'Families are especially good at buffering stress'

Have family businesses, despite their wars, shown a greater resilience during times of economic crisis, such as what we currently see? “Generally speaking, yes,” says Mr Nigel Nicholson, Professor of Organisational Behaviour, London Business School (www.london.edu). There is often a fierce determination among people who found and co-own businesses to fight for their existence, he adds, in the course of a recent email interaction with Business Line.

“In mature firms no generation wants to be the one that ends the line – the firm is held in trust for future generations, so families are prepared to make personal sacrifices to preserve what they love.”

However, family businesses are also often rather light on management systems and governance structures which can make crisis decision-making dangerously haphazard, he cautions. “Yet families are especially good at buffering stress, so the balance is positive.”

Mr Nicholson, whose first profession before becoming a business psychologist was journalism, co-authored with Grant Gordon, ‘Family Wars: Classic conflicts in family business and how to deal with them’ (www.vivagroupindia.com). He serves on the Advisory Board of the Institute for Family Business, and has been Chairman of the evaluation panel for the JPMorgan Private Bank Family Business Honours programme since its inception in 2003.

Excerpts from the interview:

How should analysts and investors value family businesses, given that sibling and other wars within the families can lead to potential value erosion?

There is plentiful evidence that family firms often outperform their non-family comparators, but at the same time they face unique risks. Investors should look to see whether they have in place the causes of business success – strong culture + strong team – and whether they have protection against the risks – sound governance + good advice.

Does corporate governance get its due attention in family businesses, generally speaking? Or, do these two go at cross purposes?

Family firms have healthy dislike of bureaucracy, but this is a risk when it translates into insufficient governance. Yet family firms are becoming increasingly sophisticated with such elements as family councils and constitutions, shareholder agreements, values statements and charters, independent directors on boards and so on. It seems that for many this comes after they have experienced some kind of crisis – they implement the mechanisms that would have kept them safe in the first place.

Is it necessary for family businesses to think of newer models of operation to continually foster entrepreneurship within the family?

What do we mean by entrepreneurship? It has three elements, the identification of opportunity, the mobilisation of strategy, and execution.

The first element requires curious minds who don’t like to be tied down – they are continually challenging what is taken for granted and stepping well outside the family firm. The model to support this is one that fosters a climate of exploration. A risk for family firms is that they are too inward looking.

The second element requires willpower and leadership. This means that you have to sustain a can-do culture with strong internal supports.

The third element, execution, requires robustness and ingenuity: the ability to overcome stress, absorb pressure, make fast decisions, negotiate and collaborate.

In other words you need different skill sets, and possible different people working on these different elements of entrepreneurship, since it is rare for an individual to have all these biases. This implicitly argues the importance of teamwork among diverse family members as a central theme in any model of entrepreneurship.

What are your observations about the Indian family businesses? Their pluses and minuses, compared to their counterparts in other countries.

They are as well established and core to the economy as anywhere in the world. This is helped by the classic Indian model of family holding company overseeing several listed subsidiaries. They have been helped by the tax-friendly HUF (Hindu undivided family) concept. Also there has been a tradition of large families with high expectations of males joining the business, accompanied by a pattern of spinning off businesses to satisfy their ambitions and keep them apart.

This is changing, I suspect, with (a) shrinking family size, and (b) new attitudes that value female as much as male participation.

I see a generation gap in many Indian family firms. Some of the senior generation maintain an attitude that those in the next generation have a duty to pay back to the business through their careers all the benefits its wealth gave them through childhood. Against this are modern youngsters who want to make their own free career choices. Families are going to have to adapt to these trends and deal with the new tensions they will create.