Perspectives from ISB

At the recently concluded Family Business Conclave organized by the ISB in Mumbai, several fund managers remarked that family businesses make for easy, stable and resilient investments. However, they also cautioned that funds are wary of investing in companies run by second-generation family owners. Funds tend to treat them with a degree of skepticism until they have proven to be as good at running the business as the first generation.

As suggested by Mr. Adi Godrej, during the conference, a sound mechanism of corporate governance is key to the long term sustainability of family-run enterprises. Family businesses typically have a dominant shareholder. This ownership concentration has its own advantages and disadvantages. The concentrated shareholder is able to monitor the business more effectively. However, it also increases his chances of siphoning away earnings at the cost of the smaller shareholders. As a result, conflicts between owners and managers, which plague widely-held firms, are often superseded by the conflict of interest between controlling and non-controlling shareholders. Hence sound corporate governance mechanisms are indispensable to inspire trust and credibility among investors.

Source: Forbes India Magazine, November 5, 2015

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