More than half of the top 50 Indian companies and about 73 per cent of the top 500 companies are family-managed businesses. However, only about 30-35 per cent of these business houses survive after the first generation and 15 per cent till the third generation. Hardly four to five per cent 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.
This was part of the findings of a study by the Indian School of Business. Authored by K Ramachandran, Chair Professor of ISB’s Family Business and Wealth Management, the study probed 40 family-owned businesses with an average turnover of ₹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,” Ramachandran pointed out.
While 85 per cent of the senior members said there were clear policies for business operations, only 66 per cent of their juniors agreed. This agreement further dwindled in regard to policies on business strategies, with only 58 per cent of the younger members agreeing to their existence.
Majority of family businesses were found to lack policy framework for trans-generational issues of ownership, transfers, developing strategic direction of the businesses, starting new ventures, allocation of roles and responsibilities to family members. On most of these issues, three out of every four seniors said they had such policies in place, but half or even lesser proportion of juniors agreed to that.
“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,” he said.