What Family Business MBA programmes teach that generic MBA courses don’t

Dr Kavil Ramachandran of ISB Hyderabad

The Indian School of Business (ISB), Hyderabad is the latest b-school to offer an MBA in Family Business Management, which they call the Management Program for Family Businesses (MFAB). In an interview with PaGaLGuY, ISBs Dr Kavil Ramachandran explains the need for a separate kind of management education for family businessmen and how family businesses are increasingly upholding meritocracy against entitlement. Dr Ramachandran is the Thomas Schmidheiny Chair Professor of Family Business and Wealth Management at the school.

What is the need for a separate family business management programme that a generic MBA doesn’t solve?

Family businesses constitute a major percentage of businesses today. Therefore, they become a strong driver for economic growth. Hence, strengthening family businesses is an important agenda. A business school can play a role here by looking at those issues that can make a family business succeed or fail. ISB decided to step into this area and make it an important area for study.

We have built a capability to look at the issues of family businesses and developed expertise and capabilities to help in those areas. Obviously, this programme becomes a natural extension to whatever we are doing. Therefore, we said we will look at a Master’s long duration programme which we call as the MFAB which will prepare the young generation in the area of handling family businesses.

Family businesses are unique. This is not only about business management but also about issues which are typically faced by family businesses. Therefore, if you continue to learn both and balance these, then you will have a successful family business. Also, this program is a platform ito help us build a relationship with family businesses so that we can continue to do more research on the subject.

Across the world, most family businesses do not remain competitive or survive beyond the 2nd or 3rd generations. There are two reasons. Unless the governance factor within the family is strong, there is a huge impact on business prospects. Secondly, unless the leaders are competent enough to keep up with the changing business environment of the world, are qualified and have the right mix of capabilities, the business destiny will be affected. The family’s capabilities become a major driving force.

Another observation is that the younger generation plays huge role in determining the future of the family business in not only survival but also growth. Lately in many family ventures, you find that professionally qualified family members are driving change. Thus there is a need to prepare the younger generation with a professional competence and family governance principles. So that they understand the implications of the governance of a family relationship and also are trained to work with non-family professionals. They don’t always have to become the Chairman or Managing Director and if there is already a Chairman or MD, they should be able to have a wavelength.

How is professionalism in a family business different from professionalism in a generic corporate meritocratic company?

Professionalism is seeing the situation objectively and taking the right decision using the appropriate strategy, structure, systems and processes, where the individual is not important but the organisation is. The relationship is contractual, hire and fire is possible. You’re there because you’re good. If you are no longer good, you move out.

When you bring in the family dimension, things change. Membership is by birth, everybody is equal, and relationship is informal and driven by emotions. There is nothing like a meritocratic evaluation. The rewards are equal. Thus, in a purely professional organisation, the decision-making is smooth and transparent. Let’s assume there’s no politics. When the family members come, they start wearing at least two hats simultaneously. One is the Executive Hat. The second is the Family Member Hat. The third sometimes is the Ownership Hat. If I’m sitting here and taking a decision, I have to remember that I’m taking the decision in the interest of the organisation. Sometimes the question is: Is the business more important or is the family more important? Or that we have always sacrificed the family wealth for business wealth so we have a right to enjoy part of it. Sometimes the challenge is that your siblings, parents or cousins may be sitting in other positions and you have to take tough decisions.

For example, say you are in charge of marketing and I’m in charge of production. I’m ten years older than you and you’re like my son. But I haven’t delivered the product. Will you shout at me and take me to task for not performing? So these kind of dynamics are always there in family businesses. It may be direct, indirect, and subtle. Very often, there are no platforms for communications and deciding what is right and what is wrong.

Coming back to the question, in a well-governed family business, these are the rights, limitations and responsibilities. In a well-governed family business, you will get a chance to work only if you’re good. You will be paid according to your work because business is a separate entity and family is a separate entity. If family governance is not strong, that affects the nature of your involvement in the business either at the operations, strategy level or as an owner. So there is a huge influence of family governance on the nature and extent of professionalism practice in the family business.

Take examples from India. You find that for instance, the Dabur family has completely withdrawn from operations. They were completely hands-on till the mid 90s and then they realised that family members might not be the best to run operations in the business. So they sit at the board level. You have several examples. Many family members are CEO, MD, Chairman etc. Five different functions are run by family members. Many of them go through this division in the next generation.

Would it be correct to say that the objective of family business focused MBA programmes such as the MFAB is to professionalise family businesses?

I would say that it is part of the objective to improve the level of professionalism and professional behaviour of the organisation. But it is also to prepare them as good family business leaders. A typical MBA programme will give them the professional training but it doesn’t prepare you to be a leader of a family business. Unless the governance and family leadership inputs are given to youngsters, they may not be appropriately prepared to lead the business. The reality is that in many families, the younger generations take the elevator to the top. At the age of 30, you are becoming the executive director of a big company. It’s not just the professional qualification but also the maturity is required. That we believe we will be able to provide.

An MS in engineering aims to make engineers more of an engineer and an MD makes doctors even more of a doctor. But ironically, it seems that by seeking to professionalise family businesses, a family business MBA aims to make their students less of a family business person. Comments?

No, not at all. This is a misunderstanding. On one extreme is having day-to-day involvement in the company which doesn’t give the family members the freedom and time to work on strategy. The other end is where the family says that we’re just watching and we have an oversight. They allow others to run the company and in a way that they don’t break the principles they have laid down.

I would say that the second case would be more of a family business because the family members there would be trained in custodianship values. Typically, in the Indian context, if you take this amoebic principle of dividing the company with every passing generation, it means I’m worried about my individual family unit. So I’m moving away from custodianship value.

An example is Merck, the German pharma giant. Their family is not at all involved in the business. They control 60-70% of the business. They have an executive chairman from outside and they have a family partners chairman. They are involved in the strategy like anybody else. They ensure that the shareholder’s wealth is preserved and grows. They ensured that the family values of honesty and integrity are preserved.

Free markets uphold meritocracy. Family businesses on the other hand uphold entitlement. How does the research of family businesses make peace with these two conflicting values?

This is a fundamental question and we often start the class with this. The first realisation we give the students is that these are two different things. It becomes problematic when we apply family principles in the business context or we give business solutions to family problems. For example, if one brother is already is in the business, there is pressure on others to be there. If one brother has an extra credit card, everyone has to have one.

What we teach is that families have to apply meritocratic principles in the business context.

If a family number is incompetent, taking him on-board will destroy the worth of the business. Increasingly, families write their own constitution for practising governance. One normally accepted policy is that family members cannot automatically find a job in the business. They have to have the necessary qualifications, experience of working outside and they have to earn the position. One example is GMR which has prepared its own constitution. They are all young now but they’ve prepared it early on so that there are no governance issues later. One of their policies is that in the next generation, members have to have the qualification and experience and they cannot join the group at a junior level. They can at most intern for a year but then they have to work somewhere outside. They can join the family business at a very senior level after having made a difference in other companies. You move in only if the HR finds you competent. Else, you don’t come in.

At Merck, they feel that family members shouldn’t be working at junior levels. They can only join at a senior level after gaining external experience. This helps them avoid conflict and in the process they ensure that meritocracy is retained.

How much of the MFAB course is generic management content and how much of is it family business content?

There are three parts. One part is general principles of management like in any other MBA course. Accounting, basic finance, operations, marketing will remain the same. The second part is the family involvement area. How the family dynamics are understood and displayed. If you take employment, human resources, leadership, strategy making and professionalisation as a theme on its own, related to that are the decisions on succession, retirement, benefits. That’s the HR and strategy related content.

The third part will deal with contextual areas. Say, if a family wants to go for an IPO. The third part will deal with questions such as whether the IPO is right or not, what will be the effect of the family’s control in the business, whether the decision will ensure that the business benefits and its goals are fulfilled and at the same time and the family interests are also taken care of. There will be more such cases in the third part.

Does the MFAB teach the best practices from family businesses in different cultures? Such as how Marwaris run businesses differently from Tamilians, for example.

There wont be much emphasis on this, except for occasional reference points. Also, the class will be a mix of people from different communities. They will be bringing out their own dimensions and during class discussions, these things will come up and there will be learning.

There is an international immersion module in the programme. What do you see Indian family businesses learning from family businesses in Europe?

The history of industrialisation in India is short. From traders, we turned into manufacturers and to service providers. We don’t have many businesses that are long-lasting. We don’t have a very rich pool of heritage to draw on. Whereas in Europe or in the US, there are different industry experiences. When Dr Fran from Merck came to one of my classes and I introduced him as the Chairman of the Merck Group belonging to the 11th generation, everybody had goosebumps. People could not believe that such a giant organisation had survived for so long. By studying such cases from Europe, Latin America and other parts of Asia, the students faith in the success of sustenance of family business will be much greater. There will be an indirect influence on their thought processes also.

Which are the top 3 latest trends in family business in India?

One is family entrepreneurship. Earlier, people used to just join the business. It was more like jumping into a running train and continuing ahead. Since the opening up of the economy and increase in opportunities, there is a huge interest in entrepreneurship among the younger generation.

The second thing is that there is a huge level of awareness and interest growing in families about better management of their businesses. Partly because they realise that there can be solutions to challenges that they’re facing. If they can work together and remain together to grow in size rather than keep splitting, it’s good.

The third thing is the effort they are making to professionalise business. This is primarily because of better education among family members.