Category: Corporate And Other Laws

The Company incorporated in 1999. It started as a trading company with the seed capital raised from within the family. At that time, it was entirely family-owned and run. Within a few months, stepping on the dream of being a global company since beginning, the first international office was inaugurated. Also parallely, the first manufacturing facility with three production lines was set up in India. In a short span of two years the sterile manufacturing facility received an important certification and the Company also touched an important revenue landmark. This brought immense confidence to us and gave us a direction towards the upward journey. Integrity, implementation, excellence, innovation and patient satisfaction became our values.

In 2003, the Company received approvals from regulatory authorities from various other developing countries. The global growth strategy also permitted the Company to apply in various developed markets. Still, the organisation’s size was small and structure was not very much in order, hence most of the functions were directly managed by the family members. Managing an international set-up for a family-run company was obviously placing a great deal of pressure on the top management. The time had come for us to transit to the next orbit. Today we have market a presence in 76 countries and this has been achieved by decentralising the organisation and creating various presidents, business heads, division heads, and managers.

When I stepped into the MD’s role, I first focussed on new product development and streamlining of manufacturing and operations of the Company. We brought advanced technology equipments and automated machines to add up to manufacturing capacity and to enhance productivity. We established management systems and processes and review mechanisms across organisation which were to become base for advanced transition later.

In 2006, one of the largest international private equity funds invested in our Company. The introduction of this private equity fund in the Company was a crucial point in the transition of our Company towards professional management. We inducted independent directors to improve our corporate governance and to attain the highest standards of corporate governance. Improving the corporate governance helped us in maximising the long-term value for all stakeholders of the Company, including shareholders, employees, customers, society, etc. Our corporate governance philosophy and practice consists of the following facets:

To make timely disclosures and adopt transparent policies
To show greater responsibility and fairness in dealings with all
To demonstrate the highest level of accountability towards employees
To conduct our business in an ethical manner.

We introduced more robust systems like SAP and centralised inventory system. On one hand, where the business was flourishing in terms of back-end, on the other, the front-end needed further focus to match with the market demands and be at the edge with the competition. Hence, as MD I took charge of Businesses (Sales and Marketing) and focussed more on visiting countries, meeting people, getting market insights and devising international marketing strategies. We established a great market presence across various regulated markets as well as emerging markets. USFDA approval for sterile injectable manufacturing facility was one of the greatest milestones which opened a new scope for expansion of the business. The Company also focussed on enhancing visibility in the market in terms of participation in conferences and competing in awards and came out with flying colours. We received several awards. We also ramped up effective management of back-end and front-end as per demand of time-witnessed manifold growth in business, presence across countries, thousand-plus registrations across.

Looking at the volume and growth of the company, it became quintessential to streamline and professionalise the organisation structure. We developed the second-level and third-level management cadre and assigned functional accountability to non-family members who needed to independently handle their teams. Delegation of responsibility and giving authority to the second level helped improve the organisation and also develop a better workforce. We maintained inherent cultural values, focussed on people policies and practices which later helped the Company achieve recognition as one of ‘the Best Places to Work for in India’ and #1 Healthcare Company to work for.

The Company started to work on its dream of going public, following a culture of continuously upgrading best practices in corporate governance and management quality. The Company shifted gears and prepared itself in all aspects to take this big move. In 2010, the Company became a listed company. This was the next big thing for us and has put us in a completely different bracket. Through the IPO, the Company raised proceeds which it has already started investing in augmentation of manufacturing capabilities. Listing brings with it greater responsibility and greater external scrutiny but also puts your company on a higher pedestal.

Throughout, the journey, the Company made sure that its growth does not get hampered in bringing about a professional management approach. We always believed in ourselves and will continue to do so, thereby removing every hurdle that comes on the way. The underlying mantra behind the success story is ‘dream big and work hard’. As we look back on these 12 years, we have transitioned from a family-run and owned company to a professionally-run company to a PE-funded company and finally to a family-owned listed company. The road has been long and arduous but very satisfying and fulfilling. We have miles to go before we sleep but we believe in one motto which has been our mantra through the years:

“The world changes view, if you change yourself”.

The topic is opportune because the ‘family managed companies’, are now a powerful force and play a dominant role in an economy. Family business has graduated long ago from ‘mom-and-pop stores’ to giant companies like Cargil having headquarters in the United States. Cargil1 the family controlled company2 is the rule in most of the world. Statistics indicate that family controlled company businesses account for 99% of Italian businesses, 70% of Portuguese, 75% of British, 80% Spanish, between 85% and 90% of Swiss, 90% of Swedish and 80% of Canadian. Even in the United States between 80% and 95% of the companies are family controlled.

As of 20093, the private sector represented 95% of all companies in China, the vast majority are family controlled firms and most of the remaining firms are state owned enterprises. The rural areas are heavily populated by small farms.

In India,4 family businesses account for as much as 95% of all Indian businesses. Nearly 80% of family companies dominate Indian economy. About 461 of the 500 most valuable companies are under family control. In addition, the family controlled businesses also comprise large groups like the Tata group and the Aditya Birla group to mention a few. “IT giant TCS and financial services major HDFC (once a family managed company) have been named as India’s two best managed companies in an annual poll conducted by Finance Asia magazine. TCS and HDFC are followed by IT major Infosys, telecom giant, Bharti Airtel and PSU behemoth ONGC in the list of the top-five best managed companies in the country”, says a report in The Times of India on 18th May 2011. The best managed companies are thus a mixed bag.

“The Aditya Birla Group5 is also a hard-charging multinational corporation emerging from that country. (India). The Birla Group produces and sells such products as fibre, chemicals, cement, metals, yarns and textiles, apparel, fertiliser, and carbon black (a petroleum-based material used in the manufacture of rubber and plastic). It is a US $ 30 billion conglomerate operating in about 25 countries, with 60% of its revenues now coming from outside India.”

Competition that firms face now, as we pointed out earlier, is no longer local. Competition cannot remain confined within the borders of a nation. In many industries, competition has now become global. Textile and clothing, automobile, IT, and ITES are just a few examples of industries which now face global competition. Firms compete globally with global strategies in mind. Firms compete globally by participating in global trade and through direct foreign investments. The family managed companies must therefore face global competition.

What are family controlled companies? Do they have the vitality and the dynamism to compete globally? The purpose of this article is to discuss these questions.

A family business6 is a business in which one or more members of one or more families have a significant ownership interest and significant commitments toward the business’ overall well-being.

“Family firms7 were often able to take a longerterm, more strategic approach and kept stronger relations with their customers, says Harvard Business School professor Belén Villalonga, who has just completed a study comparing the performance of 4,000 family and public firms in the U.S. and Europe. Between 2006 and 2009, she says, family controlled firms both gained market share — increasing sales 2% faster than non-family firms — and outperformed their public peers by 6% on company market value. Another report, by the German consultancy Roland Berger, looked at family owned firms in Europe’s biggest economy and found they navigated the crisis with better liquidity and less debt. This all builds on what has become a decade-long trend of family firms outperforming the market, says Villalonga.”

The Indian experience seems to support this view. Indian companies like Wipro, TCS, Reliance Industries have achieved impressive growth in their sales revenues, exports, profits and market capitalisation. The development of all these organisations in a short period is truly astounding.

Our discussion so far should not lead us to the conclusion that all is well with family managed companies. The carcases of the closed textile mills in Ahmedabad show the utter failure of the family management of the textile industry, the oldest Indian industry. These seasoned captains of the industry could not anticipate the changing competition in the Indian textile industry and therefore could not forge a new competitive strategy to survive in the changed environment.

“From8 behemoths such as Ford to mom-andpop shops, they (family businesses) share a set of common challenges in today’s business climate.” This quotation from Stacy Perman’ article ‘Taking pulse of family business’ aptly describes the situation in India. The small and medium enterprises in India face similar challenges as the large family businesses face. Similarly, the small and medium family businesses have the same dynamism as the large family businesses have. We illustrate our reasoning with the help of an example from the textile and clothing industry. In Appendix I, we present the data about the export of textiles and clothing. The Indian exporters of textiles are mostly medium and large textile mills that are large family controlled [Except the textile mills owned by the National Textile Corporation (NTC) that are not family controlled textile mills. However, the contribution of the NTC mills to export is not substantial and we can safely ignore it]. This data shows the Chinese exports of textiles are about 2.42 times the Indian exports of textiles.

On the other hand, the Indian exporters of clothing are small to medium family owned firms. Here again we notice that the Chinese exports of clothing are 2.79 times the Indian exports of clothing (The firms in the clothing industry are small and medium family owned businesses). These examples support our point that small and medium family businesses have the same dynamism as the large family businesses have.

It may not be out of place to cite another example of a medium-sized family owned pharmaceutical company to reinforce our point about the dynamism in the medium-sized family owned companies. The name of this company is Shiva Pharmachem Pvt. Ltd. whose annual sales in the year 2009-10 were about one billion rupees (Rupees one hundred crore). However, before we discuss the example of Shiva Pharmachem Pvt. Ltd., we explain below some terms that we have used in discussing the example of Shiva Pharmachem Pvt. Ltd.

Value added. Following Paul Samuelson9, we will define the term value added as the sales an organisation achieves minus the items that it buys form outside to achieve the sales that it makes. Some scholars define value added as:

Total income – items bought from outside

Capital employed. We will define capital
employed as net worth plus long-term loans or as net fixed assets plus
working capital.

Return on Capital employed

We will define return on Capital employed as

We now return to the example of Shiva Pharmachem Pvt. Ltd. that we want to cite in support of our point. In Table 1 below, we show the salient features of the company’s financial statements for the years ending 31st March 2010 and 2009, respectively.

How effectively has Shiva Pharmachem Pvt. Ltd. used its human and monetary resources? Do the financial results of the company show the management’s dynamism? We now turn to a discussion of these questions.

From Table 1 we can glean the three important conclusions that we list below.

(1)    The firm’s return on capital employed declined in the financial year ending 31 March 2010. However, even the lower return on capital employed is sufficiently high to give the firm’s owners a good return on their capital.

(2)    The value addition the firm achieved in the year 2009-10 was higher than the value addition the firm achieved in the year 2008-09.

Further, the value added per employee in 2010 is much higher than the minimum a company should achieve. We believe that the minimum value addition that a company must achieve is about Rs.1,200,000. Now it is quite common to see that the average wage bill for a company per employee per year is about Rs.100,000.

(3)    Therefore, the results the company achieved comprise a mixed bag. It has used its human capital better than what it has used in the previous year. However, it has not used its monetary capital as well as it used in the previous year.

The reason for the decline in the return on capital employed is easy to see. From the last two rows of Table I, we see that in the year 2010, the margin the company achieved on sales was almost equal to the margin on sales the company achieved in the previous year. However, the turnover of capital the company achieved was much lower in the year 2010 than what the company achieved in the previous year. Now, we have from (1.6) Return on capital = margin on sales x turn over.

From Table 1 we can see that the margin on sales is almost the same as the margin on sales in 2009. However, the capital turnover in 2010 is much lower than the capital turnover in 2009. Therefore, the return on capital will be lower in 2010. Does the decline in the return on capital in the year ending on 31st March 2010 show the lack of the management’s dynamism in using the capital effectively? The answer is not conclusive. We must wait for at least two years before we come to that conclusion. The decline in the return on capital employed shows the management’s enthusiasm to grow and develop rapidly by making substantial investment in the business. From Table 1 we can see that the capital employed in the company has increased by 39.16% in the year ending on 31st March 2010. Obviously, the management would not make such a large capital investment unless it has a strong desire to develop rapidly, and has the confidence in its abilities to earn a good return on the capital it invests. Here is another example of a family managed company that has the vitality to participate actively in a globalising business. Having achieved high levels of productivity that we measure by its value addition per employee and return on capital employed, Shiva Pharmachem Pvt. Ltd., we have no hesitation in saying that the company is ready to prosper and develop in a globalising economy.

However, all is not well with the family managed businesses. Stacy Perman in his report ‘Taking the Pulse of Family Business’11 observes

“Generally speaking, the failure rate for all private businesses is high. According to the Small Business Administration’s Office of Advocacy, 580,900 new businesses were launched in 2004, the most recent date available for data, while 576,200 closed. Given that only one in three family businesses succeeds in making it from the first to the second generation, it’s clear they have their own inherent risks.

Each succeeding generation has its own ideas about taking the company forward — or if, indeed, it wants to join the family business at all. Successful transition has always been crucial to the continued success of family businesses —and in the next ten years will see a major increase in the number of companies facing that hurdle, as more baby boomers begin to retire.”

Accordingly, the question arises as to whether and how boomers will pass the baton along to their children. The issue is fast becoming a critical one. The challenges to longevity are substantial.

For starters, many of the concepts that have been traditionally associated with family businesses have eroded and new sources of potential conflicts have arisen, as have new opportunities and challenges. Compared with 10 or 20 years ago, the sense of duty and obligation to join the family business has weak-ened, while the sense of entitlement has grown.

In the same vein Michael J. Conway12, JD and Ste-phen J. Baumgartner, MSc (Econ) observe “While there is entertainment value to the drama and intrigue which surround the Earnhardt, Wrigley, Murdoch, and Walton family owned businesses, their highly publicised trials and tribulations can also provide real-life lessons for family owned businesses that operate well out of the limelight. Family owned businesses face unique issues — succession planning, marriages and divorces, complicated relationships — as well as routine issues that emerge around turf battles, shareholder control, compensation structures, and processes for strategic decision-making. Without proper documentation in place to help address these and other issues when they arise, the family owned business is at risk from an operational, management and financial perspective.”

Closer at home, Professor D. Tripathi13 observes “Behind the glare of momentous changes wrought by liberalisation, a very significant development went almost unnoticed. This was the declining importance of business families in the nation’s life. A well-regarded observer of contemporary business scene has gone to the extent of suggesting that the joint family is dead for all practical purposes.” Professor Tripathi concludes by saying “These prognoses may or may not turn out to be correct, but the mounting crisis in family business is bound to greatly influence the course of private enterprise and its management in the future.”

This article would be incomplete without a discussion about the dichotomy between family managed companies and professionally managed companies. Rahul Bajaj is directionally correct in his comments on the dichotomy between family managed companies and professionally managed companies. According to Bajaj14 , “if a professionally managed firm means one that is managed by those who hold no equity in the enterprise, there is ‘no reason to believe that a non-owner is more competent than an owner. In fact, a lot of studies done recently in the U.S. show that family owned businesses are doing better than non-family managed companies.’ What is relevant in a competitive economy is that the company has to be efficiently managed.” To resolve the apparent dichotomy we must understand the significance of the word ‘profession.’ In the contemporary world management, practitioners and thinkers use two yardsticks to judge whether a business is profession. Below we list the yardsticks.

(1)    Are the practices in the business based on a body of knowledge that can stand a rigorous logical scrutiny as in medicine and engineering?

(2)    Is there a code of conduct in the business that puts service before self?

The last verse of the Bhagvadgita15 sums up the code of conduct extremely well. The last verse asks us “to unite vision (yoga) and energy (dhanuh) and not allow the former to degenerate into madness and the latter into savagery. High thought and just action must ever be the aim of man”.

When we use the word profession to mean that its practices are based on rigorous logic and the profession demands a high code of conduct, then the dichotomy between professionally managed companies and the family managed companies disappears.

Unfortunately, the recent spate of ‘scams’ that we are witnessing leads us to ask “does the Indian business have a code of conduct? In India, businesses, both the professionally managed and the family managed, fail to measure up to the second yardstick.

A dabbawala (one who carries lunch box), some-times spelled dabbawalla, tiffinwalla, tiffinwallah or dabbawallah, is a person in the Indian city of Mumbai whose job is to carry and deliver freshly home-made food in lunch boxes to office workers. Tiffin is an old-fashioned English word for a light lunch, and sometimes for the box it is carried in. Dabbawalas are sometimes called tiffin-wallas.

Though the work sounds simple, it is actually a highly specialised trade that is over a century old and which has become integral to Mumbai’s culture.

The dabbawala originated when a person named Mahadeo Havaji Bachche started the lunch delivery service with about 100 men. Nowadays, Indian businessmen are the main customers for the dabbawalas, and the service often includes cooking as well as delivery.

Economic analysis

Everyone who works within this system is treated as an equal. Regardless of a dabbawala’s function, everyone gets paid about two to four thousand rupees per month (around 25-50 British pounds or 40-80 US dollars).

More than 175,000 or 200,000 lunches get moved every day by an estimated 4,500 to 5,000 dabbawalas, all with an extremely small nominal fee and with utmost punctuality. According to a recent survey, there is only one mistake in every 6,000,000 deliveries.

The BBC has produced a documentary on dabbawalas, and Prince Charles, during his visit to India, visited them (he had to fit in with their schedule, since their timing was too precise to permit any flexibility). Owing to the tremendous publicity, some of the dabbawalas were invited to give guest lectures in top business schools of India, which is very unusual. Most remarkably in the eyes of many Westerners, the success of the dabbawala trade has involved no western modern high technology. The main reason for their popularity could be the Indian people’s aversion to western style fast food outlets and their love of home-made food.

The New York Times reported in 2007 that the 125-year-old dabbawala industry continues to grow at a rate of 5-10% per year.

Low-tech and lean

Dabbawala in action: Although the service remains essentially low-tech, with the barefoot delivery men as the prime movers, the dabbawalas have started to embrace modern information technology, and now allow booking for delivery through SMS. A website, mydabbawala.com, has also been added to allow for online booking, in order to keep up with the times. An online poll on the website ensures that customer feedback is given pride of place. The success of the system depends on teamwork and time management that would be the envy of a modern manager. Such is the dedication and commitment of the barely literate and barefoot delivery men (there are only a few delivery women) who form links in the extensive delivery chain, that there is no system of documentation at all. A simple colour coding system doubles as an ID system for the destination and recipient. There are no multiple elaborate layers of management either — just three layers. Each dabbawala is also required to contribute a minimum capital in kind, in the shape of two bicycles, a wooden crate for the tiffins, white cotton kurta-pyjamas, and the white trademark Gandhi topi (cap). The return on capital is ensured by monthly division of the earnings of each unit.

Uninterrupted services

The service is uninterrupted even on the days of extreme weather, such as Mumbai’s characteristic monsoons. The local dabbawalas at the receiving and the sending ends are known to the customers personally, so that there is no question of lack of trust. Also, they are well accustomed to the local areas they cater to, which allows them to access any destination with ease. Occasionally, people communicate between home and work by putting messages inside the boxes. However, this was usually before the accessibility of instant telecommunications.

In literature

One of the two protagonists in Salman Rushdie’s controversial novel The Satanic Verses, Gibreel Farishta, was born as Ismail Najmuddin to a dabbawallah. In the novel, Farishta joins his father, delivering lunches all over Bombay (Mumbai) at the age of ten, until he is taken off the streets and becomes a movie star.

Dabbawalas feature as an alibi in the Inspector Ghote novel Dead on Time.

Etymology

The word ‘Dabbawala’ can be translated as ‘box-carrier’ or ‘lunch pail-man’. In Marathi and Hindi, ‘dabba’ means a box (usually a cylindrical aluminium container), while ‘wala’ means someone in a trade involving the object mentioned in the preceding term, e.g., punkhawala with ‘pankha’ which means a fan and ‘wala’ mean the person who owns the pankha (The one with the fan).

1.       Cally Jordan ‘The family
controlled company in Asia’ (Melbourne Law School: The University of Melbourne,
Legal Studies Research paper 334 P. 5).

 2 .      Ibid P. 4

 3 .    The author has downloaded this information from
the Internet.

 4.       Ibid

 5.      Vikas Sehgal, Ganesh
Panneer, and Ann Graham ‘A Family-owned Business Goes Global’ downloaded from
the Internet.

6.       The author has downloaded this definition from
the Internet.

7.      Sandy Huffaker/Corbis ‘In
Hard Times, Family Firms Do Better’ Newsweek P. 2. The author has downloaded
this article form the Internet. Consequently, the author did not have the
complete details about the date of publication of the article and the Volume
number of the Newsweek’s issue in which this article was published.

8. Stacy Perman ‘Taking pulse
of family business’ (Bloomberg Businessweek special report, 13 February 2006)

9. Paul A. Samuelson, Economics International, Student
Edition (Tenth Edition) P. 185.

12.     Michael J. Conway, JD and
Stephen J. Baumgartner, MSc (Econ) ‘The Family-Owned Business’ (2007 Volume 10
Issue 2)P.1

 13.     D. Tripathi ‘Crisis in
family businesses’ (Chapter VIII from a forthcoming book) P. 1

 14.     Rahul Bajaj ‘on
Family-Owned Enterprises, the U.S. Auto Industry and Global Pollution’ (India
Knowledge@Wharton 16 November 2006) P. 1

 15.     S. Radhakrishnan ‘The
Bhagavadita’ (Bombay: Blackie & Son Publishers Pvt. Ltd. 1982) P. 383.

All data, analysis and arguments put forth in this article are in the context of listed companies alone for obvious reasons. Secondly, non-family company’s universe would include Government-owned companies which face certain challenges unique to them, but are not discussed in this article.

We now look deeply into the many pros and cons of family companies versus non-family companies normally tendered in any discussion on this subject. These can be grouped broadly under five categories and then objectively assessed. These five categories are as follows.

A. Family wealth versus Company wealth

By far the largest number of arguments against family companies is that they have poor standards of corporate governance. Many lay persons carry the impression that owner families tend to treat family wealth and company wealth as fungible. Memories are fresh of robber barons who in the past have expropriated a disproportionate wealth from public companies under their control.

Good governance is, without any doubt, a fundamental attribute of a ‘good company’. However, on the other hand, one cannot just assume that a non-family company would have passed the governance test automatically. The latter, if controlled by self-serving professionals, could be as bad. There is enough evidence to bear this fact.

Hence, at the end of the day, a robust regulatory environment and an active set of independent board members can alone ensure similar standards of governance in either class of companies.

B. Control versus Ownership

The second issue is that families exert control over their companies far in excess of their economic interests. Though it appears serious on the face of it, we think it is a non-issue for three reasons.

(i) At the end of the day, whether professionals or families, there has to be a single point of control over the affairs of the company. Without this, the company will not pull in one direction. As long as the governance issues are reasonably addressed, it does not matter the percentage holding of the controlling entity.

(ii) In India, in fact, there is a tendency of the family to keep its holding as high as possible. Data shows that during the last decade many of India’s top families have increased their stake in their leading companies. (ET dated 20th June, 2011).

(iii) And, finally, the market now has a takeover code that would dissuade families to mismanage their companies whilst having a small stake.

The above two categories cover most of the issues that are listed as negatives of family companies. These were, in fact, very significant negatives of such companies in the past. It is our case that in the current environment they are not necessarily applicable to only one class of companies. On the other hand, the next three categories of arguments definitely favour family companies.

C. Entrepreneurship versus Professionalism

Even the strongest critic of family companies cannot deny that (i) entrepreneurship is the sine quo non of a commercial venture, and (ii) this quality is to be generally found with families who risk their wealth. Yes, professionals are likely to be better qualified on the average (though lately the gap is narrowing) and bring more scientific rigour to the decision-making process. But they sometimes fall prey to what is crudely termed ‘paralysis from analysis’ syndrome.

Finally, key decisions, are driven by a combination of intuition and entrepreneurial dreams. Family companies will certainly score better on this front.

Another point that finds mention is that non-family companies have elaborate systems and processes unlike in family companies. Well this is not entirely true. Family companies also have systems but they are more informal and centred around the promoter. (This issue becomes serious when more members of newer generations come on board and each wants his/her own informal system.)

D. Long-term versus Short-term Families, especially in Asia, tend to create and build for their progeny. Therefore, they tend to take a very long-term view of all value-creating propositions. On the other hand, professionals do not have any incentive to look beyond their own tenure. In addition, it is felt that performance-based remuneration militates against taking a long-term view. Interestingly there are reports that the tenure of a professional CEO is becoming shorter and shorter. In short, the family companies are more likely to work towards long-term goals.

E. Personal reputation versus Company reputation

And, lastly, the family equates its own reputation with that of the companies it manages. Nonperformance of one impacts adversely the family’s ability to tap the capital markets for fresh funds. So much so, one very often comes across a family placing its private wealth and personal guarantee as collateral to help out a listed company during financial difficulties. It is very unlikely that a professional director would pledge his personal reputation, let alone his wealth, to bail out the company which he manages.

Based on the above discussions we now face a conundrum. Empirical studies indicate that family companies perform as well as non-family ones, if not better. The dissertation of the anatomy of both these classes of companies lead to a conclusion that family companies are more likely to create long-term value for all stakeholders. Yet, popular opinion is almost against the former as a preferred model for managing companies. What is the reason for the disconnect between facts and perception ?

The reasons lie partly in history and partly in definitions.

Historically, as stated earlier, because of a weak regulatory framework, there have been many instances of corporate misdeeds. But more important, different sectors/companies in an economy do become uncompetitive and slowly decay or disappear. This is economics at work. Sometimes changes in government policy, labour laws, etc. have adverse consequences. Unfortunately, failures arising out of such developments tended to be family companies as there were hardly any professionally managed Indian companies in the early days of Indian corporate history. Therefore, public memory tends to associate corporate failures with family managements.

A more rational reason may be found in the way people, subconsciously, define ‘family’ and ‘professional’. Let us take, as an example, a venture started by a bright IIT engineer with no history of business behind him. After nurturing the business successfully for, say, five years he floats the company through a listing. Even as a listed company, he will continue to hold a stake and will control the company for many more years. But, in popular perception, this company will be bracketed as a professional company and will command relatively higher valuation. On the other hand, the perception of a similar venture started by an old-economy family company would be quite different even if that venture were to employ equally bright IIT engineers as employees.

This leads us to believe that the markets are not averse to ‘family’ per se. What it is saying is that so long as the Board/Management team exhibits entrepreneurial energy, sound domain knowledge and unitary control, it is does not matter if the promoter/family runs it. In the second example we gave above, whilst the promoting family may still be good entrepreneurs, the board would typically have members of the extended family with little domain knowledge. Hence the poor treatment by the market.

To put it differently the markets are, perhaps, saying that they prefer a family company as long as the founding family member is still firmly in control. But with the passage of time the family members grow in number, control gets diffused and domain knowledge diluted. Therefore, as the company moves from generation to generation, the role of professionals in the decision-making process should increase exponentially for this company to enjoy higher valuation.

Long ago, a popular topic for school debates used to be: Which is more important — Art or Science. Whilst all argued their respective cases vociferously, the moderator always used to sum it up by saying that both are important for the well-being of the human race. In the similar vein, both family and non-family companies have important roles to play depending at what stage of the evolution the company is in.