Pointers for Indian family-led businesses
At nearly a trillion dollars, family-led businesses account for 42% of India Inc.’s market cap.1 Relevant studies indicate that India has one of the highest shares of family-led businesses worldwide (55% of all businesses compared to <5% in the USA),2 with the third-highest number of mega (above USD 250 million) publicly listed family-led businesses.3 In recent years, family businesses have been witnessing superior to market growth in profits by nearly eight percentage points.4 Clearly, the Indian growth story has been driven significantly by its family-led businesses.
The true reason why such institutionalisation, from personalities to institutions, is harder is the cultural challenge this imposes: how do the owners ensure that those with authority and decision-making powers operate with the same entrepreneurial intensity, sense of belonging and ownership as the family – that is, how to ensure that they ‘care’ enough? For family-led businesses looking to take this leap, scepticism about loss of control and dilution of commitment is natural when they first decide to expand beyond their inner circle of family and close confidants. This leap is more than a change in operating model and strategy; it involves depersonalising success while at the same time deeply personalising an organisation’s culture and values.
1. Commitment to a family constitution: Several Indian families have embraced the practice of documenting a ‘family constitution’ – a set of principles that provide guidance for family engagement in business (strategic, operational or governance) as well as guidance on critical issues such as shareholding decisions, succession, board appointments and voting rights, and conflict resolution, which can help balance the ‘Owner’s Agenda’. Best practices include, paradoxically, prioritisation of the business above the family. While articulation and documentation of such prioritisation are relatively easy, consideration of all disparate agendas and upcoming challenges (with full agreement) is usually more difficult, especially in the case of second- and third-generation families.
2. Articulation and institutionalisation of ‘Our Way’: Articulation and propagation of Our Way is probably the most critical action that is needed to preserve entrepreneurial intensity as new talent enters the organisation and authority is distributed beyond a closed circle. This requires clear and formal articulation of implicit behaviour and attitudes (‘The Critical Few’ behaviour12) that define the work mode and should be the lodestones for the culture. It is equally critical to ensure the right way to propagate this across the entire organisation, including for new joiners.
3. Alignment of Fit-for-Growth capabilities with accountabilities: To enable any growth, focus on the right capabilities (referred to as Fit-for-Growth capabilities) is a prerequisite – each capability being a coherent combination of people, processes, knowledge and systems. Once identified (identification being a critical strategic exercise in itself), these capabilities need to be propagated through the right set of KPIs across an organisation. Right alignment of personnel is a part of this exercise, which needs to be shared across those within the inner circle, those outside it as well as new talent and leadership within the organisation.
For example, a large Indian chemical business clearly identified a roadmap for its geographical expansion. This included product portfolio growth of speciality chemicals. The company augmented its capabilities to follow this roadmap by bringing in external talent and ensuring meaningful jobs and responsibilities for them. It also made sure that compensation for executives was tied to their performance across key strategic targets as well as the development of these capabilities. These measures enabled the organisation to overcome stagnation of sales and become a formidable player in the global market over the next five years.
Another (manufacturing) company that has been transitioning to services has embraced new capabilities across R&D and data analytics, with the infusion of external talent as well as clear mandates for personnel aligned with its strategic goals for growth. It is also crucial for organisations to only focus on their critical capabilities – for example, an Indian multinational conglomerate augmented its treasury function (considered critical) with the right top-tier talent, while its IT function (considered non-critical) was outsourced to an IT vendor.
4. Alignment of accountabilities with autonomy: Propagating the accountabilities (as KPIs) also mandates cascading the right autonomy for decision making. It is critical to ensure that the autonomy enabled is not just on paper, but also in practice. While decisions taken by those outside the inner circle should be challenged as relevant, there should be no encumbrance in any way to align with the inner circle. In conjunction with institutionalisation of Our Way, this will make employees feel empowered, develop the founder’s mindset and also increase the focus on agile decisions being taken rather than a significant effort being made to refine the messaging from the implied intent of the decision. This was another theme apparent in a manufacturing (auto components) company looking to grow five times in seven years. While the company had multiple family members joining it (with most of them trained in business management or engineering), the management ensured that the decision-related rights rested with the internal and external talent, based on the mandates assigned to them.
5. Data nirvana: One of the biggest challenges family-led businesses face is in terms of balancing controls with agility. Existing risk management frameworks – which rely on conjoint ownership and decision making – need to transition. Unless carefully managed, this often results in either a system where stalling decision making outside the inner circle becomes the norm or where there is significant leakage of value due to broken or circumvented controls.
The solution lies in viewing key processes from the perspective of controls and ensuring that all the data for the right decision making is available to the right person at the right time (what we call data nirvana). In some of the key digital transformations supporting family-led businesses, establishing data nirvana as the first and primary outcome – including the centralisation of controls through data sanctity (through automation and right maker-checker controls) and automation of objective control mechanisms grounded in revised delegation of authority with the right KPIs – has enabled a ‘no-trade-off’ balance between control and agility as well as the core foundation for continued success.
Although a number of businesses manage to commit themselves to some of these practices, it is important to appreciate that it is the culmination of all these five practices that enables this Leap of Growth.
Together, they enable the fortunes of the business as well as the family, which are separate but intertwined, to grow and ensure the enhanced resilience of both. These drivers enable institutionalisation and propagation of family values to a new generation of both the family and the business, and also ensure a capabilities-led and, hence, likely more sustainable growth path along with superior returns.