As I type this sentence, there are 7.733 billion people living on our planet. All these people, put together, have created a lot of wealth— anywhere between $1.4 quadrillion and $2 quadrillion. Never before have we had so many humans and so much wealth. But how is this money distributed? This is, after all, the 21st century and democracy is the norm. Just like the Internet democratised knowledge, has capitalism democratised wealth? No. The gap between the haves and the have-nots is greater than ever before. Every available macroeconomic statistic pertaining to malnutrition, educational opportunities, employment, per capita income, etc. seems to endorse this fact. But what about lesser-known macroeconomic statistics that pertain to family businesses? Here are a few for your perusal:
- In the U.S., one of the world’s major democracies, 80% of all companies are family-owned.
- That number goes up to 90% in India, the world’s largest democracy.
- One study estimates that family-owned businesses contribute anywhere between 60% and 75% to the world’s GDP and that they also employ more than half the world’s workforce
At first glance, one might be tempted to perceive these statistics as similar to other macroeconomic indicators—a sign that the system is broken. But I would like to argue that a great majority of family businesses tend to become enduring institutions that benefit all stakeholders and the world at large.
Family businesses vary in size, revenue, and scope. They can be multinational conglomerates like Walmart or IKEA, or they can be a mom-and-pop store around the corner. At both ends of the spectrum, you will find self-starting individuals at the helm—those who create employment for themselves and, if things go right, for others as well. In the absence of family businesses, no nation in the world would be able to generate sufficient jobs for all its citizens. This conclusion is, perhaps, self-evident. Now, let’s look at a more interesting question: Do family businesses suck out more than they contribute to the collective?
Let me show the overarching benefits of family businesses, starting with the individual and travelling outwards in concentric circles.
Good for the Individual
Firstly, family businesses are good for individual members of the family. Studying the life scripts of doyens like Anand Mahindra, M.M. Murugappan, Sanjay Lalbhai, Jairam Varadaraj, and Abhishek Poddar to name just a few, I found many heartening commonalities. Based on information available in the public domain, these stellar individuals were neither forced by their families to work in the family business nor asked to stay away from the business. Instead, they were given free rein to explore their options—to live a life of their own choosing. That’s the greatest privilege that wealth bestows, isn’t it?
So, when such individuals are given this ultimate freedom, they either choose to further the family business because they find this to be the most exciting challenge they can undertake, or they choose to pursue some other vocation altogether. In either scenario, their primary motivator is not further accumulation of wealth, but a desire to create an oeuvre that will enrich them and the world. And the world can always use a few more million humans driven by self-actualisation than the desire for material gains. Ergo, what’s good for the individual can be good for society.
Good for the Corporate
Business leaders like Anand Mahindra and Sanjay Lalbhai were given their business values in the living rooms and dining rooms of their homes, not in their companies’ boardrooms. These two gentlemen grew up watching their elders participate in the freedom struggle. These elders told them that commerce can enable nation-building. It is perhaps true that family businesses place more emphasis on values than other organisations—maybe because these values got crystallised over long periods of time and the leaders realised that values can never be forced upon anybody. As super-wealthy parents, these leaders learnt that they could not force a value system on their children. Children learn values by observing, not listening. The same can be said for employees. The only way out for parents and corporate leaders is to live the values—to embody them in their behaviour as parents in the living room or as executive/non-executive leaders in the boardroom. When the leader embodies values, the rank and file of the organisation might also practise them. And that is good for employees and clients.
Good for the Consumer
With the individual in the family choosing their most desired career path, family businesses will be run either by a new generation family member or a hand-picked professional leader. In either scenario, the corporate gets a well-educated, well-informed, and incredibly motivated leader and this is reflected in the quality of product or service that reaches the end-consumer.
Good for the Shareholder
It is no secret that those who invest in any family business that is ethical and competent will always get wonderful returns in the long run. While this is true in every part of the world, Indian family-owned businesses deliver especially sterling results: Indian family-owned companies have delivered an average of 13.9% annual return since 2006 as compared to 6% return generated by their non-family-owned peers. A recent Credit Suisse study revealed that more than 50% of the top 30 best-performing family-owned companies in Asia, excluding Japan, are from India.
Family businesses tend to rely less on external funding, have an unwavering commitment to long-term growth, and are nimble and innovative. An underlying steely resolve to fend off any crisis with courage and integrity is, perhaps, their most enduring quality. That’s why a lot of the gilt-edged stocks in the markets belong to family businesses (17 of the 30 stocks that make up the Sensex are family businesses). It is not often that a family business will surprise the market with a shocking erosion in shareholder value. And those who invest in family businesses, too, tend to be stable investors. They demand value to be created over a decade or a generation, not a quarter. And that kind of thinking is required at the moment as we grapple with the challenges of global climate change.
Good for Society
Many growing entrepreneurs become charitable in no time at all. What is more difficult, and takes more time, is the desire to promote strategic philanthropy. A strategic philanthropist invests a lot of time, effort, and money in initiating, overseeing, and fine-tuning social change initiatives. A person who willingly invests so much of himself or herself into philanthropy must operate out of a mindset of abundance—in other words, this person will have no feelings of dearth or inadequacy whatsoever. While some exceptional first-generation entrepreneurs have this mindset of abundance and are spearheading strategically philanthropic projects, most others in this space are second-, third- or even fourth-generation entrepreneurs. Their families built a business empire over generations and now these families focus as much on the disbursement of wealth as on its creation. And with a proven history of endurance, these philanthropists exhibit the courage to think big and engage in long-term projects that usher in meaningful change over many generations.
Family businesses are the backbone of the global economy. To see the dominance of family businesses as a sign of concentration of wealth is to miss the point. While many individuals in this segment do enjoy extraordinary wealth, I have no doubt that this segment does a lot to preserve the integrity and harmony of society.
Views are personal.
The author is principal founder and managing director, Entrust Family Office.
This was originally published in the November issue of the magazine.