Standalone Family Firms Lead on Gender Parity

This article was first published by ISBInsight on December 14, 2018; Co-authors: Nupur Pavan Bang, Kavil Ramachandran, Anierudh Vishwanathan and Raveendra Chittoor

http://isbinsight.isb.edu/standalone-family-firms-lead-the-path-to-gender-parity/

Canadian Prime Minister Justin Trudeau declared at the 2018 World Economic Forum at Davos, that “time’s up” for gender inequality¹. His remark has bearings for the global community. 

At 130 out of 160 countries, India has one of the worst Gender Inequality Index ranks for a large emerging economy, according to the United Nations Development Programme report². It needs to take gender very seriously to realise the full potential of the country.

Now Indian women are making their mark in business (Kiran Mazumdar Shaw, Nisaba Godrej), politics (Nirmala Sitharaman, Sushma Swaraj), sports (P V Sindhu, Dipika Pallikal), as well as in science (Tessy Thomas, Priyamvada Natarajan) like never before. Yet, gender inequality is the hard fact with women faring poorly in all walks of life, from healthcare to education to economic participation.

Apart from changing mindsets to welcome the involvement of women in businesses, the enforcement of the Companies Act (2013) has ensured greater gender diversity in the boards of listed firms in India.
 As the immediate impact of this regulation, requiring every listed company to appoint at least one woman director to their board, the percentage of women directors on National Stock Exchange (NSE)- listed firms went up from 5.5% in 2014 to 12.6% in 2015 and 14.3% in 2017 (Table 1).

Table 1: Percentage of Female Directors – All firms

	2013	2014	2015	2016	2017
% Women directors	4.9%	5.5%	12.6%	13.7%	14.3%

Source: Authors’ calculations based on data from Prime Database

Diversity is often seen as a way to infuse novelty into the strategic decisions taken by the board. Research has found that gender diverse firms are more sensitive to their stock performance, thereby resulting in better shareholder value. They have more intense discussions and better monitoring and oversight³.

Women Directors in India

Governance in family firms is considered to be a black box by many analysts and investors. The independent directors’ role is thought to be more ceremonial in nature. Yet, the quality of the Board of Directors is an important characteristic of a well-governed firm.

Given this perception, we analysed 1,284 NSE listed firms for the three-year period, 2013 to 2017 to find out the specifics of women directors being appointed by family firms. We found that contrary to the general belief, the family firms were quick to meet the requirements of the Act (Table 2).

Heterogeneity within family firms was captured through the analysis of Standalone Family Firms (SFFs) separately from that of the Family Business Group affiliated Firms (FBGFs). FBGFs are firms that are parts of a group of firms owned and controlled by a family⁴.

For example, Reliance Industries Ltd. and Network 18 are both part of the Mukesh Ambani-led Reliance group. On the other hand, SFFs are typically smaller firms, focused on one industry and the only listed company owned and controlled by the family.

Table 2: Percentage of Women Directors in Family and Non-Family Firms

Ownership	2013	2014	2015	2016	2017
Non-Family	5.0%	5.8%	10.4%	12.3%	13.9%
Family	4.9%	5.4%	13.0%	14.0%	14.4%

Source: Authors’ calculations based on data from Prime Database

The study revealed that on an average (Table 2), family firms had a higher percentage of women directors on their boards. Further, we found that the SFFs had a higher percentage of women directors when compared to the FBGFs (Table 3).

Table 3:  Percentage of Female Directors in Family Firms

Ownership	2013	2014	2015	2016	2017
FBGF	4.6%	5.2%	12.3%	13.3%	13.7%
SFF	5.4%	5.7%	14.0%	14.9%	15.2%

Source: Authors’ calculations based on data from Prime Database

The absence of a clause detailing minimum educational qualifications and professional experience makes it easy for the promoters of smaller firms (that are typically SFFs), to comply with the Act by appointing their own female family members as directors without foregoing their administrative power⁵. FBGFs may not be able to appoint their own family members very easily as many of them have well established independent boards.

As can be seen from Table 4, non-family women directors are almost always more educated than the family women directors. In general, FBGFs have better-qualified women directors than SFFs, including better-qualified family women directors. There is clearly a need to specify the minimum level of qualification in the Act.

Table 4: Women Directors with Postgraduate Education in Family Firms

	SFF		FBGF
	Non-Family Women Directors	Family Women Directors	Non-Family Women Directors	Family Women Directors
2013	55%	42%	76%	58%
2014	59%	42%	80%	62%
2015	69%	43%	85%	56%
2016	77%	40%	84%	52%
2017	76%	42%	86%	49%

Source: Authors’ calculations based on data from Prime Database

Executive directors:

While the proportion of executive directors, both male and female, in family firms was lower than in non-family firms, the former had a higher proportion of women executive directors. 

Among family firms, SFFs had higher proportions of executive directors and higher proportions of women executive directors than the FBGFs. Women executives from the family again accounted for much of this difference.

SFFs have higher numbers of women executives from the family as the firms are smaller and have fewer employees and professionals.

These women’s proximity to company operations gives them more chance to observe and influence the process of strategy implementation. When the opportunity arises, they are, thus, more likely to be in substantial roles such as the executive director.

Independent directors:

To promote a meaningful debate, bring in diversity in views and ensure value creation for all stakeholders, family business researchers have argued that it is important to have truly independent directors on corporate boards⁶.

Family firms had significantly higher proportions of independent directors than non-family firms but they had a lower proportion of independent women directors as the proportion of directors from the family is higher.

Concluding Thoughts

Increasing gender diversity will require sincere commitment and cautious implementation plans from companies. SFFs are already doing well in terms of the proportion of women directors and women executive directors. We would argue that SFFs can now lead in actually empowering these women directors by providing them with the tools to perform to their potential through training, exposure and clear and challenging roles. 

Not least, they need to put in place appropriate gender agnostic performance management systems. While interventions at various levels to promote gender parity provide an impetus, their implementation in spirit is in the hands of the firms and individuals.

Know More

¹ See Justin Trudeau’s remarks at the 2018 World Economic Forum, accessed 17 October 2018: https://www.weforum.org/press/2018/01/justin-trudeau-delivers-full-throated-feminist-address-announces-new-tpp-deal/

² Accessed 17 October 2018: http://hdr.undp.org/en/composite/GII

³ For more on this literature, see among others Adams and Ferreira (2009); Terjesen, Sealy and Singh(2009); Srinidhi, Gul and Tsui (2011).  Adams, R.B. and Ferreira, D., 2009. Women in the boardroom and their impact on governance and performance. Journal of Financial Economics, 94(2), pp.291-309.

Srinidhi, B., Gul, F. A. and Tsui, J., 2011. Female directors and earnings quality. Contemporary Accounting Research, 28(5),pp. 1610-1644

Terjesen, S., Sealy, R. and Singh, V., 2009. Women directors on corporate boards: A review and research agenda. Corporate Governance: An International Review, 17(3), pp. 320–337

⁴ For more, see Bang, Ray and Ramachandran (2017): Bang, N.P., Ray, S. and Ramachandran, K., 2017. Family business – The emerging landscape: 1990-2015. Thomas Schmidheiny Centre for Family Enterprise, Indian School of Business: Hyderabad, India

⁵ Faccio, Lang and Young (2001) also describe this effect: Faccio, M., Lang, L.H and Young, L., 2001. Debt and corporate governance. In Meetings of Association of Financial Economics, New Orleans

⁶ For example, see studies by Fama (1980), Fama and Jensen (1983); Miller and Le Breton-Miller (2006).

Fama, E.F., 1980. Agency problems and theory of the Firm. Journal of Political Economy, 88(2), pp. 288-307

Fama, E.F. and Jensen, M.C., 1983. Separation of ownership and control. The Journal of Law and Economics, 26(2), pp. 301-325

Miller, D. and Le Breton-Miller, I., 2006. Family governance and firm performance: Agency, stewardship and capabilities. Family Business Review, 19, pp. 73-87

Fix it before it breaks

This article was first published in Business Standard on December 20, 2018. Co-author: S Subramanian; 

https://www.business-standard.com/article/opinion/fix-it-before-it-breaks-118121901091_1.html

Where Murugappa and GMR score over Fortis and Raymond

Looks like promoters of few family businesses refuse to learn from the past or fail to put mechanisms in place to prevent a recurrence of feuds in the family. Until the early 1990s, feuds in family businesses could not destruct the family wealth entirely as the businesses had the coveted licences in a controlled economy and the cover of limited competition. In a liberalised economy, feuds between the promoter family members not only spoil the reputation of the family and the company, but also destroy shareholder value.

Look no further than two recent cases for proof.

On September 4, 2018, Shivinder Singh, co-founder of Fortis Healthcare, filed a case against his elder brother Malvinder Singh in the National Company Law Tribunal for oppression and mismanagement at group companies RHC Holding, Religare and Fortis Healthcare. Though Shivinder later withdrew his petition, his move confirmed all was not well between the two brothers.

Malvinder and Shivinder inherited Ranbaxy Labs from their father Parvinder. Parvinder was the eldest son of Bhai Mohan Singh, founder of Ranbaxy. Bhai Mohan Singh split his business empire among his sons Parvinder, Manjit and Analjit in the late 1980s. The split was considered in favour of elder son Parvinder who got the crown jewel, Ranbaxy Labs. 

In the early 1990s, Bhai Mohan Singh and Parvinder got into a battle for the control of Ranbaxy, as an outcome of which Bhai Mohan Singh was ousted from the board. Again, in late 1990s and early 2000s, after the death of Parvinder, Bhai Mohan Singh and Manjit fought with Parvinder’s sons Malvinder and Shivinder regarding the shareholding of Ranbaxy. Governance issues came to the fore each time.

Now consider the Raymond Group. In August 2017, group founder and patriarch Vijaypat Singhania had an ugly legal fight with his son and managing director of group flagship Raymond Ltd., Gautam Hari Singhania. In the late 1990s, Vijaypat’s elder son, Madhupati, spilt from the family business after a bitter feud with his father. In a family settlement, Madhupati relinquished his rights, as well as those of his children, to the family businesses. After his exit, Gautam, the younger son, got control of Raymond. 

In 2013-14, Vijaypat’s brother Ajaypat’s children were controversially removed from the list of promoters. In 2015, when Vijaypat transferred his shareholding in Raymond to Gautam, the children of Madhupati filed a case against their grandfather for depriving them of their share in the ancestral wealth. Various cases amongst different factions of the Singhania family are ongoing and unresolved even today.

Invariably, these groups have serious governance issues. Recently, Malvinder and Shivinder were forced to give up control of Fortis. The sale of Ranbaxy Laboratories to Japanese pharma major Daiichi Sankyo had ethical issues as the buyer alleged that the Singh brothers hid irregularities probed by the US FDA while selling the company.

Similarly, corporate governance issues in Raymond were highlighted when a minority shareholder alleged in March 2017 that the promoters of Raymond Group have been using company cash for personal benefits. In its AGM in June 2017, a resolution to sell its premium real estate at throwaway prices to promoters of Raymond and their extended family was presented to the board. It was defeated by shareholders.

Regulators and external stakeholders keep a check on corporate governance. But an equally significant aspect is family governance. Family governance needs to be put in place by the family alone, voluntarily, and needs to be followed in spirit as there is no law that dictates that it needs to be put in place or that it needs to be followed.

To ensure that relations don’t sour start the governance process early on. It is easier to get the buy in from family members when the going is good. While damage control is often done when an issue gets out of hand, the softer issues of family governance are not taken up on a priority basis when more pressing business matters keep the family patriarch busy.

Conglomerates like the Murugappa Group and the GMR Group have put in place detailed family constitutions to guide members in times of doubt, conflicts and crisis. While the Murugappa Group is in its fifth generation, the GMR Group is controlled and managed by the first and the second generation family members. 

On a philosophical note, nothing in this world is permanent. So also in business. And more so in family businesses where family issues often influence business decisions. In such an environment, clarity and explicit guidance will go a long way in building lasting institutions and family legacies.

India’s Family-Ownership Factor

This article was first published by the Global Association of Risk Professionals, Risk Intelligence, November 26, 2018

https://www.garp.org/#!/risk-intelligence/market/investment-management/a1Z1W000004BThsUAG

Study underscores preeminent role of family-controlled businesses, even as multinational and holding-company investments rise

Promoters (founding shareholders/owners) of family firms have increased their shareholdings while non-promoters, institutional as well as small non-institutional investors, have reduced their stakes, a study by the Thomas Schmidheiny Centre for Family Enterprise at the Indian School of Business (ISB) reveals.

Authored by Dr. Nupur Pavan Bang, Professor Kavil Ramachandran and Anierudh Vishwanathan of the Thomas Schmidheiny Centre, and Professor Sougata Ray of Indian Institute of Management-Calcutta, Family Businesses: Promoters' Skin in the Game finds that a pattern of declining stakes by promoters in BSE 500 companies, as shown by some prior analysis, is not true for all categories of firms. Confining the analysis to BSE500 firms does not give a true picture, as the BSE500 excludes most of the smaller, standalone family firms.

The study provides insights into the ownership pattern of family, as compared to non-family, firms and explores the heterogeneity within family firms. The study covers trends in equity ownership by various classes of shareholders for 4,615 firms listed on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE), across different ownership categories, for the 2001-2017 period.

Key Findings

Rising promoters' stake. In India, family-controlled firms are greater in number than non-family firms. Lack of a strong legal framework to protect minority shareholding and other institutional voids make concentrated ownerships natural in India.

By steadily increasing their shareholdings, the promoters of family firms – both family business group firms (FBGFs) and standalone family firms (SFFs) – signal their growing confidence in the potential of their company, thereby instilling confidence among the investors.

Promoters of multinational corporations (MNCs) have also increased their stakes in Indian subsidiaries, probably indicating their belief in the “India story.” The promoter stake in State Owned Enterprises (SOEs) has been steadily falling over the past decade. 

This is in line with the policies of successive India governments to divest their holding in SOEs. Other business group firms (OBGFs) and standalone non-family firms (NFs) have also witnessed a decrease in promoter shareholding.

Rising trend of holding shares through companies. In FBGFs, the preferred mode to hold shares is through holding companies, while in SFFs the family members prefer to hold shares directly as individuals or as Hindu Undivided Family (HUF). 

In FBGFs, holding companies or trusts that hold shares of all companies on behalf of the family members enable better resource allocation, control, realization of synergies and tax planning within all group-level firms, and better management of ownership, inheritance and payouts at the family level. It also enables the family to professionalize each firm, while the family maintains a bird's eye view at the group level.

SFFs are younger, with less complex structures, both at the family and the business front. As they grow, complexities of inheritance, succession and growth would force them, too, to adopt better ownership structures. Therefore, we see a gradual increase in shareholding through companies even in the case of SFFs.

Declining institutional shareholding in family firms. Non-promoter institutional shareholding is lower in family firms when compared with non-family firms, and it has decreased further between 2007 and 2017.

As block holders, institutional shareholders influence the governance and strategy of the firm; if they refrain from investing in family firms, the pursuit of governance will take longer. Non-family firms in general have strong formal internal control mechanisms to keep the personal interests of managers out of the company's functioning.

Consequently, the probability of a strong and independent corporate governance mechanism is greater for a non-family firm. Institutional investors have a strong preference for firms with good governance. Thus, we see higher institutional shareholding in NFs and OBGFs.

Reluctant non-institutional shareholders. Except in NFs, the study shows a decline in the shareholding of non-promoter, non-institutional shareholders. It suggests that investors' preferences might have further shifted to alternative asset classes like real estate, gold, and fixed deposits, or they might be investing through institutions like mutual funds.

Most of the decline is due to small investors with up to Rs1 Lakh worth of shares. These small investors have reduced their holdings across all ownership categories. This may be due to the lack of disposable income in the hands of small investors.

Conclusions

This study has attempted to give a bird's eye view of the shareholding pattern of listed Indian firms. We found that promoters of family firms have increased their stake in their companies over the last decade, while SOEs, OBGFs and NFs have seen a decline in promoter shareholding.

This reinforces the preeminent role of family-controlled businesses in India. It seems to imply that the engine of growth of Indian businesses will not be dependent on overseas or other promoter categories. Instead, promoters of family firms will continue to play a major role.

The ownership pattern of listed businesses in India is fairly concentrated, especially in the case of family firms, SOEs and MNCs. While this has significant positive effects, there is also a need to keep close vigil on their governance practices.

Equal Stewards: The Women in Family Business Programme

This article was published in ISB Insight, web exclusive Event Spotlight section, on October 16, 2018; Co-author: Prof. Kavil Ramachandran

http://isbinsight.isb.edu/equal-stewards-the-women-in-family-business-programme/

“Women must take equal responsibility and get equal opportunity to make the family business a long-last institution.” This was a key takeaway from the Women in Family Business Programme held at the Indian School of Business in August 2018, empowering women to step into leadership roles in their family enterprise.

How can women contribute to building family businesses as long-lasting enterprises? What does the future for women look like in terms of leadership of the firms? How can women add greater value to board level discussions? On August 6 and 7, 2018, the Thomas Schmidheiny Centre for Family Enterprise at ISB conducted a tailor-made programme for women belonging to business families. The programme focused on the role of women and their most significant challenges in direct and indirect interactions with family businesses.

What is the context behind developing this women-centric focus in family enterprise? More than 90% of the listed companies in India are family-owned. If managing a business is a complex job, then managing a business with family members becomes even more complicated as business decisions get interspersed with emotional and personal commitments. 

Traditionally, businessmen have quipped that including women family members in business complicates things further, both at home and at work. This mindset is now changing. Not only are more women joining their family businesses, but many are even leading them.

Increasingly, it is being acknowledged that having women in leadership roles results in better overall performance of companies. Greater involvement of women in management brings in diversity of views to the decision-making process which makes the firms more successful.

 The Women in Family Business Programme at ISB discussed this critical need to prepare women to contribute effectively, both at the operational and leadership levels, including board of directors. The programme was also meant for women more indirectly involved in their family businesses, such as women counsellors and consultants of family businesses.

50 participants, spread over two batches, attended the programme and learned five key strategies that would enable women to find their rightful place in a family business:

1.    Align Family and Business

 Family and business follow two different philosophies, namely socialism and capitalism. It is challenging to traverse the complex world of both, together. The success of one is dependent on the success of the other. Hence, it is important for both the family and the business to work in harmony and adapt to changing environment. Involving family members from a young age makes them passionate and responsible about the family business.

2.    Establish a Family Code of Conduct

Many of the challenges faced by family businesses in general and women involved in them in particular can be addressed through a formal process of communication and written guidelines for family governance. 

Establishing a code of conduct and rule of family governance, leading up to the formation of a family constitution with participation of all family members, will specifically address delegation of responsibilities, professionalisation, succession and retirement issues. Family governance needs to be addressed as early as possible so that it can be put in place when the family and business complexity are lower.

3.    Create Clearly Defined Roles for Women

Women must have active, clearly defined roles within family businesses. The firms should leverage women’s strengths, be it strategy, finance, human resources or corporate social responsibility. If they are passive members, they can still contribute to the discussions at the board level or at home, apart from being the emotional anchor for the other family members.

4.    Balance the Personal and Professional

At a personal level, women face unique challenges as they get married and may have to move away to another city, making it difficult for them to be involved in their paternal family businesses. Similarly, they may find the culture and values in their husband’s family business different from their paternal family business.
 Such circumstances may be difficult to manage. At times, work-life balance and protecting relationships may become challenging. But, constant communication, learning to say no and educating the rest of the family will help.

At a professional level, women can assert themselves in the family business by being equipped with business relevant knowledge through formal and informal education, being decisive, expressing their views in appropriate platforms and demonstrating strong work ethics. This will ensure that they are treated as professionals. Some steps to be accepted as a professional include taking one’s role in the family business seriously, being disciplined, showing commitment and capability.

5.    Create an Ecosystem

It is important to create cohesion between a shared vision for the business, implied and explicit values that the family and business follow, clearly defined roles and responsibilities as well as transparent and frequent communication. Above all, it is important to strictly follow rules and policies. 
For example, if the family values clearly state that they give equal opportunity to both men and women, it would be reflected when succession planning is undertaken by the family business leader, giving equal opportunity to women to lead the family business if they are qualified, experienced and capable.

The biggest takeaway from this programme was that women are equal stewards in the family enterprise. They must take equal responsibility and get equal opportunity to make the family business a long-last institution.