Promoters at Helm Can be Good for Companies

narayana murthyThe return of N R Narayana Murthy (NRN) at Infosys and his hiring of son Rohan as executive assistant have raised the hackles of every Tom, Dick and Harry. A riled ex-staffer even accused Murthy of breeding a culture of servility and creating yes men who will simply pay obeisance to the chairman. As if the concept needed to be introduced in the corporate world. The corporate jungle is full of creatures who will readily crawl when asked to bend. It is hard to comprehend why promoters, who have put money where mouth is, are bad for company while managers who have little at stake and always find another job if the company fails to perform are good for business. It is time for the critics of family-run business model took a second look. Ashutosh Misra explores.

The Harvard Business Review (HBR) carried out a study of 149 family-controlled publicly traded companies based in the US, Canada, France, Spain, Portugal, Italy and Mexico whose revenues were more than $1 billion. The study conducted in November 2012 compared them with companies from the same countries and sectors, of similar size but not family-controlled. The study compared the management style and its effect on performance. It was found that family-run companies did worse than those with a more dispersed ownership structure when the economy was doing well. But family businesses outperformed the other group when the economy was going through a slump. In fact, the family-controlled companies’ average financial performance in the long term was better than that of non-family group across business cycles in the period 1997-2009 in each of the country which was part of this study. The study concluded that family-run businesses preferred resilience to performance. They choose to give up excess returns which can be earned during the boom time so that their survival chances improve during an economic slump.

narayana murthy with children

According to a Deloitte report, 85 percent of Indian companies are run by families. The report quotes a magazine study that these businesses account for roughly 25 percent of India Inc’s sales, 32 percent of net profit, 18 percent of assets and 37 percent of reserves. Their financial contribution to the economy does not match their numbers. They need to upgrade their management system so that economic growth and their bottom line soars.

When it comes to the business of politics, India’s most successful political party, the Congress, has been an outperformer because it is run by a family. It has allowed professionals to run the show at centre and has retained it appeal among the voters. But the party has failed to replicate the model at the state level and paid the price. The state-level parties which are doing well are also all a one-man or one-family shows. Most of them have shown the professionalism of co-opting experts for managing the nitty-gritty or as advisers.

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