Business houses report

PASSING THE BATON
TRANSITIONING FROM FAMILY RUN TO PROFESSIONALLY RUN BUSINESS
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From the Editor’s Desk
SHAILJA DUTT
Chairperson
For family run businesses professionalizing for the rst time, or changing from the
old guard to a newer, more contemporary management, the challenges are manifold but can be addressed effectively, with the right strategy in place.
Leading the charge on several such mandates over the years, I see a de nitive pattern emerging when one considers successful transitions and one
0102030507 09
Challenges Faced by Promoters
Challenges Faced by Professionals
Core Solutions to Challenges
The History: Growth Engine for India
The Present: Challenges of Professionalizing
The Future: Rising Professional Management
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can also see commonalities in strategy and execution
of those who struggle with professionalizing.
The takeaway from this report is a set of simple ideas that promoters, Boards may want to consider during the professionalising process.
I have seen these ideas work for the impatient, rst generation leader, they have worked for the
promoter who has seemingly “been there and done it”, and they have most certainly work for the multi -generational family businesses changing guard.
The essence of this report is the essence of what makes any relationship successful - “Communication”. The report itself is a what & how guide to having those crucial conversations.
A large part of the report derives from the huge learnings, I have had working with promoter led, professionally run companies who have mastered the art
and science of hiring the right leaders over and over again and this data has been veri ed via in person interviews with more than 50 promoters and 200 professionals working for them.
11 13 15 17 19 21 23
The Future: Rising Professional Management
Impediments to Profession- alization
Using a Third Party
The Recruitment Challenge
Cost of Poor Hiring
Action Points
Conclusion and About Stellar
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Challenges faced by
Promoters
The Dilemma of professionalization -
to be or not to be professionally run
Struggle to divest control -
• Holding on
• Inability to trust
an outsider
Addressing concerns of family members in business and creating alignment
Worrying about loss
of authority
The trap of hiring “yes” men
Looking for mirror image
of self when professionalizing
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Challenges faced by
Professionals
Struggle with degree of/
lack of control
How to build trust without compromising on values and individuality
Cultural
differences
between promoter, family and professional
Cold relationship with promoter
Struggle of
working with multi-
generational
family in business
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CORE SOLUTIONS TO CHALLENGES
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Identify inflection points to professionalization - talk/build alignment
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Leverage the expertise of your search partner
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Consider mindset of different generations involved in the business
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Facilitate operational freedom
4
Set clear expectations and divest control in a phased manner allowing both parties to be comfortable
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6
Have several informal conversations to build a better and more connected relationship
8
Step Back
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Coach, Mentor & Provide Support
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Nurture the relationship
SET CLEAR EXPECTATIONS AND DIVEST CONTROL IN A PHASED MANNER ALLOWING BOTH PARTIES TO REACH A COMFORTABLE, WORKING RELATIONSHIP WITH EASE
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RESEARCH VALIDATES THAT LARGE, LONGSTANDING, PUBLICLY TRADED FAMILY BUSINESSES GROW FASTER THAN NON- FAMILY COMPANIES, ARE MORE RESILIENT, AND OUT-PERFORM MARKET RETURNS BY SEVERAL PERCENTAGE POINTS
THE HISTORY: GROWTH ENGINE FOR INDIA
• Family owned businesses account for 90% of India’s industry output and nearly 80% of its GDP
• Comprise 67% of public listed companies at the Bombay Stock Exchange (BSE) and employ around 50% of the work-force in India
• India has the second highest number of family owned businesses after China in Asia (excluding Japan), as per a Credit Suisse study*. The market cap of Indian companies considered for this study was around USD 840 billion
• Family businesses in Consumer, Materials and Technology sectors are the major contributors to total market capitalization
* As per 2018 Credit Suisse study, evaluating its own database of almost 1,000 listed family owned businesses globally; ^ Sector break-up is as per market capitalization of Indian rms under each sector. Family owned business de nition as applicable in Credit Suisse study – Any listed company with Direct shareholding or Voting rights by founders or descendants is at least 20%.
Source: Credit Suisse, Family Business Network, Credit Suisse, Stellar analysis
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China
30%
Taiwan 3% Philippines
5%
Malaysia 5%
Indonesia 5%
MARKET CAP. OF INDIAN FAMILY BUSINESSES BY SECTOR^, 2018
Korea
FAMILY BUSINESSES BY COUNTRY IN ASIA
(EX JAPAN)*, 2018
100% = 528 family businesses
8%
India
Hong Kong 5% 14%
21%
Thailand
Singapore
3%
10% 6%
11%
9%
7%
Industrial Tech
Consumer
Energy
Financial
Healthcare
Materials
Telecom
Utilities
Australia
1%
100% = USD 840 million
16%
Consumer Discretionary Staples
18%
15%
1%
Real Estate
5%
2%
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PROMOTERS ARE INCREASINGLY WANTING TO RUN BUSINESS AS AN INVESTOR.
THE PRESENT: CHALLENGES OF PROFESSIONALIZING
• Traditional family businesses are globalizing, entering new markets and verticals
• Technology enabled new age businesses are being carved out from traditional businesses, but digitization in existing businesses needs to witness widespread adoption
• Next generation is involved at Board level decision making. Many, however, are inclined to start independent ventures
• Businesses are struggling to attract and retain external professionals - especially those professionalizing for the rst time
• Permeation of family constitution is on a slow rise.
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MAJOR CHALLENGES IMPACTING INDIAN FAMILY RUN BUSINESSES
CHALLENGE
DEVELOPMENTS
DEGREE OF CHALLENGE
Business Growth
Multiple Generations
Professionalization
Digitization
Family Constitution
• Uptick in M&A activity - M&A activity of BSE 500 companies, comprising 335 family owned businesses, has increased during 2013-17 in volume (+13%) and value terms (+56%)
• Continued expansion into new verticals and geographies
• Next Gen is involved at at Board level for strategic decision making. With strong educational backgrounds, they are focused on professionalizing and imbibing external expertise
• However, friction with older generation is evident. Some even choose to venture out independently
• Struggling with attracting and retaining external professionals
• Increasing professionalization of processes underway – through external third parties such as management consultants
• Few are front-runners
• False perception of many family businesses that their products and services would not be highly impacted by digitization
• Struggle with implementing a robust digital strategy
• Introduction of family constitution or charters or protocols has gained traction
• However, widespread adoption is needed as only 36% of Indian family business have a written family constitution
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72%
61%
Will bring in non-family professionals to help run the business
THE FUTURE: RISING PROFESSIONAL MANAGEMENT
• The two primary drivers of professionalizing businesses are:
Globalization – Size and scale of business impacts complexity and bureaucracy of a family business. Effective management/Board controls are pre-requisites to scale family business and compete with professionally-run multi-national corporations
Next Generation – Next Generation’s openness to professionalize business and non-inclination of next generation to join family business .
• Indian Family businesses have acknowledged the need to professionalize. Around 72% of family businesses plan to bring in non-family professionals to the business plan within the next ve years
• Furthermore, all leading indicators point
that family businesses have prioritized professionalization over keeping the business within the family
FUTURE DIRECTION OF FAMILY BUSINESS (5 YEARS’ TIME)
72% 55%
Will earn majority of revenue from the same products/services
India
54%
44%
53% 54%
Will establish new entrepreneurial ventures
Global
Will sell in new countries
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ALL LEADING INDICATORS POINT THAT FAMILY BUSINESSES HAVE PRIORITIZED PROFESSIONALIZATION OVER KEEPING THE BUSINESS WITHIN THE FAMILY
(THE PROMOTER PRIORITIES)
IMPORTANCE OF PERSONAL AND BUSINESS GOALS OVER THE NEXT 5 YEARS
Create employment for other family members Move into different export market Diversify into different sectors, products, channels Move into new regional markets in home country Ensure the business stays in the family Grow as quickly as possible Ensure staff is rewarded fairly and share in success Run the business on a more professional basis
Make a contribution/leave a positive legacy Be more innovative Enjoy work and stay interested Improve profitability Ensure the long-term future of the business
Very Important
12% 17% 18%
19% 25%
25% 27%
26% 32%
32% 30%
72% 56% 49% 43% 44% 33%
44% 21% 27%
28% 45% 11%
36% 16% 34% 11%
25% 10%
Not Very Important
35% 38%
41% 44%
48% 65%
39% 34%
30%
Attract high quality skills into the business
39% 46% 15%
Source: PwC India Family Business Survey 2016
Fairly Important
55%
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25%
14%
28%
53%
28%
36%
28%
22%
50%
47%
31%
36%
36%
47%
33%
44%
25%
THE FUTURE: RISING PROFESSIONAL MANAGEMENT
Approximately 69% of next gen family business leaders in India cited the need of external professionals to address the current challenges. This is higher than the global average of 64%
CHALLENGES FOR THE FUTURE
Diversification Having A Strong Digital Strategy
Giving Back To Society Growing In New Geographies
Having A Clear Mid-term Strategy
Having A Clear And Documented Long-term Strategy
Continually Innovating Products/services
Risk Appetite 39%
Bringing External Expertise To Address Current Challenges
Very Important
Essential
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INDIA
97% 69% 72% 83% 67% 50% 64% 81% 39%
|
GLOBAL
90% 64% 68% 82% 73% 52% 61% 75% 47%
Source: PwC Next Gen Study 2018
“A family business goes through various stages of evolution, depending on
the vision of the founders. “If they only want to have a local presence and hold, they can run it like a retail store. If they want to grow the business, they will require a leadership team, the right resources and tools to grow it. For any future venture that we get into, we may have to look at professionals to run it, depending on the stage of development & growth need of founder
AAKASH CHAUDHRY
CEO & Whole Time Director at Aakash Educational Services Ltd. (AESL)
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“


IMPEDIMENTS TO PROFESSIONALIZATION
There are several ? challenges faced by family
business and external
professionals during the
WHAT THE PROMOTER WORRIES ABOUT
Cultural dilemma
• Professionals may not understand the business culture and complexity of family relationships
Hard to ‘let go’
• Family leader has to disengage from the management of business
• Informal trust based systems can be no longer relied upon
Insecurity of the family business leader
• Trade secrets and other
con dential information can be compromised
Lack of adequate focus to successfully professionalize
• Non-de ned KRAs and
KPIs for the professional
• Lack of control
mechanisms to ensure desired outcomes are met
transition. On examining these challenges, often we see that a ‘No Man’s Land” is created between the family business leader and the professional manager. Such gaps, if not mediated and sealed, would lead to an absolute failure of the transition.
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WHAT THE ? PROFESSIONAL
WORRIES ABOUT
Struggle with degree of control
• Gap between perceived
and actual control given to handle business
Conflict in decision making
• Decisions may get overridden by the family
• Greater tendency to become follower, rather than leader
• Non-involvement in strategic decision making
• Emotional decisions of the family leader are prioritized over situation and data based decisions by the professional
Cultural differences
• Concept of work from home may not go down well with family business
• Similarly, working long hours and even during the weekends may not go well with the professional
Discontent over family discords
• Professionals feel
dejected as at times they play a role of communicator between family members who have serious differences
Lack of focus of promoter on building relationship with
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NO MAN’S LAND - STATE OF MISPERCEPTION CREATED BETWEEN THE BUSINESS AND THE PROFESSIONAL


FACILITATORS & ADVISORS
Family business owners
often nd themselves turning
to their trusted friends and extended family to help them professionalise their business. Though well intentioned, often this set of advisors have biased perspectives and lack objectivity. It’s important for companies however small/large to put
in place a Board of advisors
with a diverse set of members, who are acquainted with the challenges and opportunities
a family run business provides and are well networked within the professionals community and can balance expectations on both sides.
ACTION POINTS
TO AVOID CHALLENGES WITHIN
A FAMILY BUSINESS ENVIRONMENT
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BE CERTAIN
Decision Triggers
Keep tab on primary triggers of professionalization
Rapid growth of business
Promoters’ inability to cope with the demands of a multi- faceted business/fast growing business
Next generation reluctant to join family business
Lack of successor or absence of a family member with the necessary skill sets
Keeping family business separate from family (family owned, but not family run business)
BE PREPARED
Building Alignment
Bring the family business leaders to agreement
Showcase the need (problem area) and business areas to be handed over to the external professional
Communicate the expected changes in the organization/ reporting structure and decision making powers of the professional
Clarify the con dential information that would be shared with the professional
Discuss the steps to avoid alienating the professional to ensure long-term engagement
Provide reassurance about the stability of the company and preserving the family members’ loyalty and commitment
BE PROACTIVE
De ning Recruitment Strategy
De ne requirements. For example, position(s) to be lled, broader roles and responsibilities, skills set, selection criteria of search partner, support areas, etc. Involve your search partner and allow
for a healthy debate. Debate and diverse points of views are the most critical element of de ning an appropriate search strategy
Clearly - spend more time on this
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“In a number of traditional, brick and mortar Groups, a large percentage of the
next Gen is happy to be sitting on the board as owner and investor but are distancing themselves from management, not running the business on a day to day basis. They nd that their global education has prepared them to look at strategic growth, expansion, new ventures better than the earlier generation and they genuinely feel that running large capital intensive businesses, liaising with nancial institutions, managing gargantuan manufacturing facilities is best left to professionals/ specialists and is not an optimum use of their time, especially as they seek newer avenues of value creation.
SHAILJA DUTT
Chairperson Stellar Search
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A NEEDLE IN THE HAYSTACK -
THE PROMOTER’S RECRUITMENT CHALLENGE
?
HOW TO RECRUIT THE MOST SUITABLE PROFESSIONAL
Hire a Search Partner who understands the nuances of family businesses and has demonstrated success of working with family run businesses
Support from your search rm include -
1. De ne role and responsibilities, KRAs for the professuonal.
2. Use data
3. Revaluate existing HR processes ad re ne
4. Measure performance of the professional.
5. De ning monetary and non-monetary
incentives - Link pay to performance
6. Articulating career growth opportunities
clearly and de ning succession criteria
7. Assistance in running a structured hiring
process.
8. Handholding the professional to acclimatize
with the family business for 6 months to 1 year
“


?
WHAT CAN YOU EXPECT FROM YOUR SEARCH PARTNER?
ADVISE
Business and family governance consulting
Understanding family values and culture
Remuneration and incentives advisory
ALIGN
Focus on family alignment and understanding family nuances
Assist family run rms in benchmarking internal talent against the pool available in the broader market
Conducting thorough reference checks of candidates
SEARCH COACH
Conflict management
Programs
for responsible ownership
‘Transition coach’ for initial few months to handhold both sides
SEARCH
Data - backed decision making
Family and non-family CXO succession
Identify talent
for the C-suite, executive team and family of ce
Do thorough assessments and share the same transparently
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COST OF POOR HIRING
ECONOMIC COST OF A WRONG HIRE
`
REPLACEMENT COST
2-2.5 TIMES THE ANNUAL SALARY
Includes costs pertaining to -
Hiring
Onboarding and Training
Ramp time to peak productivity, etc.
OTHER COSTS
SIGNIFICANT, DEPENDING UPON BUSINESS SIZE
Includes costs resulting from -
Deterioration of business reputation and pro tability
Lower employee engagement, motivation, and productivity levels
Wrong business decisions
Fall in stock price and erosion of business value
Source: PeopleKeep, Press articles, Stellar analysis
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THE COST OF SELECTING
THE WRONG PROFESSIONAL ARE IMMENSE, AND THE IMPACT ON THE FAMILY BUSINESS IS FAR-REACHING
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ACTION POINTS
??
HOW TO SET EXPECTATIONS?
Reiterate KRAs repeatedly and ensure they are aligned with business strategy and growth targets.
Disclose business challenges that need to be addressed with absolute transparency.
Educate the professional on work culture and use your search rm to provide feedback when necessary
HOW TO FACILITATE OPERATIONAL FREEDOM?
Provide a robust and comprehensive orientation and keep ‘Handshake’ period for six months. Mentor and coach the executive during this phase.
Provide adequate freedom levels to the professional to allow him/her to perform
Trust the professional’s decision making capability. Get involved in rst few decisions, but stay involved in rst few critical decisions to provide support and con dence to the professional.
Involve the professional in strategic decisions, which generally falls under the purview of family business leaders
Communicate the value added by the professional to other family leaders and old timers in the business and vice versa.
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INVOLVE THE PROFESSIONAL IN STRATEGIC DECISIONS, WHICH GENERALLY FALLS UNDER THE PURVIEW OF FAMILY BUSINESS LEADERS
??
HOW TO ASSESS PERFORMANCE?
Conduct rigorous periodic performance assessments against the set KRAs.For the rst quarter, involve your search partner in these meetings to check deviations and suggest corrective action
Provide support from relevant family members, if necessary
Exceptional reward for exceptional performance
HOW TO BUILD AND STRENGTHEN RELATIONSHIP WITH THE EXTERNAL PROFESSIONAL?
In rst six months, take time out
for weekly conversations and set aside time to have informal, open conversations to help build connect.
Involve the professional with formal/ informal connects with top key clients
Spend time to know the person and not just the “professional”
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CONCLUSION
Family businesses are the true backbone of the Indian economy.
In times marked by relentless disruption and innovation, where businesses are pursuing ef ciency and shareholder value creation at unprecedented speed, the traditional family run businesses, which have in the past, performed through an external manifestation of the family values, riding on courage, authenticity, loyalty, and tradition are now looking to reorganise themselves, especially in the face of disruptive challenges confronting them.
In my view :
It’s crucial to prepare the organization for the change and not bring in external professionals without adequate consensus amongst family stakeholders. The route to professionalise has to evolve via consensus and advocacy and not via anarchy.
There is no “one size ts all approach”- professionalisation has to be customised as per the unique needs of each organisation. For a search partner, there is no greater determinant
of success than understanding the mindset of the promoters, their vision for the mid to long term. Our approach becomes totally different when we work with a 3rd generation promoter looking to create a legacy for his/her children and future generations over several decades, vs the approach followed with a rst generation Founder running a PE/VC backed start-up, looking for maximum top-line growth within a 5 year time frame.
For Stellar, we believe that the end objective of professionalising is to raise the bar on corporate governance, deliver better returns to shareholders while remaining true to the original vision of the promoter.
We would love to hear back from you, your thoughts on this subject and was our rep t helpful in your journey to ofessionalise!
ABOUT STELLAR
We are a leadership advisory rm specializing in Executive Search across the emerging markets of Asia, Middle East and Africa. Since our inception in 1998, we have been passionate about building global leadership teams that deliver sustainable value for clients across multiple industry segments.
You can reach us at:
SHAILJA DUTT
Managing Partner
Phone: +91 98101 80450
Email: [email protected]
VARUN SINHA
Senior Partner
Phone: +91 96506 62525
Email: [email protected]
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