analysis

Updated: Sep 15, 2019 19:45 IST

Institutions required to run a business are well-established and are statutorily required in most countries.

Often, the securities regulator specifies the structure — the board of directors and the subcommittees below it. Boards of companies have the responsibility to ensure both performance and conformance (with the rules of the land) of the company. In addition, company managements of most businesses set up overlay and authority structures within the organisation termed either as the management committee or the operating committee to monitor business, agree on tactics, and create alignment within the company on different aspects of the business. Managers in addition have clearly defined key performance indicators (KPI) to measure how they are doing against their mandates.

In businesses owned and managed by families, we introduce an additional layer of complexity. We need not only to manage the business but also have to manage the family. The underlying basis for a family is different from a business. It is based on love and fairness, and not performance. Family members are both owners and managers of the business. As owners, they have a right to the business but, as managers, they are accountable to deliver performance to their owners (within or outside the family).

It is often much harder to manage a family than a business, for none of the structures mandated for a business are automatically present in families. So it is much more complicated to manage the family in business than the business itself. The complexity increases with every succeeding generation.

The obvious institutions in the family are typically implicit and are based on love, respect, fairness, and continuing traditions. Every family has its own traditions and unique sets of rules. Mostly, these tend to be implicitly understood and are rarely formalised (especially in comparison to corporate governance standards for companies), other than perhaps in a will or a tax saving trust. After all, everyone deals (well or otherwise) with one’s parents and siblings. But when families own and manage a business, absence of agreed rules and structures are a recipe for trouble.

The philosopher John Rawls, in his theory of justice, talks about the need for a “veil of ignorance” as the method of determining the morality of issues. It asks a decision-maker to make a choice about a moral issue, and assumes that they have enough information to know the consequences of their possible decisions for everyone concerned. But in this process, they would not know, or would not take into account, the background of the individual. Not knowing the other person’s position in society would lead to the creation of a just system. So too in a family.

Defining explicit structures in families is neither trivial nor straightforward. It requires deep introspection, careful thought and agreement within the family. Family elders must anticipate and prepare. In addition, families need statesmanship, compassion, generosity and wisdom. They also need to create forums that can facilitate awkward conversations on sensitive topics with openness and without rancour.

Typically, the family must have a vision for itself, a governance structure and the ability of its members to operate the governing structure with adequate transparency, fairness, respect and stewardship. The first of these activities is for families in business to anticipate what their vision should encompass, and what topics need to be covered in their governance structures. The values are normally spoken about and imbibed. The topics that could create contention are not hard to anticipate and typically are around — entry and exit from the business, succession, dividend policy, capital allocation, and role allocation among many family members (both junior and senior), performance evaluation and retirement. There are wrinkles to each of these too. But it is not difficult to anticipate the issues.

Once identified, the next step is for the governance forums to be set up. How formal these are depends upon the family, but typically, there is a need for a fully representative family assembly. In succeeding generations, this group can grow quite large and a smaller group elected by the assembly might form a smaller family council that is a more active decision-making body.

The decision rights of the family council are granted by the family assembly, which often retains the right to decide on exits and dividends. The family council has representative members of the family, often a few outside members, and very clearly defined decision rights on a wide range of issues that relate to the family in business. Succession, role allocation, performance measurement, entry level, compensation, conflict management, capital allocation all get discussed here. The interaction of the Family Council with the business has also to be managed. This is often done by Board representation or by identifying Board members that represent the family.

The structure of both these forums, the membership, the topics for discussion, the periodicity of meetings, the decision rights and decision mechanisms, the duration of the decisions, conflict resolution mechanisms, and the family code of conduct have to be discussed and decided. The families must define the actual process to be followed when each topic comes up for discussion. This involves laying out both “hard” and “soft” elements. Hard elements refer to incontrovertible, formal steps of the process. Once finalised, documented, and put together, along with the rules from the previous step, these processes become the structure for families to officially refer to whenever the associated topic needs to be discussed. But without paying attention to the softer aspects, demonstrating empathy and respect, and recognising the impact of conversations on feelings of specific family members, discussions can rarely be effective or fruitful.

Families need to anticipate and prepare for discord without fear. The longevity of their business is not a result of absence of conflict, but rather how they learn to manage these fairly, respectfully, with generosity and statesmanship. The path they decide to take makes all the difference for the business to continue together as a family.

Janmejaya Sinha is chairman, BCG India. This article was written with support from Varun Govindaraj. This is the fifth of a six-part fortnightly series on family businesses.

The views expressed are personal