November 2020 < Back
A majority of domestic companies in India -big or small- are run or controlled by a family. Family-run enterprises play a significant role in contributing to our economy. Globally, as well as in India, family businesses contribute to over 70 percent of GDP of most developing and developed countries
In the case of India, this could be even more because if you go deeper into the economy almost every small enterprise is family run. 91 percent of the listed firms in India are family- firms (Study by Bang, Ray and Ramachandran in 2017).
Historically, the joint family system was the backbone of businesses and provided the required resources and capital for the cohesion and growth of the firms. Be it the Industrial Revolution of eighteenth century, the license-raj of the early 1990s or the economic liberalization in 1991, family businesses have displayed resilience, character and adaptability over their long history and played a pivotal role in India's growth story.
Apart from superior financial performance and more robust share price returns, family firms have demonstrated stronger revenue growth, higher EBITDA margins and better cash flow returns. According to ET Intelligence Group's analysis (based on publicly available data), family businesses have earned 14 per cent annualized returns between Jan 2017-2020 on the stock exchanges compared with 6 per cent returns generated by their non-family-owned peers. Key reasons for this are due to their longer term outlook, less reilance on external funding and more investments into research and development.
However, they run the risk of premature mortality given their peculiar complexities thereby making it challenging for a micro, small and medium-sized (MSME) in the founder generation family business to grow and progress into a multi-generation conglomerate. Very few family companies sustain beyond the fourth generation, without concerted action to prevent their decline and death.
The Indian family businesses also actively engaged in social causes and played a pivotal role in institutional building by partaking philanthropic activities such as setting up premier educational institutes, research, and cultural centers for the progress of the country.Therefore, family firms fulfil a larger socio-economic purpose.
To conclude, family-run SMEs are the hidden champions who contribute silently yet diligently to fuel the economy through steadfast and focused efforts in innovative products and services. By gaining the right and timely awareness about the complexities of family-run businesses, they will stand to benefit greatly by putting in place adequate measures and processess to address their future growth, harmony and perpetuity.
Family Commitment
Family Commitment to the Company: The greater the level of family commitment to the company, the greater the Financial Performance and Non-Economic Goals (value creation in the larger community). The presence of a strong culture of commitment enables the individual interests of family members through behaviors such as loyalty, pride, and a feeling of belongingness to the company, which guide their decisions towards higher performance. In unlisted companies, a culture of commitment is considered as the "common factor" for boosting economic and financial performance alongside such objectives as perpetuity and the conservation of the family's heritage and assets.
Experience
Experience increases as new generations integrate into the ownership and management of the company. The intergenerational transition brings benefits to the level of knowledge incorporation (also known as the succession experience curve). On the flip side, higher levels of generational dispersion alter the ownership structure, and the relationships between family members are potentially more vulnerable to differences. Addressing and arresting the root causes of these differences should be a priority to prevent negative effects on performance.
Cohesion
The identity in family business is reflected through the sharing sharing and alignment of values among the family members participating in the company. This cohesion of family-company values occurs when family members, through their participation, accept the mission and values of the company as their own. The greater the level of this cohesion, the greater the willingness of family members to strive for objectives such as the continuity and independence of the company
Trust
When family members share a healthy and enriching relationship characterized by trust and respect, such family firms tend to outperform their counterparts. A core element is trust, especially a trustor's belief that a trustee will act beneficially because the trustee cares about the trustor's welfare. High trust within a business environment can enhance firm confidence, stimulate firm performance during times of market uncertainty, and trust facilitates the formation of alliances and resource exchange.
Therefore, many Family Businesses survive over generations because they fulfill the socioemotional needs of their owners in pursuit of non-economic objectives. These, in turn, significantly influence the financial performance of the firm. In the absence of family commitment, cohesion, new generation experiences, trust and increasing unresolved differences in the family, the same strategic resources can lead to premature death of the family enterprise.
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