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Family owned businesses and the third generation curse

Posted by Mitali Bose

Mitali Bose

In some parts of the world, their focus on their family capital has ensured that they outperform their corporate peers and survive till their 8th or 9th generation. But, in a sharp contrast here in India, ironically a country where the family structure is so deeply embedded- they struggle as they grapple against the third generation curse.

Now, I’m not declaring that family owned businesses in India are a big failure. All that I am trying to analyze is despite a strong legacy and foundation to depend on, why are they unable to keep things together? If I was to state facts, I would point to Hay Group’s research which shows that while family business owners would like to transfer their companies to their next generation, it is estimated that 70% will not survive into the second generation and 90% will not make it to the third generation. But, not everything is limited to facts. Without using too many statistics, here is my effort to analyze what’s going wrong for these family owned businesses.

Like many other setups, the challenges that family owned businesses face in the present economic climate are various. It can range from an absence of shared alignment of vision and goals to an absence of long term business planning. It could be an absence of succession planning or the absence of professional management. Any of these or a completely different set of factors could be the reason why family owned businesses today face the threat of a really short lifespan.

Now, although the list of obstacles isn’t short to say the least, not everything about the present scenario is glum and depressing. Although at a slow pace, the scenario is changing. Say hello to a new generation which is fundamentally very different from its predecessors and this generation is now taking charge. This new band of leaders demand a professional set up. Closer to the model used by their western counterparts, these leaders know that leading through influence and not authority is key for success. Working collaboratively yet independently is significant. It’s an interconnected world and having a global perspective is mandatory. Controlling resources and valuing intangibles are both equally important. All of these facts and many others are significant for these leaders and their focus is on creating layered portfolios and retaining talent.

Hierarchy does not work. Loyalty and engaging people does work. These new leaders realize the need to create a performance culture which is fully mapped out. This includes goal setting, enforcing fairness and consistency through structured rewards, and formalizing processes of hiring, appraisal and promotion based on performance metrics.

Yes, I did start this blog listing out what all is wrong with family owned businesses. But, I’ve more than made up for it with all the optimistic factors mentioned above. However, this doesn’t mean that these new leaders have it all figured out. What these leaders need to adopt is a measured approach to family owned business’ professionalization. Financial priorities have to be balanced with family capital, a term encompassing family relations, traditions, values, rights and obligations. In fact, this is particularly relevant in Asian companies.

The bottom line is Indian family owned businesses need to learn to retain their intangible family capital, but at the same time let the best people manage the balance sheet. Don’t you agree that retaining their valuable legacy and coupling that with a progressive professional culture is the only way forward to ensure they can increase their life span and last as long as some of their global counterparts? In my opinion, it wouldn’t be incorrect to conclude that considering their substantial contribution to major economies, the benefits of this move would be limitless.

 

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