How Family-run businesses can ensure cultivation of enduring value
Most of the businesses in India are family owned / managed businesses. Yet despite their economic weight, their failure rate is high. While only a very few of family businesses survive the transition from one generation to another generation.
Our partners are familiar with the challenges faced by family firms / businesses. In our view Family business consulting is like going to the doctors. We can only help you if you are honest about your symptoms. We might have to ask some sensitive questions however it is in the interest of the organization that those questions are correctly answered.
Here are the points to be taken care of based on Kreston OPR’s extensive experience of working with family owned firms in to ensure family firms do survive the transitions.
Transitions are very critical and hence needs to be handled timely and effectively, transition left for too long or done too early are ineffective and can spell disaster for an organization.
- Strengthening of Corporate Governance
Good governance is key to the long-term sustainability of any business. The creation of a board of directors and a family board is crucial to ensure longevity to the business / organisation.
It’s seen too often that that when the leader or founder steps down, the next generation finds it difficult to run the organization in the manner being done in the past, this may be due to the changed philosophy of management or the newer generation is not completely yet committed to business and hence does not respect the company’s rules or is unable to step into the shoes of the founder. A family board can help in these situations, as it regulates the relationship between family and business, acting as a bridge between the two.”
Businesses / Organizations should also consider the introduction of a shareholder’s agreement to regulate the manner in which shareholders can exercise their rights. Additionally, the appointment of an advisory board, or independent board members, can bring fresh perspectives. Effective oversight can also avoid issues such as ‘sticky baton’ syndrome – where the older generation hands over management in theory but still attempts to retain control over big decisions.
Many difficulties associated with succession planning can be traced to inadequate communication among key stakeholders in the business. Businesses of all types can help address these difficulties through the use of formalized governance structures that open the lines of communication. This is especially the case for family businesses, which can employ family business governance structures designed to separate the “business of the family” from the “business of the business.” This division can help on both fronts — driving company profits while maintaining family harmony.
- Creation of effective Communication Channels
It is seen too often that poor or nonexistent communication channel results into turning minor disagreements into major conflicts. Strong communication policies results into helping weed out emotionally charged conversations due to disagreements. Ideally, there should be candid performance reviews and honesty when speaking with third-party advisors and other stakeholders. In-fact in family businesses one of the policies should be made very clear with in the family that all should follow one rule and that is ‘OHC’ (Open Honest Communication)
Family businesses cannot simply afford to have breakdown in trusts and communication as the effect of the same would ultimately fall on how the businesses are run.
- Introduction of Structure and Policies
One of the most basic issues faced by family firms / organizations is the lack of formal structures and procedures. Too often we observe that the lines between family, company ownership and the management of the business are blurred and unclear.
One of the most basic mistake that we often see is to confuse ownership and management. Often, the same person wears three hats – the CEO is also the chairman of the board of directors, as well as being the main shareholder. All too often, this culture is then passed on to the next generation.
We have observed that an introduction of a written family constitution that clearly states the values and vision of the family, and regulates the relationship between family members and the business, can offset potential conflicts and help with succession planning
- Well thought out Financial compensations and planning
One of the most common problem is lack of discipline while using business funds / money for personal expenses. It is a general perception that the company’s money is the same as owner’s money. Whereas it is absolutely correct to understand that till the firm is running as a proprietary small firm, as you grow there are various stake holders in the business other than the owners. It is very important that we understand that these stakeholders also have to be given their due.
Also, remuneration policies are generally not well defined and are generally based on various factors but the roles and responsibility of the person in the business. This does affect the employee motivation and does affect the performance.
- Introducing strategic vision and planning
Not surprisingly, a lack of strategic planning does limit the lifespan of the business. Advice for companies is often to plan, to avoid being caught out by unexpected events. Family-owned companies are also more likely to gasp on how well the business is performing today and are generally reluctant to step outside their ‘comfort zone’.
It’s always helpful to try and visualise different growth scenarios, whether it is organic or through acquisitions or partnerships. Small and medium-size companies often don’t pay enough attention to planning – the owners might have a vision in their head but they are rarely put on paper, defining what they want to achieve and how they are going to get there.
The plan is not a plan until it is effectively communicated to the stakeholders of businesses. Until then it is an idea in the minds.
- Nurturing and Managing Talent
Choosing the right person to lead the company into the future is perhaps the most important decision that family businesses take during their life cycle. Entrepreneurial talent within the family should be identified and nurtured from an early age. Likewise, it is important to avoid forcing children to join the firm if they don’t want to, this only results into disaster. Whereas it is very difficult to believe that the children are not interested to take over the family run businesses, however the earlier the same is understood the better it is for the business and family too.
Having strong governance policies in place, including the support of external independent advisors and committees overseeing areas such as HR and finance, can help to overcome many of the potential sticking points during any discussions regarding future leadership.
The family constitution should clearly spell out “A detailed profile for the role of CEO should be part, specifying whether the position is open to non-family members.” We often have seen that the children of promoters are not suitable for the top job, however the pressure of putting them in top job does affect not only the family relationships and families but also businesses.
It’s a difficult task to not only select the talent for the organization, and the selection might go wrong, however consistent effort towards employing right talent is essential. The owners / promoters generally
- Change is only constant – Adaptation to changing way of doing business
The businesses are evolving fast and the ways of doing business is changing rapidly, whereas the way we conducted business some years back was the correct way to deal with it then, however how correct is the same in today’s business environment is what needs to be understood. Where as in India, employee policies and the way we treated employees is completely different in the way they need to be treated today. They now understand their value in the entire business eco system and not giving due credit to this may result into troubles. In order to provide a firm its essential that turn our firms nimble to be able to adapt to these changes and elongate the life of the business. The firms that fail to adapt to change either have restricted growth beyond a particular size or die out eventually.
“Change is hard at first, messy in the middle and gorgeous at the end” (Provided you are constantly at it and committed to change)
- External advice
There are often sensitive issues within family firms that can lead to conflicts and disagreements. Advice from an independent party can provide valuable insight on resolving the same. This may result in more open discussions on issues that are emotionally charged such as succession and direction of the business.
- CONCLUSION
Conclusion for an enterprise that may have begun really small — one in which positions may still coincide with relations of blood or marriage — the idea of introducing formal structures may appear intimidating or unnecessary.
However we feel, no matter how daunting this may seem to be, however these are important steps that reflect the growing maturity of the business. Setting up these governance structures may seem complex, but if the structures are not made timely may result into real complexity affecting the family and businesses both.
