Leadership Succession in an Indian Family Business

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Leadership Succession in an Indian Family Business Context

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Leadership Succession in an Indian Family Business Context

Project Focus on Succession

Family businesses are becoming more common as they are being considered ideal in creating employment for the family members in a highly competitive workforce environment (Rothausen, 2009), where employability is becoming a common concern even for the university graduates (Dacre Pool and Sewell, 2007). Especially in reference to India, with a population of over 1.25 billion people (Mundkur, 2011), family businesses are becoming more commonplace in securing the wealth of the family over the generations. While these ventures strive to create wealth for the family members, a key area for concern is their leadership succession. This is because research points out that only 33% of family-owned businesses successfully transit from the first generation (founders) to the second generation (successors) (Ibrahim et al., 2001). Therefore, the proposed study is an analysis of leadership succession in an Indian family business context to deduce the challenges the businesses experience and profile the entrepreneurial benefits of a successful transition as well. (All the businesses are based in India.) As “a person who does not worry about the future will shortly have worries about the present” (Ancient Chinese Proverb)

                        Justification of Succession  Research

Most of the previous studies into the topic of family businesses are too general. They touch on topics such as governance and management, objectives, interactions and relations with human resources, and only a few of them have focused on leadership succession in family-owned businesses. Even for the studies covering leadership succession, they are too general as their focus is worldwide. Therefore, the studies are lacking a specific context that can help to understand cultural, regional, and cross-border differences in leadership succession of family businesses. Considering that many large-scale family businesses are mushrooming in India, such as the Ambani family operating the Reliance industries, the country is a good context of understanding the leadership succession from a specific context, which is the focus of the proposed study.

 

                        Aims and the Research Questions in regards to Succession

The aim of the proposed project is to analyze leadership succession in an Indian family business context in comparison with that of other family-owned businesses worldwide. In this regard, the proposed research questions below will guide the project.

• Does the leadership succession of Indian family businesses conform to experts’ views in the literature?
• Does gender of the family members determine their eligibility in leadership succession of the family business?
• What are the training programs available for potential successors in Indian family-owned businesses?
• Does Indian parenting determine the interest of the children in the family business?

 

Preliminary Literature Review

There exists a large body of literature revolving the operations of family businesses around the world and their succession planning. As such, this field of study is not that terra incognita anymore. In this regard, profiling of the works of previous researchers reveals four categories of knowledge in literature about the operations of family business around the world: governance and management, objectives, interactions and relations with human resources, and their succession planning.

A preliminary review of literature indicated that family businesses are inclined towards some specific objectives in the course of their operations. To begin with, most family businesses operate with long-term objectives of the business running within the hands of the family members, as opposed to short-term objectives of most non-family businesses that are more profit oriented (Harris et al., 1994). According to the authors, the family members are seen as just custodians of family wealth. This is because most family businesses are less likely to diversify their product offering and enter into new entrepreneurial ventures, which are likely to subject the business to risks (Kellermanns et al., 2008). There is the fear that a single mistake can lead to the collapse of the business, and hence the way forward to avoid such risks is to maintain the status quo of how the operations of the family business have been running for years. According to Miller and Le Breton-Miller (2003), most family businesses prefer to have their profitability and turnover growth smaller instead of venturing into new ventures that carry high risks.

There are also postulations that the success criteria of most family business are not based on profitability of running the venture (Berrone et al., 2012). However, other factors are put into consideration, such as providing long-term employment to the family members, ability to successfully pass on the business to their children, social accomplishments of the business like being recognized as charity donors, and preserving the family business name over the generations.

According to Gomez-Mejia et al. (2007), what matters most in a majority of the contemporary family businesses is the ‘socio-emotional wealth’ (SEW) the family members derive from their ventures. In this light, SEW is defined as the non-financial aspects of the businesses that create identity, allow complete control of the business in the hands of the family members, and preservation of family dynasty in the running of the business (Gómez-Mejía et al., 2007, p106). One strong point to note from Gómez-Mejía et al. (2007) is that a venture becomes a family-type of business simply not based on the ownership structure, such as sole proprietorship, but instead when children of the owners show interest in taking succession of the business over time. This means that leadership succession is a key characteristic of family businesses.

So far, the major downside in family businesses is that they are risk-averse (Kleiman et al., 1996; Gonzalez et al., 2013), which can lead to their stagnation and low levels of innovation (Hiebl, 2012).  However, Hiebl (2013) postulates that compared to non-family businesses, the family businesses only prefer to take risks that will bring long-term, rather than short-term, benefits. This tends to associate the non-family businesses with risky short-term investments, which can paralyse a whole organization in case things are to go wrong. This can be interpreted to mean that the governance and management of a majority of family business is rather long-term than short-term oriented.

Another study suggested that the motivation of most owners of a family business is on the family status among other SEWs, but not in the business itself (Wang et al., 2004). As such, family businesses lack external perspectives such as hiring of professional managers. This contributes to lack of professional experience among the owners outside the business. Therefore, generally family businesses are characterized by lack of ability to professionalize and in seeking external advice (Wilson et al., 2013). Moreover, the lack of external shareholders in family businesses means less pressure that is important in challenging how the operations of a business are run (Jeuschede, 1998).

A different research pointed out that compared to other family businesses worldwide, UK has more owner-managed family businesses (Scholes et al., 2010). The result of this is that such businesses end up being poorly managed and less open to new innovation (Schulze et al., 2003b), which then culminates to low profitability and slower growth (Bloom et al., 2012). Especially in reference to in-family succession, recruiting from members of the family narrows down the pool of drawing talented management. Therefore, according to Bacon et al. (2013), the use of best practice in HR is limited in family-owned business.

            Although there is lack of professionalization and HR training in most family businesses, these ventures foster better relationships between the junior employees and the upper management (Sundaramurthy and Kreiner, 2008). In addition, family-owned businesses experience low rates of employee turnover, high employees’ satisfaction, and employee loyalty is high (Danes et al., 2009). These positive aspects are attributed to the fact that, in most family-owned business, the upper management and the junior management are members from the same family. Hence, they have high congruence in the goals and objectives of the family business (Zhu et al., 2007). In addition, because most family-owned ventures are more focused on the long-term sustainability of the business, treating the employees well is not an option to avoid high rate of turnover that can result in loss of employees who have accumulated experienced over the years (Kotey and Folker, 2007). Where some employees are sourced externally, research points out that the owners recruit carefully to ensure that the hired employees fit into the team, ethos, and values desirable to keep the family business running.

Research postulates that most family-owned businesses are affected by how they are transferred from one generation to another (Poutziouris, 2001; Sharma et al., 2001; Morris et al., 1997). This is because the transfer process has its own implications on the business, as it determines whether the business will be successful or will fall (Wang et al., 2000). A research by Ibrahim et al. (2001) points out that only about 33% of family-owned businesses successfully transit from the first generation of founders to the second generation. Out of 33% of family businesses that transit successfully from the first generation to the second generation, research points out that only about 33% of them transit successfully to the third generation (Ibrahim et al., 2001). This can be interpreted to mean that only 10.89% of family-owned businesses successfully transit over two generations.

According to Stavrou and Swiercz (1998), the process of leadership succession takes place in three major stages. The first stage is referred to as the pre-entry, whereby the potential successors are subjected to training, orientation, and others forms of preparations meant to “groom” them to take over the business. The second stage is the actual entry, whereby the trained and prepared successors become integrated into the family business so that they can gain and accumulate relevant experience of how they run the business operations. The final stage is the promotion, whereby the more experienced and qualified successors are appointed to senior management positions to spearhead the operations of the family businesses.

According to Nordqvist et al. (2013), there is a major distinction between management transition, whereby the next generation takes control of running the operations of the family business, and ownership transition, whereby the next generation are allowed to buy or receive equity in the family business (Lansberg, 1997). In most cases, the two occur together. However, irrespective of the type of transition, Salvato et al. (2010) and DeTienne and Chirico (2013) opine that the physical transfer of the family business to the next generation is a much less important aspect in succession planning compared to the transfer of the core values of the family business to the successors. This is tandem with an earlier postulation that the one of the major objective of running a family business to safeguard the socio-economic wealth (SEW) of the family members.

There is also another standpoint in literature indicating that leadership succession in family businesses can be seen a process of entrepreneurial exit and entry (DeTienne, 2010) Based on this postulation, the first generation is viewed to have different entrepreneurship skills and talents compared to that of the upcoming generations (Zellweger et al., 2012). Although it is not possible to exactly state which generation’s entrepreneurship skills and talents are effective for the family business (Steier and Miller, 2010), at least succession can be seen as the transition from the old entrepreneurship era (exit) into a new one (entry).

Research Gap

From the preliminary review of literature, it is explicit that a majority of previous studies into the topic of family businesses are too general. They touch on topics such as governance and management, objectives, interactions and relations with human resources, and only a few of them have focused on leadership succession in family-owned businesses. Even for the studies covering leadership succession, they are too general as their focus is worldwide. Therefore, the studies are lacking a specific context that can help to understand cultural, regional, and cross-border differences in the leadership succession of family businesses. Considering that many large-scale family businesses are mushrooming in India, such as the Ambani family operating the Reliance industries, Tata, Birla, and Jindal among others, the lack of adequate literature on such Indian ventures is a huge research gap that is worth investigating. In this light, the country is a good context of understanding the leadership succession between men and women, training programs to develop the leader, and the influence of parenting in successful transition of Indian family businesses