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Communication gap splits business families

Simplistic as it may sound, the lack of tradition and communication is responsible for splits in major Indian business families.

business Updated: Apr 25, 2007 15:57 IST

Simplistic as it may sound, the lack of tradition and communication is responsible for splits in major Indian business families, says an academician who has studied the phenomena around the world.

To prevent such splits that are often very messy, family-controlled Indian businesses could learn a lot from US and European models where even in third generation conglomerates there is a clear separation of ownership and management, says K Ramachandran, associate dean for academic programmes at the premier Indian School of Business (ISB) here.

"The role of the family in running a business is to a large extent controlled if there is a strong board of directors that presides over the company," Ramachandran said.

"In India, what it comes down to is lack of communication because of which there are differences in goals and therefore, a lack of prioritising," he said, specifically stating that he was not referring in particular to any of the big-ticket separations that have occurred in Indian business families in the past few years.

The diversified Reliance conglomerate and pharmaceutical major Ranbaxy are some of the Indian family-controlled businesses that have split up in recent times.

As for lack of tradition, this is more of a north Indian phenomenon, said Ramachandran.

"In the south, family traditions are stronger because money is not the main issue. South Indian families play the role of a trustee where the main aim is to preserve the wealth and hand it over to the next generation," he maintained.

"Then, the women don't get involved in the business but concentrate on playing a social role," he added.

"It's not that women don't run businesses in the south. In fact, many of them operate some very successful family-run ventures. But in companies where the men dominate, the women generally stay away from the day-to-day affairs of the business," Ramachandran said.

Thus, in spite of deep divisions within many businesses in the south, they have still managed to stay together for their common good, the academic explained. This, however, is not generally the case in the rest of India, he added.

Pointing to the US model and its separation of ownership and management, Ramachandran said that in family-owned businesses, third generation siblings routinely get together to "elect" which one of them will serve on the company's board.

"Europe has a mix where the proprietor element is strong in industries like brewing but even then a lot of operations are delegated to professional managers," stated Ramachandran, who is a Thomas Schmidheiny Fellow of Family Business and Wealth Management at ISB.

So, as India globalises what would be the ideal model for the country?

One could be the holding company route, Ramachandran said.

"Let's say there are three brothers. All of them will have shares in the holding company. This will ensure they do not create silos but that each one of them will be running a business and bringing in profits to the venture.

"In this way, everyone moves to a higher corporate level," he added.

The other could be the venture capitalist route for the new generation entrepreneur.

"The venture capitalist puts in the money but leaves the running of the company to the entrepreneur who has the professionally acquired skills to do so. In this way, everyone is happy," Ramachandran said.

First Published: Apr 25, 2007 15:24 IST