Family Business – Role of Professionals

1. Family Business – Role of Professionals EIRC , 3rd September , 2013 Bharat Baid FCA

2. Family Business • A 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.

3. Family Business • Main characteristics – • Strategic decision vested with the family • Family culture and behavior reflects in the family • Based on trust and loyalty between family • Essentially long term in nature • Low to moderate risk appetite • Vulnerable to family feuds • Low on innovation and creativity

4. Family Business - Challenges • Ushering in professionalism • Succession planning and implementation • Managing technological changes • Whether or not to go public • Balancing between Quarterly results and long term goals • Adopting Corporate governance practices in family run business.

5. Family Business - Challenges • Grooming family members to face challenges • Diversification into other businesses • Compliance issues • Ownership issues

6. First Generation -Strength • Long term commitment • Passionate with strong belief and value system • Fast and straight forward decision making • Strong relationship with stakeholders • Low cost and overhead • Founder has overwhelming authority

7. Challenges for inner Circle Professionals • Define and document Strategy and policy • Get “Buy in” from patriarch and family managers • Provide domain knowledge and Management skills • Mentoring and training Core family managers • Interacting with family managers , power sharing , ego management

8. Sustaining the business in the second Generation • Recruiting and training the best talent in the interest of business • Develop culture of trust and transparency • Develop and formalize organizational structure • Promote competent family members • Family hierarchy vs Business hierarchy

9. Sustaining the business in the second Generation • Equal opportunity to be demonstrated • Professional inner circle managers are the buffer between family , extended family and professional managers. • Promote culture of trust • Perception of fairness: Pay and perks • Reward for management must be distinct from returns from ownership • Extra 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

10. Family Members • Ambitious Achievers • Optimizers • Alternative Path Seekers

11. Ambitious Achievers • Driven, committed, passionate • High entrepreneurial spirit • Want to create large institutions and set a scorching pace of growth • Share core family values • Seek recognition for performance • Believe they are the best, they are marketable • View family business as an opportunity to charter own course • Seek freedom to work • Resist equality within family without involving the criterion of merit

12. Optimizers • Committed to the business and the family • View themselves as intrinsic part of the family business • Subscribe to core values • Seek to participate in running of the business • Focused on efficiency of operations • Value status, security and the perks / infrastructure that business provides • Returns from business to translate into enhanced cash pay outs

13. 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

14. Principles • Four key principles need acceptance by every family member • 1.Core family values • 2.Wealth maximization -primary purpose of business • 3.Shareholding a birthright but right to manage must be earned • 4.Leaders are trustees

15. Family Business should… • Evaluate performance transparently • Meet expectation on Security , life style and infrastructure support • Ensure Dividend payout and enhance profitability • Create a central fund to finance new opportunities

16. Family Business should • Align selected projects with profitability • Establish clarity with respect to nature and quantum of support • Provide freedom for execution of projects • Ensure Dividend payout to compensate non-family executives • Option to encash shareholding without loosing family ties

17. Over the long term • The most competent people should head the business • Leadership transition should be smooth • Family Constitution should be followed • Only continuous wealth creation can sustain the family and the business.

18. Family Business Governance • Clear understanding between family , business stake holders and management • Effective family Council • Functional Family Constitution • Succession Planning • Attitude of Trust and sacrifice

19. Growths of successors and Family Business • Business becoming large and globalised • Aspirations and ambitions rising among the successors • Intolerance among siblings , cousins • Businesses under corporate structure difficult to divide • Demergers and SPVs among some of the complex solutions

20. Strategic Management Process • Balance between Family and Non Family Professionals • Keep interest of Family above personal Interest • Be ready to forego Dividend during recession • Reasonable remuneration policy • Missions , goals and aspirations

21. Succession – The ways to ease Transition • Clear and frank atmosphere • Transparency and not mystery • Take everyone on board • Hear out all concerns • Legal support to create a sustainable succession plan • Shareholder’s Agreement should be binding on all • Family Constitution should be honored • Creation of a registered Will

22. Why Succession is postponed • Financial insecurity , Business , family , Spouse • Identity Crisis , reason to be is only Business • Fear of Conflict among family members • Concerns of the older generation – reward and security • Taxes and other costs • Younger generation – Lifestyle issues

23. Key to successful succession • Separate Business , family and ownership • Business – Clear mission , Strategy , Structure, Technology , Culture • Ownership – Legal Form , Distribution of ownership , Board of Directors , Shareholders Agreements • Family –Roles and relationships , Cultural patterns and values ,Decision making ,Conflict management

24. Key steps in succession • Transfer of Ownership of Shares • Transfer of management responsibilities • Transfer of Authority • The transformation of relationships • Transfer of knowledge

25. Planning for next generation • Outside work experience • Career path with responsibility and accountability • Performance responsibility • Mentoring and coaching • Transmitting family values • Education and executive development activities • Peer network

26. Shareholders Agreements • Shareholders 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

27. 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

28. Wills • Execution of a will disposing of your interests in the business • If no, have you considered the effects of intestate succession under law • Have you appointed executors and made provisions for the safe custody of your will • Have 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

29. 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

30. Personal Assets • Are any of your personal assets tied up in the business • Have 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

31. Arbitration and Mediation • Trustworthiness • Neutrality • Perception • Articulation and understanding • Knowledge of Business • Domain Expertise – Income Tax and Company Law

32. Mentoring • Interacting with the 2nd Generation • Training • Skill sharpening • Information Technology

33. Human Resources • Recruitment of the right people • Employees Training • HRD issues , facilities and policy

34. Conflict Resolution • Resolving complex issues • Drafting the Family Constitution • Drafting the Share holders Agreement • Enabling smooth separation • Custodianship of Brands , intangible Assets

35. Custodians • Serving 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

36. THANK YOU