Corporate governance in family owned businesses : Pre and post IPO scenario

Abstract

Family owned Businesses (FoBs) contribute to 60-70 percent of the GDP in most developing nations. So is the case with India as well. Hence the significance of such family owned or closely held businesses in the Indian economy cannot be emphasized more. These businesses face unique challenges due to the nature of ownership and control involved. Differences in attitudes, ego clashes between members of the same family and succession issues are just some of the problems faced by family owned businesses today. The most publicized example of succession feuds is Reliance Industries where a filed succession planning resulted in a bitter split in the family. It is in this context that corporate governance becomes of utmost importance. Besides solving succession challenges for the organization, corporate governance ensures that the interests of the minority shareholders are not compromised before the interests of the promoters. Most family businesses in India have become proactive and started implementing internal controls for two reasons. Not only would these controls serve as good guidelines but they implementing international best practices would also give the FoBs a good standing against competitors in the international arena. Family businesses evolve through various stages (Figure 1). A study of existing literature on family businesses measures in India has indicated that only 13 percent of family businesses manage to survive till the 3rd generation and only 4 percent till the 4th generation. One third of businesses end up getting disintegrated because of internal conflicts. This is exactly why corporate governance assumes importance in this context. In this study, we have compared and contrasted the corporate governance in family owned businesses in the post IPO scenario vis-à-vis the pre IPO scenario. We have taken a sample of 60- family owned businesses which have gone for an IPO in the past few years and analyzed critical elements such as evolution of board structure, changes in board independence, revenue streams for the promoters and so on. The main objective of this paper was to verify if corporate governance in family businesses change significantly after the IPO issue. Consequent to this, how do the dividend policies change and how it affects the revenue streams of the promoters. We have also attempted to build an Indian Corporate governance Index taking into consideration the various factors studied. We will also touch upon to check if corporate governance protects interests of the minority shareholders by bringing into action committees for regulation such as the Audit committee and Remuneration Committee.