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Role of ID in Family business

The DNA of a family business is different from that of a normal corporate. A family business has a distinct promoter family, which not only participates in the running of the business, but also influences the culture of the company. The top management of such a company usually has family members, and the shareholding  pattern is also skewed in favour of the family members, and their dependents. The patriarch of the family is usually the Chairperson of the Board. There are a number of persons in management roles who are personally loyal to the family, in addition to being loyal to the business. A number of decisions therefore are likely to be influenced by the thought process of senior members of the family. There could also be situations where the top management positions are passed on from one generation to another.

This situation does not necessarily change when such a company lists on the Stock Exchanges. While processes might get defined as per law and regulations, the DNA, the culture and the importance of the family members does not reduce. Post the listing of such a company, the Board necessarily needs to induct Independent Directors (IDs), who are supposed to bring objectivity and an independent perspective to the decisions. While law and regulations do attempt to define independence, what matters ultimately is independence of thought and action. Some family businesses either end up getting “IDs” who are friends or known persons, but who meet the test of independence as per law and regulations. Some of them get truly independent IDs, since the promoter attaches importance to independence of thought. In the case of the former, most decisions would be as influenced by the promoter. However, for promoters that truly value IDs, the role that an ID can play is phenomenal. Some of these are

  1. Promote independence and objectivity: IDs tend to bring their independent perspective to discussions and the decision-making process. Unbiased views help in taking proper decisions.
  2. Aid in creating proper processes: For a family business to transition to a professional company requires setting up proper processes, which work independent of persons manning them. IDs help by suggesting and putting in place improved practices.
  3. Promote proper and healthy discussions in Board and committee meetings: With IDs being on the Board, each meeting is expected to follow due processes and procedures. Healthy discussions and opinion sharing too is promoted.
  4. Give comfort to institutional shareholders: Institutional shareholders are often comforted by a good quality Board, since they know that the interests of non-promoters too would be looked after. Also, the promoter would not unquestioned rights to take decisions which would favour only him/her.
  5. Give comfort to small shareholders: IDs are suppose to promote the interest of small / retail shareholders by ensuring that the management takes their concerns into account.
  6. Improve reputation of the company: A good quality Board goes a long way in promoting the reputation of the company.
  7. Promote professional managers: IDs interact with professional managers, and ensure that the company is run properly. They would also look at succession planning processes, compensation to top management etc, so that too much focus on only family members running the company can be avoided. IDs would promote the culture of getting the best person for a role, rather than focussing on having only family members. They would also play the role of mentors.

If a family wants its business to prosper or a long time, getting good and truly independent ID, would be an indispensable requirement.

Heeral Nichani