Family firms: Preordained to be governed by passion and purpose

This article was first published in moneycontrol.com, March 29, 2022, Co-authors: Sougata Ray & Navneet Bhatnagar; https://www.moneycontrol.com/news/business/family-firms-preordained-to-be-governed-by-passion-and-purpose-8283921.html 

In the face of the challenge posed by phenomena such as global warming, climate change, poverty and inequality, and rapid depletion of natural resources, calls have grown louder for putting stakeholder capitalism over shareholder capitalism that has been practiced by companies for ages.

Social and political unrest in many countries, increased frequency of natural disasters, and finally the COVID-19 pandemic have laid bare the fault lines on which the global economic order rests and vulnerabilities of modern societies.

These developments reinforce the urgent need for companies to widen their canvas of responsibility, do more good, and do good for more constituents by embracing the sustainable development goals (SDGs) of the United Nations.

Corporations and family businesses in India, and elsewhere, have little choice but to shift their focus from only increasing profit to balancing profit with increasing net positive impact on the Environment, Society, and Governance (ESG), marrying profit with purpose.

Corporate governance under shareholder capitalism has traditionally been mandated and designed for maximizing shareholders’ wealth and minimizing agency costs.

Empathy, sensitivity, perseverance and adaptability have, however, emerged in recent years as key traits that board members individually and the board collectively must possess to govern a company from a multi-stakeholder point of view.

Interestingly, these are called feminine traits because women across cultures are found to possess these qualities more than men. Greater presence and participation of women is more likely help a board to discharge its mandate in the new paradigm more effectively.

Reducing inequality and discrimination has also been one of the most formidable social challenges, of which gender is the most pervasive one. Greater gender inclusivity and diversity in every level of corporate hierarchy is going to be a source of competitive advantage for some time before it becomes sine qua non for modern corporations.

In her article for the inaugural issue of the Family Enterprise Quarterly, Dr. Sangita Reddy, joint managing director of Apollo Hospitals, put it eloquently: “In today’s hypercompetitive marketplace, gender diversity is good business.”

How well are family businesses in India positioned in the emerging environment?

Our research at the Thomas Schmidheiny Centre for Family Enterprise, ISB, reveals that family businesses listed on the National Stock Exchange of India showed a greater propensity to comply with the mandate of the Companies Act, 2013, that certain public companies must appoint at least one woman-director on their boards. This demonstrates the resolve of family-run companies to embrace and adapt to changing regulatory requirements.

The identity and image of the family is closely tied to the functioning of the family business. We observe that family firms in India, on average, have a greater than 50 percent stake in their firms, making them personally invested in the reputation of the business, its longevity, and image as a socially responsible, sustainable contributor to society. The ownership control enables them to influence decisions and reorient the board-level discourse towards better outcomes for all stakeholders.

Our research also shows that women directors in family firms are mostly executives. And a family member is at the helm of affairs at more than 90 percent of such firms. The combined effect of these two factors provides business families the management control to implement required changes at the strategy and operational level to adopt ESG-friendly practices.

Demographic changes in business families and at the societal level in India, in recent years, have nudged many family-run companies to adapt, discard primogeniture, promote gender equality and evolve with time to be a responsible corporation.

The enterprising one have defied “from shirtsleeves to shirtsleeves in three generations” while the others have fallen to the adage. It is time more family firms understand that what is good for the society is good for business, and, therefore, good for them too!

Firms founded by enterprising business families are preordained and wired to be long-term-oriented, driven by values, and led by passion and purpose. In an era dominated by shareholder capitalism, family firms, being more patient and not driven by quarter-on-quarter results, were significantly disadvantaged compared to other companies barring state-owned enterprises.

As the world of business swings towards stakeholder capitalism by incorporating an ESG framework, family businesses in India and elsewhere have the opportunity to leverage corporate governance as a competitive advantage. It is time for them to recognize this and seize the momentous opportunity.