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Indian family business heads trust family members more than outsiders

Non-family employees are being overlooked in Indian family businesses, because of a combination of company heads trusting their relatives more than outsiders and a culture where family members are required to work in the firm.

Non-family employees are being overlooked in Indian family businesses, because of a combination of company heads trusting their relatives more than outsiders and a culture where family members are required to work in the firm.

That’s according to Kavil Ramachandran, a professor at the Indian School of Business and the author of a report, Challenges Faced by Family Businesses in India, released last week.

The study of more than 200 owners of family companies, turning over anywhere from around 50 crore Indian rupees (€7.1 million) to more than 200 crore Indian rupees, found that around 50% of respondents did not use the same entry requirements for family and non-family members when hiring.

This is largely because family-run small and medium sized enterprises are still finding their feet and getting to grips with professionalising their companies, reckons Ramachandran.

“For families with [a] lack of clearly articulated governance principles, it is a discovery-driven journey to decide on the principles and policies for [employing family members] in [the] business. Two, in [India] and in most Asian countries, working in the family business is culturally, socially and economically a requirement,” he told CampdenFB.

When it came to performance appraisal, 56% of those questioned said members of the family did not undergo a review during their stint at the company, with 66% adding they were also not penalised for non-performance. “[This is because] there is great trust in the integrity and confidentiality of family members compared to non-family members,” said Ramachandran.

The survey also found 51% of respondents made decisions that were “reactive to address day-to-day developments”, but that didn’t mean companies didn’t have a “long-term purpose in having the business”, said Ramachandran.

“Long-term orientation and vision clarity are things that evolve over a period of time. For that matter, very few entrepreneurs start with a great vision. Again, given the discovery-driven approach of most SME family businesses, they do not prepare long-term growth or investment plans for want of an understanding of such tools. They try to keep the business together and build it up [for] as long as possible,” said Ramachandran.

Decisions were found to be largely made by the eldest family members – 52% of the respondents, who were involved in sectors such as services, mining and manufacturing, chemicals, and real estate, said the eldest person in the family had final authority on business matters.

However, involvement of next-gens was also strong – 68% of those surveyed said “younger family members participated in the decision-making process in their businesses”.

The report also suggested there was a clear succession plan in place among 49% of the companies. But letting go was an issue – more than 70% of the groups had no formal retirement age for family members.

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