FAMILY BUSINESS AND

STRUCTURES
 UNIT 4
Family Business
 Importance of family business
 Types
 History
 Responsibilities and rights of shareholders of a family business
 Succession in family business
 Pitfalls of the family business
 strategies for improving the capability of family business
 improving family business performance.
 Why Family Business
  It is estimated that 90% of the business in India is controlled
by families.
 Examples Tatas, Ambanis, Birlas, Godrej, Wadias,  Munjals,
Mahindra, Thapars, Mittals, Shaparji Paollonji, Jindals,
Adanis, Anil Aggarwal – Vedanta, Bajaj, Ruias, Ranbaxy,
Times of India and many more are all controlled by families.
Shifting from family owned to family Led
Success Mantra
Emotional Capital+
Wealth Creation+
Leadership and ownership sense
What is Family Business
A family business is a commercial organization in
which decision making is influenced by multiple
generation of a family related by-
Blood
Marriage
Or adoption
Family has the ability to influence the vision of the
business and willingness to use this ability to pursue
distinctive goals.
Members are owners and leaders
Owner-management firms are not family business.
 Importance of Family Business in India
90% of the business in India is controlled by families.

Family business remains the norm for a large section of society in India and is not going to fade
away. (Homo-Social Reproduction) – Exception Infosys

Personal wealth creation and preservation, the brand of their family names, family reputation
and goodwill, the elements of self-discipline and self-governance are high.

Stability of leadership till life event (illness)

Commitment

Flexibility: You won’t hear, “Sorry, but that’s not in my job description” in a family business.

Long-term Outlook – not quarterly result

handy during challenging times

Contributing to economic development

Philanthropy - Reliance and TATA

 Pitfalls in a Family Firm

1. Succession problems (and related transfer of ownership challenges).

2.  lack of clarity on the role that different stakeholders play in a company.

3. Stop Innovation

4. Family problems affect business operations

Example ; In 2005, a famous dispute between the sons of Reliance Industries founder
Dhirubhai Ambani, Mukesh and Anil, divided India’s largest petrochemical manufacturer.
When all was said and done Mukesh retained control of the petrochemical business, while
Anil became chairman of Reliance Capital, Reliance Communications, and Reliance Energy.

5. Business problems affect family relationships.

6. Little opportunity within a family business for non-family members.

7. Succession problems (and related transfer of ownership challenges).

8. Differing views of the younger and the older generations
9. Ability to attract external staff and chart out their growth plan vis-à-vis members of the
family
9
10. Managing diverse opinions of family members, and also external staff, in key decisions
 The Different Types of Family Businesses

Family Business

On the basis of ROI

Family-controlled
Sole Fractioned Vs
versus family-
Associated Partners Financial returnbusinesses
Emotional return Relationship return
influenced

10
 The Sole Practitioner
 The owner wears many hats within the business.

 Businesses start out, with one entrepreneur, or couple, as the

founder and owner of the new business, and then it grows from there.

 The growth of family businesses from this sole practitioner stage

happens organically in most cases, as the founder’s family matures
and more members take an active interest in the company.

 This can be a tricky stage to evolve from, as the founder has a strong
attachment to the company, and might find it hard to relinquish
or share control of the business with another family member. The
sole practitioner is used to running every aspect of the business, and
often feels irreplaceable.
11
 Associated Partners
 This is not necessarily a formal partnership in the legal form of the

term, the union of the different entrepreneurs could be in various

different forms, such as a Limited Liability Company (LLC), a

corporation or other enterprise.

 This type of family business is founded by two or more

entrepreneurs, in the case of family businesses, normally siblings or

cousins, who then take on ownership of different aspects of the

12 business.
Family-controlled versus family-influenced businesses
Family-controlled businesses: where a family
member is not only the owner of the business, but
is active in the management and running of the
business on a day-to-day basis.

Family-influenced businesses: Family taking a

backseat in the actual running of the business. Here
the running of the business could be outsourced to
key employees who may be better suited for
certain roles than family members.
 On the Basis of ROI
Financial Return
Family members need a financial return as an acknowledgment
from the company that their assets are invested in an enterprise with
a long time horizon.

Emotional return
 Family members need to feel connected to the company, its
history, its products, its relationship to the community, its loyalty
to employees or its philanthropic activities.

Relationship return
Family members need to feel good about being business partners
together. Getting together must be a fun, rewarding and fulfilling
experience.
 History of Family Business in India
1. Initially, family business in India started in the form of trading and
money lending involving the hustle and bustle of the bazaar.

2. It was also confined to certain communities, notably the Jains and

Marwari’s especially in the northern India.

3. Before First World War Cawasji Davar set up the first cotton mill,
or say, the first manufacturing enterprise in Bombay (now Mumbai)
in 1854.

4. Consequent upon this, some trading communities started textile

mills in Mumbai and Ahmedabad during the last half of the 19th
Century.
The trading communities emerged as

Aggarwals and Guptas in the North,

the Chettiars in the South,
the Parsees, Gujarati Jains and Banias, Muslim Khojas
and Memons in the West,
and Marwari’s all over India.
 The Agrawals
The Agrawals claim descent from the legendary king Agrasena of
Agroha.

According to the legend, Agroha was a prosperous city and hundred

thousand traders lived in the city.

An insolvent community person as well as an immigrant wishing to

settle in the city would be given a rupee and a brick by each inhabitant
of the city.

Gradually, the city of Agroha declined and finally gutted in a huge fire.

The residents of Agroha, i.e. the Agrawals, moved out of Agroha and
spread to other parts of India.
In his book, ‘Agarwalon ki utpatti,’ Bhartendu
Harishchandra categorized Agrawals into four
branches:
Marwari’s,
Deswal,
Purabiya, and
Pachihiye.
TATA
Jamshedji Tata started his varied business enterprises like
cotton mill in Nagpur,
 the Taj Hotel in Mumbai,
 his famous steel plant in Jamshedpur,
and several real-estate developments.

A number of families, such as Birla’s, Bangurs,

Khaitans and Goenkas started their business in
Kolkata and developed the city as a centre for
commerce.
 Combination of Joint Stock Principle and
Family Control over Business
 Initially family businessmen were engaged in small-size
businesses requiring small investments managed by themselves
only.

 But, once they entered into manufacturing sector, they felt the
need for more and heavy investments not manageable by
themselves.

 family businesses inducted their family members or relatives

or friends in the business by allotting them blocks of shares
while making sure that the majority control and, in turn, the
management of the business remained with the promoting
family itself.
Managing Agency System
The managing agency system continued till 1970 as
an instrument of maintaining family control over
business enterprise.

As such, all critical decisions about the business

were taken by the promoting families.

Indian business during the 1950s, were in the

hands of just 18 Indian families and two British
houses.
Developments that affected Family owned
Business
1. The post-Independence period to solve the problem of
unemployment and poverty stalking the land, the Government
invited private sector to partake of new opportunities available
for business and industrial development, of course, amidst a
myriad of restrictions imposed on the freedom of enterprise.

2. The Governments, both at Central and State levels, set up

various financial institutions to provide finance to private sector
enterprises in the country.

3. Emergence of nuclear families

Financial control of business started gradually shifting
from promoting families to financial institutions.

Also the business families started splitting and cracking.

Example: Dalmias

Other examples: Birla’s, Modis, Sarabhais, Bangurs,

Singhanias, Mafatlals, Shrirams, Thapars, Walchands,
Goenkas and the most recently, the Ambanis are the
illustrious family businesses in our country who have
experienced split in their businesses.
The family control over management of business still
remains impaired in the hands of promoting families.

461 out of 500 most valuable companies is still under

family control in our country.

One of the significant changes in family business in

India is induction of professionals to manage the
affairs of business.
 RESPONSIBILITY AND RIGHTS OF FAMILY
SHAREHOLDERS
 Be knowledgeable about company’s operations

 Have information about basic company finance, and be able to read

and ask questions about the income statement and balance sheet of
their company.

 Attend shareholders meeting.

 Understand board member qualification and participate, in

screening of board members.

 Constructively question management and offer suggestions to

management.
 Publically support management decisions

 Keep appropriate company information in strict

confidence and recognize that shareholders are not entitled
to all company information on demand.

 Try and provide additional investment capital.

Rights and Responsibilities of Shareholder

SHARE
Dividend Narayan Murthy
HOLDER

Director Fees

Officers Salary Vishal Sikka

https://www.firstpost.com/business/what-infosys-crisis-reveals-poor-succession-planni
ng-hesitance-to-innovate-mar-india-inc-on-world-stage-3980929.html

https://knowledge.wharton.upenn.edu/article/icon-idle-leadership-challenges-facing-in
RESPONSIBILITY AND RIGHTS OF FAMILY
SHAREHOLDERS
Elect directors

Receive dividends if and to the extent any are declared by

the directors

Vote on major corporate matters like mergers, sale of the

business and liquidation

Receive financial statements

Sell their stock.

They Do not have the right of…
Shareholders do not have the right to manage day-to-
day operations or tell the officers what to do.

 They do not have a right to work for the company or

to receive salary, company cars or other perks.

In fact, they don't even have the right to determine

operating philosophies, except by their selection of
directors.
Directors Give Direction-
As the elected representatives of the shareholders, directors have some critical
responsibilities, including:
 Represent the interests of all shareholders as a group, not individual
shareholder's interests.
 Elect officers (and fire them if appropriate) and determine their
compensation.
 Determine general business strategies and philosophies, usually in
consultation with the officers.
 Oversee the officers to assure that the board's strategies and policies are
being implemented.
 Vote on significant matters, such as major property acquisitions/sales,
incurring debt and mergers.
 Declare dividends if and to the extent the board believes funds are
available after considering future operating and growth needs.
 Directors do not manage the day-to-day operations of the business.
Their functions are broad policy determination and oversight. They
typically meet with the officers several times per year and are entitled to
reasonable fees for their services.
Conflict in Family Business
Rivalry

Favoritism or Nepotism

Intra-family Friction
 Approaches to Avoid Conflict in Family
Business
Strategize Today

Hire wisely

Have family meetings

Establish shared family values, goals, and objectives

When conflicts arise, take a structured approach to resolution

Seek the help of mediators

Give family members space (and permission) to air grievances

Don’t let business bleed into family time (too much)

Conflict Management in Family Business
 STRATEGIES FOR IMPROVING CAPABILITY OF
FAMILY BUSINESS
 Inculcate professionalism in family firms : professionalism
in business refers to retaining of effective talent in company,
proper documentation of business transaction, planning and
implementation of efficient strategies for success of business.

 Replenishing entrepreneurship: Basically refers to expand

existing business and be role model for their families to open
business of their own.

 Good management : refers to proper communication of

information among family members about present business
and utilization of available resources in business.
 Ability to change : business environment is dynamic in
nature for which business have to renew their strategies on
regular basis to meet demand of changing situation to
compete in market.

 Have strategic plan : situations of business are

unpredictable in nature in nature so present plans of
business should be designed keeping in point about future
strategy in picture.

 Have active board of directors : refers to have competent

employees in business who can assess future requirements
and accordingly management business resources and take
decisions in business.
 IMPROVING FAMILY BUSINESS PERFORMANCE
 Core value of family business act like yardstick for family
members to act accordingly towards business. Core values are
comprised of training of family members newly entering family
business, future, finance and accountability of these members towards
the business.

 Impact of family values on business performance : when members

of family are clear about business expectation they can formulate their
strategy well in advance which helps them enhance quality of their
performance towards business.

 Training : members of family business should be trained about thee

family values, competition existing in market and skills required to be
possessed by in order to have competitive advantage in business
market.
 SUCCESSION IN FAMILY BUSINESS
1. First family succession plan, then business succession
plan : Family business plan must recognize and
accommodate the needs, goals and objectives of each
member of family. Family succession plan has to be
developed first as if business plan is designed in advance
it proves to be difficult for owner to coordinates goals of
family members towards business.
 KEY POINTS TO BE CONSIDERED BEFORE
SUCCESSION PLAN
 Quick decision on business plan process will provide
more alternatives to the process.
 A child than having right to inherit business should have
ability to manage family business. Children's must be
encouraged to out of family business so that they have
better insight about competition persisting in market and
accordingly develop strategies for development of own
business.
 Establishing an outsider as advisor for family business
may prove to be risky for which experts in succession
planning should be chosen from management team with in
the family business.
 Conducting family meeting on regular basis will help
establish and keep the family focused on rules, goals and
objective
 Develop non business interest
 Develop financial resources that are independent of business
 Evaluate component successor : which requires to assess
whether person to be chosen as successor has potential to
lead the business, will he be accepted by all members in
family, check his willingness to control the business.
 Person who will be chosen as successor should be give an
appropriate standard to be achieved which will help him
deign effective strategy and have yardstick to compare his
actual performance with expected one.
 WAYS TO EASE TRANSITION PROCESS
 Hire most competent advisors ( attorneys, accountants,
financial planners, and business consultants for succession
planning. Succession planning is complicated process and
requires advice of expertise on the same.
 Business valuation : when business transition takes place
it leads to change in controlling hands and accordingly
even present situation may change in business. Depending
on the purpose of the valuation, cost vary accordingly.
Usually business owners value family business for
purpose of strategic planning of their business.
 Funding to be considered as part of succession plan : it
is important to understand that business may need to grow
significantly in order to pay the transition cost which
includes which includes tax , insurance, professional
advisors. Funds available for expansion should be retained
in the process for transition.