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Guidelines to sustain a family business

By Ashok Shah and Diana Mathias

“For better or for worse, our company is a reflection of my thinking, my character and my values” – Rupert Murdoch

These sentiments are true for all family owned businesses as the family’s values, ethos, culture, and beliefs always take precedence and influence the organisation’s strategies, plans and policies.

A few years ago, when Reliance exited the non-vegetarian food business, many investors applauded this decision. They felt that Mukesh Ambani, who was a vegetarian and an animal lover, should do what he believes in. Thus, a business opportunity was abandoned to give way for a long-cherished belief. This is what distinguishes family-owned businesses from public enterprises, as family businesses are more so often run on family ethos, religious beliefs and emotional considerations rather than on financial or commercial considerations.
Typically, the values of the founders shape the foundation of the organisation and they get manifested on to the next generations. There is a strong sense of loyalty to these values from the family members and the longevity of those values helps support a philosophy beyond profitability.

People selected by the founder have values and interests similar to the founder’s. Over time, the employees and the community around the organisation believe the vision of the founder and help perpetuate this vision. Founders, thus, aspire to leave a legacy behind of their values and have the future generations completely aligned with these values. In order to maintain family harmony and ensure longevity of these values, it is necessary that one defines these values to incorporate them in the way of conducting business. This is essential as it draws the scope and boundaries within which the family members can operate, knowing what kind of businesses they can venture into and, most importantly, the businesses they cannot venture into.

So, you have business houses that do not deal in businesses related to non-vegetarian food, animal products like leather, tobacco, alcohol etc., or Muslim family-owned businesses that do not deal in non-Halal products or do not give or take loans for the purpose of their business. Some business houses not only go to the extent of restricting the business that can be done directly but also expand to restrict generating any income from such activity whether directly or indirectly. For example, some business houses do not invest in listed companies that engage in non-vegetarian or tobacco businesses. Some Muslim families do not invest in banks as their principal business is that of earning interest by providing loans.

Another important and relevant aspect is defining what constitutes your core Family Business while drawing up a Family Charter i.e. the main focus area of the family business. This definition needs to be comprehensive enough to include all activities including ancillary to the core Family Business which the family may want to venture into, thereby ensuring flexibility for backward or forward integration of their business. In order to insulate the family business from disputes and disagreements, it is essential that the business definition and its contours are drawn up post discussion with all the family members. Different family members may have different thought processes. These issues require elaborate discussions to avoid confusion and bring clarity in the thought processes of the family members. However, at the end of the process there needs to be complete alignment on the vision and values of the family amongst the family members. Consensus amongst family members on such issues goes a long way in managing expectations, avoiding future conflicts and helping maximise the potential for successful family business. As rightly said by Roy E. Disney “It’s not hard to make decisions once you know what your values are.”

One must also understand that the next generation of family members may not want to adhere to these values or due to differences in working style, seek to venture out in their personal capacity. Also, family cultures vary greatly in their tolerance of differences. Some demand total adherence to the values of the culture and regard any divergence from the norm as threatening to the well-being of the family. In this regard, alongside defining family business, one must also discuss the consequences of breaching the defined values or starting an independent business. Generally, as long as family members are part of the family business whether as working partner or otherwise, they cannot start a competing business as you cannot have the cake and eat it too. And in case they do, then they need to exit the family business at a discount to the value of the family business. The discount needs to be such that it acts as a huge deterrent for the family member to start a competing business. This is done so that family members are encouraged to continue and help grow the family business rather than venture out independently.

Another aspect that needs to be emphasised is that the brand created by the family-owned business will always remain that of the family business and no exiting family member can claim any right on the brand. This ensures that the brand value is protected. A case in point is that of Haldiram’s wherein the same brand is being used amongst three factions of the family across different territories.
Lastly, one must appreciate that the above process is not a one-time exercise or the outcome of a rigid classification of the current generation’s views. This needs to keep evolving based on changing times, environment and experiences of the family as long as the family, together have an agreed vision and goal. In the end, all families no matter how different they are, want to succeed as a family and this process will ensure that the family business will have an enduring legacy for the future generations.

Ashok Shah is Partner, NA Shah Associates, and Diana Mathias, Manager, Business Advisory, NA Shah Associates LLP

This article was originally published in Financial Express. Read the article here.

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