Family owned businesses will help in Covid recovery, as they did during The Great Recession

Family owned businesses will help in Covid recovery, as they did during The Great Recession
Vaibhav Maloo
  • In India, family-managed businesses contribute almost 70% to the overall GDP.
  • During the global recession, family businesses were the driving force with sensible leverage and more.
  • As per a survey, only one-third (34%) of businesses cut dividends, and 31% family members took pay cuts.
The unprecedented challenge presented by the coronavirus pandemic has been an event of global awakening. It placed a huge question mark on all the economic and social systems that had been in practice until now, often invariably steered by shareholder primacy and short-term profit maximization. Today, the world needs action directed toward a more resilient, equitable and sustainable economic, societal and environmental model.

And the way corporates have responded to the pandemic has proved that a more principled management philosophy does exist. One particular form of organizational structure —family-owned businesses — when well governed and united around purposeful owners, possesses the right ingredients for a responsible business model.

In India, family-managed businesses contribute almost 70% to the overall GDP. Statistics also suggest that about 85% of India Inc companies are family businesses.

Winning back the trust

When the economy is on an upward curve, the potential of these family businesses and their immense contribution is often overshadowed by the growth of upcoming start-up culture and unicorns. However, in times of need, the strong fundamentals driven by the traditional values and ethics of these family-owned businesses rebounded to build back opportunities in a shattered economy.

During the global recession, these family businesses became the driving force for bringing back a damaged world economy on track as their commitment to values, long-term thinking and sensible leverage are what recoveries are based on.

The 10th Global Family Business Survey suggests that “in a world where capitalism is under fire and people are demanding more accountability, family businesses can help win back trust.”

The survey also indicates that family businesses have the capabilities required to hit the sweet spot where ethics converge with competence. To thrive in today’s corporate-dominated world, the young leaders of these family businesses will require to change the definition of legacy and invest more time and effort to keep up with the fast-paced technological advancements and significant innovations to stay relevant in the market.

Apart from this, to maintain the earned reputation of prioritizing people over profits, family businesses also need to take the leadership roles in creating more environmental, social and corporate governance (ESG) credentials where their profits are aligned with a purpose of giving back to the society.

Pandemic after-effects

During the COVID-19 pandemic waves and consecutive nationwide lockdowns, almost all major businesses faced losses and decline in sales. Although the same situation was encountered by family-managed businesses across the world, their resilience and robust people-first approach helped them handle things much more efficiently than the corporates.

According to the PwC Family Business Survey 2021, almost 46% of family businesses expected sales to decline during the pandemic. But about 86% of them also anticipated a return to pre-pandemic growth rates by 2022. These figures were optimistic considering when the survey was prepared no vaccines were authorized by the World Health Organization (WHO) for emergency use.

The survey also suggests that, out of the 2,801 respondents, only one-third (34%) of surveyed businesses cut dividends, and 31% family members took pay cuts. In totality, only one in five businesses needed to pump in extra capital; 15% of the owners had to use more cash, and a further 23% said that they are prepared for more such unforeseen circumstances.

As of 2022, 17 of the world’s top 500 family-owned businesses are headquartered in India, generating an annual revenue of $277.1 billion. These figures depict that similar to the 2009 global recession, family businesses will be the driving force to pull the Indian economy out of the COVID-19 gloom.

An intergenerational crisis

In a recent statement, Rajeev Chandrasekhar, Minister of State for Electronics & Information Technology and Skill Development & Entrepreneurship said that India suffered $150 billion to $200 billion economic loss due to lockdowns in the pandemic, but the country has emerged stronger despite the economic setbacks. The COVID-19 pandemic has revealed an intergenerational crisis and urgent need for a better model of capitalism.

The unprecedented challenges put forth by the ongoing pandemic have brought to light that our old systems are in an urgent need to be renewed. The global awakening shifts focus on the society’s demand for a more resilient and sustainable model of businesses to respond to the unforeseen future.

As of this year, 90% of all listed companies in India are family-owned businesses. It is now the responsibility of the next-gen entrepreneurs to make this number grow consistently so as to achieve the upward curve recovery the country needs to handle the pandemic blow effectively.

Under their leadership, from creating solidarity funds to support the employees and shareholders to contributing to third parties for helping those who support these businesses, several family-owned businesses stepped up and took charge for the welfare of the people during the lockdowns.

At a time when quarterly profits are prioritized by public companies, family businesses operate under generational legacy and believe in longevity. In the last 15 years, businesses that fall under the family universe grew at least 47% more than the others. This is the right strategy when it comes to recovering and maintaining the progress for exhibiting stronger performance.

Families that own businesses are directly responsible for contributing to the externalities and this demands a holistic ownership approach. This indicates that the ethics and long-term resilience people expect during a crisis and which family businesses wear as a badge of pride will be the blueprint for an all-round economic recovery.

High stakes

McKinsey research “The case for stakeholder capitalism” shows that a stakeholder business model can be profitable and more competitive in the long-term, optimizing the return for all stakeholders. The problem arises when these businesses start valuation. The world needs to be measured in a more inclusive and sustainable way, a framework that includes natural, social and human capital as opposed to the calculation of only financial progress.

The idea that ‘benefit of all is the benefit of a company’ needs to be imbibed so as to change the mindset and the philosophy of stakeholder responsibility.

In times of dire need, consumers look for support and tend to put their faith into businesses that keep the interests of the people ahead of their profits. Though, in monetary terms, family-owned businesses may not earn as much and as quickly as their private counterparts, they build a secure firm for the future generations to take forward which forms the basis of such businesses.
(The author is the MD of Enso Group)

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