Generation gap makes Indian family businesses fragile, says ISB study

Suresh Dharur

Tribune News Service

Hyderabad, February 17

The traditional family-run businesses in India are grappling with the widening generation gap, resulting in fragility in their operations and strategies.

According to a study conducted by the Indian School of Business (ISB), a premier management education institution here, most of the families were facing differences in the matters of transition and succession, strategic direction of the business, starting new ventures, allocation of roles and responsibilities to family members and reward to family members for their contribution to business.

Out of the top 500 companies in the country, over 75% are family owned and run. However, only about 30-35% of these business houses survive after the first generation and 15% till the third generation. Hardly 4-5% of these companies remain afloat after the third generation.

The Murugappa and Godrej Groups are stellar examples of family businesses getting stronger even after the fourth generation of the founding members. The root cause of the low survival rate of family businesses after the first generation and beyond is lack of clarity among the family members on a raft of issues such as succession planning, wealth management, rewards and responsibilities.

The ISB study, authored by K Ramachandran, chair professor of ISB’s Family Business and Wealth Management, probed 40 family-owned businesses with an average turnover of Rs 200 crore, getting responses from both senior and younger members in the families. Majority of the seniors in the study were above 50 years of age and belonged to the first generation of the family, while the younger members were below 30 years, belonging to the second generation.

“The study found that family togetherness in Indian family-owned firms is fragile, with many difference of opinions between generations in crucial areas. Though family members remain firmly together in social matters, their ties weaken when it comes to matters of business operations and long-term strategic issues of succession, retirement, wealth management and distribution,” the study pointed out.

Calling for pro-active policies and cogent processes, the study said, “Indian family businesses often do not realise the need for policies and so do not make them. Crisis and disaster are natural, especially when the younger generation is not on the same page. Family businesses should proactively develop policies and processes to keep the concept of togetherness.”

The study found that family togetherness is a multi-layered concept, that is, the meaning of family togetherness had different connotations in the contexts of family, business operations and trans-generational strategic matters. The study found that togetherness in Indian family firms was fragile, with senior and junior generations divided on many issues. “The study underscores the importance of establishing open channels of communication to address the differences among family members.

Business families specially need to work towards minimising inter-generational differences and business interests will be better served if the family managements adopt an objective, policy-based framework for strategic decision-making and chalk out a mutually agreed, clear roadmap for future growth and sustenance,” Ramachandran said.

“Another gap that was visible between the two generations was the induction of new family members into their businesses, with juniors mostly not agreeing to entry of newer members,” the study said.