Why Family Businesses are Better Equipped to go Global?
By Onkar Kanwar
According to the data from the Family Firm Institute, family firms account for two‐thirds of all businesses around the world, generate around 70–90 per cent of annual global GDP, and create 50–80 per cent of jobs in the majority of countries worldwide.
In the United States, one-third of S&P 500 firms are owned/controlled and/or managed by the founding family; family firms account for 89 per cent of total tax returns and 64 per cent of GDP, and they employ 62 per cent of the total workforce.
Europe is no different. According to Forbes, of the Top 500 Family Businesses in the World almost half of these businesses are based in Western Europe, making family businesses the economic powerhouse in Europe.
And the situation is no different across India as we see that family businesses dominate the economic landscape. As per estimates, over 90 per cent of the business in India is from family owned companies. And these range from the ‘Mom and Pop’ Kirana stores to large conglomerates and SME’s. India has about 111 publicly-listed family-owned businesses, the third highest in the world. China tops the tally with 159 such companies followed by the US with 121.
What does all this mean? If we have to look at the top 500 family businesses worldwide as a separate entity, they will constitute the third-largest economy considering that the combined annual sales amounted to $6.5 trillion.
Today’s challenge is primarily growth and every company in India is looking at expanding beyond the Indian shores to find newer markets. It is in this context, I think that family businesses are better equipped to handle the growth and the transition of becoming a multi-cultural, multi-locational company. I am not saying that non-family businesses are not equipped to do so, but I think the balance is tipped in favour of family businesses. Data from major agencies also reinforces this. Family businesses are more likely – 27 per cent compared to 22 per cent of non-family businesses – to prioritize entry into a new overseas market as a growth strategy.
Also, there is an intrinsic pull in family businesses to expand beyond your own country. The younger generation is usually getting better educated — very often in other countries—than their elders. The younger generation travel and have global exposure. They seem to have an idea of the opportunities in the family businesses’ traditional domain or in new areas. Even where members of the younger generation do not yet have formal leadership roles, the family listens and learn from these members while grooming them for future leadership roles. This listening and sharing culture typically does not exist in the non-family businesses. In a way the family businesses seem to have a built-in vanguard who seed the business with new ideas.
The first reason why I think that the family enterprises are better equipped to look at global opportunities is due to the long-term outlook taken by most family companies. This distinguishes them from other enterprises.
This kind of thinking has ramifications on the company.
Currently, we see the undue focus on quarter-on-quarter results by companies and management in non-family businesses. There is a continuous focus on short term growth and profit and this has created a general risk-averse view of the world. ‘Play safe’ seems to be the theme for most companies.
However, the family companies can afford the luxury of the long-term view and this allows them to focus on long-term growth, margins and returns. This has multiple implications for the company.
First, it lowers the need of external funding as profits are continuously channelled back into the business. Given that usual conservative nature of large majority of family businesses, they are cautious of over leveraging and unlikely to increase their debts. This brings in prudence with their finances. It is rare that you will see a family business doing buy-back of shares. Rather, the thinking is to use the cash for long-term investments and give a better return to the stakeholders. Further, given the long-term view, such companies seek to continuously invest in long-term competitive advantages and hence if is common to see such enterprises building strong R&D as a safeguard to weather future storms.
Finally, the large pool of institutional knowledge held by the family members who would have seen economic boom and downturn helps further reinforce the imperatives of a long term view. In the case of Apollo Tyres, as the world was facing a recession in 2009, given that we had seen earlier low growth era, we were not worried and invested in our plant in Chennai. This helped us as when the country started on the growth trajectory, we were ready with the right products and easily surfed the growth wave.
While we may debate on the merits of the quarter versus long term view, but the fact is that if you look at stock market data in India, it is clearly evident that share-price of family-owned companies have continuously outperformed those of non-family firms.
I think that the management’s ability to take a longer-term view as to how they invest and manage the business is key to longevity and success. So I think that family businesses with a long term view of business are better equipped to seize the global opportunities as investing in a new market can take a long time to give back the returns on investments and a quarter-on-quarter outlook certainly makes matter tough for companies looking at expanding their wings.
The second reason I feel that family businesses are prepared to go global is the talent management abilities in such companies. In my interactions with other family owned businesses in India and globally, I see the theme of talent management coming again and again. And I think that the reason is simple – family businesses give their employees a sense of purpose as employees have the opportunity to work with the owners on achieving the vision. The strong, purpose-driven cultures that characterize family businesses attract employees and keep them engaged and loyal. This comfort of working with the family owners further lends itself in many ways. These businesses have higher employee retention as compared to non-family businesses. This helps when you are kick starting an international initiative as you have the right resources pool which can be deployed from one country to another. Also it is easier to reinforce the core culture and the values of the organisation in other parts of the globe.
Many times, I have seen companies following the quarter-on-quarter approach take the hire and fire route to cut cost and increase profitability. However, I have seen that family enterprises tend to keep people rather than laying them off and hire people even with the prospect of economic downturn. Further, unlike non-family businesses, family businesses often focus to protect for the long term the benefits they provide their employees, family shareholders, suppliers, customers, the communities in which they work and do business, and the charitable and civic works they value. This creates a strong employer brand and you have passionate people working for the company.
In our case, when we had to articulate our value system, I remember that ‘One Family’ as the core value was picked up by each member in the room as they had been living that value for such a long time. And this is not common or unique to Apollo Tyres. I see a similar value in most family run businesses.
So given the global labour market dynamics and the need to integrate people into your way of doing things, it is easier for family businesses with a resource ready pool to make its mark in the global arena.
The other thing that I see in family business is the range and depth of management experience. Like mentioned earlier, we have inputs from the younger generations and on the other hand we have leaders with greater depth of management experience. This is the nature of the family firms where it is not unusual to see longer average tenures of family business CEOs of between 25 to 28 years, compared with 4 to 6 years for CEOs in non-family businesses. There is a continuous play of listen, learn, share and cross generation engagement, everyone tied to a common purpose. The older generation is listening to the younger generation, the younger generation is learning from the older generation, and actually they’re learning from each other.
Believe me, the lack of learning and changing is the downfall of many companies. We have volumes written about companies which could not change and adapt as they got stuck in doing what they did, in the ways they always did it. In the process they went from being really successful to becoming tombs in the corporate graveyards.
However for the family businesses, there is a continual reinvention, which means that the older generation has to continue to learn. This keeps the organization agile, ready to travel the long distance and adapt to achieve the journey. This process ensures that family businesses have a built-in vanguard who seed the business with new ideas.
While my last point is not directly related to being prepared to take the family enterprises global, but this is the bedrock of why family businesses do everything. I have been maintaining that with Apollo Tyres, we need to create a self-sustaining institution which survives for a long, long time. This is about leaving an impact beyond the family of the company and includes a much larger family – the people that we serve, the community that we live in — the idea of family becomes broader and grows in circles that extend wider and wider. Again this is the norm for lot of family businesses and everything that I and other family businesses do is to create this legacy for the coming generations. Consequently, this forces us to take a long term strategic outlook.
In the end, it is not about growth and profits but about creating an enduring legacy for each one of its stakeholders. Something that you proudly and fondly remember! So many global family firms have to look beyond business and focus on other areas to create this legacy. I am sure most of you in family enterprises will appreciate the fact that for us the legacy is about our family’s identity and reputation. With so much on the line, we have do take hard decisions and forgo activities which might make short-term business sense to other enterprises. I remember that long before the government mandated CSR as a way of life for companies, we had been engaging extensively with the truck driver community and the communities around the plants. It is not that Apollo Tyres is unique in this regard. It seems to me this is the nature of family enterprises’ way of life. It is this reason there is a higher likelihood of Family businesses contributing to CSR or engaging extensively in philanthropic pursuits.
I think the pursuit of enhancing long-term stakeholder returns, forces family enterprises to work hard to achieve superior profitability, conservative financial structure and credit-worthiness. Time and again, I have seen that such companies have been rewarded with higher equity valuation as these companies have historically tended to trade at a valuation premium compared to their non-family peers. Beyond valuations, I think that these are exactly the reasons why family firms are better equipped to go global. Nevertheless, I think the key for senior leadership of family and non-family enterprises is that they should try to endeavour to build enduring legacies and other things will fall in place – whether in the country or outside.
The author is Managing Director of Apollo Tyres. This article is representative of the talk he delivered at The Economic Times Family Business Summit on October 26, 2018