Indian multi-generational family businesses: Why it’s a rare phenomenon

Family business dynamics have evolved considerably. With several stakeholders and varied perspectives and expectations, conflicts in a family business are inevitable. Egos and misunderstandings, sometimes, lead to breakdown of relationships, long drawn court battles, reputational damage, erosion of value and eventually partition of the business. There are several instances of family business owners in India parting ways and reiterating statistics, only 12% of family businesses make it to the third generation and a mere 3% to the fourth generation.

Some of the reasons for conflicts may be differences in points of view amongst a generation or between current and next generation, lack of alignment of strategy and vision, no governance and clarity, absence of a clear succession plan and accommodating non-competent family members in the business. In the Indian context, Professor John Davis of Harvard Business School who teaches an elective course on Managing the Family Business, has opined that “India has seen the decline of the joint family in business houses, which has been replaced by a loose system of living independently in proximity.” This trend of moving from a joint family concept to a nuclear family concept may have also contributed to different experiences and growing complexities in working together in the family business.

Having said this, there are still several family businesses in India that have perpetuated for generations. But they are still a rarity in comparison to countries like Japan and Germany where family businesses have survived for well over 200 years and in the case of some of the oldest family businesses have been passed down over 50 generations.

So, what is the secret to the survival and longevity of these multi-generational families?

While Japan follows an approach of single leadership and ownership, in Germany, founder families tend to retain majority shares and control. However, at the heart of multi-generational families are strong family values which are also translated into the business. There is a sense of shared purpose and to maintain the legacy of the founder. Late U.S. Senator Robert F Kennedy said, “Every generation inherits a world it never made; and, as it does so, it automatically becomes the trustee of that world for those who come after.” In multi-generational families, members have a long-term mindset, a common stated vision and consider themselves as stewards of the family business.

Another key characteristic is putting the business first. While ‘family’ is the essence of a family business, it is important to balance the needs of the family with that of the business. Family members acknowledge that each of them plays different roles. However, it may not be necessary that everyone would be involved in the business. We have seen merit taking precedence over lineage. As the business grows, just family leadership may not suffice and there is a necessity to bring in external professionals not just in management but also by expanding the board with independent directors. We believe that as the business evolves, the leadership would also need to evolve in tandem.

We have also seen that despite different upbringings and varied experiences, members of multi-generational families consider themselves as one family organisation. A third-generation family explained that they departed from the mindset of the family branch and adopted the philosophy of ‘One Family’ based on the founding value of meritocracy. They embrace differences of opinion, agree to disagree and strive for majority rather than consensus. To encourage family bonding, the members meet once every month over Sunday lunch and organise an annual retreat. They also recognised the need to build strong working relationships amongst cousins and formed a next generation committee which focused on the incoming generation collaborating and working together from an early stage.

Summing up, to sustain the family business for generations, it is vital to articulate and formalise the informal and unwritten understandings in a family constitution. This not only brings clarity of roles and level of involvement (as owner vis-à-vis board member vis-à-vis management) of the current generation but more importantly helps subsequent generations appreciate the family history and reinforce the responsibility of sustaining the legacy which was built on entrepreneurship and a strong foundation of values. A robust governance framework strengthens communication, builds trust, minimises potential conflicts and lays the foundation to perpetuating the family business.

(Kalpesh Desai is Partner, M&A and PE Tax, KPMG in India and Akshika Harikrishnan, Director, Family Office and Private Enterprise, KPMG in India. With inputs from Aditya Menon, Assistant Manager, Family Office and Private Enterprise, KPMG India)

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