What distinguishes family-run businesses and dynastic politics
Political families in a democracy do not have the advantage that those in business have. Here is whyUpdated: Jul 21, 2019 18:19 IST
In the recently concluded Indian elections, one of Prime Minister Narendra Modi’s campaign themes was the need for India to move beyond dynastic politics. Families are present in all political parties in India, but in many, they are in control of the party. Equally, a majority of the top 500 companies in India are family businesses. But is the logic of family predominance in politics and business the same? If not what defines the difference?
Let us take politics first. Other than the Bharatiya Janata Party (BJP) and the Left parties, most political parties are “controlled” by families - the Congress, the Dravida Munnetra Kazhagam (DMK), the Samajwadi Party (SP), the Biju Janata Dal (BJD), the Nationalist Congress Party (NCP), and the Shiv Sena (SS), to name a few.
Max Weber had distinguished three types of legitimate political leadership, domination and authority – charismatic, traditional and legal authority. He defined authority as power accepted as legitimate by those subjected to it. He averred that charismatic authority grew out of the personal charm or strength of the individual, people obeyed the leader because they believe in him or her. This authority sustains as long as people believe in the leader, and does not sustain post the death of the leader unless converted into the other forms mentioned – traditional or legal authority. Traditional authority emanates from tradition or custom - a monarchy, clan leader, dominant elite, chosen successor, or family eldest. Legal authority stems from the legal office that a leader holds, an authority that goes when the leader leaves office.
In this classification, parties like the Trinamool Congress (TMC) and the BSP or are led by charismatic leaders and depend solely on them. This was also the case with the All India Anna Dravida Munnetra Kazhagam, under the late J Jayalalithaa. Parties that are family-led like the Congress, the SP, the DMK, and the SS are based on traditional authority and survive as long as the tradition stays strong, and the party leaders have enough patronage to dispense to their supporters. The reason family-led parties rarely convert to legal authority is because the family wants to stay in power, and is threatened by any institution that may challenge the family’s authority. They only allow a second line to develop from within the family, and trust only members of the family not to usurp their power. The moment the family members lose their charisma, or their ability to succeed and offer their retainers patronage, the party starts to weaken. It fails to rejuvenate unless transformed.
Finally, parties like the BJP and the Left ones are based on legal authority. Legal authority is more stable but needs to have a vision to offer its supporters. It needs to persuade people to believe in the underlying ideology that it espouses. If its ideology loses its appeal, or if its leaders do not ignite their supporters, then the party either adjusts its ideological moorings to the times or faces decline. The party leader enjoys authority only as long as they retain their office.
This defines the challenge for families in politics. The advantage of traditional power after the charismatic leader goes cannot sustain, unless either the children are charismatic, or subject themselves to legal authority where the hold of the family diminishes and then declines.
In contrast, the logic for family-run businesses is quite different. Once a business is established by the founder, the business becomes the wealth as well as occupation for the family. The wealth and prestige of the family is linked to the success of the business. The family does not need a mass following, only business acumen, to sustain and grow the business.
Each succeeding generation of the family has a choice that their counterparts in politics do not – they can manage their involvement in the family business differently. They can choose between being passive owners, activist investors sitting on the Board of their companies, or being active owner-managers. This is in stark contrast to politics, where family members are either completely in or out.
The dominant choice in India is for families to be owner-managers of their businesses.
There is a common belief that family businesses tend not to survive beyond the third generation. While there is some truth in this statement, it is a bit unfair because most non-family businesses also don’t survive beyond 60 years, and it is not that there are no family businesses that have survived beyond this time. Further the performance of owner-managed businesses compares quite favourably to non-family run businesses.
There are many methods to prepare the next generation in a family for business. It is easy to instil the values of the family in the next generation. They grow up in an environment where dinner conversations are about the business. They have a longer-term view about their business, and are more deeply committed to the business than other employees. They can be trained, mentored to understand their industry, taught about their sector and given lessons on how to manage employees. If they are open (and if the family desires), their performance “can” be measured objectively and feedback can be provided for development.
This is not to say that family businesses do not face their own challenges. Interests start to diverge among the children, and conflicts arise on account of wealth sharing, succession, and capital allocation. As families become larger and shareholding gets fragmented, decision rights and shareholdings start to diverge. Unless the family sets in place a family charter and a governance structure before the disputes begin, the challenge of keeping the family business intact become harder. Family businesses can survive and succeed overtime if the family leaders pay careful attention on how to manage the family with fairness, transparency, and by instilling a meritocratic value structure that distinguishes between management and ownership so that the business can be well-managed.
The political family in a democracy does not have the same advantage; charisma is not easy to pass on; and legal authority challenges the primacy of the family. Modi’s attack on undeserving dynasts amply demonstrated this in our election. In the end, the role and success of a family in business and politics is very different. Families should introspect and recognise that success is earned and not assumed.
Janmejaya Sinha is Chairman, BCG India. The article was written with support from Varun Govindaraj
The views expressed are personal
This is the first of a six-part fortnightly series on family businesses