The nature of workplace decision-making as experienced within family businesses has long been a contentious issue. Some studies claim that family-owned companies gain advantages during the decision-making process through high levels of trust that exist between family members. Foes of this theory maintain that decision-making is encumbered by the lack of formal structures that is often found in family firms. Professor Ajay Bhalla, Professor of Global Innovation Management at Cass Business School, United Kingdom, has a personal understanding of the subject: His grandfather built a successful family business in india and Bhalla can’t remember a time when he was not to some degree involved in it. From a young age he was positioned to observe the inner workings of family businesses and the effects of sibling and parent collaboration on decision-making.
Today, Professor Bhalla is a published author and Full Professor with a focus on innovation management and ownership governance. He has maintained his attachment to the intricacies of family businesses, with particular attention paid to india, through his work in the business and academic order of the field. In an interview with Tharawat magazine, Professor Bhalla describes Indian family businesses, what factors influence their decision-making processes, and what their future holds.
What are the unique traits of family businesses in India?
Set apart the government entities and the foreign businesses, 60% of the Indian stock exchange is dominated by family businesses. What is interesting about most of these family businesses is that they are very diversified business groups. Before 1991 and India’s liberalisation family businesses used to be highly specialised. But after the liberalisation most of these family firms have widely diversified into unrelated areas. Another characteristic is that most family businesses in India are very young apart from the few industry giants that are a century old or older. Due to their young age many family firms haven’t experienced the changes in leadership that the multi- generation family businesses have known through frequent phases of succession.
Also, most Indian family businesses are still fully family- managed and the next generation of these family businesses is well educated. Most of them tend to go abroad for their education, and seek apprenticeships in businesses outside the family and then they come and join the family business. Mostly these young people are the forces that drive family businesses into new unchartered territory and are used as the drivers for diversification.
Why are family businesses so important for the Indian economy?
In the Indian economy you primarily have two types of corporations: One type describes the fully or partly government- owned businesses and the second type is the private businesses. However, the economy traditionally has been dominated by family businesses. Most of these family businesses are young and their economic wealth has been built by close relationships with the political class. Now there is a call for more transparency through clear governance systems. Because the economic scene of India is dominated by family businesses they are going to be the ones who are expected to set an example in these practices. The question is how these family businesses will expand their boundaries beyond economic conventions.
What are the key strategic decisions Indian family businesses face?
Indian family firms face strategic decisions at two levels: First there are the decisions they need to take at a business level such as expanding into new markets, or upgrading the existing businesses. The second level of strategic decision- making is at the family level. Both levels involve different dynamics. Most family businesses tend to be driven by market logic. But there are always family dynamics at play and family members want to decide on the strategy.
A strategic decision that concerns both the family and the business level, is, for instance, the inclusion of the next generation of family members: In many cases, the new generation starts a new business, or they are given independent ownership of one of the affiliates. This is a key strategic decision for the family business, because often they need to allocate an experienced mentor to the younger family members. The grooming through such mentorship is key as this is a way through which the values of the family can be transferred from one generation to another and family perpetuity can be assured.
Another key strategic issue is who is going to be the next leader of the family business. In the past it used to be the eldest son that was automatically put in charge or, in other cases, the Kartha law was applied which nominated one male family member who made all key decisions, both concerning the family and the business. Today, we are seeing a greater disintegration of the family structure, which does not allow this anymore, and the individual family units are becoming more common.
The strategic question of stewardship comes up again and again. The social fabric of India does not allow that families vote for a steward. The answer is often that it is best to put a family governance system in place. Many companies have started doing that. It is important to have a governance structure, which evolves every couple of years. You cannot initiate family governance practices just at a whim. If the head of the family does not believe in these practices then it can become tricky.
In many of the family businesses, we see that challenges start emerging by the second or third generation. We see the need for family governance becoming greater. I think that a governance structure can be quite informal if a family prefers it. But it has to answer the stewardship question.
What factors and motives influence decision- making in Indian family businesses?
Indian families are quite clearly divided according to their origins. There are clear distinctions according to classes of society and their heritage. It’s also a belief- and trust- driven society: Most business ventures are based on shared values. The community you come from influences your decision-making.
The other great influence is of course what the market dictates. But even behind that influence there is ultimately the logic which leads to increased family reputation. For example, certain family businesses will not touch any business to do with alcohol or betting because it contradicts their values. Of course, there is a modern face of India. But, I do believe that there is now slowly a compromise between what the market wants and what values the families hold dear.
What does the future of Indian family business hold?
We are increasingly seeing a professionalisation of the Indian family business. Primarily, because the market logic is becoming much more transparent, this attracts more investment. There is a lot of openness and transparency, which is pushed to increase expansion possibilities.
I believe that families will continue to be active together in business, especially, in a traditional society such as India because of the fabric of the community and of the social structure. Family ownership is not something that will be questioned in the near future. There are a few cases where the family has sold out and made an exit.
Another development will be the implementation of corporate governance. I believe we will see greater independence and more professionalism also through independent directors joining the boards of Indian family businesses.
There is appetite for growth in India, and I think that presents family businesses with unique opportunities within and outside the country.
Tharawat Magazine, Issue 16, 2012