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.