By: Adi B. Godrej

January 16, 2005, Business Today

The concept of the family-owned business is as old as that of commercial enterprise itself. Yet, popular myth, which informs the opinions of some people, deems these enterprises as capricious, short-lived and small. None of this is by and large true. Worldwide- as in India-family-owned businesses have survived multiple generations, have grown to become multi-billion dollar corporations, and have continued to make significant contributions to the economy.

It will surprise many readers to learn that the oldest family-owned business still in operation is the Japanese construction company Kongo Gumi, founded in 578 ad. It is currently managed by the 40th generation! Kongo Gumi is no one-off exception. There are more than 100 family businesses that are more than 200 years old. Many family businesses have attained considerable size too: The largest company in the world, Wal-Mart, is a family business. Some of the largest businesses in the world, and in India, are family businesses. Worldwide, there are around 200 family businesses with annual revenues of at least $2 billion (Rs 8,800 crore) each.

Family-owned businesses play a crucial role in the economy of most countries. Much of the retail trade, the small-scale industry, and the service sector is run by family businesses. Worldwide, family-managed businesses employ half the world's workforce and generate well over half the world's GDP. In the United States, 24 million family businesses employ 62 per cent of the workforce and account for 64 per cent of the GDP. In India, it is estimated that 95 per cent of the registered firms are family businesses.

In India, family-owned businesses have played and will continue to play a central role in the growth and development of the country. In the next few paragraphs, I shall outline why I believe that Indian family businesses have been and will continue to be key drivers of the economy, and what changes these businesses need to undertake to continue to succeed.

Most commercial enterprises are born as family-owned and family-managed businesses. A large number of family-owned and managed enterprises remain that way-planets in the family-centric planetary system. A smaller number, on the other hand, need access to public equity capital and in the process become non-family owned. Others could remain family-owned but professionally-managed, either due to lack of interest on the part of the family or due to practical necessity. There is, unfortunately, no Rubicon that differentiates a business owned and managed by the family from a business that isn't so. Family ownership and management versus non-family ownership and management is a continuum; and arguably, some firms lie in the grey area of this continuum. For the sake of simplicity I shall assume that firms where a family (or, perhaps, a few families) exerts significant influence over the firm's strategy and its destiny are family-owned; and, firms where family members-unless professionally qualified-do not hold executive positions, are professionally-managed.

Family businesses have existed in India since as long ago as recorded history. With time, the contribution of family businesses has gone beyond simply paying taxes and employing people. During the last 100 years or so, Indian family businesses have made significant contributions in three areas:

The freedom movement: Family businesses were an integral part of the Indian freedom movement. In the early years, firms were created specifically to pursue ideals such as import substitution and economic freedom from the colonists. The Godrej enterprise, for instance, was started by Ardeshir Godrej in 1897 with a vision to promote India's economic freedom.

Spirit of entrepreneurship: Family businesses have done an excellent job of keeping the spirit of enterprise alive especially through the 40 years of quasi-socialism. The spirit survived onerous taxation and repeated government attempts to undo supposed 'concentration' of economic power. Today, as India competes in an increasingly globalised economy, family businesses are playing a major role in turning the engines of growth.

Philanthropy: Lastly, Indian family businesses have played a significant role in giving back to the community. To the average Indian, names of large Indian business groups are synonymous with philanthropic efforts in education, environment, health, culture and heritage conservation. And it is not just the large groups that have been active-numerous foundations engaged in charitable work are supported by scores of small and medium family enterprises.

Also, family businesses in India (and elsewhere) have several inherent advantages that provide them with unique strengths:

Trust lowers transaction costs: It is a well-documented fact that 'trust' lowers transaction costs, corruption, and bureaucracy. Trust can be a source of significant competitive advantage to a family business. In India, family businesses have often revolved around large joint families. Joel Kotkin has documented the families of Palanpuri Jains from western India, who have established commercial colonies in diamond centres as dispersed as Tel Aviv, Antwerp, Mumbai, London and New York. Today these families account for roughly 50 per cent of all purchases of rough diamonds in the world.

Small, nimble, and quick to react: Family businesses, both small and large, tend to be quick to react to threats as well as opportunities. There are fewer decision-making gates and constituencies to deal with. Very often, the survival of the family depends on the survival of the business. This results in sharp and decisive action in the face of threats that could be potentially fatal for the business.

Information as a source of advantage: Many family businesses are private enterprises. This is an advantage since a private company can see the strengths and weaknesses of its public competitor and act accordingly while the converse is not true. Further, private companies can have private strategies to which analysts and the competition are not privy. And, private family businesses have the freedom to pursue truly long-term strategies that are not constrained by 'quarterly reporting'.

However, continued success for the family businesses is not guaranteed. I believe that family businesses that prosper on to 2020 will have three clear characteristics:

•The highest standards of corporate governance;

•Modern management and technology; and

•Long-term, performance-focussed strategies.

Corporate governance and the family business: Family businesses that can clearly distinguish between family interest and company interest-and make hard decisions when the two are in conflict-will emerge winners. Good corporate governance in family business should promote the long-term good of the company and not necessarily of the majority or minority stakeholders. It is well understood that neglecting or bypassing the interests of stakeholders like shareholders, employees, vendors, customers, consumers, the government, or the society at large is likely to adversely affect the long-term interests of the company. Good corporate governance entails a strong performance ethic framework leading to a true meritocracy. It is essential for family businesses to acknowledge the distinction between ownership and management: Only qualified family members should be engaged in the management of the business and there should be clear roles and rules of engagement for both owner-managers and professional managers. Above all, the perception of fairness should reign. Prof. John L. Ward, an international expert on family businesses at the Kellogg School of Management, confirms that family businesses with "effective governance practices are more likely to do strategic planning and to do succession planning. On an average, they grow faster and live longer".

Modern management and technology: In line with my thoughts on performance ethic, I believe that family businesses should strive to hire the best people, and be capable of recruiting and retaining outside professional talent. In a competitive world this is a sine qua non. The inability to professionalise management can lead to family businesses being shut out of sectors that require complex management, scale and constant technological improvements. Family businesses should be willing to seek and acquire assistance when required. The 'not invented here syndrome' and ego must not stand in the way improving the organisation's capabilities. The successful family businesses will seek collaboration-be it with consultants or with other firms-to imbibe new strategies and skills. In addition, family businesses will need to constantly seek and embrace the latest technology and productivity enhancing techniques such as improvements in information technology, communications,tqm, Six Sigma, et al.

Long-term, performance-focussed strategies: I mentioned earlier that one of the potential strengths of family businesses is its ability to draw up plans focussed on creating long-term value. However, there has been a sea change in what truly long-term strategy is and what is often falsely deemed as long-term strategy. Family businesses tend to build 'long-term strategies' that assume that today's business model and assets will not be valuable tomorrow. Long-term strategy goes beyond survival: it means investing in technical capabilities, employees, R&D, brand building, and acquisition of customer knowledge. As I mentioned earlier, many family businesses are privately held and are not susceptible to the pressures of quarterly results. A family business can choose to measure its success in terms of years and decades, not merely quarter by quarter. The smarter ones, I believe, will use this as an advantage to create truly long-term strategies, which may not necessarily yield results in the short-term.

Clearly, for Indian family businesses, the path to sustained excellence is one that requires willingness to change, learn and excel. However, there is no doubt that Indian family businesses will be able to make the transition and, thus, play a vital role in contributing to India's development and make India an economic power to reckon with by the year 2020.