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Monday, Nov 18, 2019

The origin, evolution and growth of family businesses in India

Large family businesses have shown higher revenue growth and displayed an appetite for risk taking.

analysis Updated: Aug 05, 2019 07:52 IST
Janmejaya Sinha
Janmejaya Sinha
Some of the largest companies in India, for that matter the world, are family-owned and spread across industry and sector.
Some of the largest companies in India, for that matter the world, are family-owned and spread across industry and sector.(iSTOCK)
         

A lot of economic activity comes out of the family. In fact, the word economy itself comes from the Greek “Oikonomia”, which roughly translates to “the management of the family or household”. So Aristotle, for one, would not be surprised that I take family business seriously.

While most of these companies (in terms of sheer numbers) are small privately-held enterprises, there are also quite a few that are large, publicly-traded companies. Some of the largest companies in India, for that matter the world, are family-owned and spread across industry and sector. Some have performed well over time, while others have stumbled. Sixty percent of the 500 largest companies in India are family-owned.

Today, we explore why they became large and measure how they have performed against non family-owned businesses.

In an emerging market like India, where there was originally a paucity of information, and institutions and the power of the State was large and encompassing, there were benefits to reputation and connections. Once the founder (typically a superman entrepreneur, for example a Jamshetji Tata, Ghanshyam Das Birla, Jamnalal Bajaj, or a Dhirubhai Ambani) overcame the obstacles to set up a successful business, advantages accrued to the family. They became wealthier and their children could be better educated, could enter existing relationships with bankers, had access to Government officials (in an era of license raj), and could access public capital more easily because of reputation and brand awareness.

Getting around raising capital, a binding constraint in an emerging economy, because the family name had gotten established and trusted, or accessing lines of credit, in the absence of credit bureaus and rating agencies, because Banks found well-established family business that has been operating successfully for years at a small scale an attractive option to lend to, were big advantages. Information gaps were overcome and families learnt early how to manage and grow these existing relationships.

The large family businesses also learnt how to navigate around government and developed access to the top political leadership. This was often a mixed blessing because political parties would reach out for funding, and their electoral rhetoric in a poor country would often be anti-rich. Yet, the families learnt how to navigate the chaotic and disorderly ecosystem of the Indian political economy.

Despite all these theoretical advantages the old adage of “Haveli ki umar 60 saal” (A mansion lasts 60 years) or roughly that a family business lasts only three generations, still persisted. Is it true? What in fact is the empirical evidence of family business performance and what patterns are discernible?

One could postulate that since owners of family businesses have major skin in the game, they should be risk averse, focusing on profitability at the expense of growth, and eschewing debt. If we take just the recent past in India, the interesting discovery is that this is not the case. Over the last 15 years, the largest Indian family businesses have shown higher revenue growth when compared to similar non-family businesses in almost every industry where they are both present. They also have lower profitability and have taken on more debt in most industries compared to non-family- owned businesses. All this points towards a strong bias for growth and an appetite for taking on risk. The markets have rewarded them for their risk-taking and shareholders have benefitted from this mentality in the last decade-and-a-half.

An investment in an index of family businesses in 2004 (that have survived till date) would yield almost double the return compared to their non-family run competitors (who have survived till date) over the same time period. Interestingly, this founding spirit and risk-taking extends beyond the first generation — over 70% of these family businesses are well into their second or third generations of leadership, with a handful going even further. It appears that the entrepreneurial spirit gets embedded and risk-taking gets learnt allowing these companies to sustain their performance into the future.

What is evident in India also is that the dominant model of family business is not share ownership, or even an activist role for the family through its presence on the Board, but the owner-manager model. Most family businesses in India are both owned and managed by the family.

The simplistic notion that family businesses started by superman entrepreneurs need to professionalise, and family members should exit from management of the businesses when they have achieved a certain size, does not empirically hold out. It is the case though that there are many cases where family businesses become conglomerates, and even list separately to provide space to multiple family members to run businesses. But the family businesses that we cover here were mostly family-owned and-managed. In a later article, we will discuss the pros and cons of this model, but for now suffice to say that the family businesses have done well in India.

In the end, survival of any business beyond 60 years is not easy, but we can find both family businesses and non-family businesses that pass this longevity test. For family businesses to thrive in succeeding generations, they must learn to manage conflict, and this, will be the focus of our next piece.

Janmejaya Sinha is Chairman, BCG India. This article was written with support from Varun Govindaraj.
The views expressed are personal. (This is the second of a six-part fortnightly series on family businesses in India)