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'Eldest sons are poor managers'

On the other hand, family-owned companies with outsiders at the helm of affairs are the best managed among all companies, reports Suman Layak.

india Updated: Oct 13, 2006 03:21 IST

A McKinsey study surveying 700 mid-sized companies in Europe and the US suggests that family-owned companies managed by the eldest son are generally poorly managed compared to others. On the other hand, family-owned companies with outsiders at the helm of affairs are the best managed among all companies.

In India, the scene is largely different—where very few family-owned companies are completely professionally managed, and some eldest sons of families have done really well. The study on how well companies are managed was conducted by McKinsey in association with the London School of Economics in the US, the UK, Germany and France.

It notes that both family-owned businesses and other companies share the average score of 3.2 on a scale of one to five. However, family-owned companies managed by outsiders had a higher score of 3.6. On the other hand, family-owned companies that are led by the eldest son have an average score of 2.9 only.

According to the study, “Eldest sons ran 44 per cent of the family-owned businesses in France and 50 per cent in UK. By contrast, eldest sons ran only 30 per cent of family owned businesses in the US and 10 per cent of those in Germany.” The study says the feudal traditions of France and UK seem to be the reason why more families tend to hand over to the eldest sons in these two nations—something that can be true for India too.

VK Sharma, research head of Anagram Stockbroking, feels that in India family-owned businesses have not really been professionalised.

“In my personal view, the family has at times gone in for professional management and while some have done well, others have not. But generally, the professionals have only helped to keep the chairs warm for family members to take over later. The families have never really given up the power and have time and again come back to regain control.”

“Automatically handing control to a designated heir can create problems. First, any company that considers no one else for the top job automatically excludes better potential candidates in the talent pool.”

K Sudarshan, the India-Managing Partner of EMA Partners, an international CEO search firm, feels that eldest sons have done well in India when they have been eased into the leadership roles after long stint of training in different positions. “The problem happens when a very young man takes over and starts making rapid changes. That can turn away professionals,” he adds.

Sudarshan said the best-managed companies in India are those that have a strong family-based leader with a second layer of professional CEOs managing the individual companies. On the flip side, Sudarshan points out that some of the top professional managers in non-family owned companies in India have not been able to move away from their company as they approached retiring age and has also not developed a successor.