The document discusses insights into transforming a family business. It begins by providing background on the prevalence of family businesses globally and in India. It then outlines some of the common challenges family businesses face, such as unclear roles and decision-making bottlenecks. The document recommends conducting an assessment of the family business' "maturity" to identify gaps. It suggests transformations on both the family side, such as establishing governance structures and succession planning, and the business side, like evaluating operations and investing in capabilities. The goal is to professionalize processes while preserving family identity.
How to transform a family business: insights from the trenches
1. Dr TR Madan Mohan
http://www.browneandmohan.com
H O W T O T R A N S F O R M A F A M I L Y
B U S I N E S S : I N S I G H T S F R O M T H E
T R E N C H E S
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Introduction
According to the Family Firm Institute, family-
owned businesses own 2/3rd of all businesses
worldwide. Coming closer to home, according
to CII, majority of business in India are family
run, and 30% of BSE listed companies are
family owned. According to SME Chamber of
India and other SME association estimates,
79% are family owned, provide employment to
43.3 Million people, contribute to about 45% of
Industrial output, 40% of exports and produce
more than 8000 quality products for domestic
and international markets.
The transition of ownership from founders to
siblings to cousins is the most important
reality all family businesses face. By 2028,
more than $10 trillion family-owned
businesses in U.S will have transferred to next
generation. The transition is not easy for many
family businesses. While no official figure for
closure/exit rates is available in India,
informal estimates suggest only one in five
businesses survive beyond second generation.
Most family businesses face the same
challenges that other businesses face.
However, the personal relationships that exists
within the family business create different
consideration, especially true when things do
not go as expected. Working with family
businesses across industries, we realize the
reason for such a high failure rate is because
many suffer from:
1. Family members donning several roles, with
thin line between executive and governance.
In absence of data driven reviews, quality of
results suffers. The result, none owns the
outcomes.
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3. 2.Management becomes the bottleneck.
Limited organizational hierarchy chokes
decision making and results in poor
execution.
3.Poor 2nd level leadership. Rewarding
unquestionable loyalty over competencies
leads to sycophancy.
4.Highly centralized organizational structure,
non-standard process and inadequate report
and review systems affecting the long-term
business sustainability and customer
experience
5.Procrastination on successor selection and
maintaining “status quo” leading to confusion
6. Lack of a corpus, fraud and risk
management systems leading to opportunism
by employees or by family members.
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Family business audit
Only way family businesses can survive
multiple generations is when they can
successfully untangle the tightly intertwined
family from business, but also bring business
focus into the family by adopting appropriate
process and systems. Transforming a family
business is complex and messy affair.
Transforming a family business first requires
an assessment of the “maturity” of the family
business.
Browne and Mohan have developed a “family
code maturity assessment” model to identify
the current status of family business
governance and its management of resources.
The family business maturity is based on our
proprietary family business code framework
that includes: family governance, ownership,
corporate governance, succession, wealth
management, and giving back to society. See
Appendix 1 for more details.
4. Based on the information,
categorize family businesses
into four groups as shown in
Figure 1. Once an “as-is”
measurement is done, gaps
and “to-be” state are
identified and define changes
that needs to pursued on both
family and business fronts.
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Start by conducting an “as-is” assessment” of the family and business governance through one-
on-one interviews, using family maturity assessment. Use a set of standard questions to learn
the current level of planning, execution, governance, and professionalism in running the
family business. It is critical to engage all key family members and executives currently
involved in business, but also family members who have significantly contributed to the
growth of business and are now in honorary capacity. Engage with participants from all
departments to understand the challenges each function is facing and, if the current actions
are not generating measurable financial and non-financial performance, how they could do so.
Transformation steps:
Family side
Changes required on the
family side of the business
may involve investing in
governance and control
mechanisms, processes to
deepen identify and
commitment to values and
goals of the family.
While changes vary based on
the current maturity of the
family business as shown in
Figure 1, major changes
family businesses have to
adopt include:
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Create a Family charter (FC) that define the very
purpose of family court and procedures similar to
articles of association. Family charter can act as a
family constitution detailing the vision, values,
relationship of the family with businesses. It
could also detail the number of board
representation, voting rights, nomination,
decision rights, meeting rules, accountability of
trustees; removal of members, dispute resolution
mechanisms, financial and proprietary audits.
Involve all key family members in the creation of
family charter. If required, plan for an open
workshop where everybody involved discuss and
contribute to the charter.
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1.Family charter to guide governance
2. Demarcate Family & Business role
Family business can thrive when they can
successfully demarcate “family” from business. A
good starting point is to align the family business
relationship with business goals and detail a plan
with a clear description of the roles, expectations
and performance. Define the command chain of
command preserving the social order and the
skills required for the function.
3. Family governance structures
Create a family council or a cousin-consortia depending on the size, scale and maturity of the
business. Family council provides centralized focus and control over family finances, legal,
tax and administration issues including risk management. Family council is a personal
operating setup that can act as a single decision-making body with various matters on behalf
of the family. Strictly adhere to leave work at work and home at home policy. Keep clear
communications across all family members. Bad news must always take priority. Family
members must be transparent about their intentions to join the business, motivations and
expectations.
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A strong board of directors with a significant presence of independent directors will
improve corporate governance. Pay the market rate. Always remunerate the job, not the
person. Use formal remuneration and nomination committee to fix the salaries of family
and non-family professionals working in the business.
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4. Business level board structures
5. Family & Business plans
Use family councils to address
family matters including plans for
next few years. It may comprise
members who ma be owners but not
company employees. Family council
must participate in annual strategic
planning but will not micromanage
how the businesses are run. They
establish and manage three set of
plans: individual plans (of each
family member to determine and
work on their own
professional/personal goals), family
plans (overall growth of family in
terms of its prestige, wealth
maximization, social ladder) and
business (managing revenues,
cashflows and growth).
6. Succession planning
Invest in formal succession planning activities. Independent directors or outside professionals
or experienced family members may be involved in coaching and mentoring the successor.
Eliminate restrictive clauses like first-born or male only to attract worthy successors who can
sustain and grow family businesses. Create programs and options for elder siblings to
graciously side-step and allow younger, more focused leaderships to emerge. Establish the
business parameters, discuss and communicate the same across multiple family factions to get
the buy-in for succession plan in advance. Allow successors to move through do, improve and
drive stages that protect them from small missteps or minor failures. Encourage them to
introspect, provide inputs when asked and allow them space to evolve.
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Define conflict dissolution mechanisms that can save the family and business from length
and expensive legal actions. Create conciliation or mediation mechanisms to amicably
resolve issues within the family. Restrain any personal castigation when business
performance is discussed in family council and censure performance reviews of a related
party discussions in board meetings of an associate company.
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7. Conflict, conciliation and resolution mechanisms
9. Preserve identity and give back to society
Family business can also invest in a
family office, a trusted fiduciary
acting on your behalf to manage
many different professionals
providing their services to the
family; for example, trust
management, legal advice, tax
planning, estate planning, and
investment management. Family
office can have representation from
multiple generations to ensure fair
coverage and responsibilities.
Family offices define the processes
that define “family affairs” and
“governance affairs”. From a legal
perspective, family office can be a
LLC, Branch office, HUF, private
trust or Foundation. It is a legal
vehicle, often employs in-house
staff, to provide asset management,
wealth protection, succession
planning and tax mitigation.
Use family reunions, festivals and rituals to bond, create relationships and preserve the
family identity. Empower and support both intrapreneurship and entrepreneurship
platforms for next generation. Encourage transition across business and conduct an annual
family office meeting with all family members similar to an annual business plan meeting
on the status and directions of the businesses. Articulate commitments towards
philanthropy, causes and activities of interest, setting up of family foundation to support
charitable causes and creation of family philanthropy.
8. Wealth Management
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Successful family business transformation requires systemic changes on the business side in
tandem. Changes required on the business side of family business may vary based on the
people, process and systems maturity. However, major changes that needs to be pursued
include:
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Transformation steps: Business side
Evaluate the current business model
of each business unit, limitations
and constraints holding back the
business, client and partner
relationships, performance
management, squeaky wheels and
leak points with functions and
across functions. Identify new
revenue streams, novel delivery
mechanisms that bring down cost
and offer unique market making
advantages, and complementary
relationships that need to be
invested.
goals to reach scale, define specific outputs at each stage and what would be the outcome from
a scale perspective. Transformation requires concentration of efforts and energies. Large
family groups have to rationalize the products across various plants and locations may
have to let go some products or business lines.
1. Evaluate and rewire business
model
2. Identify growth options
Expansion into new products or
services or by venturing out to new
geographies can revenue growth
and newer platforms for successors.
Plan for a short-term and long-term
3. Focus on Group profitability, with “unit specific” alignment
An untiring focus on revenue and net profit is a must for family business. However, be
pragmatic to define unit specific financial goals. Emphasize on annual sales and gross margins
for a growth business, cash generation for a bleeding operation and increase in shareholder’s
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value for all units that are pursing complete transformation is a must. Keep reporting simple
and actionable. Start implementing a simple ESG score card and eliminate non-value adding
activities and expenditures that have an impact on the financial performance or revenue of
the group companies. Benchmark and target both short term and long-term debts. Revenue
integrity, cost optimization, minimise potential risks must be the focus.
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5. Sharpen sales motions
Key to business side transformation is
improvements on the capacities and
capabilities of people. Transformation
may require hiring of expertise from
market and cultivate internal talent in
parallel. Build next level of leadership by
pursuing appropriate coaching and
mentoring programs. Internal leadership
program succeeds only if platforms and
process to self-review without the stigma
of failures or low outcomes are
encouraged. Job rotation or a new
geography broadens the work
experience. For family businesses that
suffer from location disadvantages or
high attrition rates at junior levels,
fellowship programs serve as cost-
effective and highly efficient mechanism
to attract and build talent. Hire
professionals who can only lead, but
mentor and guide existing resources.
Empower the professionals to drive
changes to realize higher efficiency and
productivity.
Reboot sales organization with right structure and resources covering demand generation,
direct and partner sales. Some units may require “named account” strategy, while other may
require more broad-based approach. Align GTM of each unit to pursue high focus and high
4. Invest in competencies and capabilities
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energy sales motion. Expand partner management beyond business development to the
complete ecosystem of engineering/design consultants, market integrators (for example, EPC
in case of large projects) and standard setting/approval organization. Support each unit to
stitch sales incentives that drive desired performance and recognize sales talent across
family business. Encourage sales and other functional leaders to take small stints in other
units to bring in comradery and cross-pollination of best practices within the group.
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7. Preserve identity and give back to society
Adopting right Information technology tools
and systems enable family businesses to
compete against large companies. IT systems
allow family businesses manage their costs,
customer experience and make profits-faster.
Often family businesses have an “if it is
broken, do not fix it” attitude that can stall
the adoption of emerging technologies and
tools. Family business must view technology
as a key component of their overall strategy.
Continuously evaluate the IT systems for their
effectiveness. If the existing systems fall short
compared to what is available and what could
protect their competitive advantage, the gaps
need to be filled in quickly.
Family businesses enjoy rich history of the
struggle the founder’s, quick decisions and
risks each generation took could emerge as
inspiring stories for multiple generations. A
good family business story always motivates
6. Systems to manage CX, Quality, Cost,
Delivery
next generation and employees, engages customers and even media. Family businesses
must invest in branding around its roots, key personal (both family and non-family that
helped it shape over years), corporate (how each unit contributed to the well-being of the
nation) and employee branding (what do they stand for). Branding also plays another
important role that of preserving and sharing family values. Commissioned books, awards,
CSR programs, social media, and employee-volunteer programs are some of the platform
family businesses can use for branding purposes.
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HR in family business has to adopt right tools and methods to drive sense of urgency and
quality outcomes across hire to retire process. More importantly, HR function has to invest
and sustain programs that help family business units imbibe the “unique cultural advantage”
they enjoy. Institutionalization through rituals, routines and extension programs is key to
sustain a family business.
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Family business transformation
requires tighter integration of
objectives, activities and outcomes.
Align individual’s role and
responsibilities, ownership and
accountability with the intended
change or outcomes. Implement a
simple measurement system that
integrates strategy, resources, process,
people and results. Define a good mix
of lead and lag measures that not only
help you capture the quality of
outcomes; it must also be able to
induce appropriate behavioral
changes. Mid-period review using
output and outcome measures are
useful indicators of what is working
and what is not working. Quickly
calibrate alignment between activities,
resources and outputs to see the
returns are on expected line.
Communicate the positive results to
motivate the employees, recognize
family person/employee making a
difference and let them know their
contributions have not gone
unnoticed.
8. Culture building and identity
Transformation of a family business involves crafting a carefully thought-out plan with clear
goals and timelines, and implementation across multiple quarters. The key to family business
sustenance is by transform them to build in certain capabilities that will make it stronger in
9. Measure results and impact
Conclusion
13. Family governance refers to the degree of alignment of family members to the vision and core values, and the
values are embedded in governance and policies. Family governance also includes family governance mechanisms
including family court which can act as a family constitution detailing the vision, values, relationship of the family
with businesses. It could also detail the number of board representation, voting rights, nomination, decision rights,
meeting rules, accountability of trustees; removal of members, dispute resolution mechanisms, financial and
proprietary audits. Family governance will also include conflict resolution mechanisms that set out means and
processes for resolving conflicts among family members and the businesses owned by the family.
Ownership governance refers to the legal structures and mechanisms that are adopted to firewall the business and
family. This may include This involves decisions related to separate or combined governance roles, large or smaller
boards, separation of the CEO and chairperson role, elect or select to positions, rotation or stability among family
members, inheritance of shares of companies whenever a separation or marriages impacts the business, issuance of
dual-class stocks to control family ownership and ward off any potential hostile takeover.
Corporate governance includes professionalization of the board, enlisting of independent directors, nomination of
an independent women director, formal audit, remuneration and risk committees and adoption of robust GRC tools
to systematically track and report outcomes. It may also include hierarchical structures family business build to
manage the boards and respective business and regular family reports that document what was planned, report
achievements and required improvements.
Succession in terms of its inclusiveness, planning, review and implementation process varies between family
businesses. A carefully designed succession plan to facilitate the transfer of the family business from one generation
to another may exist albeit with some restrictions. We see even in some professionally run and listed family
business; board representation or board chairperson role is restricted to first-born or male descendant only.
Wealth management includes establishment of a family office or investment in a professionally managed multi-
family investment vehicle, establishment of robust strategy that allocates wealth to different fields of investment,
continuous assessment of investment and periodic reporting to the
family board and activity.
Preserving identity is key for emotional connect and monetizing the benefits of “legacy”. Institutionalization of
routines and rituals that bring together family members often to reinforce common lineage and facilitate informal
meetings where family and business issues are discussed. Family business, including founder and family-owned,
vary in terms of mechanisms used to preserve identity and communication strategies to report and review.
Giving back to society includes commitments towards philanthropy, causes and activities of interest, setting up of
family foundation to support charitable causes and creation of family philanthropy.
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Appendix 1: Browne and Mohan Family Business Code