Family Business Code (FBC) for Listed and Unlisted

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Family Business Code (FBC) for Listed and Unlisted

Family Business Code (FBC) for Listed and Unlisted

Family Businesses in India – An Overview

INTRODUCTION – India has a rich business history with a significant number of significant numbers of businesses still being controlled and managed by families. Family Business in India contributes to over 70 percent of its GDP. An article on the Hindu business line quoted the Credit Suisse 2018 report stating that India has the third-largest number of family-run businesses in the world after the US and China with 111 publicly listed family-owned businesses with a combined market capitalization of $839 billion. Besides this as of 2017, it reports India to have 10.68 lakh active unlisted private limited companies. However, CII observed that only 13 percent of the family businesses survive till the 3rdgeneration and only 4 percent go past the third. Without agreed-upon operating norms, families have less direction when conflicts arise. The family members embrace several roles, with thin lines between executive and governance facets. This sometime can lead to conflict and jeopardize the sustainability of the business. Interlocking directorships, intermediate relationships and tacit dependencies which are quite common among family business may affect quality of governance. Good corporate governance of both family and their business are key to survival, growth and sustenance.

India’s culture, traditions entwined in community practices and values instilled with in family businesses make the governance complex and unique. It is not uncommon to see such restrictive practices are leading to family dispute between the siblings or between successive generations. Protracted litigations are likely to affect the performance of the business units the family owns.

Family business owners and their board recognize they need a list of mechanisms and rules to which everyone adheres to in a family business. What they need is a code that is cognizant of the size and development of both business context. They desire to have a family business code that covers the governance mechanisms for family, interfaces with corporate governance at the business level, professionalization, limits on insiders, remuneration for family and family members, succession and social responsibilities. Their interest in investing and adhering to a family business code is to adopt a holistic approach to balance family and business interests and successfully preserve the business for generations to come. Family business owners and the boards lack a touchstone for common decision making to build profitable and sustainable businesses, define boundaries and rules for family and business interactions, and mechanism to preserve long term ownership of the businesses. Lack of a standardized family business code is also limited GRC professionals in their assessments of a family business and identifying what areas need improvements. Towards filling this gap, we have attempted to a family business code for Indian family-owned businesses.

FAMILY BUSINESS CODE DIMENTIONS

Based on telephonic interviews and questionnaire data, 12 dimensions emerged as family business code measures for Indian family businesses.

  • Family business goals
  • Family governance structures
  • Family governance processes
  • Conflict and dispute resolution
  • Family ownership control
  • Family communications
  • Family rituals and preserving
  • Corporate governance of family business
  • Family member assessment and assimilation
  • Succession management
  • Family wealth management
  • Philanthropy and CSR

CONCLUSION

Family businesses are unique, leading towards differing requirements on the governance. The code proposed needs more empirical validation. However, the family business code suggested here serves as a tool for family businesses to evaluate where they are and what investments they require to stay profitable and survive across generations.