Unit 4

Family Business
4.1 Meaning
● A Family Business is the one in which two or more extended family members
influence the business through the exercise of kinship (blood relation) ties,
management roles, ownership rights and/or which the owner intends to pass a
family heir”.
● It is a business that is owned or run by members of a single family.
● It is the transfer of ownership across at least two generations and there is
continuous relationship between family & business.

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Some of the family business
Reliance empire:
While Dhirubhai Ambani, created the
Reliance empire to rule the Indian
industrial sphere, his sons Mukesh and
Anil took the enterprise to new heights,
despite disputes that resulted in divisions.
Some of the family business
Wipro :
Wipro is one of the most successful
families in India which was started
in 1945 by Mohammed Hasham
Premji as an enterprise to extract
cooking oil from peanuts. Upon the
senior Premji's death in 1966, his son
Azim took over the business, giving
up his studies for the same. The rest
is history as Azim Premji eventually
brought Wipro into software and
made it the power it is today.
Some of the family business
Hamara Bajaj is a tagline that is
synonymous with one of the most
trusted names in India's automobile
industry. Founded by Mahatma
Gandhi's close aide, Jamnalal Bajaj, in
1926 and taken over by his son in 1946,
Bajaj ventured into manufacturing
scooters which have made Indian lives
easier for decades now. When Rahul
Bajaj took charge of the business in
1965, he helped the two wheeler giant
scale new heights. As of now Rahul's
son Rajiv handles Bajaj Auto.
Some of the family business
When Mohan Lal Mittal kicked off the
family steelmaking business in 1950s in
Rajasthan, little did anyone know that his
son Lakshmi Mittal, who was still learning
the trade, would go on to become the
"steel king". Lakshmi's global journey
began with migration to Indonesia in the
70s where he set up a steel plant and
founded his own firm Mittal Steel
independently.
Some of the family business
The Birla family business which is a market
leader in products ranging from cement
traces its roots to a jute mill started in 1919
at the hands of Ghanshyam Das Birla. As
generations put their effort into shaping the
firm's future, Birla came to be the most
commonly mentioned name in India
whenever wealth was discussed. Kumar
Birla has been heading the Aditya Birla
Group for 20 years now as it achieves more
success in the manufacturing sector.
Some of the family business
One of the oldest enterprises in India,
Godrej is a name all Indian
households know, be it consumer
goods or home appliances. The
firm began its journey in 1897 with
Ardeshir Godrej who introduced the
first ever soap made from vegetable
oil in 1918. Riding on the success of
the revolutionary product, the Godrej
family with Ardeshir's brother
Pirojshah went on to become the
leader in consumer products now
helmed by MIT graduate Adi Godrej
and his brother Jamshed.
 4.2 Importance of Family Business
● Family owned businesses play a crucial role in the economy of most
countries.
● Family-owned businesses are recognized today as an important and distinct
organization in the world economy.
● They now operate in every country and may be the oldest form of business
organization
● Much of the retail trade, the small scale industry, and the service sector are
run by family businesses.
● World wide, family managed businesses employ half the worlds work force
and generate over half the world’s gross domestic product.
● In India, family owned business have played and will continue to play a
central role in the growth and development of the country. 8
● 75% of registered companies of the world are family businesses,
● 50-60 % of the workforce in the world are engaged in family controlled
businesses,
● In India 95% of the registered firms are family business.
● Aditya Birla Group, Ford, Mittal Steel, Raymond Group, Samsung, Tata
Group, Toyota .etc are family owned business.

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 4.3 Types
There are 3 types
1) A family owned business,
2) A family owned & managed business,
3) A family owned & led company.
● Tagiuri & Davis set these three into a structure called the “3 Circle” Model
of Family Business.
● It comprises of three systems representing family, business and ownership.

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 1) Family-owned Business
●
A family business is a commercial organization in which
decision-making is influenced by multiple generations of a
family, related by blood or marriage or adoption.
●
They have ability to influence the vision of the business and to
pursue distinctive goals.
●
They are closely identified with the firm through leadership or
ownership.
●
Owner-manager entrepreneurial firms are not considered to be
family businesses because they lack the multi-generational
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dimension and family influence.
 2) Family-owned & managed business
●
The business is owned and managed by several members of the
family. Usually a number of brothers and sisters, but sometimes also
cousins.
●
There is active participation by one family member in top
management so that other family members have management
control.

3) Family owned & led business

●
It has active participation by at least one family member in the
Board of Directors of the company so that one or more family
members have at least a high level of influence over the company’s
direction, culture and strategies as they lead the company. 12
 Responsibilities & Rights of Shareholders of Family
Business
Responsibilities
● Be knowledgeable about company operations (product, service, design,
location, competitors etc),
● Be knowledgeable about finance,performance reports,
● Attend shareholders meetings,
● Understand board members, their skill & talents,
● Be constructive in suggesting & be part of the management process
● Be a positive representative of business,
● Publicly support management decisions,
● Keep necessary business information in strict confidence & be aware all
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shareholders are not entitled to all information of business.
● Where possible & useful, generate business leads and new business links,
● Provide additional investment capital,
● Keep afloat the family name, family business & respect in society, more so
in public life,
● Enhance the feeling of trust & dependability & be resourceful person
available on demand.

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 Rights
● Timely information about business strategy, important organizational
changes, financial status,
● Views of board & other shareholders on management matters,
● The ability to participate in the election of board of members,
● Fair policies to protect weak members,
● A shareholder in a family business has legal shareholder rights and
obligations as well as rights and obligations as defined by the family
dynamic.
● Right to receive any dividends declared by the board of directors, to vote for
members of the board, to sue in the event of company mismanagement and
to receive a share of the assets if the company is liquidated. Dealing within
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the family is another matter.

 Succession in Family Business
●
Succession planning is the process of pinpointing key needs for leadership and
intellectual talent throughout the organization over time and preparing
individuals for present and future work responsibilities.
●
In a family business succession planning involves:

i) Strategic planning,

ii) Financial planning,

iii) Estate planning, and

iv) Human resources planning

●
Typically, family business owners consult with a variety of professionals in
developing their succession plans — lawyers, accountants, bankers, financial
planners, insurance advisors, merger and acquisition consultants and
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management consultants.
 For successful business succession plan, the following points may be noted;
● Family members to put business interest ahead of the family interests,
● Importance to merit over family positions,
● Describe & discuss the role of members during transition period namely full
time, part-time, retire etc.
● Family dynamics – alternate plan to work,
● Compensation for working members & shareholders,
● Treatment of loyal employees,
● Tax implications & consequences,
● Periodical review & meetings.

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 Family Business Succession Planning
●
Start Business Succession Planning early
●
Involve your family in business succession planning
discussions
●
Look at your family realistically and plan accordingly.
●
Get over the idea that everyone has to have an equal
share.
●
Train your successor(s) and work with them.
●
Get outside help with your business succession planning.
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 Pitfalls of Family Business

1) Lack of focus & strategy,

2) Favouritism in family: Some family businesses are reluctant to let outsiders into the top tier, and
the result is that people are given jobs for which they lack the skills, education, or experience. This,
has a far-reaching effect on the success of the company.

3) Lack of professionalism,

4) Inability to separate the family interest from the interest of the business,

5) Sibling rivalry in the family business:

● Conflict is bound to happen at any firm.
● Deep-seated, long-lasting bitter fights and quarrels can affect every single person within the firm.
Because family members are involved, conflict can be more difficult to solve and can result in
difficult endings.
● In 2005, a famous dispute between the sons of Reliance Industries founder Dhirubhai Ambani,
Mukesh and Anil, divided India’s largest petrochemical manufacturer. When all was said and done
Mukesh retained control of the petrochemical business, while Anil became chairman of Reliance
Capital, Reliance Communications, and Reliance Energy.
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6) Dispute over assets & valuation of properties.
 7) Succession Planning:
●
Many family firms lack succession plans as there is too much trust
in the family.
●
In fact, because of close relationships and long histories, it is of
utmost importance in family firms that a strong succession plan is in
place.
●
Risks associated with not having a strong succession plan include
poor leadership, family quarrels and often financial or legal trouble
for the company. Founder of Hyundai Motor, Chung Ju-Yung,
named his son, Chung Mong-Koo, his successor in 1999. Just a year
later, Chung Mong-Koo defied his father’s orders to step down.
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 Strategies for improving capability of Family Business
and improving performance

1) Keep the lines of communication open: Schedule

regular family meetings to discuss issues of concern as
well as key topics such as performance and transition.
●
Include all the family members, no matter where in the
hierarchy their jobs fall
●
Create a family manual that lays out the ground rules for
how the meetings will take place.

2) Assign clear roles and responsibilities.

3) Keep good financial data: The downfall of many

small businesses and family businesses is not having
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solid data. Have data and manage the finances.
4) Avoid overpaying family members: Market-based compensation is
fundamental and essential. Parents in family businesses tend to either
overpay the next generation or pay everyone equally despite differing levels
of responsibility. Both are bad practices.

5) Don’t hire relatives if they’re unqualified: Business should care about

profits. Family members will be hired to provide them with a job, even
though they’re not qualified. The remedy is to get them trained, move them
to a role that matches their skills.

6) Family firms must be able to Professionalize

7) Good management

8) Ability to change

9) Have a strategic plan

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10) Have an active board of directors

 History of Family Business
●
The origin of family business in India is traced back to the bazaar system in the ancient
times.
●
Initially, family business in India started in the form of trading and money lending in the
bazaar. It was also confined to certain communities, notably the Jains and Marwari’s
especially in the northern India.
●
Cawasji Davar set up the first cotton mill, the first manufacturing enterprise in Bombay
in 1854.
●
Some trading communities started textile mills in Mumbai and Ahmedabad during the
last half of the 19th Century.
●
Jamshedji Tata started his varied business enterprises like cotton mill in Nagpur, the Taj
Hotel in Mumbai, his famous steel plant in Jamshedpur, and several real-estate
developments.
●
A number of families, such as Birla’s, Bangurs started their business in Kolkata and
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developed the city as a centre for commerce.
●
Initially family businessmen were engaged in small-size businesses
requiring small investments managed by themselves only. But, once they
entered into manufacturing sector, they felt the need for more and heavy
investments not manageable by themselves.
●
Family businesses inducted their family members or relatives in the business
by allotting them shares while making sure that the business remained with
the promoting family itself.
●
This is how corporate management was born embedded by a combination of
joint stock principle and family control over business.
●
All businesses were controlled and managed by a few families in the country.
●
R. K. Hazari, a well-known industrial economist, had concluded that most of
the prominent industrial firms of Indian business during the 1950s, were in
the hands of 18 Indian families. 24