Tuesday, October 07, 2008

Don’t worry pop, I’ll make sure I blow it all up!

From the Editor’s desk, come to you smashing strategies sons of owners have used to devastate family businesses
The reference is directly to the question of whether companies that are led by founders or their heirs perform better or worse than corporations whose reins are held by non-family CEOs, given the fact that globally, and even in India, there has been a propensity of cases with the likes of Bill Ford, Michael Dell, the Bajaj family, Ambanis, Ranbaxy, and many more sticking on hedgehog-like to the concept of not leaving family control. Consider this – 33% of US companies, a numbing 66% of the European economy, and closer home, a huge 52% of Nifty and a huger 57% of Sensex corporations are family run, with a high probability of having legacy CEOs!

Perhaps the most dramatic paper that electrifyingly shook age-old perceptions was the one presented in 2004 by stalwart professors Belen Villalonga (Harvard Business School) and Raphael Amit (Wharton), who analysed “all” Fortune 500 firms and proved unequivocally that not only do the stock returns of family firms consistently show higher levels of risk, but also that “when ‘descendants’ (of founders or founding families) serve as CEOs, firm value ‘is’ destroyed!” If one presumed that modern corporate governance norms were enough to mitigate the damage caused by family successors, Villalonga and Raphael prove further that descendant CEOs “destroy value whether or not the family has control-enhancing mechanisms.” While the most noted 2003 research by London Business School proffered that family businesses “risk their growth potential if they fail to recruit from outside,” most amusing was the Economist research at the turn of the century that commented how the death of a significant inside shareholder resulted in a shareholders’ wealth increase (“the larger the deceased’s shareholding, the bigger the subsequent rise!”). Strangely, this finding gets humungous support from the subsequent benchmark 2005 research paper titled ‘Firm Performance...In Family Managed Firms’ by David Hillier (Leeds) and Patrick McColgan (Aberdeen), which documents positive stock price increases to the “announcement of the sudden death of a company’s founder executive.” But more seriously, they also indisputably brought out how family CEO successions are almost always followed by dramatic declines in not only stock performance, but dangerously, even operating results!

Not surprisingly, the exits of family CEOs from family owned firms led to increases in operating performance, revenues, employment, stock value, but only if the new CEO being appointed was from outside the family! A fact vindicated a few years before in 2003 by the radical Pérez-González of Columbia Business School; and even by Professor Borokhovich of Cleveland University; and by Bath, Trygve, Schone of Institute of Social Research (Journal of Corporate Finance, 2005); Slovin (Louisiana University) and Sushka (Arizona University)... the list is so endless that it seems stupid to keep on repeating the same fact. Clearly, family firms not only should hire professional outside management at the top, but also need to most definitely ensure that the CEO is “NOT” appointed from the family.

So could excellently performing Indian firms like Infosys (with 17% promoter holding), Wipro (81% family holding and Premji at the helm), Bharti Airtel (61% with the Mittals), Hero Honda (55% with Munjals), Reliance Industries (51% promoter holding; Mukesh heading the business) etc be guilty of actually not giving to shareholders what they could actually have if they had had ‘non-family’ CEOs? Interestingly, unlike the west model, most of the above firms – with the Tata group standing as a mercurial example – have now employed extremely qualified outside CEOs for separate SBUs within the group! And those which haven’t? According to the exemplary BDO Stoy Hayward Survey, only around 10% of family-businesses globally survive past the 3rd generation. The world’s second richest individual Warren Buffet wrote in 1993 that “logically the most effective in ensuring first-class management” is a setup where the CEO is not from the owner-class! Is it any wonder that both he and his best friend, the world’s richest individual, Bill Gates, have confirmed that their descendants will “NOT” inherit their legacies? Hmm, perhaps I need a legacy before I even think about following them, eh

For Complete IIPM Article, Click on IIPM Article

Source :
IIPM Editorial, 2008
An IIPM and Professor Arindam Chaudhuri (Renowned Management Guru and Economist) Initiative

Read these article :-
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IIPM in Financial times (Print Version)
IIPM makes business education truly global (Print Version)
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