Investors view families more favourably if they have governance and continuity plans in place, they say
The Ambanis, the Bajajs, the Birlas and the Hindujas—these are some of India’s biggest conglomerates. They are also all family businesses. And over the years, all of them have seen severe family feuds that have disrupted their business processes and led to splits. In its August cover “Family Feuds and How to Prevent Them”, Outlook Business analysed the reasons for familial conflicts, how managing emotions is important in keeping businesses together and the role family charters can play.
In this interview, Vijay Dhingra and Parthiv Kamdar, partners at Deloitte India, shed light on how decisions within family businesses affect investors and what family businesses must do to keep their investors happy in the long run. Edited excerpts.
How can Indian business families plan peaceful successions so that investor wealth is protected?
Parthiv: Succession must be planned with two things in mind: business succession and wealth succession.
Wealth succession typically involves the use of trusts to ensure orderly transfer of wealth within families. Many in corporate India have already adopted trusts. But there are numerous other options.
Business succession is often managed through family charters or councils which outline the family’s vision for the business. This includes decisions on succession in leadership roles, essential qualifications and the process of integrating new family members into the business.
A new generation of family members typically goes through rigorous training, often working under the guidance of non-direct lineal descendants or long-time professional stewards of the business.
If the next generation prefers to not take an active role in the business, families may hire professional managers while retaining ownership. A structured approach helps ensure smooth transition of wealth and business leadership across generations.
Deloitte survey shows that a lack of institutional framework often impedes succession planning. How can families put institutional frameworks in place?
Vijay: The need for an institutional framework in family businesses often stems from the desire to have an agreement among family members on business continuity.
Consider, for example, the structure of the Indian government. There are clear guidelines on central, state and local governments outlined in the Constitution. Similarly, corporations have defined roles and powers for the board of directors and the executive team.
As family businesses grow, they could adopt similar guidelines to ensure business continuity and protect family interests. This includes conducting thorough analysis to determine processes that need to be followed by family members. It would include determining which family members are best suited for roles within the business.
In situations where family members have interests beyond the existing enterprise, the family must decide on how to ensure the business continues to thrive or carry out option analysis.
It is important to remember that large family-run businesses often support many livelihoods. The families I have worked with recognise the broader impact of their businesses and aim to create continuity programmes that allow the business to survive and prosper beyond its tenure.
What must families do to make family constitutions effective?
Parthiv: There are a few key elements that are crucial in succession planning:
First, it is essential to maintain the flexibility to revise the plan. Flexibility ensures the plan stays relevant over time.
Second, the legacy a family wants to create is of paramount importance and the framework for succession should be built around that legacy, while recognising that what works today may not work in 30 years.
Third, both current and future generations must regularly come together to review and update the succession plan. This ensures that a family’s legacy is honoured while allowing for adjustments.
When should a family business start succession planning?
Vijay: The best time to start succession planning is now. Delaying until conflicts arise can make agreement difficult, undermining the family’s intention of business continuity and its contribution to the economy and livelihoods.
While many family businesses in India are mature, some are still maturing. It is the younger generation, those exposed to the modern market, which is initiating these processes of establishing guidelines.
I met a family many years ago where the head of the family believed their success was due to divine intervention and God would take care of the next generation. They saw no need for formal succession planning, which, while unconventional, aligns with their cultural beliefs and must be respected.
Then there are families where the older generation recognises market changes and understands the competencies of the next generation. They proactively lead the conversation [on succession].
Family constitutions often contain clauses that govern private matters of family members. Do you think governance of private matters influences business success?
Parthiv: The clauses [that govern personal matters] are not legally binding but serve as a moral agreement within the family. It is about how the family wants to stay united having conversations around the dinner table.
For instance, a Netherlands-based family with a 400-year-old organisation, now managed by 120 family members, still vacations together once a year. During these trips they discuss key initiatives and ensure open business communication, fostering collaboration and transparency.
This approach ensures that business matters are discussed openly, and family bonds are strengthened through regular gatherings. While agreements are not binding until signed, they reflect institutionalisation like how a company’s board of directors is mandated by corporate law to meet four times a year.
How important are documented governance frameworks for investors?
Vijay: A leading business owner, a banker, once mentioned [to me] that recovering outstanding loans from a family in dispute is very difficult because of a lack of clarity on responsibilities. This experience led him to create a detailed family constitution covering even personal governance.
Investors view families more favourably if they have governance and continuity plans in place rather than one created hastily due to investment or shareholder agreement. The latter often causes stress as the family is forced to collaborate for the first time under external pressure.
It is advisable to establish a plan well before seeking investors, outlining how the family will handle governance, spokespersons and nominations.
For example, if we, as family members, receive a Rs 1,000 crore investment, we must agree on its use beforehand to avoid conflict. Having clear guidelines ensures we are prepared, aligned and have one voice with value-added inputs from investors being considered.