Family businesses are the cornerstone of the Indian economy and have been for many years. But could their importance in the economy be about to change? What is certain are the practices and traditions of how family businesses work in India are undergoing fundamental changes.
These changes are being galvanised by generational pressures, whereby for the first time in their history, family owners in India are facing social and cultural pressures from incoming next generation of leaders, which they’ve never experienced before.
One of the unintended consequences of prosperous business owners sending their children away for higher education in India and abroad is that many of them have developed a broader world view towards their career path. This broader outlook has often led to a reluctance on their part to work in the family firm, particularly if the business operates in traditional sectors like manufacturing and trading.
Instead, many of the next generation are keen to pursue their entrepreneurial efforts outside of the family business - whether they have the support of the family or not. Typically, the educated next generation want to seek opportunities within India’s burgeoning service sector, and particularly in the country’s dynamic tech sector.
As a result, many of these family businesses in traditional sectors are finding it difficult to see a long-term future. Some might try to sell their business, others might diversify into other areas, and still others will adapt to the new realities of a more transactional and money-based family business culture.
These generational changes are also creating a family business environment driven by written agreements. Until recently, many family owners in India relied on trust between family members when it came to running the business - there were few shareholder agreements. This trust-based system tended to work, because family unity was taken for granted from one generation to the next.
But social and cultural trends are breaking down the traditional family structure in India. In many cases, Indian families no longer live together in the same house, compound, or even in the same apartment block. The trust that such living arrangements instilled in the past is no longer there, or very weak. As these traditional trust arrangements breakdown, more family members are demanding written shareholder agreements, backed up by legal arrangements.
This demand for more legally binding shareholder agreements is also fueling demand for external advisors to draw up these agreements. Family businesses need consultants to help them put the necessary processes in place so family agreements actually work. And perhaps the biggest beneficiaries of this demand are the big international professional services groups and management consultants. They are coming in increasing numbers to work in India.
Modernity pressures are also breaking down the tradition of the eldest son taking over the leadership of the family business. Increasingly, this is no longer accepted, and, although many of the next generation might not want to work in the family business, they will want a slice of the family’s shareholding in the firm. Again, the money and the transactional side of the business takes over from a more traditional, trust-based structure.
Greater meritocracy is also leading to more families accepting women into senior roles within family firms in India. The traditional patriarchal dominated family business culture is breaking down, and gradually women are exerting their influence in family businesses. This will continue and is certainly a welcomed development.
All these changes are fundamentally changing the face of the country’s family business sector, and through these developments the entire economy. Of course, many of these changes are to be welcomed, particularly the greater acceptance of women in managerial roles within family firms. And written shareholder agreements should help to alleviate disputes among family members. But the much more money-oriented and transaction-based culture emerging might not be without its downsides for family businesses in India.
It’s probably too early to say, but one of those downsides might be the emergence of a family business culture more driven by short-term outcomes, rather than the tradition of long-term thinking. Only time will tell whether this is the case or not.
Professor Kavil Ramachandran is executive director at the Thomas Schmidheiny Centre for Family Enterprise at the Indian School of Business