Family Businesses as a Pillar of Viksit Bharat

This article was first published in the Economic Times on January 29, 2026; https://economictimes.indiatimes.com/news/company/corporate-trends/family-businesses-as-a-pillar-of-viksit-bharat/articleshow/127759602.cms?from=mdr

Introduction: The Missing Big Idea

In a recent letter to the Finance Minister published in the Times of India, Duvvuri Subbarao, former governor of the Reserve Bank of India, posed a question that goes to the heart of India’s economic moment. If Viksit Bharat is the overarching vision of this government, what does it mean in concrete terms, and how are annual budgets aligned to that vision? Drawing a parallel with Manmohan Singh’s landmark 1991 budget, where the “big idea” was liberalisation, Subbarao asks what the equivalent organising principle is today.

This article argues that one such pillar of Viksit Bharat must be explicitly recognised and supported: India’s family businesses. The objective here is twofold. First, to situate family enterprises historically and empirically as engines of nation building. Second, to outline what the Finance Minister can do, through policy and budgetary choices, to enable family businesses to contribute responsibly, transparently, and sustainably to India’s development journey.

Family Businesses and Nation Building: A Historical Constant

Family businesses are the oldest and most enduring organisational form across nations. In India, family enterprises have long been builders of physical infrastructure, educational institutions, healthcare systems, and local employment. At India’s current stage of development, where the need for infrastructure, patient capital, and institution building is acute, these characteristics matter deeply.

History offers a useful parallel. In the late nineteenth and early twentieth centuries, the United States witnessed massive infrastructure creation led by business families such as the Vanderbilts, the Carnegies, and the Rockefellers. Railroads, steel, oil, and finance were shaped by families willing to take long-term risks at scale. These families helped build the economic foundations of modern America.

India today stands at a comparable inflection point. Large family-controlled business groups are deeply involved in roads, ports, renewable energy, logistics, manufacturing, education, and healthcare. These are sectors where long gestation periods and intergenerational commitment are advantages rather than liabilities.

Lessons from the Robber Barons

Yet history also cautions us. Many of the American families who built that infrastructure later came to be labelled “robber barons”. Some lost legitimacy due to concentration of power, weak governance, opaque practices, and an inability to manage succession effectively. Several family empires fragmented or faded, not because of lack of wealth, but because institutions did not evolve alongside scale.

This is a lesson India must take seriously. The choice is not between celebrating or constraining family businesses. The real policy challenge is to fuel entrepreneurial energy while embedding governance, transparency, and meritocracy. Without this balance, family capitalism risks public backlash and private decline.

Why Family Businesses Matter for Viksit Bharat

If Viksit Bharat is about sustained prosperity, social stability, and institutional depth, family businesses are uniquely positioned to contribute in four ways.

First, they provide patient capital. Family owners are often willing to invest across cycles, absorb short-term volatility, and commit to long-horizon projects that are unattractive to purely financial investors.

Second, they anchor local economies. Family enterprises are embedded in regions and communities, making them critical to employment generation, skill formation, and social cohesion.

Third, they enable institutional philanthropy. Many of India’s educational and healthcare institutions have been built by business families, often long before corporate social responsibility became mandatory.

Fourth, they ensure continuity. In a world of rapid managerial churn, family ownership can provide strategic consistency, provided governance systems are robust.

Policy Lessons from Other Economies

Across several jurisdictions, governments are beginning to recognise family enterprises as distinct economic actors whose long-term orientation and ownership continuity require tailored policy responses. As documented by Tharawat Magazine , this shift reflects an understanding that family businesses contribute disproportionately to employment, capital formation, and institutional stability, yet face structural vulnerabilities during succession and ownership transition that generic corporate policy does not address. The emerging response is not to privilege family firms indiscriminately, but to make them visible within the policy architecture.

This recognition has taken different institutional forms. In the United States, the creation of a bipartisan Family Business Caucus within Congress signals an effort to ensure that family enterprises are explicitly considered in legislative and regulatory debates. In Poland and Canada, legal and tax reforms have focused on reducing the cost and complexity of intergenerational transfers, acknowledging that poorly managed succession can destroy productive capacity and jobs. In the United Arab Emirates, a dedicated Family Companies Law, supported by state-backed institutions, seeks to codify governance, succession, and dispute resolution mechanisms, positioning family firms as long-term partners in national economic strategy. Hong Kong, meanwhile, has focused on building an ecosystem around family capital and family offices, combining regulatory adjustments with investments in institutional capacity for stewardship and legacy planning.

What unites these diverse approaches, as Tharawat Magazine underscores, is a move away from treating family ownership as incidental. Instead, policy frameworks increasingly aim to align continuity with governance, transparency, and professionalisation. The lesson for India is not to replicate any one model, but to recognise that if family businesses are to anchor Viksit Bharat, they must be deliberately integrated into policy design, fiscal incentives, and economic measurement, rather than remaining an invisible yet systemically important segment of the economy. 

Policy Recommendations

If robust family businesses are to be a measurable pillar of Viksit Bharat, policy intent must translate into administratively actionable and fiscally grounded measures.

First, formal recognition of family enterprises: The Union Budget can announce a formal definition of family businesses, notified jointly by the Ministry of Finance and the Ministry of Corporate Affairs. This would allow family enterprises to be recognised as a distinct category for policy design, without creating a new regulatory burden. Budget documents can mandate periodic data collection through MCA filings, enabling evidence-based policymaking.

Second, governance-linked fiscal incentives: Under the Direct Tax framework administered by the Central Board of Direct Taxes, targeted deductions or concessional tax treatment can be offered to family enterprises that meet specified governance benchmarks. These may include independent directors, documented succession plans, audited family constitutions, and separation of ownership and management. This aligns tax policy with long-term institutionalisation rather than short-term compliance.

Third, succession and continuity financing: The Budget can create a dedicated Succession and Continuity Credit Window, routed through public sector banks and development finance institutions. Backed by partial government guarantees, this facility would support ownership transitions during generational change, preventing distress sales, fragmentation, and employment loss. This intervention sits squarely within the Ministry of Finance’s financial stability and credit flow mandate.

Fourth, targeted public expenditure for family-led nation building: Capital expenditure allocations for infrastructure, education, healthcare, and energy transition can explicitly prioritise public–private partnerships anchored by long-term family ownership. Viability gap funding and concessional finance can be linked to governance and transparency standards, ensuring that public funds support stewardship-oriented capital rather than short-term extraction.

Fifth, next-generation capability development: Budgetary support can be provided under skilling and higher education heads, in coordination with the Ministries of Skill Development and Entrepreneurship, and Education, for structured leadership and governance programmes tailored to next-generation family members. Treating succession as a national economic continuity issue reframes it from a private family matter to a public interest concern. 

Measuring Progress: Integrating Family Business Health into Economic Reporting

If Viksit Bharat is to move beyond aspiration, it requires metrics embedded in official economic reporting. One such metric should be the robustness of India’s family business ecosystem.

The Finance Ministry can mandate the creation of a Family Business Development Index, published periodically alongside existing economic indicators. This composite index could track intergenerational survival rates, governance quality, professional management penetration, employment contribution, reinvestment rates, and participation in national priority sectors.

Such reporting would serve three purposes. It would signal that stewardship-based capitalism matters to India’s development vision. It would create incentives for business families to institutionalise governance and succession practices. And it would give policymakers an early warning system for stress in a segment that employs millions and anchors regional economies.

Conclusion: A Call for Early Attention

Embedding family businesses as a pillar of Viksit Bharat will not happen overnight. It may not be feasible to incorporate many of these ideas in the forthcoming budget. Policy design, inter-ministerial coordination, and institutional alignment take time.

But that is precisely why the conversation must begin now. As an early set of ideas for the next budget cycle, this article urges the Finance Minister to take notice. If India wants development that is durable, inclusive, and institutionally sound, it must look closely at the families that build, own, and steward its enterprises.

Viksit Bharat will not be built by capital alone. It will be built by families who think beyond one generation, supported by policies that reward responsibility as much as ambition.

How next-gen scions can steward family businesses amid global uncertainties

This article was first published in Forbes India magazine, May 29, 2025. Co-author: Kavil Ramachandran; https://www.forbesindia.com/article/leadership/how-nextgen-scions-can-steward-family-businesses-amid-global-uncertainties/96070/1

Family enterprises—which underpin economies worldwide by contributing over 70 per cent of global GDP and employing nearly 60 per cent of the workforce—now find themselves at the epicentre of a transformation unlike any before. The convergence of rapid technological advances, mounting climate imperatives, shifting consumer values and geopolitical realignments have all created what strategists term a BANI environment—Brittle, Anxious, Non-linear and Incomprehensible. For family firms long defined by multi-decade horizons and incremental evolution, the imperative falls on the incoming cohort of heirs to merge institutional memory with digital fluency, entrepreneurial daring and a restless drive to convert disruption into renewal.

The Shrinking Horizon

At the heart of the disruption challenge lies the brutal acceleration of product and corporate lifecycles. A report by Innosight showed that in 1965, the average tenure of a company in the S&P 500 exceeded thirty years; by 2016 it had fallen to twenty-four and is forecast to contract further to twelve years by 2027. For successor generations accustomed to inheriting legacies built over lifetimes, this shrinkage demands a marathon-sprinter’s mindset: heirs must deploy rapid experimentation, continuous skill-building and lean decision loops to stay ahead of digital-native rivals, even as they preserve the family’s enduring values.

Bruce Lee used to say, “Empty your mind, be formless, shapeless, like water,”—advocating a state of perpetual readiness, adaptability and strength. And he was not talking only about martial art! 

Future-Focused Strategy in Action

Consider two of India’s most venerable family business groups. The Tata Group, founded over 150 years ago, has become as much a technology and services conglomerate as it is a steel manufacturer. Its digital arm, Tata Consultancy Services, invests billions in cloud computing and artificial intelligence to offset the gradual commoditisation of legacy offerings. Mahindra & Mahindra, similarly, has pivoted from tractors and utility vehicles to become a global player in electric mobility, forging partnerships with tech firms in Silicon Valley to accelerate R&D. Heirs at Tata and Mahindra did precisely what the moment demanded. Those were essential moves to catch up with rapid technology shifts and establish footholds in adjacent markets.

Today’s successors confront an entirely new mandate: they must trust their own capabilities and provide steward leadership to drive transformation within their families. By leading from behind, they shape outcomes across multiple fronts. Family governance, business strategy, entrepreneurship and wealth management are among the areas that demand fresh perspectives.

 

Each circle in the chart ‘Nextgen Leadership’ represents a core dimension of successor stewardship:

• Strategist - As a custodian of the future growth of the business, a successor has to envision the emerging environment and chart the family firm’s horizon by scanning technological trends and market shifts to align capital allocation with emerging value pools.

• Professional Manager - They must facilitate practice of professionalism as a value by benchmarking and introducing best practices such as clear KPIs and process rigour alongside family executives, and elevate operational performance.

• Serve Society- Business families have all along been connected closely with the society they live. Nextgen must help shape philanthropy, ESG and community partnerships to reinforce the family’s and enterprise’s social  relevance and long-term reputation.

• Value / Heritage Custodian - As family stewards, younger generation must lead by translating founding values and principles into actionable norms, ensuring that legacy values guide strategic and cultural choices.

• Groom Nextgen - They should not wait for the seniors to groom them; rather the initiative must come from them since they are the change makers.

• Family Governance Custodian - Nextgen must take upon themselves the responsibility to enforce transparent governance in the family. They will thus be living by example the principles and policies of high quality family governance. 

• Wealth Creator / Protector- Younger generation understands the significance of structured wealth management more than the seniors. They must help balance bold investment in growth areas with prudent risk buffers and diversification strategies to preserve intergenerational capital.

In sum, whereas the previous cohort sprinted to catch the wave of disruption, today’s successors must surf the entire storm.

Governing with Agility

Amid relentless disruption and ever-accelerating change, robust governance becomes the linchpin of resilience. Effective governance now demands far more than static rules—it requires a learning culture that reconceives the family’s role in business. Central to this is comprehensive family education: each member must grasp how the family’s identity and purpose interact with a swiftly shifting environment. Traditional models built on extended-family norms no longer suffice; in nuclear or geographically dispersed families, notions of fairness and togetherness must be re-negotiated. Accordingly, family policies, processes and practices should be revisited collaboratively, with formal forums to debate and codify new charters that foster harmony and mutual accountability.

Equally important is the recalibration of governance vehicles. The Family Business Board remains the enterprise’s guardian of strategy and risk, while the Family Council safeguards cohesion by enforcing the charter and resolving disputes. The Owners Council, however, assumes an expanded remit: it must incubate entrepreneurial initiatives through transparent venture-financing guidelines, clear ownership stakes and performance-linked rewards—effectively treating new ventures as corporate-venturing projects. In all bodies, respected independent directors are essential to uphold rigour, test values of trust and transparency, and temper the inevitable interplay of logic and emotion. In practice, many group structures will evolve into holding-company frameworks, with each subsidiary managed as a strategic business unit under its own performance matrix. This architecture recognises that heirs often seek both individual agency and collective purpose—and it ensures that “I-Me-Mine” ambitions remain anchored within a unified family vision.

Generational Duality

Interwoven with strategy and governance is the delicate balance between senior-generation stewardship and next-generation dynamism. The former brings deep institutional memory, extensive networks and a long-term orientation that has underpinned stability for decades. The latter embodies fluency in digital ecosystems, comfort with ambiguity and a restless pursuit of new value pools. When harnessed constructively, this generational duality can become a formidable competitive advantage. The story of Lavanya Nalli, who transformed and expanded her family’s ninety-year-old silk business into a thriving e-commerce platform within five years, exemplifies how next-generation initiative can amplify a legacy brand’s reach and relevance.

However, generational tensions can turn unpleasant and acrimonious if roles and expectations are not clearly defined, underlining again the need for next-generation heirs to act as steward leaders. They cannot afford a narrow, self-righteous stance in such a dynamic world. They must recognise that their future is at stake and that it is their responsibility to ensure continuity and change simultaneously. Leadership and ownership succession remain among the trickiest challenges in the life of any family business. Cyient, a multi-technology company, has successfully undergone major changes in its business portfolio during and after the transition of leadership from Mohan Reddy to his son Krishna. Cyient has been adapting proactively to disruption.

Impact and Purpose

If governance forms the backbone of resilience, then a compelling social and environmental purpose defines the family firm’s licence to operate. As regulatory regimes tighten carbon-emissions norms and stakeholders demand rigorous ESG performance, heirs can no longer defer sustainability to a later date. Too often, family enterprises underinvest in low-carbon strategies even as climate-related liabilities mount. 

Successors must therefore educate the wider family on the business case for embedded sustainability—aligning priorities, capital allocation and executive incentives with long-term ecological stewardship. Moreover, a unifying purpose binds the family together; without it, cohesion frays and the risk of fragmentation rises.

Heightened scrutiny of corporate conduct and social impact are reshaping brand narratives. Younger consumers prize purpose-driven enterprises, and family firms enjoy an inherent credibility if they can demonstrate consistent community support and ethical probity. Next-generation leaders must therefore embed social and environmental impact at the strategic core—transforming purpose from a peripheral concern into a driver of resilience, reputation and sustained growth.

The FAMILY Framework for Resilience

Underpinning all these practices is a holistic FAMILY framework, integrating six mutually reinforcing pillars (see chart ‘Family Framework’). This framework operates not as a static checklist but as a living operating system—one that demands rigorous discipline, continual upskilling in new domains and regular recalibration. At its heart lies the proactive agency of the next-generation, ensuring a genuinely future-focussed orientation (see chart ‘Dynamic Family Framework’). 

Dynamic Family Framework

 Disclaimer: Generated using AI

In conclusion, the nextgen in family enterprises has the responsibility to take on the role of the nerve centre of renewal. Externally, they need to reconceive their business models through the lenses of digitalisation, sustainability and global agility. Internally, they must drive an agile governance and talent ecosystem that unites generational wisdom with new-economy dynamism. The FAMILY framework—with its emphasis on future orientation, governance agility, meritocratic culture, purpose fidelity, financial prudence and generational inclusivity—offers a practical roadmap.

Stewardship in today’s turbulent seas means more than preserving tradition: it requires embracing change as a source of renewal. As Bruce Lee taught, true mastery demands speed, fitness and an unencumbered mind ready to flow like water. Only by dancing on a globe in rough seas—ever ready to pivot, learn and hold fast to enduring values—can family businesses convert the pressures of disruption into engines of sustained growth. In this new era, those who master the art of agile resilience will not merely survive; they will redefine what it means to endure.

Navigating the Crossroads

This article was originally published in Business Standard, May 07, 2024; Co-author: Kavil Ramachandran

https://www.business-standard.com/opinion/columns/impact-of-divisions-in-family-businesses-motivations-and-consequences-124050601237_1.html

The recent trend of ownership restructuring and vertical splits amongst prominent Indian family businesses, exemplified by the division within the Godrej Group, has brought to the forefront the complexities and challenges associated with managing large, multi-generational enterprises. While opting to split the business may appear as a strategic manoeuvre to navigate differing visions and aspirations within the family, it necessitates a thorough examination of both the potential benefits and drawbacks. This article delves into a comprehensive perspective on family business divisions, scrutinizing both the motivations propelling such decisions and the adverse consequences they may entail at both familial and corporate levels.

The Positive Aspects

Complexity of Managing Large Conglomerates: As family businesses expand and diversify, managing the intricate web of operations and stakeholders becomes increasingly challenging. Formations of smaller clusters, each having its own strategic business units, allows for streamlined management structures and clearer accountability, leading to enhanced efficiency and agility in decision-making. For instance, the Adi-Nadir and Jamshed-Smita clusters will enable the entities to focus on their core competencies and strategic priorities, driving operational excellence and value creation in their respective sectors.

Unlocking Value and Growth Potential: A split can unlock the individual value and growth potential of different business segments. Specialized focus allows each entity to tailor strategies, attract specific talent, and pursue targeted investments, ultimately leading to greater success and profitability. The division of the Godrej Group into separate entities controlled by different family members should enable each cluster to capitalize on their respective strengths and market opportunities, drive innovation, and value creation.

Accommodating Growth and Aspirations of the Family: As family businesses expand across generations, differing opinions on strategy and management can arise, leading to conflict. Dividing the business offers autonomy to individual branches, fostering ownership and accountability while reducing discord. For example, the Birla Group split allowed each faction to pursue independent growth, leveraging diverse skills. Additionally, younger generations may seek opportunities aligned with their interests, driving innovation. For instance, the Bajaj Group's diversification into finance empowered the next generation to pursue their entrepreneurial vision.

Learning from Past Experiences: Observing the challenges faced by other business families during succession or disputes can serve as valuable lessons. Proactively choosing to divide the business allows for a planned and amicable transition, ensuring the preservation of family relationships and the brand's reputation. The Bajaj family's decision to split the Bajaj Group into separate entities facilitated a smoother transition of leadership and ownership, mitigating the risk of future legal battles and reputational damage, while preserving the family's unity and legacy.

Ownership and Rewards: A strategic and amicable split within a family business can enable individuals to have greater "skin in the game" and receive rewards commensurate with their contributions and aspirations, ultimately fostering harmony and prosperity within the family. The Mittal family, for example, founders of the Mittal Steel Company, decided to amicably split the business to align ownership with individual aspirations and rewards.

Moreover, the division of the business not only aligns ownership with individual aspirations and rewards but also serves to minimize politics in decision-making processes. By decentralizing control and empowering each cluster within the family, quicker decision-making is facilitated, eliminating the need for seeking approval from numerous stakeholders.

While the preceding discussion highlights reasons that motivate families to split, it's essential to recognize that divisions entail inherent risks and complexities too. Below, we discuss some negative impacts of splitting.

Unintended Downsides

Loss of Synergy and Economies of Scale: A unified conglomerate often benefits from synergies between diverse business segments, leading to cost efficiencies, shared resources, and heightened bargaining power. For instance, the Tata Group's diversified portfolio leverages synergies across industries, bolstering its competitive edge and financial performance, including a cohesive brand identity. However, the division of such conglomerates, as seen in the case of the Ambani family's split of the Reliance Group and the TVS group, risks diluting these synergistic advantages, thereby impacting profitability and competitiveness.

Potential for Family Conflict and Rivalries: While division may aim to address existing disagreements or differing aspirations within the family, it can inadvertently give rise to new challenges and rivalries between the separated entities. The battle between two hero group entities, post the split, regarding the use of the brand name ‘Hero’, highlights the potential for discord arising from family business divisions. Such conflicts can impede decision-making processes, hinder strategic alignment, and erode shareholder value.

Challenges in Succession Planning and Leadership Development: Staying unified provides access to a broader talent pool, both from within the family and externally, ensuring continuity and strength in leadership across the organization. The Murugappa Group's robust leadership development programs serve as a prime example, facilitating seamless succession planning and talent pipeline management across its diverse business verticals. However, splitting the business may curtail these opportunities, making it more challenging to ensure a seamless succession process and maintain robust leadership across the separated entities.

Emotional and Cultural Impact: Family businesses often pride themselves on strong cultural identities and shared values that underpin their success. The Murugappa Group exemplifies this with its deep-rooted cultural ethos of trust, integrity, and entrepreneurship, which has fostered a cohesive organizational culture and sustained business performance over generations. However, division poses a risk to this unity and shared purpose, potentially leading to emotional challenges and a loss of cultural cohesion within the family.

Growing Wealth Disparity: Past business splits have revealed that while divisions may start out equitable, over time, one faction often amasses more wealth and resources. For example, the Ambani brothers' feud over the Reliance Group's assets led to a significant wealth gap between Mukesh and Anil Ambani. These disparities can fuel family tensions and perpetuate financial inequalities, highlighting the socioeconomic impact of family business divisions.

Harmonizing Family and Corporate Choices

In navigating the complex terrain of family business divisions, it becomes imperative to acknowledge the nuanced interplay of motivations and consequences. While the prospect of splitting a conglomerate may offer avenues for addressing immediate challenges and accommodating evolving aspirations, it also entails significant risks and losses, both at the familial and corporate levels. The case studies of prominent Indian business families, such as the Ambanis, Birlas, and Munjals, underscore the intricate dynamics and far-reaching implications of such divisions, ranging from wealth disparities to emotional upheavals.

By embracing a proactive stance towards addressing emerging challenges, family conglomerates like Godrej could potentially have emerged as global powerhouses, wielding not just economic influence but also shaping the broader political and societal landscape. However, by choosing to split, these conglomerates risk diluting their legacies and missing out on transformative growth opportunities. Ultimately, the path forward for family businesses lies in striking a delicate balance between tradition and innovation, unity and autonomy, to ensure sustained success and relevance in an increasingly competitive global landscape. We can only hope that the sum of the parts is eventually greater than the whole, in numbers, as well as in family harmony, togetherness, and impact.

ESG and Stakeholder Capitalism: Seeking Value for All

This article was first published in Outlook India on May 09, 2023. Co-authors: Moksh Garg, Sougata Ray; https://www.outlookindia.com/business/esg-and-stakeholder-capitalism-seeking-value-for-all-news-284879

Nobel Laureate Milton Friedman, in his famous essay "The Social Responsibility of Business is to Increase its Profits," published in the New York Times magazine in 1970, famously wrote, "There is one and only one social responsibility of business--to use its resources and engage in activities designed to increase its profits..."

Compare this with the Statement on the Purpose of a Corporation adopted by 181 CEOs of America's largest companies in 2019. The Statement declared, "…companies should deliver long-term value to all of their stakeholders – customers, employees, suppliers, the communities in which they operate, and shareholders."

Post the Covid19 pandemic, calls for "stakeholder capitalism" has further picked up the pace. Gone are the days when economic profits alone determined a firm's success. The for-profit entities are being held responsible not only for the bottom line but also for the activities through which they create shareholder value and the value they create for other stakeholders. As a result, it is no longer surprising to see them getting mired in controversies or even attacked by their shareholders over broad-ranging social issues. This has led shareholders and the wider investor community to take stock of businesses beyond traditional metrics.

Measure accurately and improve

The method to measure economic profits has been established and standardised for long. However, measuring stakeholders' value creation is still in its infancy. And, what cannot be measured, cannot be improved, managed, or controlled. Therefore, combined with changing social dynamics and the issue's salience, many rating agencies and data providers started providing ESG ratings for companies.

At the most basic level, ESG ratings aid investors in comprehensively evaluating a firm by analysing it across its three major dimensions: environmental, social, and governance actions and impact. While ESG, in spirit, is a step in the right direction, it has been wrestling to drive a commensurate impact worldwide. There are significant roadblocks impairing its overall uptake and effectiveness. Two major hurdles are the lack of standardized disclosures by corporate and inconsistent measurement criteria employed by the ESG rating providers (ERPs).

Disclosure: Our research at the Thomas Schmidheiny Centre for Family Enterprise, Indian School of Business, suggests that less than 4% of the total publicly listed Indian firms have been assigned ESG ratings between 2014 to 2021. We arrived at this figure by consolidating three different ERPs, i.e., WRDS Sustainalytics, Thomson Reuters, and CRISIL. The reason for the low coverage of companies by ERPs is that ERPs rely on publicly available data to make assessments. However, most companies – especially the medium and small-sized ones – do not track their ESG activities, let alone disclose them publicly. Even companies that make complete disclosures do not follow any standard procedure, making their interpretation subjective and comparisons across companies challenging.

Measurement: While comparisons across companies are difficult due to a lack of standardised disclosures, how information for the same company is compiled, measured, and converted into an aggregate score differs quite a bit from ERP to ERP. A study conducted by researchers from MIT, published in the Review of Finance, reported steep inconsistencies in the ESG ratings assigned to a business by different agencies (Berg, Koelbel, & Rigobon, 2022). In many cases, firms are assigned highly inconsistent ratings by different ERPs owing to differences in methodology, scope, or weights (importance) assigned to attributes. The divergent estimates about the same underlying entity add to the confusion and defeat the very purpose of these ratings.

Sample: The number of firms assigned an ESG rating in India (by the three ERPs cumulatively) is a minuscule percent of all listed firms (4%). Further, because we cannot compare the ratings across ERPs, research must be done using the data from just one ERP, reducing the number of companies that can be studied even further. Additionally, the number of years of data available for each ERP varies. In such a scenario, the reliability and generalization of research become questionable.

ESG ratings and their effectiveness are subject to substantial political debate in the West. The opposition has openly attacked ESG for its overly ambitious vision but deeply flawed implementation. Some critics have even questioned the morality of ESG by calling it a fabricated tool to legitimize greenwashing. However, in our opinion, although ESG is undoubtedly far from perfect, it remains one of the most potent ways to reimagine businesses in a society fraught with grand challenges.

In line with the old saying "do not throw the baby out with the bathwater," we expect that in the Indian context, SEBI's mandate for BSE Top 1000 companies to report their ESG activities as part of the Business Responsibility and Sustainability Reporting (BRSR) shall alleviate some of these concerns. However, it is time that companies understand the spirit of ESG, and even those companies that do not fall under the purview of BRSR voluntarily disclose the steps taken toward a more sustainable future. Let us actively work towards addressing the pitfalls, bringing more standardisation to disclosures and objectivity to measurement.

Shareholder capitalism to stakeholder capitalism: Are Indian family firms prepared?

This article was first published in moneycontrol.com, April 18, 2022, Co-authors: Sougata Ray & Navneet Bhatnagar; https://www.moneycontrol.com/news/business/shareholder-capitalism-to-stakeholder-capitalism-are-indian-family-firms-prepared-8371801.html

The debate whether companies should be governed with the sole objective of maximising shareholder value (shareholder capitalism as reflected in the shareholder primacy model advocated by Prof. Milton Friedman) or balancing the interests of multiple stakeholders (stakeholder capitalism as reflected in stakeholder primacy model advocated by Prof. R. Edward Freeman), including shareholders, has been raging for several decades.

Climate disasters, rapidly rising inequalities and COVID-19 have perhaps put to rest the shareholder vs. stakeholder primacy debate and tilted the balance firmly in favour of the latter. Modern corporations, irrespective of ownership, have an obligation to act in the interests of multiple constituents -- viz., ecology, environment, society, and shareholders.

It has been argued in literature, with some empirical validation across country contexts, that family firms are generally more influenced by the ideals of stakeholder capitalism and less by the idea of shareholder capitalism.

Anecdotal evidence in India suggests so. Many times in the past, when there has been the need, family firms in India have risen to the occasion and swiftly aided government and people, be it during the Independence movement, wars, floods, famine or pandemics.

How family firms fare

To measure how family firms fare with various stakeholders, we analysed them on various parameters and found interesting results.

Using a sample of over 6,000 firms, over the last 30 years, we found that family firms underperformed non-family firms in terms of return on assets. This indicates that family firms are, in fact, not very focused on returns. This is congruent with the socio-emotional wealth theory of family firms which suggests that they, at times, compromise on economic gains for non-economic goals of the family. This may not be something non-family shareholders want.

Pledging of shares by family owners is an example. Here, the goals of the family and non-family shareholders may deviate. Pledging of shares enables the family to raise funds against shares as collateral. The funds can be used for the same firm whose shares are pledged or for personal use. This results in a limited downside risk for family shareholders as they have already got the funds, but the minority shareholders risk losing a significant amount of their investments, if margin calls are not met.

Such situations are detrimental to minority shareholders. The behaviour of the dominant shareholders may lead to loss of wealth for other shareholders, and ultimately loss of wealth and control of the firm for dominant shareholders, too.

In the recent past, there has been a significant loss of wealth for all shareholders due to the misguided ambitions and decisions, clubbed with the pledging of shares, by promoters of family firms.

Low scores on social, environment fronts

It is, therefore, not surprising that the governance scores of family firms in the ESG (Environment, Social and Governance) rating, as per Reuters and Sustainalytics data, were found to be lower than those of other firms.

Family firms were also found to have relatively low scores on environment and social categories as well as consolidated ESG parameters. The low social score is somewhat puzzling as family firms in India are known to care for the community in which they operate.

In fact, among a larger sample of firms from a different database, we observed that the CSR spends of family firms are higher than those of non-family firms, suggesting that family firms are more compliant to CSR regulations.

It is important to note that the debate around primacy to shareholders vs stakeholders is not about the reaction of corporations to exigencies or CSR spends. It is not the primacy of other stakeholders over shareholders, but about achieving balance on sustainability principles.

It is not about one heroic act catching media attention, but their every action, every day. It is also not about one bottom line – profit. It is about the triple bottom line – people, planet, profit -- and generating and sharing value for all constituents in a fair and equitable manner.

It is about being purposive without losing focus on profit in day-to-day activities. Therefore, to be a multi-stakeholder-friendly and sustainable organisation, family firms need to adopt the principles of triple bottom line and make ESG their strategic ally. It is no longer an option. It is needed for the long-term sustainability of the firms as well as the business families in order to create and pass on the wealth to the next generation and build and sustain the family legacy.

The authors are from the Thomas Schmidheiny Centre for Family Enterprise, Indian School of Business.