Family Business – Role of ProfessionalsEIRC , 3rd September , 2013

Bharat Baid FCA

Family BusinessA business is considered to be a family

business if any one of the following three conditions are fulfilled

(a) if a majority of the voting rights is with a family

(b) If the Chairman /MD is from a family

(c) If it can be reasonably said that in the event of the death of the Chairman the successor will be from the family.

Family BusinessMain characteristics –Strategic decision vested with the

familyFamily culture and behavior reflects in

the familyBased on trust and loyalty between

familyEssentially long term in natureLow to moderate risk appetiteVulnerable to family feudsLow on innovation and creativity

Family Business - ChallengesUshering in professionalismSuccession planning and

implementationManaging technological changesWhether or not to go publicBalancing between Quarterly

results and long term goalsAdopting Corporate governance

practices in family run business.

Family Business - ChallengesGrooming family members to

face challengesDiversification into other

businessesCompliance issuesOwnership issues

First Generation -Strength Long term commitmentPassionate with strong belief and

value systemFast and straight forward

decision makingStrong relationship with

stakeholdersLow cost and overheadFounder has overwhelming

authority

Challenges for inner Circle ProfessionalsDefine and document Strategy

and policyGet “Buy in” from patriarch and

family managersProvide domain knowledge and

Management skillsMentoring and training Core

family managersInteracting with family

managers , power sharing , ego management

Sustaining the business in the second GenerationRecruiting and training the best

talent in the interest of businessDevelop culture of trust and

transparencyDevelop and formalize

organizational structurePromote competent family

membersFamily hierarchy vs Business

hierarchy

Sustaining the business in the second GenerationEqual opportunity to be demonstratedProfessional inner circle managers are the

buffer between family , extended family and professional managers.

Promote culture of trustPerception of fairness: Pay and perksReward for management must be distinct

from returns from ownershipExtra constitutional family benefits to be

controlled and reframed as expenses from ownership returns

Transparency within family and professionals on structured benefits as per organizational hierarchy

Family MembersAmbitious AchieversOptimizersAlternative Path Seekers

Ambitious AchieversDriven, committed, passionateHigh entrepreneurial spiritWant to create large institutions and set a

scorching pace of growthShare core family values Seek recognition for performance Believe they are the best, they are

marketable View family business as an opportunity to

charter own courseSeek freedom to workResist equality within family without

involving the criterion of merit

OptimizersCommitted to the business and the

familyView themselves as intrinsic part of

the family business Subscribe to core valuesSeek to participate in running of the

businessFocused on efficiency of operations Value status, security and the perks /

infrastructure that business providesReturns from business to translate into

enhanced cash pay outs

Alternate Path Seekers•Key interests lie outside the

business•No interest or inclination towards

business•Value the status, perks and

infrastructure that the business provides

•Seek support from the business to fund their interests

•Want to reserve the opportunity for their offspring to join the business

PrinciplesFour key principles need

acceptance by every family member

1.Core family values2.Wealth maximization -primary

purpose of business 3.Shareholding a birthright but

right to manage must be earned4.Leaders are trustees

Family Business should…Evaluate performance

transparentlyMeet expectation on Security ,

life style and infrastructure support

Ensure Dividend payout and enhance profitability

Create a central fund to finance new opportunities

Family Business shouldAlign selected projects with

profitabilityEstablish clarity with respect to

nature and quantum of supportProvide freedom for execution of

projectsEnsure Dividend payout to

compensate non-family executives

Option to encash shareholding without loosing family ties

Over the long termThe most competent people

should head the businessLeadership transition should be

smoothFamily Constitution should be

followedOnly continuous wealth creation

can sustain the family and the business.

Family Business GovernanceClear understanding between

family , business stake holders and management

Effective family CouncilFunctional Family ConstitutionSuccession PlanningAttitude of Trust and sacrifice

Growths of successors and Family BusinessBusiness becoming large and

globalisedAspirations and ambitions rising

among the successorsIntolerance among siblings ,

cousinsBusinesses under corporate

structure difficult to divideDemergers and SPVs among

some of the complex solutions

Strategic Management Process Balance between Family and Non

Family ProfessionalsKeep interest of Family above

personal InterestBe ready to forego Dividend

during recessionReasonable remuneration policyMissions , goals and aspirations

Succession – The ways to ease TransitionClear and frank atmosphereTransparency and not mysteryTake everyone on boardHear out all concernsLegal support to create a sustainable

succession planShareholder’s Agreement should be

binding on allFamily Constitution should be honoredCreation of a registered Will

Why Succession is postponedFinancial insecurity , Business ,

family , SpouseIdentity Crisis , reason to be is only

BusinessFear of Conflict among family

membersConcerns of the older generation –

reward and securityTaxes and other costsYounger generation – Lifestyle issues

Key to successful successionSeparate Business , family and

ownershipBusiness – Clear mission , Strategy ,

Structure, Technology , CultureOwnership – Legal Form , Distribution

of ownership , Board of Directors , Shareholders Agreements

Family –Roles and relationships , Cultural patterns and values ,Decision making ,Conflict management

Key steps in successionTransfer of Ownership of SharesTransfer of management

responsibilitiesTransfer of AuthorityThe transformation of

relationshipsTransfer of knowledge

Planning for next generation Outside work experienceCareer path with responsibility and

accountabilityPerformance responsibilityMentoring and coachingTransmitting family valuesEducation and executive

development activitiesPeer network

Shareholders AgreementsShareholders agreements -

regulate the rights and interests between family members as well as their relationship with external shareholders , if any

Incorporate the provisions of shareholders agreements , if any , into the articles of association of the Company

Family Constitution , Family Structures and External Advice Adopting a family Constitution that – Regulates the relationship between family members Lays down rules relating to induction into the

business Lays down rules relating to administration of the

business Lays down rules on succession to ownership and

management Establishes family and business relationship for

effective management. Lays down dispute resolution procedures Establishment of family council to address business

and non-business issues Have you appointed an external board of advisors

who can give you expert advice from a neutral standpoint

WillsExecution of a will disposing of your

interests in the business If no, have you considered the effects of

intestate succession under lawHave you appointed executors and made

provisions for the safe custody of your willHave you borne in mind the requirement of a

probate and letter of administration for the execution of a will

Have you made nominations that may be made under various laws to overcome the delays that may be caused in obtaining a probate

Trusts

Have you considered the option of streamlining succession to ownership through the establishment of long duration trusts

Have you factored in the restriction on perpetual trusts under Indian laws

Have you provided for a suitable representation of all family groups and interests in the composition of the board of trustees

Do you want to provide for disqualification of beneficiaries and trustees under certain conditions

Personal AssetsAre any of your personal assets

tied up in the businessHave you provided for the

transmission of your personal assets by means of a will

Have you considered settling your assets in a trust to streamline succession

Arbitration and Mediation

TrustworthinessNeutralityPerceptionArticulation and understandingKnowledge of BusinessDomain Expertise – Income Tax

and Company Law

Mentoring Interacting with the 2nd

Generation Training Skill sharpeningInformation Technology

Human ResourcesRecruitment of the right peopleEmployees Training HRD issues , facilities and policy

Conflict ResolutionResolving complex issuesDrafting the Family ConstitutionDrafting the Share holders

AgreementEnabling smooth separation Custodianship of Brands ,

intangible Assets

CustodiansServing as trusted and neutral

person on the Board as Independent Directors

Serving as trusted Resource persons for advise on key issues

Bridge between cousins consortiums

Custodians of WILLS

THANK YOU