He not only teaches and researches family businesses but also advises them in depth — hence the designation "clinical professor". He is arguably the most sought after expert on family business and scores of families across the world consult him. Professor John L. Ward is no stranger to India and is often called upon by family firms in the country for advice. In a freewheeling chat with N. Madhavan, he talks about why family businesses often don't last beyond the third generation, challenges Indian family businesses face, their approach to succession planning/continuity planning and about the need to not just create wealth but to build great institutions. Excerpts:
Who handles downturns, like the one we are experiencing now, better—family businesses or nonfamily companies?
In general, family businesses handle down cycles differently from non-family companies. Family businesses stay more consistent in their investment spending, R&D, product and market development. They also tend to hold on to people and usually have lesser debt on their balance sheet. In fact, downturns, for some family concerns, are an opportunity to acquire distressed or under-valued assets. However, family businesses which are listed on stock exchanges face the same challenges as non-family concerns. The real issue is how much any company subjects itself to stock market expectations. In India, I find that these expectations are not as intense as they are in some parts of the world.
My own research, mostly in the Western countries, shows only 15 to 20 per cent of all family businesses endure through the third generation. Classic challenges are the emotions around leadership succession, the lack of interest of family shareholders in the third or fourth generation, and in some parts of the world, the death or inheritance taxes. I find, in general, that the transfer of leadership from the senior generation to the next generation works a lot better in India. But the number one challenge in India is rivalry and conflict between siblings.
What are the other challenges?
Successfully professionalising the management team so as to become globally competitive is a big challenge. Also, like in other parts of the world, in India, too, family dynamics and business dynamics are connected and family dynamics shape the business. Then, there is the problem of defining authority— who has what authority and how various family members can work together under joint authority. There is a very strong culture in India where all male members of the next generation are expected to work in the family business.
For some that is not their passion or talent. Yet culturally, they feel they must be involved in the business for which they may not have the passion or capability. Mixing up personal standing and business standing is another common challenge among family businesses in India. It goes back to high taxes of earlier decades when income taxes were so high that people had to take family expenses through business. Now it is time to change.
What about the conflict of interest between family members who run the business and those who do not?
It is a classic problem in a third and fourth generation business family– those running the business would prefer growth and would want to contain cash outflow while others who are just shareholders may not want to see their dividend income go down. It is possible to reconcile this conflict by having a fair but explicit dividend policy and a clear commitment to growth and sustainability of the business. Both are possible. An independent board can help in assessing the growth strategy and dividend policy. But this is not a common challenge in India compared to other parts of the world. As I said earlier, in India most family members work in the business.
THE DOs AND DON'Ts...
I think because Indian families are small the transition from senior generation to the next generation is somewhat smoother than in other parts of the world. Succession planning is important but less problematic in India. The greater question is continuity planning, which is investing in the culture and governance of the business for the long-term future. This is a larger challenge for Indian family businesses. Indian family concerns should concentrate more on the quality of governance, particularly through their boards. They should also pay more attention to developing a longterm culture and a strong management development programme.
Your advice to Indian family business on succession planning?
Start early, think of it as a process and not an event, include independent directors to oversee the process, focus on personal development and professional feedback to new generation family members, set target dates for the transition and celebrate the process.
Some family members in India have been distancing themselves from day-to-day management of the company leaving the job to professionals...
The biggest question about professionalising the management for Indian family business is for the family owners to believe that they can attract the very best talent, delegate great responsibility and challenges to nonfamily management and support it with an excellent culture. Too often, I find that family businesses in India don't seek the best possible talent that they can attract and don't delegate business and strategic challenges to non-family management.
In some cases family members have even returned to chair the board. Is that a retrograde step?
I believe, in most cases, the family should have control at the chairman level. A chairman is the most important position to symbolise the family's long-term commitment to ownership, continuity and passion for the company's culture. Such families can still attract professionals, perhaps up to the CEO position, and have independent members for the Board of Directors. Indian family companies have a great opportunity to strengthen their boards and develop globally competitive top management team.
What lessons can Indian family businesses learn from those in other parts of the world?
Indian family businesses should remember that for a long time there were many excellent family concerns that were focussed not only on wealth creation but building great institutions for the country. I think for some time now the focus in India is too much on wealth creation and not enough on building an exquisite institution for the future. I hope India will remember its excellent tradition in building great institutions. Indian family businesses can also learn that simplicity of ownership and governance systems and structures can be advantageous.
In general, who is a better creator of wealth—family business or nonfamily business?
In general, around the world, we know that first generation family businesses are the greatest creators of wealth. Later generations of family businesses too perform surprisingly well considering the extra challenges these businesses face, such as succession and other issues I spoke about earlier.