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Managing transitions in family businesses

All the factors that normally would help the family businesses on the business side of the transition may end up being a drag on the family side and vice versa

Published: Feb 10, 2017

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The distinguishing features of family businesses are their longevity and trans-generational continuity.  The underpinnings of these features of family businesses are their ability to impart the family values, identity and the business knowledge in the younger members of the family so that when the time comes for the elder generation to move out, the younger members are able to take on the reigns and continue with the task of nurturing the business health and family wealth. The realized experiences of family businesses on this count are varied.  While many top Indian business houses that dominated the seventies and eighties have continued to thrive and have retained their identity, there are also many family businesses that have failed to master this process of trans-generational transition.

Even in the best of times, the challenge posed by this transition is formidable. But when the world around the family businesses is changing rapidly – in social, economic and business terms- the challenge of this transition gets magnified. All the factors that normally would help the family businesses on the business side of the transition may end up being a drag on the family side and vice versa. One may even term this a paradox of family businesses. A couple of illustrative situations will help to underline this paradox.

First, let us take the family side. The modern progressive business family typically provides the freedom and support to the younger members in their pursuit of education and learning about the real world in general. The inevitable byproduct is that the younger members develop as independent minded individuals who expect their family to respect their individuality. When the time comes for the members to be inducted into the family business, they would expect the family to view their commitment to the family business as their personal choice and not as an obligation to the family. They may well be driven by the belief that there are options other than their personal involvement to ensure the continued wellbeing of the family business. But this scenario may pose a very tough challenge to the incumbent generation in terms of finding a worthy successor – a situation they may be ill prepared to face. This issue gets complicated when there is more than one member in the next generation, and the most competent amongst them choose to stay away.

The business side can also create challenges.  Thanks to the dynamic business environments spurred by technological advances on the one side and globalization on the other, the growth opportunities for businesses have exploded, albeit in directions that the incumbent generation may find difficult to comprehend.  While the younger generation may be ready and eager to seek and opportunities in these modern businesses, the rules of the new businesses and the success requirements sometimes prove to be too radical for the incumbent generation to digest. The incumbent generation may also be unsure about how the traditional strengths and resources of the family business could be channelized to succeed with the new opportunities. The net result is a hesitation on the part of the incumbent generation to support such entrepreneurial initiatives from the younger members, while the younger generation feels frustrated about having to seek support from outside the family to pursue their dreams. And if they do succeed in doing so, it may have the same effect as cutting the umbilical cord which may weaken the emotional connect between the business and family.

What can family businesses do to face these challenges? For one, the incumbent generation in family businesses should stop taking the trans-generational transition as a given. Resetting their mind can well be the crucial starting point. Secondly, the family businesses have to build a business and organization that is equally attractive to both family members and professionals. Operationally, this would mean that the companies put in place management practices – specifically those that relate to strategic decision making and rewards and incentives for performance – that does not discriminate between professionals and family members and make the organization equally attractive as a career option to both groups. Thirdly, the family businesses have to tune up their governance systems to guarantee the effective pursuit of these management practices. This would mean setting up a functional board that includes well respected independent members which will ensure that good management practices are followed in spirit. All these have to be done in parallel with the pursuit of best practices in aligning the family with businesses. Mechanisms like family constitution, family education and family values are to be given due attention as ongoing practices to bring about close emotional alignment of the younger generation with the business of the family. Not an easy task, but not impossible either.

- K Kumar, Chairperson, Academic Programmes, NSRCEL and Apeejay Surrendra Chair Professor of Family Business and Entrepreneurship, is IIMB Faculty Professor

[This article has been reproduced with permission from IIM Bangalore. www.iimb.ernet.in Views expressed are personal.]

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