A smooth leadership transition is one of the key issues that India Inc seems to find increasingly difficult. In the recent past, there were stories galore about founders who could not or would not disconnect after leaving their companies. In the light of this, findings of a recent study, conducted by the Thomas Schmidheiny Centre for Family Enterprise at the Indian School of Business (ISB), have become significant. It looks at the growth of standalone family businesses post 1991 liberalisation in India.
"Considering that our study finds the average age of the family business group-affiliated firms (FBGF) in the sample to be 38.44 years and that of standalone family firms (SFFs) to be 28.73 years, and assuming that the founders started their journey in their 30s, which means they would be in their late 50s or mid-60s, succession issues would be crucial for most," says Prof. Kavil Ramachandran, Executive Director at Schmidheiny Centre. In the context of the recent developments in some of the leading corporate houses, including the Tatas, the Singhanias and even Infosys, succession planning should be discussed in-depth by all family-led businesses in India.
The study, he says, highlights that standalone family businesses are important and will continue to flourish. But if they have to go on contributing to the Indian economy, they need to ensure that families would not get into leadership tussles. "I, therefore, strongly feel the need for managing succession, especially in the current context," says Ramachandran.
As life expectation has gone up and people are now stronger and healthier, they may not even think of retirement, and that is another dimension, he feels. "Even if they do not retire, they need to plan for the leadership transition."
The study also reveals that liberalisation led to the rise of SFFs in India and they were the primary drivers of accelerating growth in the services sector across the country.
The study, done by Dr Nupur Pavan Bang and Prof. Ramachandran of Thomas Schmidheiny Centre (ISB) and Prof. Sougata Ray of IIM-Calcutta, chronicles the evolution of family businesses in India since liberalisation and traces their progress over a span of 26 years (1990-2015). The trio also studied 4,809 firms listed on the Bombay Stock Exchange and the National Stock Exchange of India.
The study points out that the process of liberalisation in India enabled family firms to take stock, restructure and open up new opportunities in the services sector, thus increasing their contribution to the economy. Also, there was a wave of entrepreneurial spirit that got unleashed due to a conducive environment.
A note issued by the ISB, along with the findings of the study, says, "The year 1991 ushered in a new dawn in the Indian economy with sweeping reforms across sectors. There were widespread apprehensions about the capabilities of the family-owned and managed businesses to withstand the pressure of the newly created 'freedom'." However, the study finds that not only did the family firms withstand the new rush of competitive forces in the economy, but also adapted to the changing business environment.
Based on their shareholding and management control, the companies were classified into two categories: Family businesses (FBs) and non-family businesses (NFBs). Family businesses were further classified into family business group-affiliated firms (FBGFs) and standalone family firms (SFFs) and NFBs were further classified into state-owned enterprises (SOEs), multinational subsidiaries, other business group-affiliated firms (OBGFs) and standalone non-family firms (NFFs).
Five key findings of the study are:
1. Close to 73 per cent of the listed standalone family firms were incorporated during 1981-1995. In contrast, only 49 per cent of the business group-affiliated family firms were incorporated during the same period.
2. The growth in the number of standalone family firms was driven primarily by the new firms in the services sector. Wholesale trade, financial services and Information Technology were the most favoured industries for the listed standalone family firms.
3. In FY1990, the services sector accounted for about 45 per cent of India's GDP while its contribution was close to 60 per cent in 2015. Traditionally, family businesses were strong in manufacturing, but they showed an equal penchant for the services sector when the opportunities arose. However, standalone family firms were the fastest growing category in the services space.
4. Family businesses grew faster and contributed more to the GDP and the exchequer. In 1990, family firms represented 15.7 per cent of the GDP in terms of their total income, whereas by 2015, they represented 25.5 per cent of the GDP. In comparison, non-family firms formed 20.5 per cent of the GDP in 1990 and 26.6 per cent in 2015.
5. Family firms accounted for 28 per cent of all indirect taxes and 18 per cent of all direct corporate taxes in FY2015 while non-family firms accounted for 26 per cent and 25 per cent, respectively. Although the pattern has oscillated over the years, overall, the contribution of family firms has gone up between 1990 and 2015.