Investors don't care if a business is run by Lalaji or IIM whizkid, only returns matter!
Only 13% of family-run businesses survive till third generation and only 4% go beyond the third.
The report might have shaken up a few long-term investors, but not India’s promoter-run businesses, which are still in majority and dominant in the nation’s fledgling economy.
When the Tata saga broke out last year with the ouster of Tata Sons’ non-promoter chairman Cyrus Mistry and Infosys plunged into a crisis over management-promoter tussle a fortnight back, stock investors looked over the shoulders, but did nothing.
There have been instances, with erstwhile IT biggie Satyam being a shining one, where promoter-CEOs of businesses have illegally diverted funds and resources from successful enterprises to fund their ambitions, only to end up with the short end of the stick.
Indian investors and even market veterans still make no distinction between a promoter-run and professionally-managed company while choosing a stock.
What’s the guarantee that a professionally-managed company will deliver superior returns, asks Shrikant Akolkar, Senior Equity Research Analyst at Angel Broking.
Share price performance data and business matrix do not allow you to take your eyes off Indian promoter-run businesses. As many as 70 per cent of Indian companies with over $1 billion revenue are family-owned. One estimate showed 25 per cent of BSE100 companies are promoter run.
India’s most-valued firm Reliance Industries, a family-run enterprise, has doubled investor wealth in every 2.5 years ever since it went public. The No. 2 company by market capitalisation, Tata Consultancy Services (TCS), is managed by professionals but is considered promoter-controlled because of the overarching dominance of promoter entity Tata Sons. The stock has multiplied investor money year after year, rising some 350 per cent in last 10 years.
Professionally-managed businesses such as Motherson Sumi, Larsen & Toubro, HDFC and ITC have been leaders in wealth creation, with their stocks rising 1,560 per cent, 100 per cent, 343 per cent and 400 per cent, respectively, between August 2007 and August 2017.
PERFORMANCE OF TOP 30 COMPANIES
PROS & CONS
Family-run businesses have their share of advantages: High levels of motivation, strong values, agility and speed in decision making and deep insights into the business. They are more focussed on long-term growth, unlike a professionally-run entity where the managers would be desperate to show short-term gains in the interest of their own professional growth.
Problems occur when family-owned businesses get over-confident and seek to go overboard. Such tendencies have left once super-performers such as JP Associates, Jindal Steel and Power and Anil Ambani-led Reliance Group in a soup, as they ended up accumulating huge debt without commensurate business growth to take care of the liabilities.
Industry watchers say close-knit business families, which facilitate teamwork and where family values are strong and elders call the shots, often help foster better growth. Historically, family-owned businesses have shown a better track record in staying resilient for years, even in times of adverse economic conditions.
Decentralisation of business activities and methodological decision making are hallmarks of professionally-managed organisations, which tend to have set systems and are process-driven, and encourage collective efforts towards business expansion.
“A professional management with larger participation can bring in newer ideas, energies and thoughts, which can be invaluable for a company in dealing with everyday challenges,” said DK Aggarwal, Chairman and Managing Director, SMC Investments and Advisers.
Ashish Chugh, a Delhi-based investor known for success with smallcap stocks, says family-run businesses also need professionals with domain knowledge and experience to run an enterprise.
“In professionally-managed companies, many a times decisions are taken with short-term perspective, taking short cuts, just to make sure the company’s performance is good till the time the current team is around. The CEO’s own growth may take precedence over long-term growth of the business,” Chugh points out.
Lately, many Indian family-run businesses have looked beyond family members and founders to hire qualified and experienced professionals to manage their enterprises.
Pidilite is one example. The company moved into professional hands in 2015. Shares of the adhesive manufacturer have since jumped nearly 50 per cent in last two years. Pharma major Lupin did so many years back. Infosys has not been successful in first attempt, but looks keen on a shift.
“Family-owned businesses often face inherent difficulties with issues like succession planning, while professionally-run ones may face delay in decision making due to hierarchy,” said Aggarwal.
There are instances when succession issues have turned companies into battlefields, a la Atlas Cycles and Man Industries.
Where to invest?
Of the 30 top companies that figure in India’s equity benchmark Sensex, 10 are family run, and include big players such as Hero MotoCorp, Bharti Airtel, Kotak Mahindra Bank, Wipro and Bajaj Auto.
Market veterans do not show bias towards a stock basis whether a business is run by promoters or a professional management. They say instead of separating businesses on the lines of professional and promoter management, the criteria should be judge them in terms of capable and incapable management.
Family-owned businesses that have high involvement of capable promoters would do well, as they are fully responsible for maximising their wealth and, in that process, they would also maximise investor wealth, says Akolkar of Angel Broking.
The promoter’s vision and risk-taking ability is something that investors should analyse while giving high importance to governance standards, he said.
Akolkar says broadly, companies should be analysed on their management’s ability to perform business activities in tune with the changing business environment, which is what would differentiate a good business from bad businesses.
For Chugh, the best combination would be an owner-driven company with a professional setup, where long-term strategic decisions are made by the owner with inputs from and active participation of professional managers, and day-to-day running of the enterprise is left to a professional management. For this structure to succeed, the business has to be goal/target oriented.
Everyone agrees on one point, though. A professionally-managed company would be better than a family-owned business in protecting minority shareholders’ interest, says Akolkar.