business system is that ownership power is de-emphasized. In fact, more than any other place we know, stock is willingly and frequently passed to all cousins equally. For example, if two brothers own and run the company and one has two sons and the other has three sons, the shares likely will be divided equally five ways. No voting trusts. No branch identity. That brings strength to the ownership structure and philosophy for the future.
  • India’s system of taxation and business regulation has had great impact on family firms. For several decades, the government required licenses to compete in an industry. Licenses were given to the government’s friends, leading to the creation of relatively inefficient monopolies. With global competition and opening of markets, entrenched family businesses struggled. Well-managed family firms, however, were able to enter new markets.
  • India’s socialistic era led to notoriously high tax rates. For a period of at least three years, personal tax rates exceeded 100% of income when 85-95% income tax rates were coupled with 15% wealth taxes. To have a decent standard of living and to avoid erosion of capital base, every male family member was eager to join the family business where he could participate in the “black money” and perks, methods for avoiding taxes.
  • Tax cheating led to the lack of transparency and secrecy that make professionalizing the firm so difficult.
  • Tax laws also reinforced the multi-business conglomeration that helps facilitate each son or cousin having his own business. When tax rates were so high, profits could be reduced through acquisitions and new business development. Acquisition costs were tax deductible.
  • A culture of avoiding conflict and favorable tax laws also facilitate plenty of split-ups of businesses among brothers or cousins when disputes arise. De-merging does not result in capital gains or other taxes (as it may in the U.S.). Further, Indian law prohibits perpetual trusts or foundations that might facilitate unified ownership.
  • Lack of professionalism has led experienced, talented non-family managers to avoid working for family firms. As competition intensifies, the ability to attract and retain non-family executives presents a major challenge for long established family firms.
  • Indian family firms contribute a staggering amount back to their communities. As the costs of education, health and welfare rise, older and less competitive family firms see larger percentages of their cash flows devoted to philanthropic activities that the owners feel duty bound and morally responsible to continue.  Family members take great pride in these social contributions, appreciating and supporting the business' role.
  • More of Indian business society's offspring are earning  MBAs or other advanced degrees in U.S. or English universities. Attracting “the best and the brightest” back to their homeland troubles parents greatly.
  • Facing a more competitive global business environment, many firms share strategic challenges. In the past, larger family firms conglomeratized as they gained more government licenses and expanded to provide businesses for the ever growing family. Whether to follow the global strategic gospel of focusing on limited core businesses is the decision they now face. When the country regulated imports, many large family firms entered into favorable joint venture agreements. With deregulation, their outside partners (usually U.S. or Japanese) can enter the market directly, and Indian firms struggle with maintaining their bargaining power in those relationships.

The Future

Holding companies are now legal. Taxes are now modest. Competition is pushing firms to be more focused in the core competencies of fewer business units. Daughters are becoming more educated and a few are entering the businesses. Sons are learning the western ways of individualism from overseas education. High tech industry, especially software firms, are showing India the capacity to generate high personal wealth from individualistic enterprises. These forces raise several questions:

  • Will Indian family firms be able to attract their most talented offspring? * Will the companies need to identify a single overall CEO?
  • Will the companies need more selective criteria for family members to enter the business or to be promoted to head business units?
  • Will family firms begin to have more family shareholders not working in the business? * Will families need to develop family councils or more formal systems of family governance now very rare in India?
  • Will traditional commitments to company-sponsored social welfare institutions be able to adapt to the tighter profit margins of today’s competition and the growing expectations of foreign joint-venture partners?
  • Will the exuberance of high flying stock markets affect the historic strategic patience of Indian firms?

Perhaps comparing and contrasting family business in several cultures can lead to helpful insights. One lesson seems perfectly clear: when governments over-tax and over- regulate, entrepreneurial behavior can adapt, but not necessarily for the society’s best interests. And liberalizing state controlled economies can bring great capitalistic zest and societal wealth creation. But global competition is making the costs of governmental intervention more severe and permanent and the benefits of free enterprise more dramatic and lasting.

 

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