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Family business: How old is embracing the new

LiveMint logoLiveMint 05-06-2017 Tahera Mandviwala

In this era of Twitter-presidents, radical regulatory reforms, socio-political shifts, digital disruptions and fast-growing next- generation enterprises, family businesses have to proactively tackle the rapid winds of change while keeping their business profitability, market relevance and family fabric and values intact. 

Though the backbone of many economies, family businesses have always had their unique set of challenges, which at a micro-level even differ from family to family. The core strength of any family business lies in the family and the management and, for most such businesses, the two still remain the same. Reports estimate that about 40% of family businesses worldwide will undergo a change in management in the next 5 years. 

As the old yields ground to the new, the role of the next-generation in perpetuating the family business and making it future-ready cannot be undermined. The 21st century so-called next-gens are very different from their predecessors. Foreign educated, independent, innovative, hard-working, having worked outside the country, the company and at different sectors and levels, having far greater opportunities and connectivity and zealous to make their mark, they tend to have a very global outlook and fresh approach to business mechanics and patriarchy. Also, they belong to the new age of entrepreneurship, where millennials have completely changed the rules of the game.

Many next-gens have, even before reaching the helm, proved to be great assets for their family businesses. As effective change agents, next-gens have, in some cases, reinvented the family business and in others, vastly diversified the family’s business portfolio with a higher risk appetite, but in all cases, they have put their family businesses on an accelerated growth path with loyalty to their legacy. Dominance of nuclear families and several other factors have also supported the strong rise of next-gen women members to senior management and leadership positions. Family offices and philanthropy initiatives are also seeing very active participation from and are even being led by the next-gen. 

However, not all next-gens find their place in the family business or find the integration easy, and some even move away to find their own ground, often paving way for professional management. Many patriarchs (especially first-generation patriarchs) have difficulty letting go and accepting change of charge. The next-gen, on the other hand, have to “fit in” in an already well-established structure, creating insecurity and pressures of coping with legacy, culture, expectations and meritocracy issues while craving acceptance and respect in leadership roles earned by predecessors over generations. Also, if the predecessor keeps a tight leash and a conservative approach, lack of growth potential and freedom and inability to take the wheel is felt.

A combination of early and continuous efforts from the family, the business leadership and the next-gen themselves are required to ensure smooth inclusion and transition of the next-gen into the family business. Who, how and when are all important factors for uninterrupted trans-generational transition, which may be considered a vulnerable event for the family business. 

Successfully sustaining a multi-generational family business and becoming equally attractive for both insiders and outsiders inter alia, requires a professional approach when dealing with certain family matters that may have a bearing on business. Matters like next-gen grooming, encouraging entrepreneurship, succession planning, family conflicts, governance, roles, rewards and retirement of family members, etc., may fall within this ambit.

Modern practices include using more transparent and structured methods and instruments, including consensually agreed and continuously updated family constitutions allowing synchronization of business culture and the family’s mission and vision; family councils consisting of selected (mostly elderly) family members overseeing family governance, decision-making and conflict issues; and family forums allowing regular formal and informal deliberations on family expectations, objections and objectives. Such measures and interactions on ongoing basis assist in analysing and discussing next-gen’s selection, fitness, readiness, inclination and training strategy (like using unbiased outside mentors, induction at the bottom of the pyramid, etc.).

Other nouveau family-attuned systems are also adopted after consultation with professionals and considering business complexity, sector, family’s size, eligible next-gens, company’s growth cycle, etc. Even in cases where management and ownership are separate, the board of directors and professional CEOs have a vital role in aligning and protecting the interests of the family and the business, involving the family and ensuring continuity.

(Tahera Mandviwala is a partner in the corporate and M&A practice of TDT Legal and she heads the private client practice of the firm. Mint is organizing its inaugural family business summit titled “ Mint India Wealth Creators Summit” on May 25th in Mumbai.)

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