Fundamentals of Family Business Management.docx

Fundamentals of Family Business Management
Module-1
Introduction

Family business definition
A business actively owned and/or managed by more than one member of the same family.
Family business constitute the whole gamut of enterprises in which an entrepreneur or next-
generation CEO and one or more family members strategically influence the firm. They
influence it via their managerial or board participation, their ownership control, the strategic
preferences of shareholders, and the culture and values family shareholders impart to the
enterprise. Some of the world's largest family-run businesses are Walmart (United
States), Samsung Group (Korea) and Tata Group (India).

Evolution of family businesses
Family Business in India: A Historical Perspective (with example)
Family business in India had been in practice since long, of course, with its changing nature
and structure over the period. India enjoys a rich and glorious history of family-owned
business. The origin of family business in India is traced back to the bazaar system in the
ancient times.
Initially, family business in India started in the form of trading and money lending involving
the hustle and bustle of the bazaar. It was also confined to certain communities, notably the
Jains and Marwari’s especially in the northern India.
Its industry form is relatively of recent origin, going back largely to the British rule and the
First World War. Here is one such instance to it. Cawasji Davar set up the first cotton mill, or
say, the first manufacturing enterprise in Bombay (now Mumbai) in 1854.
Consequent upon this, some trading communities started textile mills in Mumbai and
Ahmedabad during the last half of the 19th Century. The trading communities emerged as
Aggarwals and Guptas in the North, the Chettiars in the South, the Parsees, Gujarati Jains and
Banias, Muslim Khojas and Memons in the West, and Marwari’s all over India. Nowadays,
Aggarwals are mostly referred to as Marwari’s. Here is an interesting legend of how Aggarwal
families emerged as most dominating and successful in business in India.
The Agrawals:
The Agrawals claim descent from the legendary king Agrasena of Agroha. According to the
legend, Agroha was a prosperous city and hundred thousand traders lived in the city during its
heydays. An insolvent community person as well as an immigrant wishing to settle in the city
would be given a rupee and a brick by each inhabitant of the city.
Thus, the person would have hundred thousand bricks to build a house and hundred thousand
rupees to start a new business. Gradually, the city of Agroha declined and finally gutted in a
huge fire. The residents of Agroha, i.e. the Agrawals, moved out of Agroha and spread to other
parts of India. In his book, ‘Agarwalon ki utpatti,’ Bhartendu Harishchandra categorized
Agrawals into four branches: Marwari’s, Deswal, Purabiya, and Pachihiye. Nowadays,
Agrawal families are mostly referred to as ‘Marwaris.’
Jamshedji Tata started his varied business enterprises like cotton mill in Nagpur, the Taj Hotel
in Mumbai, his famous steel plant in Jamshedpur, and several real-estate developments. These
enterprises, in turn, prompted other people to join the business foray. A number of families,
such as Birla’s, Bangurs, Khaitans and Goenkas started their business in Kolkata and developed
the city as a centre for commerce.

Initially family businessmen were engaged in small-size businesses requiring small
investments managed by themselves only. But, once they entered into manufacturing sector,
they felt the need for more and heavy investments not manageable by themselves.
At the same time, they also knew that once they allow someone to join business, their control
over management of the business will weaken which they, however, did not want. In such a
case, family businesses inducted their family members or relatives or friends in the business
by allotting them blocks of shares while making sure that the majority control and, in turn, the
management of the business remained with the promoting family itself.
This is how corporate management was born embedded by a combination of joint stock
principle and family control over business. Because stock markets were yet to gain sufficient
momentum, on the one hand, and the joint family system was also intact, on the other, business
families were holding control over their business empires built up through the ingenious device,
popularly known as the ‘managing agency system.’
The managing agency system continued till 1970 as an instrument of maintaining family
control over business enterprise. As such, all critical decisions about the business were taken
by the promoting families, euphemistically termed managing agents.
This system of corporate management got so rooted in due course of time that hardly any
industrial firm remained out of its orbit. In other words, this indicates that all businesses were
controlled and managed by a few families in the country.
R. K. Hazari, a well-known industrial economist, had concluded after an exclusive analysis
that most of the prominent industrial firms on the contours of Indian business during the 1950s,
were in the hands of just 18 Indian families and two British houses. However, the period of
1950s experienced certain changes with some developments shaking and disturbing the
business environment, in general, and family business, in particular.
The consequence was the earlier tranquil situation that the family business was enjoying
in the country got greatly disturbed especially by four major developments as mentioned
below:
1. With a resolution to accelerate the pace of economic development during the post-
Independence period to solve the problem of unemployment and poverty stalking the land, the
Government invited private sector to partake of new opportunities available for business and
industrial development, of course, amidst a myriad of restrictions imposed on the freedom of
enterprise.
2. The Governments, both at Central and State levels, set up various financial institutions to
provide finance to private sector enterprises in the country.
3. The joint family system, once the bedrock of the Indian social structure in India, started
experiencing severe strains and threats and, in turn, increasingly loosing, its place in the social
structure. For such a sorry state of situation, thanks to inter alia growing urbanization and ever
increasing westernization in the country.
4. The right of possession of private property and its inheritance has been one of the major
factors in encouraging family business in India.
In lump sum, these changes, in turn, caused changes in family business in the country. With
increase in the magnanimous size of infrastructural projects in the country, business families
were no longer capable enough to mobilize the required resources including finance from their
own resources.
As a result, financial control of business started gradually shifting from promoting families to
financial institutions. Also the business families started splitting and cracking. To quote, the
Dalmias were the first prominent business house in the country to break up after freedom.
The pace of splitting family businesses started accelerating in the country beginning with 1970
and since then, it has been increasingly growing. Business history is replete with increasing
number of families splitting in the country over the period.

Birla’s, Modis, Sarabhais, Bangurs, Singhanias, Mafatlals, Shrirams, Thapars, Walchands,
Goenkas and the most recently, the Ambanis are the illustrious family businesses in our country
who have experienced split in their businesses.
Nonetheless, it is worth mentioning that inspite of various changes like loosing financial
control over business and growing splits in businesses, the family control over management of
business still remains impaired in the hands of promoting families.
This is indicated by the fact that the management of as many as 461 out of 500 most valuable
companies is still under family control in our country. One of the significant changes in family
business in India is induction of professionals to manage the affairs of business. Tata’s, Birla’s,
Reliance, Wipro, and Murugappa Group are some of the illustrative family businesses
employing professional managers to look after the management issues of their businesses.
With increase in size of business has also led to increase in split in family businesses in the
country over the period. Goenka family and Ambani family are such examples of split in family
business in our times.
That the environment of family business in India has significantly changed over the
period is indicated as follows:
Earlier Presently
(a) Business as family
(b) Family wealth and prosperity
(c) Growth strategies
(d) Expansion and diversification
(e) Family succession planning for next
generation
(a) Family as business
(b) Shareholders’ value and prosperity
(c) Economic Value Added (EVA)
(d) Core and competitive competencies
(e) Planning for attraction and retention of
professionals

Dynamics of family business
Meaning of dynamics
The forces or properties which stimulate growth, development, or change within a system or
process.

The Full Circle of Family Business Dynamics
Developed by John A. Davis and Renato Tagiuri at Harvard University in 1982, the three-circle
family business systems model is an excellent illustration of family dynamics at work in a
family business. This model describes the family business as three independent, overlapping
subsystems.

Everyone involved in the family and the family business belongs to at least one of these
subsystems – and possibly more. Only family business owners and/or investors are in the owner
circle. Family members are in the family circle. Employees, regardless of whether they are a
family member, are in the business circle.
Some people within the family and the family business may belong in only one circle or
subsystem. Uncle Joe may be a family member but is not involved in the business. The business
may have a key employee, Jan, who is not a member of the family. And the family business
may have a non-family, non-employee investor in the owner circle.
What’s more likely, however, is that individuals belong to more than one subsystem, rendering
the family business dynamic much more complex than non-family businesses. Someone can
be a family member and an owner. Or an employee and a family member. Or an employee and
an owner but not a family member. And in many cases, an individual is an employee, an owner
and a family member all in one. As each member’s status changes throughout the
organization’s lifecycle, so does that member’s position within the model. Periodic review of
how the family business’s model changes over time can also provide insight into how each
member is growing within the organization.
Now, how is this model used? Davis and Tagiuri intended the model to help family businesses
identify and understand potential sources of conflict, roles, and how to determine boundaries.
It also helps a family organization visualize in a simple manner the various roles and
interactions their members have, as well as those members’ motivations and perspectives. And
it may also help in the development of a more effective succession plan.
In fact, understanding the family dynamic is essential for effective succession planning. That’s
because in a family business, succession issues are caused more often by family issues than by

business issues. The authors of “Correlates of Success in Family Business Transitions” found
that 60% of succession plans failed because of family relationship problems, and an additional
25% failed because heirs were not prepared to take over. Compare that to the paltry 10% of
failures due to inadequate formal estate planning, and you can begin to see the importance of
family dynamic in the success of family businesses.

Role of family businesses in the economy

Role in economy
 GDP growth
 Employment generation
 Social stability
 More socially responsible businesses
 Decentralization of economic power
 Increasing competition in the market [leads to innovation and better products and
competitive prices]
 Innovation

IMPORTANCE OF FAMILY BUSINESS
 Contributing to economic development : family business play crucial role in
economic development of most of the countries. Retail sector, small scale industry, and
service sector are owned by family business.
 Spirit of entrepreneurship : family business as contributes towards development and
has been successful in country like India it paves way to various families to initiate and
bring up new ventures in country.
 Philanthropy : family business in India along with their development have also
concentrated towards welfare of general public by investing on hospitals, educational
institutions, construction of roads etc. E.g. reliance.
 Trust Lowers transaction cost : partnership and other forms of business involving
outsiders usually leads to conflict in long run. In case of family business as all the
parties in family are affected by loss incurred in company do not involve any sought
of conflict and difference in point of view arises they try and solve it internally in the
family ensuring business is not affected by the same.
 Small, nimble and quick to react : as managing team size in family business is small
compare to other form of business decision making process involves less period of time
which helps to take timely decision.
 Information as source of advantage : as family business is private firm it is not
required to take decision in accordance with pressure from other sources and strategies
of business need not be revealed to outsiders of business.

Scale of family business ventures

Growth aims: The next 5 years
The last financial year’s growth story has generated optimism
for further growth in the medium term, although more for India companies than for the global
ones. Around 40% of Indian family businesses aspire to grow quickly and aggressively against
15% of the global average, in the next 5 years.
Constant upgrading of technology, re-invention of businesses pushed by a relatively higher
demand by consumers and an upward-looking economy may help these Indian companies meet
their goals. Besides, 49% of Indian family businesses aim to grow steadily. Only 9% of them
are looking to consolidate their business and none foresee shrinking of their business. The
global average is comparatively more conservative with 70% aiming
to grow steadily, 13% looking at consolidation and 1% even expecting shrinkage in the next 5
years.
Further, 98% of Indian family businesses predicting growth are confident of achieving it.

Module-2
Understanding the ownership and organization of family business

Business environment
Business environment is the sum total of all external and internal factors that influence a
business. In other words, business environment means all of the internal and
external factors that affect how the company functions including employees,
customers, management, supply and demand and business regulations.
IMPORTANCE OF BUSINESS ENVIRONMENT
1. (a) Determining Opportunities and Threats: The interaction between the business
and its environment would identify opportunities for and threats to the business. It
helps the business enterprises for meeting the challenges successfully.
2. (b) Giving Direction for Growth: The interaction with the environment leads to
opening up new frontiers of growth for the business firms. It enables the business to
identify the areas for growth and expansion of their activities.
3. (c) Continuous Learning: Environmental analysis makes the task of managers
easier in dealing with business challenges. The managers are motivated to
continuously update their knowledge, understanding and skills to meet the predicted
changes in realm of business.
4. (d) Image Building: Environmental understanding helps the business organisations
in improving their image by showing their sensitivity to the environment within
which they are working. For example, in view of the shortage of power, many
companies have set up Captive Power Plants (CPP) in their factories to meet their
own requirement of power.
5. (e) Meeting Competition: It helps the firms to analyse the competitors ‘strategies
and formulate their own strategies accordingly.
6. (f) Identifying Firm’s Strength and Weakness: Business environment helps to
identify the individual strengths and weaknesses in view of the technological and
global developments.

Internal environment
Internal environment includes all those factors which influence business and which are
present within the business itself. These factors are usually under the control of business.
These are-
(1) Value System-The value system of an organisation means the ethical beliefs that guide
the organisation in achieving its mission and objective. The value system of a business
organisation also determines its behaviour towards its employees, customers and society at
large. The value system of the promoters of a business firm has an important bearing on the
choice of business and the adoption of business policies and practices. Due to its value system
a business firm may refuse to produce or distribute liquor for it may think morally wrong to
promote the consumption of liquor.
The value system of a business organisation makes an important contribution to its success and
its prestige in the world of business. For instance, the value system of J.R.D. Tata, the founder
of Tata group of industries, was its self-imposed moral obligation to adopt morally just and fair
business policies and practices which promote the interests of consumers, employees,
shareholders and society at large. This value system of J.R.D. Tata was voluntarily
incorporated in the articles of association of TISCO, a premier Tata company.
(2) Mission and Objectives-Mission is defined as the overall purpose or reason for its
existence which guides and influences its business decision and economic activities.
The-choice of a business domain, direction of its development, choice of a business strategy
and policies are all guided by the overall mission of the company. For example, “to become a
world-class company and to achieve global dominance has been the mission of ‘Reliance
Industries of India’. Similarly, “to become a research based international pharma company”
has been stated as mission of Ranbaxy Laboratories of India. Thus a firm’s mission and
objectives guides its operations.

(3) Organisation Structure- Organizational structure is a system used to define a hierarchy
within an organization. It identifies each job, its function and where it reports to within
the organization.
Organisation structure means such things as composition of board of directors, the number of
independent directors, the extent of professional management and share -holding pattern. The
nature of organisational structure has a significant influence over decision making process in
an organisation. An efficient working of a business organisation requires that its organisation
structure should be conducive to quick decision making. Delays in decision making can cost a
good deal to a business firm.

(4) Corporate Culture and Style of Functioning of Top Management-Corporate culture is
generally considered as either closed and threatening or open and participatory. In a closed and
threatening type of corporate culture the business decisions are taken by top-level managers,
while middle level and work-level managers have no say in business decision making. There
is lack of trust and confidence in subordinate officials of the company and secrecy pervades
throughout in the organisation. As a result, among lower level managers and workers there
is no sense of belongingness to the company.
On the contrary, in an open and participatory culture, business decisions are taken at lower
levels of management, and top management has a high degree of trust and confidence in the
subordinates. Free communication between the top-level management and lower-level
managers is the rule in this open and participatory type of corporate culture. In this open and
participatory system, the participation of workers in managerial tasks is encouraged.
Closely related to corporate culture is the style of functioning of top management. Some top
managers believe in just giving orders and want them to be strictly followed without holding
consultations with lower level managers. This style of functioning is not conducive to the
adaptability and flexibility in dealing with the changing external environment of business.

(5) Quality of Human Resources- Quality of employees (i.e. human resources) of a firm is
an important factor of internal environment of a firm. The success of a business organisation
depends to a great extent on the skills, capabilities, attitudes and commitment of its employees.
Employees differ with regard to these characteristics.

(6) Labour Unions- Unions collectively bargain with top managers regarding wages, working
conditions of different categories of employees. Smooth working of a business organisation
requires that there should be good relations between management and labour union.

(7) Physical Resources and Technological Capabilities- Physical resources such as plant and
equipment, and technological capabilities of a firm determine its competitive strength which is
an important factor determining its efficiency and unit cost of production. R and D capabilities
of a company determine its ability to introduce innovations which enhance productivity of
workers.

External Environment
External environment includes all those factors which influence business and exist outside
the business. Business has no control over these factors

External environmental factors
Political - the current and potential influences from political pressures, political stability,
ideologies of party in power, war and conflicts, funding, grants and initiatives.
Economic - the impact of local, national and world economy, taxes, FDI, market and trade
cycles, seasonality/weather issues, GDP growth rate, per capita income etc.
Social - the ways in which changes in society affect the organisation, culture, beliefs,
ethnic/ethical/religious factors, consumer attitudes and opinions etc.
Technological - the effect of new and emerging technology
Environmental - local, national and world environmental issues, innovation, R&D etc.
Legal factors - the effect of legislation, companies act, competition act, consumer protection
act, laws of state, licences etc.

Different forms of family business

Family owned
business
Family owned
and managed
business
Family owned
and led
business
Family
business

TYPES OF FAMILY BUSINESS
 Family owned business : is a profit organization were number of voting shares, but
not necessarily majority of shares are owned by members of single extended family but
significantly influenced by other members of family.
 Family owned and managed business : is a profit organization were number of voting
shares, but not necessarily majority of shares are owned by members of single extended
family but significantly influenced by other members of family. In this business has
active participation by one family member in the top management of company so that
one or more family members have ultimate management control.
 Family owned and led company : is a profit organization were number of voting
shares, but not necessarily majority of shares are owned by members of single extended
family but significantly influenced by other members of family. In this business has
active participation by one family member in the top management of company so that
one or more family members have ultimate management control. But in this method
one member has major influence on business activities who in charge of regulating
activities of business and members of family business.

Ownership pattern of family business
Models/patterns of ownership in family businesses (source-: Harvard Business Review)

Owner/operator-the simplest model replicates the role of the founder – it keeps ownership
control in one person (or couple).

Partnership-two or more family members become owner-partners, Partnerships are unique in
that only leaders in the business can be owners and benefit financially from it.

Distributed-ownership is passed down to most or all descendants, whether or not they work
in the company

Nested-Various family branches agree to own some assets jointly and others separately. This
model – nested in the sense that smaller family ownership groups sit inside larger ones – is
particularly attractive when conflict or differences in preferences interfere with decision-
making on shared assets. For the nested model to work, the family runs the core business as a
profit-making operation and distributes relatively large dividends to the branches, which then
use the money to create their own business portfolios. The nested model can effectively reduce
tension among branches while keeping the family together as a whole. There’s a risk, however,
of under-funding the core business to finance the outside investments.

Public-least a portion of the shares are publicly traded, or where a family business behaves
like a public company even though it remains privately held. Whether shares are publicly
traded, or not, the business is run by professional managers, and the owners play a minimal
role, usually limited to electing board members. Otherwise, they either support the direction of
management or sell their shares. This model works well when the business requires a
significant infusion of outside capital, or when owners are too numerous, dispersed, or
disinterested to be engaged actively in decision-making

Meaning of Hindu undivided family under Hindu law
It is defined under the Hindu Law as a family that consists of all persons lineally descended
from a common ancestor, including wives and unmarried daughters. This means membership
of a HUF does not come from a contract but from status of the person in such families.
A HUF cannot be formed by a group of people who do not constitute a family. Lineal
descendants with a common ancestor is a must.

MEANING OF JOINT HINDU FAMILY
A business, which continues from one generation tom another generation is known as joint
Hindu family business or firm. This is special form of business organization, which now exists
only in India. And the business is within the family. The head of the family is the head of the
business also. He is known as “karta” and the members are known as “co- parceners”. Joint
Hindu Family is governed by the Mitaksara Law.
A Hindu joint family consists of the common ancestor and all his lineal male descendants upto
any generation together with the wife/ wives (or widows) and unmarried daughters of the
common ancestor and of the lineal male descendants. Whatever the skeptic may say about the
future of the Hindu joint family, it has been and is still the fundamental aspect of the life of

Hindus. A co-parcenery is a narrow body of persons within a joint family. It exclusively
consists of male members. A Hindu coparcenery is a corporate entity, though not incorporated.
A coparcenery consists of four successive generations including the last male holder of the
property. The last male holder of the property is the senior most member of the family.
In the entire Hindu joint family, the karta or manager (the English word manager is wholly
inadequate in understanding his unique position) occupies a very important position. Karta is
the eldest male member of the family. He is the Hindu patriarch. Only a coparcener can become
Karta. Such unique is his position that there is no office or any institution or any other system
of the world, which can be compared with it. His position is sui generis i.e. of his own kind or
peculiar to himself. Peculiarity lies in the fact that in terms of his share/interest, the Karta is
not superior and has no superior interests in the coparcenery. If partition takes place he is
entitled to take his share. He is a person with limited powers, but, within the ambit of his sphere,
he possesses such vast powers as are possessed by none else. His position is recognized
/conferred by law. No stranger can ever be qualified to be a karta, but an adopted son who is
the eldest in the family can be qualified.

ADVANTAGES OF JOINT HINDU FAMILY

1. Easy formation: -
Formation of Joint Hindu family is very easy. Because it does not require any legal formalities
to form. It comes into existence under the Hindu succession Act 1956.
2. Quick decisions and prompt action: -
The Karta is the sole manager of the business and head of the family. He need not consult any
one before taking any decisions. Therefore, he can take quick decisions and prompt actions
3. Flexibility in operation: -
The management is in the hands of the Karta. He takes the decisions according to the changing
circumstances. He can expand or contracts his business at his convenience. He enjoys
maximum flexibility in operation.

4. Business Secrecy: -
A joint Hindu family business can maintain business secrecy. Because they need not have to
publish there’s any account to any outsider of the family.

5. Continuity of business: -
Joint Hindu family business does not dissolve due to death of Karta. Because a minor members
that is a co-parceners can become a karta after the death of the Head of the family
6. Minimum Government regulations: -
Though the Hindu undivided Family is the result of Hindu Law, there is least Government
control over Hindu undivided Family because the business are conducted by the family
members itself so they no need to publish any accounts and reports to any outsiders.
7. Limited liability of co-parceners: -
The Co-parceners enjoy limited liability. The liability of the co-parceners is limited to the
extent of the shares in the family business. However, the liability of the Karta is unlimited.

JOINT HINDU FAMILY BUSINESS
It is a form of commercial organization where a business is owned by the members of a
Hindu Family living jointly. When the business continues from one generation to another in a
Hindu family it becomes a Joint Hindu Family Business. A business where a person becomes
a member only by virtue of birth in the Hindu family is called ‘Joint Hindu Family Business’

The Joint Hindu Family Business is a distinct form of business organization existing only in
India. It is an enlarged form of sole trading concern. The business comes into existence by
the operation of the Hindu Law.

Here the head of the family manages the business. He is known as ‘Karta’ and has unlimited
liability. The inheritors of the Joint Hindu Family Business are called ‘Co – parceners’. Their
liability is limited.

Properties Act, 1937:

The act has given same rights to a widow as that to a male owner. She too can participate in
the business and can demand partition.

Hindu Successive Act, 1956:

The act extends the line of co – parcency interest to the female members born in a Joint
Hindu Family

Features / Characteristics of Joint Hindu Family Business:

The features of a Joint Hindu Family Business are:

1. Limited Capital:

The business has to depend upon the savings of the family (Karta and Co – parceners).
Borrowing is possible from banks, friends and relatives but again the amount would be
limited.

2. Limited Liability of ‘Co – parceners’:

The liability of the ‘co – parceners’ is limited to the extent of their share in the family
business i.e. their private property cannot be used to pay the debts of the firm.

3. Unlimited Liability of ‘karta’:

The liability of the ‘karta’ is unlimited i.e. if the assets of the business are insufficient to pay
the debts of the firm, karta’s private property can be used to pay off the debts.

4. Joint Ownership:

The business is jointly owned by all the members of a Joint Hindu Family.

Three successive generations can inherit the business by reason of their birth in the family.

5. Sole Management and Control of ‘Karta’:

The head of the family is known as ‘karta’. He is the sole manager of the business. It is he
who controls the business. He has the right to enter into contracts on behalf of the other
members.

The ‘co – parceners’ have no right to interfere in the activities of the karta. But if they
disapprove of his activities they can demand partition of the family business.

6. Flexibility of Operations:

This type of business offers a good deal of flexibility in business operations. The karta can
expand or contract the business, change the line of business or even close down the business
if the situation so demands. The co – parceners normally agree with the karta in business
decision.

7. Continuity and Stability:

This form of business is not dissolved due to the death, insanity or insolvency of a ‘co –
parcener’ or of the ‘karta’. The business is continuous in nature and stable in existence.

8. Business Secrecy:

There is a great deal of business secrecy in the organization. The business secrets are known
to the ‘co – parceners’ in general and ‘karta’ in particular.

9. Minimum Government Regulation:

The business is subjected to least government regulations. Government has not laid any rules
and regulations over its working. There are hardly and rules and regulations over expansion
and closure of the business.

10. Quick Decision Making:

Quick decisions and prompt actions are possible in this type of business as all the powers are
in the hands of ‘karta’ and he is under no obligations to consult co – parceners.

11. Limited Managerial Skills:

The ‘karta’ and the ‘co – parceners’ may lack the necessary managerial skills that are
required in today’s competitive business world. It may also not be possible to appoint a
specialist because of limited funds and limited nature of business.

12. Local Area of Operations:

Joint Hindu Family Business are confined to a limited local area because of limited capital
and limited business skill.

13. Lack of Economies of Scale:

Due to limited scale of operation, bulk buying and selling is normally not possible. Thus the
business may not be able to obtain economies of scale.

14. Weak Bargaining Power:

A Joint Hindu Family purchases goods or raw – materials on a small scale from wholesalers
leading to weak bargaining power. Secondly, they may not have the skills of bargaining.
Thus they may not be able to obtain competitive terms.

15. Close Contact with Customers:

Karta and the co – parceners have close contacts with the customers. Close contract with
customers help them to know their likes, dislikes, taste and preferences and to serve them
accordingly.

16. Close Contact with Employees:

Karta and the co – parceners have close contacts with the employees. Close contact with
employees helps in avoiding frictions and conflicts and leads to better relations.

17. No Legal Status:

Like sole trading concern, Joint Hindu Family Business lacks legal status. Registration of this
type of business is not compulsory. The members and the firm do not have separate legal
entity.

18. No Maximum Limit to Membership:

There is no maximum limit to membership in this type of business. Membership depends
upon the births and deaths in the family.

19. Business Dominated by Male Members:

This type of business is dominated by male members of the family. Normally, female
members do not take part in the Joint Hindu Family Business.

20. Division of Labour:

In a Joint Hindu Family Business, work is divided according to the skill and aptitude of the
co – parceners. This leads to specialization and division of labour. Every co – parcener will
work in the area in which he is good at.

Limited Capital, Joint Ownership, Flexibility of operations, Continuity and Stability etc. are
the features of a Joint Hindu Family Business.

Merits / Advantages of Joint Hindu Family Business:

The merits of a Joint Hindu Family Business are:

1. Limited Liability of Co – parceners: as in features point 2

2. Flexibility of Operations: as in features point 6

3. Continuity and Stability: as in features point 7

4. Business Secrecy: as in features point 8

5. Minimum Government Regulation: as in features point 9

6. Quick Decision Making: as in features point 10

7. Close Contact with Customers: as in features point 15

8. Close Contact with Employers: as in features point 16

9. No Maximum Limit to Membership: as in features point 18

10. Division of Labour: as in features point 20

11. Efficiency and Economy:

As the karta and the co – parceners are themselves involved in the business overheads cost is
less which brings in efficiency. All kinds of wastages and undesirable expenses are also
minimized which leads to economy.

12. Socially Desirable:

It is socially desirable business as it looks after the interest of the disabled, old and widows in
the family.

13. Goodwill:

Due to personal contacts with customers and employees a Joint Hindu Family Business
enjoys goodwill in the market which helps in generating higher sales to the business.

Flexibility of operations, continuity and stability, business secrecy etc. are the merits of a
Joint Hindu Family Business.

Demerits / Disadvantages of Joint Hindu Family Business:

The demerits of a Joint Hindu Family Business are:

1. Limited Capital: as in features point 1

2. Unlimited Liability of Karta: as in features point 3

3. Limited Managerial Skills: as in features point 11

4. Lack of Economies of Scale: as in features point 13

5. Weak Bargaining Power: as in features point 14

6. No Legal Status: as in features point 17

7. Business Dominated by Male Members: as in features point 19

8. Family Disputes:

Since this is a family business there may be continuous disputes amongst ‘co – parceners’ or
‘karta’. These continuous disputes may affect the continuity of the business.

9. Cautious Approach:

The karta may adopt a cautious approach in taking business decision as his liability is
unlimited. He may not take risky but profitable business decision.

10. Problem of Total Authority:

As far as business decisions are concerned, the karta enjoys total authority. Thus there is a
possibility that the karta may misuse the authority vested in him.

11. Problem in Distribution of Profits:

There may be a problem in distribution of profits. Some co – parceners may demand higher
share due to their higher efforts.

12. Generates Inefficiency:

As there is no direct relationship between efforts and rewards in this organization it may
result in inefficiency of the co – parceners. An efficient and an inefficient co – parcener share
the fruits of the business equally.

13. Cautious Approach of Karta: as features

Limited Capital, Hasty decision making, limited managerial skills, lack of economies of scale
etc. are the demerits of a Joint Hindu Family Business.

Karta

Article 236 of the Mulla Hindu Law defines "Karta" as follows:
Manager - Property belonging to a joint family is ordinarily managed by the father or other
senior member for the time being of the family: The Manager of a joint family is called Karta.

In a HUF, the responsibility of Karta is to manage the HUF property. He is the custodian of
the income and assets of the HUF. He is liable to make good to other family members with
their shares of all sums which he has misappropriated or which he spent for purposes other than
those in which the joint family was interested. His role is crucial. He is entrusted not only with
the management of land/assets of the family but also is entrusted to do the general welfare of
the family .

His position is different from the manager of a company or a partnership. The reason behind it
is that though the coparcenery deals with lands, assets/property but in an entirely different
fashion. When a Karta is bestowed with such a position it is something, which takes place
under the operation of law.

There are two schools of Hindu Law. They are:
Dayabhaga School in West Bengal
Mitakshara School in Rest of India
Who Can Be A Karta?
# Senior Most Male Member: - It is a presumption of Hindu law, that ordinarily the senior
most male member is the Karta of the joint family.
Jandhayala Sreeamma v. Krishnavenamma AIR 1957 A.P.434
In the case of Hindu Joint Family a suit to set aside on alienation filed by the younger of the
two brothers within three years of his attaining majority would be barred by limitation if the
elder brother, who was the manager and an adult has failed to sue within three years of his
attaining majority.
The senior most male member is Karta by virtue of the fact that he is senior most male member.
He does not owe his position to agreement or consent of other coparceners. So long as he is
alive, may be aged, infirm, or ailing, he will continue to be Karta. Even a leper may continue
to be the Karta1. However, in cases of insanity or any other disqualifications, the next senior
male member generally takes over the Kartaship. Once this is done the former will cease to be
a karta.
So long as the father is alive, he is the karta. After his death it passes to the senior most male
member, who may be the uncle, if coparcenery consists of uncles and nephews, or who may
be the eldest brother, if coparcenery consists of brothers.

# Junior Male Member
In the presence of a senior male member, a junior male member cannot be the Karta. But if all
the coparceners agree, a junior male member can be a Karta. Coparceners may withdraw their
consent at any time.

"So long as the members of a family remain undivided the senior member is entitled to manage
the family properties including even charitable property and is presumed to be the manager
until the contrary is shown. But the senior most member may give up his right of management
and a junior member may be appointed as manager."

Narendrakumar J Modi v. CIT 1976 S.C. 1953
Facts: - Baplal Purushottamdas Modi was the head of the HUF. Joint family possesses many
immovable properties and carried business of various types such as money lending, etc. He
executed a general power of attorney in favor of his 3rd son, Gulabchand on Oct 5, 1948. On
Oct 22, 1954 Baplal relinquished his share. On Oct 24, 1954 the existing members of the family
executed a memo of partition. However, the order accepting partition was not passed, the
contention of the appellant was that Gulabchand couldn’t be a karta because he is a junior
member and other members of the family did not accept him as a karta.
Judgment: - It was held that Gulabchand was given the power to manage by Baplal because
Gulabchand’s elder brother was an aged man of 70 years. And also the father of appellant died
in 1957. So, under such circumstances, Gulabchand appears to have acted as the Karta with the
consent of all the other members and hence the appeal was dismissed.

# Female Members As Karta
The concept of a “manager” of a Joint Hindu Family has been in existence for more than two
thousand years or more. Courts in India have given diverse views: -
C.P. Berai v. Laxmi Narayan AIR 1949 Nag 128
It was held that a widow could be a karta in the absence of adult male members in the family.
It was said that the true test is not who transferred/incurred the liability, but whether the
transaction was justified by necessity.

Sushila Devi Rampura v. Income tax Officer AIR 1959 Cal
It was held that where the male members are minors, their natural guardian is their mother. The
mother can represent the HUF for the purpose of assessment and recovery of income tax.

Radha Ammal v. Commissioner of Income Tax AIR 1950 Mad 588
It was held that since a widow is not admittedly a coparcener, she has no legal qualification to
become a manger of a JHF.

Commissioner of Income Tax v. Seth Govind Ram AIR 1966 S.C. 2
After reviving the authorities it was held that the mother or any other female could not be the
Karta of the Joint Family. According to the Hindu sages, only a coparcener can be a karta and
since females cannot be coparceners, they cannot be the Karta of a Joint Hindu Family.

The above views seem to be rigid. Rigidity in law is a fatal flaw. Since it is depended upon an
ill directed question whether the transferor was a coparcener.
Dharmashastra is one and only sure guide. According to Dharmashastras, in absence of male
members female members can act as karta, or in case where male members if present are
minors, she can act as karta. Debts incurred even by female members under such circumstances
will be binding upon the family and must be paid out of the joint family funds whether at the
time of partition or earlier. Often the question is raised as to whether her acts are for the benefit
of the family. Dharmashastra answers it by saying that she might act as manager by doing acts
of positive benefit and not merely conservative/negative acts.
"The position according to the Mitakshara theory as developed by Vijnaneshwara seems to be
this, that a wife gets rights of ownership of her husband's separate and joint family property
from the moment of her marriage and a daughter from the moment of her birth. But
Vijnaneshwara does make a distinction between males and females and says that females are
asvatantra or unfree. If we are to translate his notion into the language of the coparcenary, I
think we can state that women are coparceners but 'unfree' coparceners."

Prior to 1956, Hindus were governed by property laws, which had no coherence and varied
from region to region and in some cases within the same region, from caste to caste.

The Mitakshara School of succession, which was prevalent in most of North India, believed in
the exclusive domain of male heirs. Mitakshara is one of the two schools of Hindu Law but it
prevails in a large part of the country. Under this, a son, son’s son, great grandson and great
grandson have a right by birth to ancestral property or properties in the hands of the father and
their interest is equal to that of the father. The group having this right is termed a coparcenary.
The coparcenary is at present confined to male members of the joint family.

In contrast, the Dayabhaga system did not recognize inheritance rights by birth and both sons

and daughters did not have rights to the property during their father’s lifetime. At the other
extreme was the Marumakkattayam law, prevalent in Kerala, which traced the lineage of
succession through the female line.
According to Hindu Minority and Guardianship Act, 1956 woman can take only a conservative
action. It is certain that guardian acting under the act cannot undertake every class of
proceeding that would be open to a manager. Act does not purport to confer upon the guardian
the power of manager.

Former Prime Minister Jawaharlal Nehru championed the cause of women’s right to inherit
property and the Hindu Succession Act was enacted and came into force on June 17, 1956.

Many changes were brought about that gave women greater rights but they were still denied
the important coparcenary rights. Subsequently, a few States enacted their own laws for
division of ancestral property.

In what is known as the Kerala model, the concept of coparcenary was abolished and according
to the Kerala Joint Family System (Abolition) Act, 1975, the heirs (male and female) do not
acquire property by birth but only hold it as tenants as if a partition has taken place. Andhra
Pradesh (1986), Tamil Nadu (1989), Karnataka (1994) and Maharashtra (1994) also enacted
laws, where daughters were granted ‘coparcener’ rights or a claim on ancestral property by
birth as the sons.

In 2000, the 174th report of the 15th Law Commission suggested amendments to correct the
discrimination against women, and this report forms the basis of the present Act.
Discrimination against women was the key issue before the Law Commission.

The amendment made in 2005 gives women equal rights in the inheritance of ancestral wealth,
something reserved only for male heirs earlier. It indeed, is a significant step in bringing the
Hindu Law of inheritance in accord with the constitutional principle of equality. Now, as per
the amendment, Section 6 of the Hindu Succession Act, 1956 gives equal rights to daughters
in the Hindu Mitakshara coparcenary property as the sons have. The amendment was made
because there was an ur gent need for certainty in law.

Though the 2005 amendment gives equal rights to daughters in the coparcenery. An important
question is still unanswered whether women or daughters can be allowed to become managers
or karta of the joint family. The objection to this issue of managing a joint family as visualized
is that daughters may live away from the joint family after their marriage but it is well
appreciated that women are fully capable of managing a business, taking up public life as well
as manage large families as mothers. Another doubt being considered is that as managers of
their fathers' joint family they could be susceptible to the influence of their husbands or
husbands' families.

Position of karta
The position of karta is sui generis. The relationship between him and other members are not
that of principal/agent/partners. He is not like a manger of a commercial firm. Needless to say
he is the head of the family and acts on behalf of other members, but he is not like a partner,
as his powers are almost unlimited. Undoubtedly, he is the master of the grand show of the
joint family and manages all its affairs and its business. His power of management is so wide
and almost sovereign that any manager of business firm pales into insignificance. The karta

stands in a fiduciary relationship with the other members but he is not a trustee.

# Ordinarily a Karta is accountable to none. Unless charges of fraud, misrepresentation or
conversion are leveled against him. He is the master and none can question as to what he
received and what he spent. He is not bound for positive failures such as failure to invest, to
prepare accounts, to save money.

# Karta may discriminate i.e. he is not bound to treat all members impartially. He is not bound
to pay income in a fixed proportion to other members. Even if he enters such an agreement
/arrangement, he can repudiate the same with impunity.

However large powers a karta might have, he cannot be a despot. He has blood ties with other
members of the family. After all he is a person of limited powers. He has liabilities towards
members. Any coparcener can at any time ask for partition. He obtains no reward for his
services and he discharges many onerous responsibilities towards the family and its members.
His true legal position can be understood only when we know the ambit of his powers and
liabilities.

Karta’s Liabilities
Karta’s liabilities are numerous and multifarious.
# Maintenance
In a joint Hindu family, the right of maintenance of all the coparceners out of the joint family
funds is an inherent right and an essential quality of the coparcenery. As Mayne puts it: Those
who would be entitled to share the bulk of property are entitled to have all their necessary
expenses paid out of its income. Every coparcener, from the head of the family to the junior
most members, is entitled to maintenance. A Karta is responsible to maintain all members of
the family, coparceners and others. If he improperly excludes any member from maintenance
or does not properly maintain them, he can be sued for maintenance as well as for arrears of
maintenance.

# Marriage
He is also responsible for the marriage of all unmarried members. This responsibility is
particularly emphasized in respect of daughters. Marriage of a daughter is considered as a
sacrosanct duty under Hindu law. Marriage expenses are defrayed out of joint family funds.

Chandra Kishore v. Nanak Chand AIR 1975 Del 175
In this case it was held that Karta is responsible for managing the expenses of the marriage of
the daughter from the joint family estate. And in case marriage expenses are met from outside
they are to be reimbursed from the joint family funds.

# Accounts at the time of Partition
Partition means bringing the joint status to an end. On partition, the family ceases to be a joint
family. Under the Mitakshara law, partition means two things: -
(a) Severance of status /interest, and
(b) Actual division of property in accordance with the shares so specified, known as partition

by metes and bounds.
The former is a matter of individual decision, the desire to sever himself and enjoy the
unspecified and undefined share separately from others while the latter is a resultant
consequent of his declaration of intention to sever but which is essentially a bilateral action.
Taking of accounts means an enquiry into the joint family assets. It means preparing an
inventory of all the items of the j oint family property.
The Mitakshara Karta is not liable to accounts and no coparcener can even at the time of
partition, call upon the karta to account his past dealings with the joint family property unless
charges of fraud, misappropriation/conversion are made against him.

Ghuia Devi v. Shyamlal Mandal AIR 1974 Pat 68
Facts: - Gokul Mandal was the common ancestor of the family, he had 2 sons: - Gobardhan
and Ghoghan. After Gokul’s death Gobardhan was the karta of the family. Shyamlal and Kisan
are the sons of Gobardhan. Shyamlal, defendant no.1 is the husband of the plaintiff. In 1951,
partition took place between two branches: Shyamlal and Ghoghan. After partition, Shyamlal
began to act as karta of the family consisting of the members of Gobardhan’s branch. Appellant
is a pardanashin lady. Shyamlal took advantage of her position and misappropriation of
property and its income and as a result of it a suit was filed. Plea of appellant was that their
client was entitled to a decree for accounts. Their plea was rejected because they could adduce
no evidence.

Judgment: - In the suits for partition of a Joint Hindu Family property the manager/karta can
only be made liable for revaluation of account if there is a proof of misappropriation /fraud and
improper conversion of joint family assets and property. It was said that in the absence of such
a proof a coparcener seeking partition is not entitled to require the manager to account for his
past dealings with the joint family property.

However, when a coparcener suing for partition is entirely excluded from the enjoyment of
property he can ask for accounts.

After the severance of status has taken place, the karta is bound to render accounts of all
expenditure and income in the same manner as a trustee or agent is bound to render accounts.
This means that from the date of severance of status, the karta is bound to account for all mesne
profits.

# Representation: - The karta represents the family. He is its sole representative vis-a vis the
government and all outsiders and in that capacity he has to discharge many responsibilities and
liabilities on behalf of the family. He has to pay taxes and other dues on behalf of the family
and he can be sued for all his dealings on behalf of the family with the outsiders.

Powers of Karta
When we enumerate the powers of karta, the real importance of his legal position comes into
clear relief. His powers are vast and limitations are few. The ambit of his powers can be
considered under two heads: - (a) power of alienation of joint family property, (b) other powers.
In the former case, his powers are limited since a karta can alienate in exceptional cases. In the
latter case his powers are large, almost absolute.
First we will discuss the other powers.

Other powers

# Powers of management
As the head of the family, karta’s powers of management are almost absolute. He may mange
the property of the family, the family affairs, the business the way he likes, he may mismanage
also, nobody can question his mismanagement. He is not liable for positive failures. He may
discriminate between the members of the family. But he cannot deny maintenance
/use/occupation of property to any coparcener. The ever-hanging sword of partition is a great
check on his absolute powers. Probably, the more effective check is the affection and the
natural concern that he has for the members of the family and the complete faith and confidence
that members repose in him.

# Right to income
It is the natural consequence of the joint family system that the whole of the income of the joint
family property, whosoever may collect them, a coparcener, agent or a servant, must be handled
over to the karta .It is for the karta to allot funds to the members and look after their needs and
requirements.

The income given to the karta is an expenditure incurred in the interest of the family.
Jugal Kishore Baldeo Sahai v. CIT (1967) 63 ITR 238
In the present case, both the members of the Hindu undivided family, who were the only
persons competent to enter into an agreement on its behalf, considered it appropriate that the
karta should be paid salary at the rate of Rs. 500/- per month for looking after its interest in the
partnership in which it had a substantial interest because its karta was a partner therein as its
representative, and entered into an agreement to pay salary to him for the services rendered to
the family. The ratio of the above decision is, therefore, applicable to the present case.
Accordingly, the salary paid to him has to be held to be an expenditure incurred in the interest
of the family .The expenditure having been incurred under a valid agreement, bonafide, and in
the interest of and wholly and exclusively for the purpose of the business of the Hindu
undivided family, is allowable as a deductible expenditure under section 37(1) of the Indian
Income Tax Act, 1922 in computing the income of the Hindu undivided family.

# Right to representation
The karta of a joint family represents the family in all matters- legal, social, religious. He acts
on behalf of the family and such acts are binding on the family. The joint family has no
corporate existence; it acts in all matters through its karta. The karta can enter into any
transaction on behalf of the family and that would be binding on the joint family.

Dr. Gopal v. Trimbak AIR 1953 Nag 195
In this case, it was held that a manager/karta can contract debts for carrying on a family
business/ thereby render the whole family property including the shares of the other family
members liable for the debt. Merely because one of the members of the joint family also joins
him, it does not alter his position as a karta.

# Power of Compromise
The karta has power to compromise all disputes relating to family property or their
management. He can also compromise family debts and other transactions. However, if his act
of compromise is not bonafide, it can be challenged in a partition. He can also compromise a

suit pending in the court and will be binding on all the members, though a minor coparcener
may take advantage of O.32, Rule 7 C.P.C., which lays down that in case one of the parties to
the suit is a minor the compromise must be approved by the court.

# Power to refer a dispute to arbitration
The karta has power to refer any dispute to arbitration and the award of the arbitrators will be
binding on the joint family if valid in other respects.

# Karta’s power to contract debts
The karta has an implied authority to contract debts and pledge the credit of the family for
ordinary purpose of family business. Such debts incurred in the ordinary course of business are
binding on the entire family. The karta of a non-business joint family also has the power to
contract debts for family purposes. When a creditor seeks to make the entire joint family liable
for such debts, it is necessary for him to prove that the loan was taken for family purposes, or
in the ordinary course of business or that he made proper and bona fide enquiries as to the
existence of need. The expression family purpose has almost the same meaning as legal
necessity, benefit of estate, or performance of indispensable and pious duties.

# Loan on Promissory note: - When the karta of a joint family takes a loan or executes a
promissory note for family purposes or for family business, the other members of the family
may be sued on the note itself even if they are not parties to the note. Their liability is limited
to the share in the joint family property, though the karta is personally liable on the note.

# Power to enter into contracts: - The karta has the power to enter into contracts and such
contracts are binding on the family. It is also now settled that a contract, otherwise specifically
enforceable, is also specifically enforceable against the family.

Power of alienation
Although no individual coparcener, including the karta has any power to dispose of the joint
family property without the consent of all others, the Dharma Shastra recognizes it. That in
certain circumstances any member has the power to alienate the joint family property. The
Mitakshara is explicit on the matter. According to Vijnaneshwara:
....even one person who is capable may conclude a gift, hypothecation or sale of immovable
property, if a calamity (apatkale) affecting the whole family requires it, or the support of the
family (kutumbarthe) render it necessary, or indispensable duties (dharmamarthe), such as
obsequies of the father or the like, made it unavoidable.

The formulation of Vijnaneshwara has undergone modification in two respects: -
# The power cannot be exercised by any m ember except the karta.
# The joint family property can only be alienated for three purposes: -
(a) Apatkale (Legal Necessity)
(b) Kutumbarthe (Benefit of Estate)
(c) Dharmamarthe (Religious obligations)

(a) Legal Necessity
It cannot be defined precisely. The cases of legal necessity can be so numerous and varied that
it is impossible to reduce them into water –tight compartments. Loosely speaking it includes
all those things, which are deemed necessary for the members of the family. What need to be
shown is that the property was alienated for the satisfaction of a need. The term is to be
interpreted with due regard to the modern life. Where the necessity is partial, i.e. where the
money required to meet the necessity is less than the amount raised by the alienation, then also
it is justified for legal necessity.

Dev Kishan v. Ram Kishan AIR 2002 Raj 370
Facts:- Ram Kishan , the plaintiff filed a suit against appellants, defendants. Plaintiffs and
defendants are members of a Joint Hindu Family. Defendant no.2 is the karta, who is under the
influence of defendant no.1 has sold and mortgaged the property for illegal and immoral
purposes as it was for the marriage of minor daughters Vimla and Pushpa. The defendants
contention was that he took the loan for legal necessity.
Judgment: - The debt was used for an unlawful purpose. Since it was in contravention of Child
Marriage Restraint Act, 1929, therefore it cannot be called as lawful alienation.

(b) Benefit of Estate
Broadly speaking, benefit of estate means anything, which is done for the benefit of the joint
family property. There are two views as to it. One view is that only construction, which is of
defensive character, can be a benefit of estate. This view seems to be no longer valid. The other
view is that anything done which is of positive benefit, will amount to benefit of estate. The
test is that anything which a prudent person can do in respect of his own property.

(c) Indispensable Duties
This term implies performance of those acts, which are religious, pious, or charitable.
Vijnaneshwara gave one instance of Dharmamarthe, viz., obsequies of the father and added “or
the like”. It is clear that this expression includes all other indispensable duties such as sradha,
upananyana, and performance of other necessary sanskars. For the discharge of indispensable
duties the karta may even alienate the entire property.

A karta can even alienate a portion of the family property for charitable/pious purposes.
However, in this case, the powers of the karta are limited i.e. he can alienate a small portion of
the joint family property, whether movable/immovable.

Trading families
Basic Legal framework of Hindu Undivided Family
The term “Hindu undivided family" has not been defined in the Income Tax Act. “Hindu
undivided family" was included with in the meaning of the word Person in section 2(31) of the
Income Tax Act but “Hindu undivided family" is not defined in the Income tax Act. The
exclussion has been because the term “Hindu undivided family" has already been defined in
the Hindu law and the legislature wanted the meaning of the “Hindu undivided family" remain
the same as that of the Hindu Law. There are two schools of Hindu Law. They are:

Dayabhaga School in West Bengal
Mitakshara School in Rest of India
The expression “Hindu undivided or joint family" has a definite and well-known connotation.
Hindu law defines “Hindu undivided family" as all persons lineally descended from a common
ancestor and includes theur wives and unmarried daughters. Common ancestor is must. It is a
much wider body than a Hindu coparcenary, which includes only those persons who acquire
by birth an intersest in the joint coparcenary property. The expression “Hindu Undvided
family" in the Act is used in the sense in which a Hindu joint family is understood in the
personal laws of Hindus. “Hindu undivided family" is purely a creature of law and cannot be
created by an act of parties (except in case of adoption and reunion). A “Hindu undivided
family" is a fluctuating body, its size increases with birth of a male member in the family and
decreases on death of a member of the family. Females go and come into Hindu undivided
family" on marriage. The daughters after the marriages cease to be a member of her father’s
“Hindu undivided family" and become a member of her husband’s “Hindu undivided family".
In case of a sole male Hindu, strictly speaking, a “Hindu undivided family" comes to existence
automatically upon his marriage. It has been held in Gowli Buddanna v/s. CIT that to constitute
a joint Hindu family, it is not necessary that there has to be more than one coparcener in the
family; a husband and wife can validly constitute a “Hindu undivided family". “Hindu
undivided family" is used in the Act with reference to all school of Hindu Law mentioned
above. For the purpose of the applicability of section 64(2) of the Act, the expression cannot
be given a restricted meaning to include only those “Hindu undivided families" which
comprises of the individual, his wife and minor child of which he is the Karta. The expression
“Hindu undivided family" appearing in section 64(2) should be given its ordinary meaning.
First, no contrary legislative intent is discernible from section 64(2) of the Act or the object
and purpose of incorporation the same. Second the language of the section 64(2) being clear
and unambiguous and the meaning of the expression “Hindu undivided family" used therein
being well-known and well understood, the court cannot detract from the same unless, reading
the statute as a whole, the context so requires. In the instant case, there is nothing in the context
or in the circumstances to warrant such deviation with a view to give it and srtificial and
restricted meaning. Thus for the purpose of section 64(2), “Hindu undivided family" would
include a joint family consisting of himself (karta), his father (Coparceners) mother and female
members who are staying together jointly; joint in food, estate and worship. The “Hindu
undivided family" is treated as the separate entity of the purpose of assessment of tax of the
joint family under Income Tax Act, 1961 and Wealth-tax Act, 1957. “Hindu undivided family"
will enjoy all exemptions and deductions; including the basic exemption from income-tax.
“Hindu undivided family" is purely a creature of law and cannot be created by an act of parties

(except in case of adoption and reunion). A “Hindu undivided family" is a fluctuating body, its
size increases with birth of a male member in the family and decreases on death of a member
of the family. Females go and come into Hindu undivided family" on marriage. In case of a
sole male Hindu, strictly speaking, a Hindu undivided family" comes to existence
automatically upon his marriage. It has been held in Gowli Buddanna v/s. CIT [3] that to
constitute a joint Hindu family, it is not necessary that there has to be more than one coparcener
in the family; a husband and wife can validly constitute a “Hindu undivided family".
GIFTS AND “HINDU UNDIVIDED FAMILY"
HUF's Right To Receive Gifts
In Sukhlal Bhanwarlal (HUF) v. CIT , the Tribunal was held not right in holding that the
assessee, being a Hindu undivided family, could not receive the gifts. In that case, the matter
was remanded to the Tribunal to decide the point of fact whether the gifts as such as alleged
were received by the assessee HUF or not.
Gifts Out Of Ancestral Property By A Mitakshara Karta
Movable property
Although sons acquire by birth rights equal to those of a father in ancestral property both
movable and immovable, so far as movable ancestral property is concerned, a gift out of
affection may be made to a wife, to a daughter ar.d even to a son, provided the gift is within
reasonable limits. At the same time, a gift, for example, of the whole or almost the whole of
the ancestral movable property cannot be upheld as a gift through affection . If the gifts are of
excessive amounts and are not given for love and affection, these may be termed as voidable
and not void which could be challenged by the sons, but not by a third party.
In CITv. Dwarka Das & Sons , a cash gift of Rs. 5,000 by the karta out of HUF property made
to a stranger has been held not to be invalid as the same was within reasonable limit.
Immovable property
So far as immovable ancestral property is concerned, the power of gift is much more
circumscribed than in the case of movable ancestral property. A karta has power to make a gift
within reasonable limits for “pious purposes", i. e., for charitable and/or religious purposes, or
to a daughter in fulfillment of an antinuptial promise, etc. But the rule is firmly established that
a karta has no power to make a gift of ancestral immovable property to his wife to the prejudice
of his minor sons .
In CIT v. K.N. Shanmuga Sundaram , gifts of a reasonable portion of the joint family

immovable properties to minor daughters by their father were held to be valid notwithstanding
the fact that the gifts were made before their marriage. Even within the permissible limits, the
power to make such gifts may be exercised by the karta. No other member of the family can
do it
At the same time, a karta cannot make a gift to his minor sons or in favour of his daughter-in-
law. Thus, a gift by a Jat Sikh (Karta) to his son of the ancestral property is not valid so as to
attract the provisions of the gift-tax Act, 1958.
While a gift to a member of the family is merely voidable, a gift to a stranger is void Similarly,
where the gift is found to be not of a reasonable proportion and within the permissible limits,
the same would be void ab initio, a gift of immovable property of the value of Rs. 4,00,000 by
the karta to his wife has been held to be void and ineffective in law.
In Balchand Malaiya (HUF) v. CWT , the Tribunal was held justified in holding that the gift
of almost the entire assets of the HUF by the karta in favour of his five sons (two major alia
three minor) was void.
In R.C. Malpani v. CIT , it has been held that gift of an immovable property belonging to the
HUF by its karta to his wife is voidable and not void. Income from such property cannot be
assessed in the hands of the HUF.
Capital Gain By Partition Among Its Members
AMENDMENT OF HINDU SUCCESSION ACT, 1956 AND ITS EFFECT ON INCOME
TAX ASSESSMENT
The Hindu Succession Act 1956 brought in equal right for the daughter and also for the son in
the individual property of the father and also equal share in father's share in the joint family
property. . As for the tax impact, tax law will have to follow this law as regards any fallout of
such change in succession for income tax and wealth tax purposes and in recognising joint
family partition under Section 171 of the Income-tax Act
Position Of Females After Amendment In HAS, 1956 In 2005
After amendment in HAS, daughter including married treated as coparcener in joint family
property with the same birth rights as son do share- to claim partition and to become Karta also
sharing the liabilities.
HAS does not touch separate property (sec 8) only ancestral and joint family property are
amended. In Section 8 the list of class 1 heirs is broaden. Further the act makes the hiers of
pre-deceased sons and daughters equal by including heirs up to 2 generations of children of

pre-deceased daughters.
Section 23 of HSA was deleted.
Section 24 was deleted. It dealt with remarriage, now widow can inherit previous husband’s
property.
Every state has different law to inheritance of agricultural land. The amendment wiped out in
consistency in law relating to inheritance of agricultural land. HAS now is applicable to all
states in similar fashion. Now woman (married or unmarried) can inherit agricultural land.
Relation between Section 6 of HSA, 1956 and Income-Tax Act, 1961
As death of coparcener does not dissolve or disrupt the HUF Assessment will continue to be
framed on the HUF. It will continue in the same manner as that of before with one coparcener
less. The deceased coparcener share will then pass on to his successor- sons widow, daughter
etc. The interest of the deceased coparcener is determined by assuming notional partition of
HUF immediate before his death. Since the partition is notional and not real and since its only
function is to determine the interest of his heirs, which they succeed to the deceased
coparcener’s share, there is not question of any proceeding for partial partition under section
171 of IT act. But the Supreme court in Maharani Rai Lakshmi Devi Case held that though u/s
6 of HAS there may be division of share of HUF on the death of Karta this share can’t be
excluded from the assessment of HUF till an order u/s 171 of IT Act is passed. Partition under
Income Tax is governed by Section 171 and HAS can not override this provision. After the
amendment in the Hindu Succession Act in 2005 daughters by birth becomes the coparcener,
like that of a son and have same kind of liability in the coparcenary poperty. The amendment
had also brought that the share of the pre-decesed son or a pre-deceased daughter shall be
allotted to the surviving child of such pre-deceased son or of such predeceased daughter. The
asssesment of the income tax of the “Hindu undivided family" will continue to be in the same
way as that it was done previous to the amendment.
ASSESSMENT OF HINDU UNIDVIDED FAMILY
Income Tax And HUF
Under the Income Tax Act, a HUF is treated as a separate entity for the purpose of assessment
of the Income Tax. However, the income of a joint Hindu family can be assessed as the income
of a HUF Hindu Undivided Family only if the following two conditions are satisfied:
Existence of Coparcenary
It should be ancestral joint property.

Common Property includes following:
Ancestral Property
Assets created out of income of ancestral property
Converted property- when individual property is converted into HUF property
Assets created out of property in 3.
Gifts, received by HUF
In the following cases the income of ancestral property is taxable as income of HUF:
Family of widow, mother and sons.
Family of husband and wife without any child.
Family of two widows of deceased brothers
Family of two or more brothers
Family of uncle and nephew
Family of mother, son and son’s wife
Family of male and his bro’s wife.
Income Of Hindu Undivided Family
There are five heads of income:
Salary
Profits from business or profession
Income from house property
Capital gains
Income from other sources
Taxation Of Hindu Undevided Family
The HUF are taxed as a separate entity would have been taxed but the tax slab is same for
individuals and the “Hindu undivided family" . It also enjoys the deduction under Section 80C.

All the income tax slabs and deductions and exemptions available to individuals are
mandatarily available to the HUF.
HUF As A Taxable Entity
On a conjoint reading of section 2(31) and section 4, it can safely be stated that a Hindu
undivided family is a taxable entity for the purposes of charge of income-tax under the 1961
Act.
Ordinarily, HUF is a taxable entity but, on or after 1-12-1976, no assessment possible on a
HUF in Kerala State. It is pertinent to note that the enactment of the Kerala Joint Hindu Family
System (Abolition) Act, 1975, has abolished the joint family system among the Hindus in the
State of Kerala. That Act has been brought into force on and with effect from 1st December,
1976. By virtue of the provisions of the said Act, the members of a Hindu undivided family
holding coparcenary property as on 1-12-1976 shall be deemed to he holding such coparcenary
property as tenants-in-common as if a partition had taken place among all the members of that
Hindu undivided family. In that view of the matter, it is not permissible or open to the Income-
tax Department to continue to make assessment In the status oftl1e Hindu undivided family on
or after 1-12-1976 so far as the Kerala State is concerned .
‘Total Income’, For Charging Tax On Specified HUFs
For applying a higher rate of tax in the case of a specified HUF, for assessment years 1974-75
to 1996-97, it is necessary that at least one member of the Hindu undivided family should have
'total income' exceeding a specified sum. For this purpose, the expression 'total income' should
be only as referred to in section 2(45) as computed in the manner specified under section 5,
including the income tagged under section 64 .
‘Total Income’ Of The Individual Member Is Relevant
For the purpose of applying higher rates of tax to a specified HUF, the 'total income' of an
individual member of the HUF concerned, which may be a bigger Hindu undivided family, is
relevant and not the total income of a smaller HUF, which along with other smaller HUFs is
constituting a bigger HUF .
Hindu Undivided Family-Special Provisions Applicable
There are certain special provisions in respect of Hindu undivided family, which are to be
found in sections:
Sr. No

Section
Provision
6(2) and 6(6)(b)
residence in India
47(i)
transactions not regarded as transfer
49(1)(i)
cost with reference to certain modes of acquisition
80C
(operative up to 31-3-1991) LIP, etc., deduction for, also applicable to individuals
80CC
(operative up to 31-3 993) investment in certain new shares, deduction for
80CCA
[deposits under National Savings Scheme or payment to an annuity plan
80CCB
(operative from 1-41991) investment made under Equity Linked Savings Scheme, also
applicable to individuals
80D
(operative between 1-4-1968 and 31-3-1985) medical treatment, etc., deduction for, also
applicable to individuals
80D
(operative from 1-4-1987) medical insurance premia, also applicable to individuals
80DD
(operative between 1-4-1991 and 31-3-1999) [medical treatment, etc., of the handicapped

dependants, also applicable to individuals;
80DD
(operative from 1-4-1999) [maintenance including medical treatment of handicapped
dependant also applicable to individuals];
80DDA
(operative between 1-4-1996 and 31-3-1999) [deposit made for maintenance of handicapped
dependant, also applicable to individuals];
80L
interest on certain secuntles, dividends, etc., deduction for, also applicable to individuals
88
(operative from 1-41991) [rebate 0n life insurance prem13, contribution to provident fund, etc.,
also applicable to individuals
88A
(operative between 1-4-1991 and 31-3-1994) (rebate in respect of investment in certain new
shares or units, also applicable to individuals];
133(2)
[power to call for information];
14O(b)
[return by whom to be signed];
171
[assessment after partition of HUF];
194A
[deduction at source out of interest, applicable to all units except individual and HUF];
194H
(operative from 1-10-1991) [deduction at source out of commission, brokerage, etc. applicable

to all units except individual and HUF];
194-1
(operative from 1-6-1994) [deduction at source out of rent, applicable to all units except
individual and HUF]; 194J (operative from 1-7-1995) deduction at source out of fees for
professional or technical services, applicable to all units except individual and HUF];
209(3)
[computation of advance tax j;
278C
[offences by HUF J; Ch. XXII-A (omitted w.e.f. 1-4-1988) [ss. 280A to 280X, Annuity
Deposits, applicable to all units except RF, company, co-operative society, local authority,
cooperation established by a Government Act];
280Z
(operative up to 31-3-1990) [tax credit certificates to equity shareholders, also applicable to
individuals];
282(2)(a)
[service of notice 1; and
283(1 )
[service of notice when family is disrupted]; and Explanation to rule 73 of Schedule II [arrest
of Karta possible].
Computation Of Tax
It is based on following principles:
HUF is a separate tax entity.
HUF has to file its own return of income.
HUF can be a partner in a partnership firm through the Karta. (The Indian Partnership Act
excludes an HUF carrying on family business as such from the ambit of partnership.)
When there is a direct relation between investment and income earned then it will be treated as

HUF income.
HUF can not be a shareholder in a company
If Karta is director of company then his salary will be treated as income of HUF. If he devotes
his personal skills to earn that income then it will be treated as his individual income.
HUF having its own business
Where the business is carried out by Karta or members and draws salary from this business,
then the salary is an allowable expenditure in the hand of HUF and it will be taxable in
Individual capacity of Karta or members receiving the salary.

There are three simple steps to create HUF. These steps are as below:
1. Create HUF Deed & Requirement of Rubber Stamp of HUF
2. Apply for HUF’s P ermanent Account Number
3. Open Bank Account in the name HUF
A. Create HUF Deed & Requirement of Rubber stamp of HUF
Creating a HUF Deed is not mandatory. However it is always beneficial to have a HUF Deed.
A HUF deed is a written formal document on a stamp paper stating the name of Karta and
Coparceners of HUF. The eldest male member of HUF becomes Karta of HUF. The name of
members of HUF and the name of the HUF is also required to be stated in the HUF Deed at
the time of creating of HUF. The name of HUF is usually the name of the Karta followed by
the word HUF e.g. Ram Kumar HUF. HUF Deed also states the capital with which the HUF
has been initiated. There are various sources through which capital can be introduced in the
HUF which we will learn later.
A declaration is also provided by each member of family where they declare the name of Karta
and also state that—
A. Karta has the authority of the accounts vested in his hand
B. Karta holds the right to govern all the transactions of the HUF accounts on behalf of the
members.
Further, A Rubber stamp of HUF will also be prepared. Rubber stamp should be Rectangular.
Rubber Stamp will be affixed on all the documents pertaining of HUF to authorize the
transaction.

B. Apply for PAN
Since HUF is a separate assessee under Income Tax Act, 1961, therefore HUF have to hold its
own permanent account number. A separate application for PAN Card can be made, in Form
49A, by the Karta of HUF on behalf of HUF for allotment of PAN. On allotment of PAN, HUF
is required to file separate Income Tax Return & can avail all the benefits under Income Tax
Act, 1961.
C. Open Bank Account in the name of HUF
As regards bank account of a HUF, it should be either in the name of the HUF or in the name
of the Karta of the HUF with a specific declaration that the account is that of the HUF. The
members should also be careful and not deposit their personal funds in the HUF bank account
as only funds belonging to the HUF can be kept in it. Normally, only the Karta is authorized to
sign all cheques and operate the account on behalf of the HUF. However, he may also authorize
any other member of the HUF to operate the same on behalf of the HUF. A person, who desires
to bequeath some property to his son or sons, may also provide a specific instruction in his will
to transfer the assets on his demise to the HUF or his son or sons. This will result in effective
tax savings in the hands of the beneficiary sons.
Creation of HUF- By Operation of Law
Typically, a HUF is automatically created. As the name suggests, a HUF means a family of
Hindus. However, under the Indian tax law, persons belonging to the Jain and Sikh religion
can also form HUFs. The existence of a HUF requires at least two members of a family, of
which at least one should be male. Once member of a HUF receives any ancestral property
from any ancestor three generations above him, a HUF is automatically created. However there
are some legal requirements also which we have already understood. Capital of Hindu
Undivided Family can be created by following ways:
A. Blending of individual property with the family Hotchpots;
B. Receipts of Gifts;
C. Doing Joint labour for the benefit of HUF;
D. Inheritance through a specific bequest under a Will;
E. Partition of a larger Hindu Undivided Family;
F. Reunion of separated coparceners.

Module-3
Understanding family and business system

Objectives, planning, organization and control of family business

THE PLANNING PROCESS
Strategic planning—centering around both business and family goals—is vital to successful
family businesses. In fact, planning may be more crucial to family businesses than to other
types of business entities, because in many cases families have a majority of their assets tied
up in the business. Since much conflict arises due to a disparity between family and business
goals, planning is required to align these goals and formulate a strategy for reaching them. The
ideal plan will allow the company to balance family and business needs to everyone's
advantage.
Family Planning
In family planning, all interested members of the family get together to develop a mission
statement that describes why they are committed to the business. In allowing family members
to share their goals, needs, priorities, strengths, weaknesses, and ability to contribute, family
planning helps create a unified vision of the company that will guide future dealings.
A special meeting called a family retreat or family council can guide the communication
process and encourage involvement by providing family members with a venue to voice their
opinions and plan for the future in a structured way. By participating in the family retreat,
children can gain a better understanding of the opportunities in the business, learn about
managing resources, and inherit values and traditions. It also provides an opportunity for
conflicts to be discussed and settled. Topics brought to family councils can include: rules for
joining the business, treatment of family members working and not working in the
business, role of in-laws, evaluations and pay scales, stock ownership, ways to provide
financial security for the senior generation, training and development of the junior
generation, the company's image in the community, philanthropy, opportunities for new
businesses, and diverse interests among family members. Leadership of the family council
can be on a rotating basis, or an outside family business consultant may be hired as a facilitator.
Business Planning
Business planning begins with the long-term goals and objectives the family holds for
themselves and for the business. The business leaders then integrate these goals into the
business strategy. In business planning, management analyzes the strengths and weaknesses of
the company in relation to its environment, including its organizational structure, culture, and
resources. The next stage involves identifying opportunities for the company to pursue, given
its strengths, and threats for the company to manage, given its weaknesses. Finally, the
planning process concludes with the creation of a mission statement, a set of objectives, and a
set of general strategies and specific action steps to meet the objectives and support the mission.
This process is often overseen by a board of directors, an advisory board, or professional
advisors.
Succession Planning
Succession planning involves deciding who will lead the company in the next generation.
Unfortunately, less than one-third of family-owned businesses survive the transition from the
first generation of ownership to the second, and only 13 percent of family businesses remain
in the family over 60 years. Problems making the transition can occur for any number of
reasons: 1) the business was no longer viable; 2) the next generation did not wish to
continue the business, or 3) the new leadership was not prepared for the burden of full
operational control. Lack of planning, however, is by far the most common underlying reason

for a company to fail in the generational transition. At any given time, a full 40 percent of
American firms are facing the succession issue, yet relatively few make succession plans.
Business owners may be reluctant to face the issue because they do not want to relinquish
control, feel their successor is not ready, have few interests outside the business, or wish to
maintain the sense of identity they have for so long gotten from their work.
But it is vital that the succession process be carefully planned before it becomes necessary due
to the owner's illness or death. Family businesses are advised to follow a five-stage process in
planning for succession: initiation, selection, education, finance preparation, and transition.
 In the initiation phase, possible successors are introduced to the business and guided
through a variety of work experiences of increasing responsibility.
 In the selection phase, a successor is chosen and a schedule is developed for the
transition. Analysts almost unanimously recommend that the successor be a single
individual and not a group of siblings or cousins. To some degree, by selecting a group,
the existing leadership is merely postponing the decision or leaving it to the next
generation to sort out.
 During the education phase, the business owner gradually hands over the reigns to the
successor, one task at a time, so that he or she may learn the requirements of the
position.
 Finance preparation involves making arrangements so that the departing management
team can withdraw funds enough to retire. The more time is used in preparing for the
financial implications of this transition the more likely a business will be able to avoid
being burdened in the process.
 In the transition phase, the business changes hands—the business owner removes
himself or herself from the daily operations of the firm. This final stage can be the most
difficult, as many entrepreneurs experience great difficulty in letting go of the family
business. It helps when the business owner establishes outside interests, creates a sound
financial base for retirement, and gains confidence in the abilities of the successor.

There are three components to family governance {controlling function}:
• Periodic (typically annual) assemblies of the family; all families in business can
benefit from this activity.
• Family council meetings for those families that benefit from a representative group
of their members doing planning, creating policies, and strengthening business-
family communication and bond.
• A family constitution—the family's policies and guiding vision and values that
regulate members' relationship with the business. This written document can be
short or long, detailed or simple, but every family in business benefits from this kind
of statement.
The rare family in business may have a more elaborate family governance structure, with a
separate meeting for family-owner-managers or a separate council for family shareholders
or periodic meetings between shareholders, the board, and management.
Properly composed and managed, a family assembly and family council help:
• Develop clarity on roles, rights, and responsibilities for family members.
• Encourage family members, family employees, and family owners to act
responsibly toward the business and the family.
• Regulate appropriate family and owner inclusion in business discussions.
The family assembly typically meets annually, lasts one to two days, and includes all adult
family members (yes, including in-laws). Families need to decide at what age children should
attend these meetings. One family says that children should attend when they are able to
feed themselves; most families start bringing the younger generation into meetings at
around age 16. For the young children, families should still consider organizing some group
activities where the children can begin to learn about the business and develop
relationships with their siblings and cousins.

Figure 1: Basic Governance
Structures of the
Family Business System
Family assembly activities include learning about the business through presentations by
family and non-family managers, discussing (not deciding) the direction of the company,
being educated about what the company does or about important skills like reading
financial statements. It is also a good forum to get updated on changes in the family such as
important events and accomplishments, and on changes in ownership. For example, have
any shares changed hands since the last meeting? Are there new tax laws shareholders
need to be aware of?
If family has fifteen or fewer adults, you may be able to have in-depth discussions and create
plans and policies in the family assembly meeting. When the family grows beyond this size
certainly, families generally benefit from having a family council.

The family council can perform all of the following duties:
• Conflict resolution
• Plan family assembly meetings, which otherwise the CEO usually has to arrange.
• Discusses current business, ownership, and family issues and direction and keep the
family informed about these.
• Help the family reach decisions and speak with one voice about its goals.
• Keep the board of directors informed about family views about the company and
maintain a dialogue with the board about key business policies and plans.
• Develop plans and policies, in conjunction with the board, that regulate family activity
with the business.
• Guard against family interference with the business while seeing that the family's key
goals are satisfied.
• Develop loyal, informed, contributing family shareholders.
• Scout the family for business talent.
• Create educational events or otherwise encourage the education of family members
about the business.
• Plan family social gatherings and rituals and help to create healthy, harmonious family
relationships.
Any family council that accomplishes these tasks strengthens a family's relationship with its
business and its discipline and is a valuable resource for management and the board.
If the family is reluctant to engage in the discussions it needs to have in the family council or
assembly—out of concern about potential family conflict, not understanding what these
groups should do or just being shy in these meetings—hire a facilitator to help organize the
meetings. Good structures that do not address the right topics are a costly waste of time.
Family council or family assembly complements rather than replaces the board of directors.
The family council sets policy for the family and recommends policy that concerns the family
to the board, such as around family employment in the business. The board of directors sets
policy for the business and may also make recommendations to the family council in
matters that concern the business.
The board and family council should coordinate their work and not overstep each other's
domains. Coordination may take the simple form of having the council and board update
each other periodically on their important objectives, having an annual joint planning
session, or having a board member sit on the council or vice versa.
The family constitution articulates a family's vision for itself and the business, its core
values and the policies and guidelines that maintain family discipline. Among the policies a
family council might create include:
• Employment standards for the next generation.
• Career development policies for family employees.
• Family compensation.
• Succession process, including retirement ages.
• Ownership, including buy-sell agreements.
• Dividends.

The coordination of the family council and family assembly with management and the board
on some key plans affecting family companies is shown in Table 1.
Table 1
Structures and Plans to Govern a Family Business System
STRUCTURE
PLAN CEO
TOP
MANAGEMENT
BOARD OF
DIRECTORS
FAMILY COUNCIL &
FAMILY ASSEMBLY
1. Strategic Plan
Initiates and
approves
Generates
Consults and
approves
Consults and
supports
2. Family
Constitution
Participates in
Family Council
Consults
and supports
Consults and
approves only
business policies
Generates
3. Succession Plan Generates
Consults and
supports
Consults and
approves
Consults and
supports
4. Family Business
Leader's
Retirement Plan
Generates Aware Aware
Consults and
supports
5. Family Business
Leader's Estate
Plan
Generates Aware Consults
Consults and
supports
Treating the family in a more formal, organizational way can feel a bit strange at first. It may
take a year or two for the family to grow into this more structured way of interacting. But
the value of this process is demonstrated in the strides so many families have made with
these structures. They have learned that in discussing issues that can be sensitive and raise
complicated feelings, a little structure is a family's best friend.

Developing effective boards of directors and advisory boards
Advisory Boards for Family Business
Many successful family business owners consider an advisory board of directors to be an
essential tool. Advisory boards are not to be confused with the boards of directors at public
companies. Those public company entities are governing boards. Some of the key differences
are listed below.
Advisory Board
 Selected by owners
 Provides advice
 Low compensation
 No liability for advice
 Verbal agreement
 Uninsured

Governing Board
• Elected
• Provides governance
• High compensation
• Fiduciary responsibility • Written agreement
• Insured by company
Many family companies have a governing board, often made up of family members and/or
other investors. An advisory board provides a way for owners to reach outside this inner
circle for a broad spectrum of knowledge and experience.
A good advisory board can bring a number of important benefits to the business.
Supplemental Knowledge and Experience
Advisory board members can help fill gaps in the knowledge and experience of ownership. If
owners are strong in sales but weak in operations, a board member with a strong operations
background can share that expertise. Family businesses can tap into experience in mergers
and acquisitions, human resources, supply chain, international business and other areas. This
expertise may be financially out of reach on a full-time basis.
Strategic Thinking
Advisors are not wrapped up in the day-to-day business. They can and should bring a strong
strategic perspective to the owners. In most businesses, there are plenty of people already
working in the business, and very few working on the business. A good advisory board
looks to the future, forcing ownership and management to consider the challenges and
opportunities ahead.

Avoiding Myopia
Business owners surrounded by relatives, long-time friends and employees can easily
develop a myopic view of the business and the outside world. A good advisory board puts
new points of view in front of ownership and challenges the sacred cows and tribal
knowledge that can stymie progress.
Advisory board members are not highly compensated so they have the ability to give
ownership the brutal facts.
Selecting good individual board members and the overall composition of the board is a
critical step.
Interviews with numerous owners and advisory board members revealed these attributes as
most important for a family business:
 Integrity
 Sense of duty and commitment
 Competence
 Demonstrated track record

 Objectivity
 Willingness to speak the brutal truth
 Lack of ego
There is no need to expand on integrity, competence, a track record, objectivity and
willingness to speak up. Duty and commitment are important because though board
members are not highly compensated, there is a need for full participation in all
meetings and outside preparation before the meetings.
Lack of ego is essential because the board members need to understand their role in
serving on an advisory board. Owners won’t always heed their advice. If a board
candidate is going to have an ego problem with that, he or she should not be selected.
The composition of the board should complement the knowledge and skill set of the
owners. Good advisory boards will have at least one member with strong financial
skills, one with good content or industry knowledge, and others with strong business
backgrounds. However, board composition can change over time depending on a
number of factors.
 A new business may need board members with more “start-up” and financing
knowledge than a more mature business.
 When ramping up a rapidly growing business, human resources expertise may be
essential.
 A new generation of owners in the business may want broad managerial and business
advice and counselling.
 Families transitioning to new ownership may seek board members with that
specific experience.
Advisory boards can and do fail for a number of reasons.
Ego is a major cause of death for advisory boards. It can be the board
member who can’t stand it when the owner fails to take the advice, or it can
be the owner who never listens to anyone and shouldn’t be wasting the
advisors’ time.
Poor advisor selection can result in bad advice and bad chemistry, and can
also kill a board. Selection of friends and relatives without regard to their
abilities and the needs of the business will, at the very least, guarantee
mediocrity, if not outright failure. Another advisor mistake is the selection of
“Names”, board members selected because the business owners believe their
names will look good in their publications. If these members are only
contributing their names, the advisory board will be an empty shell.
Lack of trust will hamper a board. Failure to share key financial information
and other intelligence essential to the board’s function will result in advice that
is, at best, based on a superficial understanding of the business and, at worst
will put the business at risk.

Organizing family assembly and family council meetings

Definition: Also called “Family Supervisory Board”, “Inner Council” and “Family Executive
Committee”, the family council is a working governing body that is elected by the Family
Assembly among its members to deliberate on family business issues. The council is usually
established once the family reaches a critical size, i.e. more than 30 members. In this
situation, it becomes very difficult for the family assembly to have meaningful discussions
and make prompt and qualified decisions. The family council is established at this point as a
representative governance body for the family assembly in coordinating the interests of the
family members in their business.
Purpose: The composition, structure and functioning of family councils differ from one
family business to another. However, the duties of a typical family council would include:
- Being the primary link between the family, the board, and senior management.
- Suggesting and discussing names of candidates for board membership.
- Drafting and revising family position papers on its vision, mission, and values.
- Drafting and revising family policies such as family employment, compensation, and family
shareholding policies.
- Dealing with other important matters to the family.
Membership: Just like any well-functioning committee, the family council should have a
manageable size, i.e. from 5 to 9 members. These members are usually elected by the family
assembly by taking into consideration their qualifications and availability to perform the
council’s duties. Some families prefer to impose certain restrictions regarding membership in
the council such as age limits and experience requirements, and non-participation of in-laws
and family members that also serve on the board or are part of the company’s senior
management. One good practice is to set limited terms for the council’s membership so as to
allow more family members to be part of the council and create a feeling of fairness and
equal opportunities within the family.
The family council should have a chairman, who is also appointed by the family assembly.
The chairman leads the work of the council and is the main contact person for the family. It is
also a good practice to appoint a secretary of the council that keeps minutes of meetings and
makes them available to the family. Depending on the complexity of issues facing the family,
the council would meet from 2 to 6 times per year. Decisions are usually approved by
majority votes of the council’s members.
The following table outlines the major differences between the family meeting, family
assembly, and family council:
Family Meeting Family Assembly Family Council

Stage Founder(s) Sibling Partnership/ Sibling Partnership/

Cousin Confederation Cousin Confederation

Status Usually informal Formal Formal

Membership Usually open to all
family members.
Additional membership
criteria might be set by
the founder(s).
Usually open to all
family members.
Additional membership
criteria might be set by
the family.

Family members
elected by the family
assembly. Selection
criteria defined by the
family.
Size Small size since family
still at founder(s) stage.
Usually 6- 12 family
members.
Depends on the size of
the family and
membership criteria.
Depends on criteria set
up for the membership.
Ideally 5- 9 members.
Number of
Meetings
Depends on the stage of
the business’
development. When the
business is growing fast,
can be as frequent as
once a week.

1- 2 times a year. 2- 6 times a year.
Main
Activities
- Communication of
family values and vision.
- Discussion and
generation of new
business ideas.
- Preparation of the next
business leader(s).
- Discussion and
communication of ideas,
disagreements, and
vision.
- Approval of major
family related policies
and procedures.
- Education of family
members on business
issues.
- Election of family
council and other
committees’ members.

- Conflict resolution.
- Development of the
major family related
policies and procedures.
- Planning.
- Education.
- Coordination of the
work with the
management and the
board and balancing the
business and the family.

Creating policies and plans for the family’s involvement with the business

The involvement of “family” in a business, results in some issues assuming a greater degree
of complexity due to the emotional component.
Establishing policies concerning the business and how they feed into a governance
framework is often done on an ad hoc basis. Prudent business owning families recognise that
predictable issues are going to come up that will create some conflict or friction. They ask,
how are we going to deal with this issue or that issue when it arises? They deal with this by
establishing policies before the policies are actually needed. The advantages of this are:
1. Issues are attended to before they become personal and emotional and therefore
are addressed more comfortably and rationally.
2. Expectations are managed for family involved inside and those outside the
business and for non-family employed inside the business. Where policies are
communicated effectively, there are no surprises.
Where policies are developed on this basis, they can be set in a much more objective fashion
than where decisions are made in the middle of a crisis. Many of the conflicts that might
otherwise arise are avoided by managing family members’ expectations. While a family and
business can never anticipate every policy needed, if they established policies in the past, this
will have resulted in them previously reaching consensus through collaboration and, as a
result, should be better equipped to deal with an unexpected issue.
When developing your family business policy guide, focus not only on the policies you need
now – look ahead and anticipate what policies need to be put in place for the future.
The factors that influence policy development include:
• The stage and size of the business and size of the family.
• The culture of the business and family.
• The number of family members involved in the business who are shareholders.

• Harmony or lack of harmony in the family.
It is important to consider the following:
• Involve everyone who needs to be involved.
• Start with easier policies around code of conduct, philanthropy, employment (provided
no one family member is joining the business in the near future), then moving on to
issues around dividends, compensation policy for family members and finally issues
around conflict of interest, governance including participation on the board of directors
and shareholder agreement.
A good starting point is to look at policies that other families have adopted and leverage off
that in deciding what is right for your business. It is also important that the policies be
forward looking as opposed to being based on what has been done in the past.
Policies should not be a compromise of personal opinions but should emerge from values,
beliefs and principles that the family believe should apply in operating their business. The
core policies revolve around:
• Decision making/governance
• Compensation/performance evaluation
• Employment
• Codes of conduct
Decision making/governance
 How are family decisions made? By consensus? By vote?
 Where voting, who is eligible to vote?
 How is stalemate resolved?
 What rights do family members have to be on the board of directors and will they be
paid?
 What balance is there to be between family/ non-family members?
 Who should chair the board and how are they selected?
 Are there criteria for family members serving on the board?
 Can family members not on the board contact independent/professional directors on
their own?
Policies should not be a compromise of personal opinions but should emerge from
values, beliefs and principles that the family believe should apply in operating their
business.
Compensation/performance evaluation
This is one of the biggest areas of contention, often interacting with liquidity policies and
distribution policies at shareholder level. Pay problems can arise due to role confusion,
paying too little or too much, use of pay to smooth ups and downs, using pay to achieve tax
savings and using pay to maintain parental control.

Key issues family should explore are:
 Market compensation or some alternative?
 Privacy or transparency on compensation of family members?
 Will compensation decisions be validated by outside consultants, independent board
members, benchmarking?
 Expense accounts and perks?
 How is performance to be assessed relative to compensation?
 Who will determine those standards of performance?
 Who will perform the performance review and what rewards are there for exceptional
performance?
 What penalties are there when performance does not meet expectations?
 How will these decisions affect non-family employees? Will they feel they are treated
fairly?
 Will our policy be known to non-family employees? Will it motivate or de-motivate
them?
 Do our compensation decisions make good business sense in driving a pro table
successful business?
Employment
 When will family members be permitted to work in the business?
Qualifications/educational requirements/outside work experience?
 Will all be allowed join or only when positions are available and they are
appropriately qualified?
 What process is there for hiring people, including family?
 Who makes the decisions? What criteria will be used? Will family members be
favoured over non-family?
 Will in-laws be permitted to work in the business?
 Will only family who have the potential to rise to the top be permitted to join or can
people join at lower levels, as long as they understand that is their role?
 What are the rules in respect of promotion?
 How is a family member’s non-performance dealt with? What about full time versus
part time employment? What about summer employment or part time jobs for
younger family members?

Codes of conduct
 What rules will we establish as regards respect in dealing with each other?
 How will we handle conflict?
 Will we solve our problems behind closed doors and not in front of employees?
 How do we support each other? What information should we share with each other?
 What sort of communications policy should we have?
 What about confidentiality? How do we handle media relations?
 Should family members be allowed date employees? What about our lifestyles?
 What about contracts with other businesses owned by family members?
 What about personal use of business assets?

Documentation/agreements
When decided upon, many of these issues
will need to be documented. Some may form
the basis for an overall guiding statement of
how the business should operate or a detailed document of protocol to be followed. On a
more comprehensive basis, they may be documented as part of a family constitution and at a
shareholder level, by way of a shareholder agreement. Many of the issues mentioned fall into
the categories of business statement or business protocol or family constitution. At
shareholder level, shareholder agreements would generally be concerned with the following:
• Who can own shares? Must the family members meet certain requirements to be owners?
• Should stock have different voting rights?
• Can in-laws or non-family employees own shares?
• In what circumstances can the company reacquire stock?
• How will buyouts be funded?
• When can stock be sold?
• How will the company be valued for any transactions in shares?
•What should the distribution policy be?
Developing leaders in the family-business-ownership system

Strategies for Developing Next-Generation Leaders
Family firms that develop effective next-generation leaders often employ the following
leadership development strategies:
 Ensure next-generation leaders have job assignments with real responsibility,
accountability and risk either inside or outside the family business: Next-
generation leaders need opportunities to make complex decisions and experience the
results of those decisions;
 Provide accurate feedback on performance, often from trusted non-family leaders
in the business: Next-generation leaders benefit from knowing how others perceive
their leadership behavior in order to learn the emotional and social intelligence
competencies that account for more than 85 percent of a top leader’s performance;
 Create a positive and supportive family climate: Families that work hard to foster
open communication, establish effective conflict resolution and governance processes,
and create an overall positive family culture enhance the chances that next-generation
family members will develop effective leader- ship skills;
 Start early: Learning leadership skills takes time, so wise family business owners
encourage next-gen- eration family members to gain leadership experience through
activities in which they are personally interested at school and early in their careers.

Following is an extract from JOHN Davis research
John A. Davis
Cambridge Institute for Family Enterprise

A consistent finding about family business systems—the business, its owners, and the family
in control—is that strong, long-term business performance also requires strong performance
by the family and by the ownership group. You can’t keep a family business performing well
over many years just focusing on the business. Family unity, united ownership and ownership
support of the business are just too important to ignore or take for granted.
We also know that strong performance of the business, the ownership group, and the family
depends on the effective leadership of each group. This shouldn’t be surprising: good
performance of any group always depends, to a surprising extent, on capable leaders. If boards
of directors of public companies didn’t believe that leadership mattered so much, they wouldn’t
pay such huge salaries to their CEOs. (By the way, I don’t think they are worth that much, but
the point is: having the right leader does matter.)
Because there is not only a business, but also an ownership group and a family that need
capable leadership, a family business system is much more complicated than other kinds of
business organizations. Leading these systems is also much more complicated.
Family business systems have a number of formal leadership roles. The CEO and Board
Chairperson lead the business and usually the shareholder group. Family council leaders,
parents and grandparents are the formal family leaders. These formal leaders don’t make all
the important decisions in these systems. Nor do they provide all the guidance. They don’t
allocate all the resources. But because they have considerable authority, influence and control
over resources, we rely on them to do their part in setting direction and guiding their group.
Because the performance of people in these roles is so important to the performance of the
family business system, we need to understand what capable leaders in family business systems
actually do. I’ve spent much of my professional life figuring this out.
I’ve gotten to know a number of excellent family business leaders in my long career, along
with some weak ones, and a couple of awful ones. To illustrate my profile of a great family
business system leader, I’ll use one of my favorite examples—Nelson Sirotsky, Chairman of
RBS, his family’s world-class media company based in Porto Allegre.
I met Nelson and his cousin Marcelo Sirotsky at a seminar I led on family business management
in Santiago in 1999. I’ve worked with their family business system ever since. Nelson, CEO
of RBS and also leader of his family branch, attended my seminar to develop plans for his
family business system and to reconsider his own leadership role. As the program unfolded,
Nelson came to new understanding. He realized that he needed to give more attention to his
family and the owners, in order to keep pace with his tireless focus on the business.
What Nelson and his family accomplished over the last decade is very impressive. As I write
this article, they are celebrating Nelson’s successful and smooth transfer of his CEO role at age
58 to his very capable nephew, Eduardo Melzer, 40. Nelson remains Chairman of the board
with clear responsibilities. RBS is stable and poised for more great performance. My colleague
Vicky Bloch, a superb coach and advisor, helped them throughout this process. But much of
this good work stemmed from Nelson understanding his role as a leader of the business, family
and ownership group, and from his performing so well as a leader.
Which brings me to a question I am often asked: “Is it better to have one ultimate leader of the
family business system or a team of leaders?”

UNITARY LEADERSHIP VS. LEADERSHIP TEAMS
There are two basic models. A family business system can either consolidate leadership with
one person, or it can choose two or more people to lead different parts of the system. Each
model can work well, as long as it’s clear and supported by the stakeholders. Both models have
some potential weaknesses: unitary leadership can lead to excesses; leadership teams can be
slow and hobbled with rivalry.

Management roles and functions in a small business
Managerial
function
Construct Description
Planning Preparation for the
future
Thinks about the future, seeks information and
analyses the environment in which the company
operates.
Establishment of goals Evaluates and defines the company’s mission,
guidelines, goals and targets.
Establishment of
courses of action and
resources
Identifies, evaluates, and selects alternatives and
means to accomplish goals.
Organization Establishment of
workflows
Defines workers’ attributions and conduct and
behavior rules.
Provision to
personnel’s needs
Hires personnel, assigns workers’ attributions and
duties.

Provision to needs
regarding tangible and
intangible resources.
Allocates material goods throughout company or
financial resources demanded by plan or budget.
Leadership Decision on work
implementation
Decides and communicates to subordinates,
implementation of plan and workflows. Relays rules
and work routines.
Relationship with
subordinates
Prompts actions verbally and in writing, responds to
initiatives and requests from subordinates, directs,
encourages, rewards, and reprimands subordinates,
conducts meetings and interferes with interpersonal
relationships to solve conflicts.
Dealing with people Maintains contact with other people who are not
subordinated, e.g., customers, suppliers,
consultants, service providers or peers.
Control Monitoring of activity
implementation
Evaluates progress of plan through visual, verbal
contact, electronic, or written means.
Analysis of
divergences
Compares what has been accomplished with plan
and assesses reasons for divergences.
Provision of
information
Provides remaining areas of company with
information on plan implementation as it occurs
and/or on later occasions (feedback).
Business managers direct the talent and resources within an organization to advance strategic
business goals. While that is a simple definition, management is becoming more complex as
managers must respond to both planned and unplanned issues that might arise within the
organization. The manager's job can also be marked by overload under the expectations to be
both a generalist and a specialist.
Strategic Planning
Planning and organizing is a core function of business management. Business planning involves
developing business goals, and designing strategies and organizing business resources to advance those
goals. Both internal data related to organizational performance and external data about the industry,
markets and competition provide insights business management needs in order to direct the company's
resources and identify organizational needs.
Decision-Making
Management is responsible for the decision-making in an organization, such as choices related to changes
needed to adapt to external and internal factors that impact business operations. Management must also
decide where to use capital resources within an organization. Other decision-making responsibilities
include selecting suppliers and vendors for goods and services for the organization.
Informational Role
Management is charged with informational responsibilities in an organization, disseminating relevant
information within the workplace. This might include collecting, monitoring and reporting relevant data

used to analyze business performance. A manager might also serve as the spokesperson for the
organization, frequently responsible for transmitting organizational information to outsiders such as
stakeholders and media professionals.
Interpersonal Role
Interpersonal communication is an important part of a manager's duties across the board when
communicating with customers, employees and suppliers. As a leader within the organization, a manager
is a symbol of leadership, setting the atmosphere and tone of the organization. Management also ensures
that staff is properly connecting within the workplace. This includes developing effective teams to manage
programs and projects that further business objectives, as well as managing conflict resolution systems.
Role Construct Description
Figurehead Participation in social
affairs
Participates in external events, e.g., award-granting
ceremonies or professional class meetings.
Attention to visitors Meets with non-customers visiting the company.
Promotion of social
events
Conceives and sets up social events to promote the
company’s image or products.
Leader Guidance in activity
implementation
Defines work targets and communicates
commands and instructions to subordinates.
Relationship with
subordinates
Criticizes, praises, and motivates subordinates.
Exercise of authority Makes sure that subordinates fully understand
instructions as well as accept and follow them.
Liaison Internal relationships Develops activities to maintain a set of formal and
informal relationships within company.
External networks Establishes external professional networks.
Dissemination of
internal information
Relays important external information to
employees.
Monitor Information gathering Identifies and collects information relevant to
company.
Monitoring of internal
operations
Assesses company performance in order to make
adjustments and changes.
Monitoring of external
events
Verifies what competitors are doing and monitors
events in exterior environment.

Disseminator Information selection Sorts out which relevant information will be shared
with subordinates.
Information sharing Shares relevant information with subordinates.
Confirmation of
information reception
Makes sure that subordinates obtain information
relevant to task completion.
Spokesman Preparation of reports Grants interviews, makes speeches or provides
company information to external audiences.
Communication in
company’s name
Speaks about company’s history or situation at
events or meetings.
Representation of
sector
Claims benefits for companies in the same sector.
Entrepre-neur Promotion of
improvements
Changes workflows to improve productivity.
Proposition of
opportunities
Seeks innovations that can become projects in the
company.
Implementation of
new projects
Directs implementation of improvement or change
in products, services, and management/production
methods.
Disturbance
handler
Solution of routine
conflicts
Solves subordinates’ conflicts deriving from
everyday situations.
Solution to sudden
conflicts
Solves subordinates’ conflicts deriving from
unexpected situations.
Solution of impasses Solves impasses between subordinates and other
people.
Resource
allocator
Scheduling of
commitments
Schedules personal and subordinates’
commitments.
Evaluation of budgets Decides on company’s investments (analyzes and
selects projects that demand application of
financial resources).
Allocation of
resources
Allocates financial, material, and physical
resources to maximize company’s efficiency.
Negotiator Negotiation of
cooperation
Persuades other people to combine forces around
company’s projects.
Negotiation of
agreements
Negotiates agreements with labor, governmental
and legal entities and organizations.

Negotiation of
transactions
Negotiates commercialization of products and
services or contracts with other companies.

Basic awareness on the issues impinging on quality, productivity and
environment

Module-4
Managing and growing family business

The pros and cons of alternative growth options: internal and external

Internal (or organic growth) can be defined as: “Expansion from within a business
by expanding the range of products and/or locations”
As you read the business news or watch business stories on television on online,
you should be able to identify lots of stories of businesses that are growing
organically. Here are some good examples…
Dominos UK has grown strongly in recent years through a rapid expansion of the
number of Dominos Pizza outlets and significant growth in amounts sold per store
Apple has followed an organic growth strategy by focusing on the development and
launch of new products like the iPad and iPhone
Hotel chains like Jury Inns achieve growth by investing in new hotel locations and by
refurbishing existing hotels to boost revenues
Keep a look out for these kinds of business stories and add them to your notes. Has
the business achieved organic growth by adding new products, expanding into new
geographical areas, or increasing its share of the market?
Internal growth builds on the business’ own capabilities and resources. For most
businesses, this is the only expansion method used. Internal growth involves
approaches such as:
- Designing and developing new product ranges
- Implementing marketing plans to launch existing products directly into new markets
(e.g. exporting)
- Opening new business locations – either in the domestic market or overseas
- Investing in research and development to support new product development
- Investing in additional production capacity or new technology to allow increased
output and sales volumes
- Training employees to help the best acquire new skills and address new technology
Whilst these approaches are not easy, they are generally considered to be lower risk
than the alternative – acquisitions or joint ventures. However, the major downside of
focusing on internal development is that
the speed of change or growth in the business may be too slow.
What are the advantages and disadvantages of internal/organic growth? Here is a
summary:
Advantages
Less risky than taking over other businesses
Can be financed through internal funds (e.g. retained profits)
Builds on a business’ strengths (e.g. brands, customers)
Allows the business to grow at a more sensible rate
Disadvantages
Growth achieved may be dependent on the growth of the overall market
Harder to build market share if business is already a leader
Slow growth – shareholders may prefer more rapid growth
Franchises (if used) can be hard to manage effectively
Meaning of Growth Strategy
The concept of strategy has been derived from military administration wherein it implies
‘Grand’ military plan designed to defeat the enemy. As applied to business, strategy is a firm’s

planned course of action to fight competition and to increase its market share. The term strategy
means a well planned, deliberate and overall course of action to achieve specific objectives.
According to chandler, “strategy is the determination of the basic long term goals and
objectives of an enterprise and the adoption of courses of action and the allocation of resources
necessary to carry out these objectives”.
‘Growth Strategy’ refers to a strategic plan formulated and implemented for expanding firm’s
business. For smaller businesses, strategic plans are especially important because these
businesses are extremely at risk to the smallest changes in the marketplace. Changes in
customers, new moves by competitors, or changes in the overall business environment can
directly affect their cash flow in a very short span of time. Negative effect on cash flow, if not
estimated and adjusted for, can force them to shut down. That is why they need to plan for the
future. Small entrepreneurs generally believe that strategic planning is for large business
houses; in reality it is very crucial for small and medium enterprises. Strategic Planning is a
process that involves change. It provides a proper direction to the business. Strategic planning
is essential to take care of the additional efforts and resources required for faster growth.
Different type of growth strategies are available each having its own advantages and
disadvantages. A firm can adopt different strategies at different points of time. All firms need
to develop their own growth strategy according to their own characteristics and environment.

 The Expansion Strategy is adopted by an organization when it attempts to achieve a
high growth as compared to its past achievements. In other words, when a firm aims
to grow considerably by broadening the scope of one of its business operations in the
perspective of customer groups, customer functions and technology alternatives,
either individually or jointly, then it follows the Expansion Strategy.
The reasons for the expansion could be survival, higher profits, increased prestige,
economies of scale, larger market share, social benefits, etc. The expansion strategy is
adopted by those firms who have managers with a high degree of achievement and
recognition. Their aim is to grow, irrespective of the risk and the hurdles coming in
the way.
The firm can follow either of the five expansion strategies to accomplish its
objectives:

 Expansion through Concentration-The Expansion through Concentration is the
first level form of Expansion Grand strategy that involves the investment of resources
in the product line, catering to the needs of the identified market with the help of
proven and tested technology.
Simply, the strategy followed when an organization coincides its resources into one or
more of its businesses in the context of customer needs, functions and technology
alternatives, either individually or collectively, is called as expansion through
concentration.
The organization may follow any of the ways to practice Expansion through
concentration:

 Market penetration strategy: The firm focusing intensely on the
existing market with its present product.
 Market Development type of concentration: Attracting new customers
for the existing product.
 Product Development type of Concentration: Introducing new products
in the existing market.

The firms prefer expansion through concentration because they are required to do
things what they are already doing. Due to the familiarity with the industry the firm
likes to invest in the known businesses rather than a new one. Also, through
concentration strategy, no major changes are made in the organizational structure, and
expertise is gained due to an in-depth knowledge about one or more businesses.
However, the expansion through concentration is risky since these strategies are
highly dependent on the industry, so any adverse conditions in the industry can affect
the business drastically. Also, the huge investments made in a particular business may

suffer losses due the invention of new technology, market fickleness, and product
obsolescence.

 Expansion through Diversification-The Expansion through Diversification is
followed when an organization aims at changing the business definition, i.e. either
developing a new product or expanding into a new market, either individually or
jointly. A firm adopts the expansion through diversification strategy, to prepare itself
to overcome the economic downturns.
Generally, the diversification is made to set off the losses of one business with the
profits of the other; that may have got affected due to the adverse market conditions.
There are mainly two types of diversification strategies undertaken by the
organization:

 Concentric Diversification: When an organization acquires or develops a new
product or service that are closely related to the organization’s existing range of
products and services is called as a concentric diversification. For example, the shoe
manufacturing company may acquire the leather manufacturing company with a view
to entering into the new consumer markets and escalate sales.
 Conglomerate Diversification: When an organization expands itself into different
areas, whether related or unrelated to its core business is called as a conglomerate
diversification. Simply, conglomerate diversification is when the firm acquires or
develops the product and services that may or may not be related to the existing range
of product and services.
Generally, the firm follows this type of diversification through a merger or takeover
or if the company wants to expand to cover the distinct market segments. ITC is the
best example of conglomerate diversification.

 Expansion through Integration-The Expansion through Integration means
combining one or more present operation of the business with no change in the
customer groups. This combination can be done through a value chain.
The value chain comprises of interlinked activities performed by an organization right
from the procurement of raw materials to the marketing of finished goods. Thus, a
firm may move up or down the value chain to focus more comprehensively on the
needs of the existing customers.
 The expansion through integration widens the scope of the business and thus
considered as the grand expansion strategy. There are two ways of integration:

 Vertical integration: The vertical integration is of two types: forward and backward.
When an organization moves close to the ultimate customers, i.e. facilitate the sale of
the finished goods is said to have made a forward integration. Example, the
manufacturing firm open up its retail outlet.
Whereas, if the organization retreats to the source of raw materials, is said to have
made a backward integration. Example, the shoe company manufactures its own raw
material such as leather through its subsidiary firm.
 Horizontal Integration: A firm is said to have made a horizontal integration when it
takes over the same kind of product with similar marketing and production levels.
Example, the pharmaceutical company takes over its rival pharmaceutical company.

 Expansion through Cooperation-The Expansion through Cooperation is a strategy
followed when an organization enters into a mutual agreement with the competitor to
carry out the business operations and compete with one another at the same time, with
the objective to expand the market potential.
The expansion through cooperation can be done by following any of the strategies as
explained below:

 Merger: The merger is the combination of two or more firms wherein one acquires the
assets and liabilities of the other in the exchange of cash or shares, or both the
organizations get dissolved, and a new organization came into the existence. The firm
that acquires another is said to have made an acquisition, whereas, for the other firm
that gets acquired, it is a merger.
 Takeover: Takeover strategy is the other method of expansion through cooperation. In
this, one firm acquires the other in such a way, that it becomes responsible for all the
acquired firm’s operations. The takeovers can either be friendly or hostile. In the
former, both the companies agree for a takeover and feels it is beneficial for both.
However, in the case of a hostile takeover, a firm try to take on the operations of the
other firm forcefully either known or unknown to the target firm.
 Joint Venture: Under the joint venture, both the firms agree to combine and carry out
the business operations jointly. The joint venture is generally done, to capitalize the
strengths of both the firms. The joint ventures are usually temporary; that lasts till the
particular task is accomplished.
 Strategic Alliance: Under this strategy of expansion through cooperation, the firms
unite or combine to perform a set of business operations, but function independently
and pursue the individualized goals. Generally, the strategic alliance is formed to
capitalize on the expertise in technology or manpower of either of the firm.
Thus, a firm can adopt either of the cooperation strategies depending on the nature of
business line it deals in and the pursued objectives.

 Expansion through Internationalization -The Expansion through
Internationalization is the strategy followed by an organization when it aims to expand
beyond the national market. The need for the Expansion through Internationalization
arises when an organization has explored all the potential to expand domestically and
look for the expansion opportunities beyond the national boundaries.

But however, going global is not an easy task, the organization has to comply with the
stringent benchmarks of price, quality and timely delivery of goods and services, that
may vary from country to country.
The expansion through internationalization could be done by adopting either of the
following strategies:

 International Strategy: The firms adopt an international strategy to create value by
offering those products and services to the foreign markets where these are not
available. This can be done, by practicing a tight control over the operations in the
overseas and providing the standardized products with little or no differentiation.
 Multidomestic Strategy: Under this strategy, the multi-domestic firms offer the
customized products and services that match the local conditions operating in the
foreign markets. Obviously, this could be a costly affair because the research and
development, production and marketing are to be done keeping in mind the local
conditions prevailing in different countries.
 Global Strategy: The global firms rely on low-cost structure and offer those products
and services to the selected foreign markets in which they have the expertise. Thus, a
standardized product or service is offered to the selected countries around the world.
 Transnational Strategy: Under this strategy, the firms adopt the combined approach
of multi-domestic and global strategy. The firms rely on both the low-cost structure and
the local responsiveness i.e. according to the local conditions. Thus, a firm offers its
standardized products and services and at the same time makes sure that it is in line
with the local conditions prevailing in the country, where it is operating.
So, in order to globalize, the firm should assess the international environment first, and
then should evaluate its own capabilities and plan the strategies accordingly to enter
into the foreign markets.

Go through the examples below to further comprehend the understanding of the
expansion strategy. These are in the context of customer groups, customer functions
and technology alternatives.
 The baby diaper company expands its customer groups by offering the diaper to old
aged persons along with the babies.
 The stockbroking company offers the personalized services to the small investors
apart from its normal dealings in shares and debentures with a view to having more
business and a diversified risk.
 The banks upgraded their data management system by recording the information on
computers and reduced huge paperwork. This was done to improve the efficiency of
the banks.
In all the examples above, companies have made significant changes to their customer
groups, products, and the technology, so as to have a high growth.

Consolidation Strategies:

 In business, consolidation refers to the mergers and acquisitions of many smaller
companies into much larger ones for economic benefit.
 Consolidation (or amalgamation) is the act of merging two or more organizations into
one.

Distribution of wealth
Crisis of Business Growth
All organizations pass through various stages of growth and at each stage the organization is
required to solve some specific problems.
A very useful model of organizational growth has been developed by Greiner. He argues that
each organisation moves through five phases of development as it grows. There are five phases
in organizational growth – creativity, direction, delegation, coordination and collaboration
followed by a particular crisis and management problems.
1. Creativity Stage. Growth through creativity is the first phase. This phase is
dominated by the entrepreneurs of the organizations and the emphasis is on creating both a
product and a market. However, as the organization grows in size and complexity, the need
for greater efficiency cannot be achieved through informal channels of communication. Thus,
many managerial problems occur which the entrepreneur may not solve effectively because
they may not be suited for the kind of job or they may not be willing to handle such problems.
Thus, a crisis of leadership emerges and the first revolutionary period begins. Such questions
as ‘who is going to lead the organisation out of confusion and solve the management problems
confronting the organisation; who is acceptable to the entrepreneurs and who can pull the
organisation together arise. In order to solve the problems a new evolutionary phase – growth
through direction – begins.
2. Direction Stage. When leadership crisis leads to the entrepreneurs relinquishing
some of their power to a professional manager, organisational growth is achieved through
direction. During this phase, the professional manager and key staff take most of the
responsibility for instituting direction, while lower level supervisors are treated more as
functional specialists than autonomous decision making managers. Thus, directive
management techniques enable the organisation to grow, but they may become ineffective as

the organisation becomes more complex and diverse. Since lower level supervisors are most
knowledgeable and demand more autonomy in decision making, a next period of crisis – crisis
for autonomy begins. In order to overcome this crisis, the third phase of growth – growth
through delegation – emerges.
3. Delegation Stage. Resolution of crisis for autonomy may be through powerful
top managers relinquishing some of their authority and a certain amount of power equalisation.
However, with decentralisation of authoirty to managers, top executives may sense that they
are losing control over a highly diversified operation. Field managers want to run their own
show without coordinating plans, money, technology or manpower with the rest of the
organisation and a crisis of control emerges. This crisis can be draft with the next evolutionary
phase – the coordination stage.
4. Coordination Stage. Coordination becomes the effective method for
overcoming crisis of control. The coordination phase is characterised by the use of formal
systems for achieving grater coordination with top management as the watch dog. The new
coordination system proves useful for achieving growth and more coordinated efforts by line
managers, but result in a task of conflict between line and staff, between head quarters and
field. Line becomes resentful to staff, staff complains about unco-operative line managers, and
everyone gets bogged down in the bureaucratic paper system. Procedure takes precedence over
problem solving; the organisation becomes too large and complex to be managed through
formal programmes and rigid systems. Thus, crisis of red – tape begins. In order to overcome
the crisis of red-tape, the organisation must move to the next evolutionary stage – the
collaboration stage.
5. Collaboration Stage. The Collaboration stage involves more flexible and
behavioural approaches to the problems of managing a large organisation. While the
coordination stage was managed through formal systems and procedures, the collaboration
stage emphasizes greater spontaneity in management action through teams and skilful
confrontation of interpersonal differences. Social control and self – discipline take over from
formal control. Though Greiner is not certain what will be the next crisis because of
collaboration stage, he feels that some problems may emerge as it will centre round the
psychological saturation of employees who grow emotionally and physically exhausted by the
intensity of team work and of the heavy pressure for innovating solutions.

ISSUES IN FAMILY BUSINESSES
A family business can be described as an interaction between two separate but connected
systems—the business and the family—with uncertain boundaries and different rules.
Graphically, this concept can be presented as two intersecting circles. Family businesses may
include numerous combinations of family members in various business roles, including
husbands and wives, parents and children, extended families, and multiple generations playing
the roles of stockholders, board members, working partners, advisors, and employees. Conflicts
often arise due to the overlap of these roles. The ways in which individuals typically
communicate within a family, for example, may be inappropriate in business situations.
Likewise, personal concerns or rivalries may carry over into the work place to the detriment of
the firm. In order to succeed, a family business must keep lines of communication open, make
use of strategic planning tools, and engage the assistance of outside advisors as needed.
Family versus Non-family Employees
There are a number of common issues that most family businesses face at one time or another.
Attracting and retaining non-family employees can be problematic because such employees
may find it difficult to deal with family conflicts on the job, limited opportunities for
advancement, and the special treatment sometimes accorded family members. In addition,
some family members may resent outsiders being brought into the firm and purposely make

things unpleasant for non-family employees. But outsiders can provide a stabilizing force in a
family business by offering a fair and impartial perspective on business issues. Family business
leaders can conduct exit interviews with departing non-family employees to determine the
cause of turnover and develop a course of action to prevent it

Employment Qualifications
Many family businesses also have trouble determining guidelines and qualifications for family
members hoping to participate in the business. Some companies try to limit the participation
of people with certain relationships to the family, such as in-laws, in order to minimize the
potential for conflicts. Family businesses often face pressure to hire relatives or close friends
who may lack the talent or skill to make a useful contribution to the business. Once hired, such
people can be difficult to fire, even if they cost the company money or reduce the motivation
of other employees by exhibiting a poor attitude. A strict policy of only hiring people with
legitimate qualifications to fill existing openings can help a company avoid such problems, but
only if the policy is applied without exception. If a company is forced to hire a less-than-
desirable employee, analysts suggest providing special training to develop a useful talent,
enlisting the help of a non-family employee in training and supervising, and assigning special
projects that minimize negative contact with other employees.
Salaries and Compensation
Another challenge frequently encountered by family businesses involves paying salaries to and
dividing the profits among the family members who participate in the firm. In order to grow, a
small business must be able to use a relatively large percentage of profits for expansion. But
some family members, especially those who are owners but not employees of the company,
may not see the value of expenditures that reduce the amount of current dividends they receive.
This is a source of conflict for many family firms and an added level of difficulty in making
the necessary investments into the business for continued success. To ensure that salaries are
distributed fairly among family and non-family employees, business leaders should match them
to industry guidelines for each job description. When additional compensation is needed to
reward certain employees for their contributions to the company, fringe benefits or equity
distributions can be used.
Succession
Another important issue relating to family businesses is succession—determining who will
take over leadership and/or ownership of the company when the current generation retires or
dies. The key to avoiding conflicts about who will take over a business is having a well-defined
plan in place. A family retreat, or a meeting on neutral ground without distractions or
interruptions, can be an ideal setting to open discussions on family goals and future plans, the
timing of expected transitions, and the preparation of the current generation for stepping down
and the future generation for taking over. When succession is postponed, older relatives who
remain involved in the family firm may develop a preference for maintaining the status quo.
These people may resist change and refuse to take risks, even though such an attitude can
inhibit business growth. The business leaders should take steps to gradually remove these
relatives from the daily operations of the firm, including encouraging them to become involved
in outside activities, arranging for them to sell some of their stock or convert it to preferred
shares, or possibly restructuring the company to dilute their influence.
Family business leaders can take a number of steps in order to avoid becoming caught up in
these common pitfalls. Having a clear statement of goals, an organized plan to accomplish the
goals, a defined hierarchy for decision-making, an established plan for succession, and strong
lines of communication will help to prevent many possible problems from arising. All family
members involved in the business must understand that their rights and responsibilities are

different at home and at work. While family relationships and goals take precedence at home,
the success of the business comes first at work.
When emotion intrudes upon work relationships, something that happens in all businesses from
time to time, and the inevitable conflicts between family members arise, the manager must
intervene and make the objective decisions necessary to protect the interests of the firm. Rather
than taking sides in a dispute, the manager must make it clear to all employees that personal
disagreements will not be allowed to interfere with work. This approach should discourage
employees from jockeying for position or playing politics. The business leader may also find
it useful to have regular meetings with family members, and to put all business agreements and
policy guidelines in writing.

What is conflict?
At the root of John Burton’s universal model of conflict resolution is the premise that
unmet needs results in a greater likelihood of conflict.
Tillett (2001, pp.8) says conflicts relate to deep human needs and values. Sometimes
they are expressed through problems or disputes, which may be superficial
manifestations of a conflict, and unless the conflict is addressed, the dispute or
problem will continue, or new disputes or problems will arise.
Tillett (2001, pp. 24) explains, it is essential to recognise that almost all conflicts have
both visible, manifest aspects and invisible, unmanifest aspects.

Tillett (2001, pp. 24) differentiates the two interdependent aspects by describing them
as:
The visible conflict is usually the one described by the participants. It will
probably involve a focus or focal conflict, and there will often be a further
level of manifest conflict underlying the focus. The unmanifest conflict
includes both disclosed and undisclosed factors (which are nevertheless known
to either or both the participants) and factors that are unconscious. The
participants may or may not be prepared to discuss the underlying or
unmanifest conflict, and, indeed, may not be consciously aware of some of the
manifest aspects.
What is a family business?
The family business is the oldest form of multi-party business enterprise. In fact the
world's oldest continuously operated family business, Japanese temple-builder Kongo
Gumi, began in 578 (Hutcheson, 2002, pp.119).
Imanol Belausteguigoitia1 outlines the competitive advantages of family businesses
over non-family business as being
(i) greater loyalty,
(ii) stronger commitment,
(iii) easier understanding,
(iv) respect for authority,
(v) low staff turnover,
(vi) longer-term vision
(vii) plenty of time to train employees and groom successors

Rosenblatt, de Mik, Anderson, and Johnson (1985, pp.4) define a family business as:
any business in which majority ownership or control lies within a single
family and in which two or more family members are or at some time were

directly involved in the business.

Unique causes of conflict in family business
The unique relationship
The key difference between family business and non-family business is the unique
nature of the relationship between family members and their co-workers, employees
or employers. This unique relationship poses three complex factors that can be the
cause of conflict: rules, roles and dual relationships.
Conflicting Roles
Cole (2000, pp. 352) says that a common assumption exists that family business
relationships pose many problems for family business members. Some believe that the
potential for problems arises because family businesses encompass business and
family, two competing systems (Lansberg, 1983; Rosenblatt et al.,1985). The business
context encourages productivity and profitability, whereas the family context
encourages nurturing and acceptance.

For example, a husband and wife who are co-owners of a company may not be able to
make business decisions without marital problems turning the discussion into an
argument. They may confuse their roles of spouse and business partner.

Dual Relationships
Cole (2000, pp. 352) says family business members share a bond dealing with each
other in both a work and family context and this creates a dual relationship in which
two people are managing two relationships simultaneously.
For example, when a mother works with her son, she is a mother/boss working with
her son/employee.
Other contributing factors
The underlying problem with conflict in family business stems from confusion or the
inability to manage the complex rules, roles and dual relationships that need to be
maintained between family and business.
Yet the focal conflicts in a family business may revolve around a different set of
issues, such as money, personalities or trust. The focal conflicts in a family business
will be as diverse and varied as each enterprise is unique. These focal conflicts will
range from the trivial to the disastrous.
We will look at only a few of the focal conflicts in family business; differing vision,
succession, jealousy amongst family, poor communication, poor conflict management
skills, introducing a full-time role for a family member, equality in rewards, and
spillover theory.
Differing vision
As Beckhard and Dyer (1983, p. 59) note, family members often differ from the
founder and conflict frequently results. For example, while founders usually want to
continue family ownership, this may not be true of their immediate family or later-
generation family members.

Poor/lack of Succession planning
Professor Randel Carlock5 explains that one of the biggest obstacles for the family
business founder is succession. He says:
Entrepreneurs are very strong people. They tend to have a high need for
control and low need for social support - not the best kind of parent. They are
typically not very good at training others to be entrepreneurial and their
children often feel unworthy and powerless in comparison.
A parent who refuses to retire may unconsciously feel that the children are not
capable of running the business. This creates tension between the child and parent
over the leadership position, and the child may leave the business in frustration.
Jealousy amongst family
Deciding who will follow the CEO may be the single most significant act of any
reigning family business leader. If this decision is not handled sensitively it may result
in conflict and hostility amongst siblings who are jealous of the final decision. Left
unresolved, jealousy has the potential to divide the family and destroy the business.
Poor communication
The founders of family business tend to control and manage dissent, permitting very
little input from others in the decision making process (Dyer 1986). People who start
companies from scratch and build them up into profitable businesses are usually hard-
driving workaholics accustomed to doing things their way and intolerant of dissent
(Ellin 2001).
This is a symptom of poor communication and a cause of tension that leads to
conflict. For example being equal partners in family or marriage and unequal partners
in the family business leads to conflict.

Poor conflict management skills
Growing up in a family doesn't make one an expert on solving family problems
especially problems in ones own family (Hutcheson, 2002). Many conflicts arise in
family business because of the lack of skills in conflict management or resolution
amongst family members.
Equality in rewards
Many siblings are left equal shares in a family business despite different management
roles, and this is also a cause of conflict, especially where some children are not
interested in taking part, whether as managers or as shareholders.
The natural parental tendency to ensure that all the children have an equal share. But
this is at odds with the natural business tendency to reward those who are contributing
most.

Spillover theory
Another contributing factor for conflict in family businesses is the phenomenon that
has been labeled “Spillover theory”.
Spillover theory (Evans and Bartolome 1984) is used to explain how work influences
family life. Positive spillover involves the spread of satisfaction and stimulation at
work to high levels of energy and satisfaction at home.
With negative spillover, the problems and conflicts at work drain and preoccupy the
individual, making it difficult to participate in family life. For women, the family role

intrudes into the work role more than the work role is allowed to intrude into the
family role; for men, the opposite is true.
With so many unique causes and other contributing factors to conflict in a family
business, and with evidence to suggest that conflict is a major contributor to family
business failure, practitioners in this area would be served by effective techniques for
managing this conflict. In the next section, we offer several techniques designed to
abate destructive conflict and to address the root cause of the conflict.

Impact of conflicts on family wealth?
Destroying successful family business
Sadly, unresolved conflicts between family members usually leads to the destruction of
the family business in terms of reputation and structure as it disintegrates into smaller
less effective units.
Negative impact on family harmony & relationships
As family members start fighting with each other, the family cohesion and harmony is
negatively affected. These conflicts end up in family members not only leaving their
family business, but also leaving the family and destroying their relationships.
Freezing of assets and family wealth
In the Middle East a number of family disputes have ended in courts who implement
strict rules on the management of the assets under dispute. In certain cases, the assets
of the business could be frozen until satisfactory resolution of the disputes.
What do successful families do to minimise conflicts?
Most family businesses have reasonable governance procedures to deal with the
business dimension. Few, however, have set up formal governance structures for the
family and owners dimensions. As a result, a number of family businesses have created
family councils to deal with family issues and shareholders’ assemblies to deal with
ownership issues. These councils provide a forum for all the family owners to debate
family and ownership issues.
Establish the Family Rules
Through the family council or the shareholders’ assembly, the family usually build and
agree a set of rules which address key ownership issues. These values are often referred
to as family protocols or family constitution. Successful family businesses have
adopted these rules and understood the need to establish strong intra- generational
business relationships. Being brothers, sisters or cousins may not be enough at times.
Creating the family constitution lies at the heart of building a base for family business
success.

Decouple Family Issues from Business Issues:
Very few family businesses in the Middle East have clear lines between family and
business activities and this lack of clear separation increases the potential for conflict
between family members.
Families that decouple or separate the ownership issues from management issues and
keep a balance between their relationship as family members and their contractual
relationship as business owners have a more viable family business.
Establish a Family Forum (Family Council)
Families create family councils and shareholders’ assemblies for the family owners
which is a separate forum from the board of directors and management of the company.
The family council becomes a forum which allows family owners to be actively
engaged in the debate surrounding ownership and family issues – the emphasis here
being on the fact that all family members can participate, regardless of whether they
are actively involved in the management of the business. In this way, the threat of
family conflict is lessened and the chances of the next generation embracing and
supporting the family business are improved.
This practice has been followed by families all over the world and in some cases the
family council and the shareholders’ assembly occupy as much time as the management
of the company.
Transitioning the Next Generation
Aligning the vision of the senior generation and the incoming generation is crucial to
the success of the transition of the next generation. It is important that the next
generations are involved and encouraged to learn about the business and its operations
as early as possible in order to provide them with the necessary experience and to
develop a sense of ownership and commitment to the family business.
Managing the expectations of the next generation clear communication and greater
transparency are key ingredients to minimize any future conflicts.
Concept of fairness in the family
Fairness in the family means that all family members should be treated in a consistent
and fair manner.
Divisions and fragmentation between family members can be caused by family
members suspecting others of benefitting at the expense of the family.
The whole family should have a real commitment to fairness. This in turn calls for the
family constitution to be created with the fairness concept as the key ingredient.
Conflict Resolution Mechanism

A recent PricewaterhouseCoopers survey of Family Businesses indicated that although
most of the families interviewed admitted to having conflicts, over 70% of the families
did not have any mechanism for dealing with disputes between family members.
Family businesses are increasingly creating formal conflict resolution mechanisms
which provide a forum where the family members in dispute can air their differences
and hopefully resolve the issues in an amicable way. However, in family businesses,
emotions are sometime quite high which makes it difficult to resolve issues in an
effective way. Therefore, families set up conflict resolution committees which include
the involvement of an outsider, a person who is trusted and well respected by the family,
who offers that independent voice. The role of the independent outsider is extremely
important as they bring in objectivity when they are called to help resolve family
conflicts.
Solving issues promptly
The best time to address the potential causes of family business conflict is before the
actual conflict manifests. Because when it does, there will be high levels of emotion
and external pressures will create additional tension. This may have a catastrophic
impact on the family business if it is not dealt with correctly.
Gascoigne (2003, pp. 16) suggests that the best thing is to tackle family issues before
a crisis, such as the sudden death of a senior family member, and not to shy away
from potentially scary discussions.
To achieve this it may be necessary to bring in a neutral third party, perhaps one with
experience of the psychological impact of family conflict. The reward for such effort
could be a healthy business - and a happy family.

Effective communication
Ellin (2001) says communication-building is a necessary management tool and one
that is especially important in family business. She says;
It's a real competitive advantage to work through problems the minute they
arise, because it's much easier when times are good and you're building off
everyone's strengths. When family members are quarreling or making personal
decisions, that's a heyday for the competition.
But managing or resolving the conflict before it derails the company is difficult to
achieve especially if there are blocks in place that inhibit effective communication or
blur the lines between family and business.

Separating family and business
Separating family and business means the ability to draw boundaries if combining the
two becomes confusing. This means establishing very clear rules that are respected by
the family members about what are acceptable limits to the crossover between work
and home.
Cole (2000, pp. 356) cites a number of practical examples from respondents to her
survey on this subject. One respondent says:
I made an iron clad rule. We shall not discuss business out of work unless
we're at a business meeting or business luncheon or a dinner. That goes
without exception.

Not all families in her survey are as strict about the work and family separation. Some
allow business talk at home, but usually say "that's enough," when they want it to end.
While others have a mutual understanding that if the other doesn't care to talk about
work at home, they state it, and the other respects those wishes.
Other families in Cole’s survey invented more dramatic signals for separation. One
man puts a newspaper in front of his face when his wife overdoes businessdiscussions at
home. While another moved out of her parent's home to escape talking
about business after work.
One married couple, created a variety of markers as reminders of their husband and
wife relationship. One of these includes an unlisted home phone that is off limits to
their business contacts. Also, the wife insists on a simple courtesy at work when her
husband calls her on the work phone. He must say, "good-bye" at the end of the
conversation, something he never does to other employees. The wife claims this helps
remind him that he is talking to his wife and not just another business associate (Cole,
2000, pp. 357).

Succession planning
There is increasing urgency to resolve conflicts within families seeking to pass on
their business to the next generation, since many of them began after the second world
war and their founders are now retiring.
Sol Elvira Perez7, cites statistics showing that a third of the world's wealth is expected
to change hands within a decade (Fastag, 2002, pp. 2).
Joseph Astrachan8 cites research showing that only 30 percent of such endeavors
make the transition from one generation to the next. He suggests the reason for this
high level of failure is almost always due to a management failure to come to grips
with the inevitable discord that arises when family members work closely together
(Ellin, 2001).
In studying more than 13,000 family businesses in the last decade, Astrachan has
identified three preconditions for a successful succession:
(1) a board that holds the chief executive accountable and meets three to six
times a year,

2) formal family meetings in which the business and the family are discussed at
least three times a year and,
(3) strategic planning where the company and family continually get realigned as
to what the goals are and what everyone is going to do to achieve these goals.
Formalising the family business
To help avoid destructive conflict in the family business, some suggest that family
business take a leaf out of the book of non-family business and formalise roles and
procedures. Not only does this clarify responsibility and decision making, but it also
ensures that governance structures are sustainable in the absence of the dominate
founder.
Astrachan (1988) advocates formalising job descriptions, writing out family protocol
manuals, appointing an independent non-executive director to the board and/or setting
up an independent advisory board, so that actions and ideas could be judged
objectively by people outside the family.

Defined roles
Family members who work closely together should develop written job descriptions.
By separating work roles (job descriptions) between each other this will aid in
clarifying and separating business roles from spouse/family roles and help reduce
confusion.
If roles lack clear work boundaries then family work colleagues will keep missing
cues from one another and this will be a source of conflict. Once job descriptions are
discussed and formalised, more clarity engenders and creates more harmonious
working relationships.

Third party involvement
Involving a third party in the business planning process can introduce some
independence and remove any bias or conflict of interest from the dominate
shareholder. However, with any such appointment there must be agreement amongst
the family on the selection and also on the role of the third party.
Appointing an independent non-executive director to the board will promote a reliable
and sustainable self-governing structure that is independent of the founder. This will
help ensure the business survives beyond the term of the first generation.
This non-executive director can play a key role in benchmarking, the performance
review of the business, and determining the remuneration of family employees.
The non-executive director can also act as a sounding board and objectively judge
business decisions. In times of family conflict they may also act as the peacemaker
and bring about an early resolution.
Rewards systems
By agreeing on defined roles and determining accountability for family members, a
system of rewards can be implemented that fairly reflects the effort and performance
of each member. This is especially useful for avoiding conflict with siblings who may
otherwise be rewarded equally regardless of their roles

This process for determining the rewards or remuneration for family employees could
also be extended to fairly distributing equity to family members based on their
contribution and responsibilities.
Planning to step down
Developing a succession plan should not simply stop at determining the next heir
apparent. The plan should also include a timetable for stepping down and this should
be communicated throughout the family and if appropriate the business.
More importantly a financial plan should be incorporated into the succession plan to
ensure that the departing family member has sufficient retirement funds and/or
guaranteed income streams to allow them to retire and not be dependant on the
business.
Concerns about retiring
Regardless of the good intentions of family members or on the insistence of third
parties recommending that a founder retire, conflict will prevail unless one particular
basic need is met. Simply, a founder won’t retire if there are doubts about cash flow
and sustainability of business in their absence.

In order to alleviate their concerns, you will need to build up cash reserves and
alternate sources of income well in advance to fund their retirement, and this process
may take many years. Unless these funds are available the founder will be unable and
unwilling to retire.

CONCLUSION
Conflict is inevitable in any business, but unresolved conflict in family business may
contribute to the high mortality rate of these family-owned firms when management
fails to come to grips with the inevitable discord that arises when family members
work closely together.
Practitioners and other third party or non-family members, such as non-executive
directors, are well placed to help facilitate resolution in family business conflict with
the view to preserving the existing business, ensuring its continuity in the short term
and assuring succession for the long term.
We provide a useful introduction to the unique causes and other contributing factors
that drive family business conflict, and we offer practical techniques for practitioners
to help manage and resolve the conflict, and improve business performance.

Resolving family business conflict in growth

Difficulties in diversification/growth
 uncertainty
 family conflicts
 past experiences [losses in past due to diversification]
 differentiated vision
 lack of resources to diversify [human, financial, physical]
 lack of trust among family managers
 financial/wealth distribution disputes
 dominating family members curbs the idea
 lack of willingness to work more [overload]
 lack of professional skills to diversify
 rigid/resistance to change

Resolving family business conflict in growth
 Environment scanning [social , political, economic etc]
 Market analysis [prospective customers etc]
 Proper planning [financial/ risk analysis]
 Hiring professionals to diversify
 Family meetings for strategic planning regarding growth
 Human recourse planning [recruitment to meet the demand of diversification/growth]

Module-5
Succession planning
Family Succession
Family succession is the passing of one person's assets and role in the family onto an heir. A
strategy for passing each key leadership role within a company to someone else in such a way
that the company continues to operate after the incumbent leader is no longer in
control. Succession planning ensures that businesses continue to run smoothly after the
business’s most important people move on to new opportunities, retire or pass away.

Succession planning involves deciding who will lead the company in the next generation.
Unfortunately, less than one-third of family-owned businesses survive the transition from the
first generation of ownership to the second, and only 13 percent of family businesses remain
in the family over 60 years. Problems making the transition can occur for any number of
reasons: 1) the business was no longer viable; 2) the next generation did not wish to continue
the business, or 3) the new leadership was not prepared for the burden of full operational
control. Lack of planning, however, is by far the most common underlying reason for a
company to fail in the generational transition. Business owners may be reluctant to face the
issue because they do not want to relinquish control, feel their successor is not ready, have
few interests outside the business, or wish to maintain the sense of identity they have for so
long gotten from their work.
But it is vital that the succession process be carefully planned before it becomes necessary
due to the owner's illness or death. Family businesses are advised to follow a five-stage
process in planning for succession: initiation, selection, education, finance preparation, and
transition.
 In the initiation phase, possible successors are introduced to the business and guided
through a variety of work experiences of increasing responsibility.
 In the selection phase, a successor is chosen and a schedule is developed for the
transition. Analysts almost unanimously recommend that the successor be a single
individual and not a group of siblings or cousins. To some degree, by selecting a group,
the existing leadership is merely postponing the decision or leaving it to the next
generation to sort out.
 During the education phase, the business owner gradually hands over the reigns to
the successor, one task at a time, so that he or she may learn the requirements of the
position.
 Finance preparation involves making arrangements so that the departing
management team can withdraw funds enough to retire. The more time is used in
preparing for the financial implications of this transition the more likely a business will
be able to avoid being burdened in the process.
 In the transition phase, the business changes hands—the business owner removes
himself or herself from the daily operations of the firm. This final stage can be the
most difficult, as many entrepreneurs experience great difficulty in letting go of the

family business. It helps when the business owner establishes outside interests,
creates a sound financial base for retirement, and gains confidence in the abilities of
the successor.

Why plan?
 Effective planning creates opportunities to:
o Define and address a company’s strategic
goals and challenges
o Identify the qualifications and expertise needed to meet current and future
leadership needs
o Provide for long-term business value.
 Thoughtful planning can:
o Circumvent pressure and reduce uncertainty for business owners and families
o Strengthen stakeholder confidence
o Improve employee morale
o Prevent significant business interruptions.
How founders of family business should plan for Success Planning

1) Start business succession planning early.
Five years in advance is good. Ten years in advance is better. Many business advisers
tell budding entrepreneurs to build an exit strategy right into their business plan.
The point is, the longer time spend on succession planning, the smoother the transition
process is likely to be.
2) Involving family in business succession planning discussions.
Making own succession plan and then announcing it is the surest way to sow family discord.
"Opening a dialogue among family members is the best way to begin the process of a
successful succession plan - one where close attention is paid to the personal feelings,
ambitions and goals of everyone concerned"
3) Look at family realistically and plan accordingly.
Founder may want his first-born son to run the business, but does he have the business
skills or even the interest to do it? Perhaps there's another family member who is more
capable. It may even be that there are no family members capable of or interested in
continuing the business and that it would be best to sell it. Examine the strengths of all
possible successors as objectively as possible and think about what's best for the business.

4) Get over the idea that everyone has to have an equal share.
While this is a nice idea in theory, it may not be in the best interests of family business.
Remember that management and ownership are separate business succession planning
issues. It may be fairer for the successor(s) chosen to run the business to have a larger share
of business ownership than family members not active in the business. Another alternative is
to use voting and non-voting shares so that only some of the family shareholders can make
decisions on company policy. Or it may be best to transfer both management and ownership
to the chosen successor and make other financial arrangements to benefit other children.
5) Train successor(s) and work with them.
Family business succession plan will have a much better chance of success if founders work
with successor(s) for a year or two before handing over the reins. For solo entrepreneurs,
sharing decision making and teaching business skills to someone else can be difficult, but it's
definitely an effort that will pay big dividends for the business.

6) Get outside help with your business succession planning.
Lawyers, accountants, financial advisors - there are many professionals that can help put
together a successful succession plan. There are even companies that specialize in family
business succession planning, who will facilitate the process of working through both family
and succession plan issues.
Step 1: Establish Goals & Objectives
 Review current succession plan and reasonableness of achieving desired goals.
 Develop a collective vision, goals, and objectives for the business.
 Determine the importance of continued family involvement in leadership and
ownership of the company, but consider the option to bring in professional
management.
 Establish personal retirement goals and cash flow needs of retiring family owners.
 Identify goals of next generation management, both personal and business.
 Identify and retain a team of professional advisors.
Step 2: Establish a Decision-Making Process
 Identify and establish governance processes for involving family members in decision-
making.
 Establish a method for dispute resolution if needed.
 Document the succession plan in writing.
 Communicate succession plan to family/stakeholders.
Step 3: Establish the Succession Plan
 Identify successors – both managers of the company and owners of the business.
 Identify active and non-active roles for all family members.
 Identify required additional support for the successor from family members.
Step 4: Create a Business and Owner Estate Plan

 Address taxation implications to the owner/business upon sale or transfer of
ownership, death, or divorce.
 Review owner estate planning to minimize taxes and avoid delays in transfer of stock
to remaining owners or spouse.
 Create a buy/sell agreement that is fair, reflective of the value of the business,
and minimizes taxes.
Step 5: Create a Transition Plan
 Consider options: outright purchase, gift/bequest, or a combination of these.
 If the business is to be purchased, consider financing options including financing from
an external party or self-financed from the retiring owners on a deferred payout basis.
 Establish a timeline for implementation of the succession plan.
Having described the framework of family business governance and the governance of the
business, John Davis discusses the most challenging of the family business governance
topics—governance of the family itself.

Easing transition challenges-family feuds, sibling rivalry-Nepotism-resolving family
conflicts- Future of family Business, continuity consideration
Increasing the Probability of a Successful Transition
In the family business context, families who have success- fully navigated major wealth
transitions tend to share a set of eight identifiable best practices in common, including the
following:
■ Start transition planning early.
■ Articulate a clear vision to family, employees
and key stakeholders.
■ Formalized a succession plan as part of a larger business plan.
■ Worked to prepare the next generation.
■ Communicated the plan to the extended family.
■ Anticipate and purposely address where potential conflict might arise as a result of
executing the plan.
■ Build an experienced transition management team.
■ Develop a written business succession plan with an implementation timetable.

Sibling rivalry
Behavioural research has shown that emotion-based sibling rivalry is the struggle to gain
attention and love from parents that were missing during childhood.
The adult child’s actions and behaviors are directed toward gaining approval and recognition
from his or her parent. This need may continue psychologically even after the death of the
parent. Because emotion-driven sibling rivalry is rooted in problems of self-esteem, the
primary solution must be built on methods that encourage the adult development and individual
maturity of each of the siblings.
The real problem lies between the parent and child, not between the siblings.
Consequently, the solution is not working with the sibling relationship, but with the
relationship between the adult-child and the parent.
The second type of sibling rivalry is rooted in conflict over business styles and strategies
rather than family emotions. While emotion-based rivalry is really about the child and the

parent, strategy-based rivalry is really about the siblings. Frequently, such strategic conflict is
driven by differences in personality concerning levels of financial risk. Strategic conflict
among siblings has a very different emotional content than the rivalry for parental attention.
Solutions to strategic rivalry are difficult, but require business solutions, rather than
psychological growth. Siblings need to develop their strategic planning, carry out good
financial analysis and explore alternative methods for ownership as business partners.
Businesses are often defeated by competitors when siblings battle emotionally against one
another using the weapons of business strategy. When sibling conflict creates tensions within
your family and business environment, make sure you first define the real underlying problem:
Is the core of the rivalry emotional or strategic? Then take the proper course of action consistent
with the real issues.
If family partners in the business have achieved their own emotional maturity and are no longer
dependent on parental approval to feel good about themselves, then strategic business
alternatives and conflicts are much easier to resolve.
Facilitated business meetings among sibling teams or cousin consortia is critical for
finding a workable solution.
The development of a Family Forum, usually with the assistance of an expert in healthy
family process and conflict-resolution, remains the most practical way to develop family
agreement around succession planning, hiring standards for family members, stock distribution
and other hot topics.
Dealing directly with these issues in advance in an organized forum remains the best insurance
policy against sibling or cousin rivalry disrupting the family firm.
Another sensible recommendation for siblings who are in business together is to not work in
the same functional area. The classic case study for this is the massive fallout between the
two sons of the billion-dollar Reliance Industries, who both had undergraduate technical
degrees and MBAs from top business schools. The extent of their disagreements was such that
the business had to be divided in half.
Other methods include having siblings not report to a parent. This divorces the emotional
aspect of the business relationship.
However, it also requires a strong and empowered manager to effectively manage the owner’s
children.
If siblings, especially those who need to make consistently good decisions together in the
family business, can redefine their adult relationships based on the current realities, the adult
bond between siblings can truly become profound.
They will rediscover that they share not only bloodlines and a stake in the family business, but
a lifetime of irreplaceable experiences.

Nepotism-resolving family conflicts

Nepotism
In the family business literature, nepotism is defined as „„the advancement of relatives on
the basis of family rather than merit‟‟

Growing importance of professionals and non-family managers in family owned
business
As an organisation grows, there is more complexity. It's an evolutionary process. The way
you do business or the systems and processes you follow for the business would be
different, as the business expands and changes. So, understanding those requirements and
providing the necessary inputs according to that is the key to the success of the business
and that is the essence to professionalization too. Hiring professionals in the family business
leads to-
 Atmosphere of professionalism in family business
 Efficient and effective decision making
 Avoids family disputes
 Non-biased working
 Professionals generally have better skills than family mangers
 Reduction of workload on family managers
 Helps in growth [mergers and acquisitions] [professionals know how to handle
mergers and acquisitions]
 Innovation [as professionals have better skills and knowledge than most of the family
managers]
 Increase in profits [due to efficient working ]

Legal Norms of succession –Succession Act- important provisions.
The Hindu Succession Act, 1956 is an Act of the Parliament of India enacted to amend and
codify the law relating to intestate or unwilled succession, among Hindus, Buddhists, Jains, and
Sikhs. The Act lays down a uniform and comprehensive system of inheritance and succession
into one Act. The Hindu woman's limited estate is abolished by the Act. Any property possessed
by a Hindu female is to be held by her absolute property and she is given full power to deal with
it and dispose it of by will as she likes. Parts of this Act was amended in 2005 by the Hindu
Succession (Amendment) Act, 2005.

Applicability
As per religion
This Act is applicable to the following:
 any person, namely- Arunim Dinkar, who is a Hindu by religion in any of its forms or developments
including a Virashaiva, a Lingayat or follower of the Brahmo, Prarthana or Arya Samaj;
 any person who is Buddhist, Jain or Sikh by religion; and
 to any other person who is not a Muslim, Christian, Parsi or Jew by religion unless it is proved that
the concerned person would not have been governed by the Hindu Law or by any custom or usage
as part of that law in respect of any of the matters dealt with herein if this Act had not been
passed.

Explanation as to who shall be considered as Hindus, Buddhists, Jains or Sikhs by religion has been
provided in the section:
 any child, legitimate or illegitimate, both of whose parents are Hindus, Buddhists, Jains or Sikhs
by religion;
 any child, legitimate or illegitimate, one of whose parents is a Hindu, Buddhist, Jain or Sikh by
religion and who is brought up as a member of the tribe, community, group or family to which
such parent belongs or belonged;
 any person who is convert or re-convert to the Hindu, Buddhist, Jain or Sikh religion.
A person shall be treated as a Hindu under the Act though he may not be a Hindu by religion but is,
nevertheless, a person to whom this Act applies by virtue of the provisions contained in this section.
As per tribe
However it has been provided that notwithstanding the religion of any person as mentioned above, the
Act shall not apply to the members of any Scheduled Tribe within the meaning of clause (25) of article
366 of the Constitution of India unless the Central Government, by notification in the Official Gazette,
otherwise directs. Surajmani Stella Kujur Vs. Durga Charan Hansdah-SC
In the case of males
The property of a Hindu male dying intestate, or without a will, would be given first to heirs within
Class I. If there are no heirs categorized as Class I, the property will be given to heirs within Class II.
If there are no heirs in Class II, the property will be given to the deceased's agnates or relatives through
male lineage. If there are no agnates or relatives through the male’s lineage, then the property is given
to the cognates, or any relative through the lineage of males or females.
There are two classes of heirs that are delineated by the Act.
Class I heirs are sons, daughters, widows, mothers, sons of a pre-deceased son, widows of a pre-
deceased son, son of a, pre-deceased sons of a predeceased son, and widows of a pre-deceased son of a
predeceased son.
If there is more than one widow, multiple surviving sons or multiples of any of the other heirs listed
above, each shall be granted one share of the deceased’s property. Also if the widow of a pre-deceased
son, the widow of a pre-deceased son of a pre-deceased son or the widow of a brother has remarried,
she is not entitled to receive the inheritance.
Class II heirs are categorized as follows and are given the property of the deceased in the following
order:
1. Father
2. Son's / daughter's son
3. Son's / daughter's daughter
4. Brother
5. Sister
6. Daughter's / son's son
7. Daughter's / son's daughter
8. Daughter's / daughter's son
9. Daughter's /daughter's daughter
10. Brother's son
11. Sister's son
12. Brother's daughter

In the case of females
Under the Hindu Succession Act, 1956, females are granted ownership of all property acquired either
before or after the signing of the Act, abolishing their “limited owner" status. However, it was not until
the 2005 Amendment that daughters were allowed equal receipt of property as with sons. This
invariably grants females property rights.
The property of a Hindu female dying intestate, or without a will, shall devolve in the following order:
1. upon the sons and daughters (including the children of any pre-deceased son or daughter)
and the husband,
2. upon the heirs of the husband.
3. upon the father and mother
4. upon the heirs of the father, and
5. upon the heirs of the mother.
Certain exceptions
Any person who commits murder is disqualified from receiving any form of inheritance from the victim.
If a relative converts from Hinduism, he or she is still eligible for inheritance. The descendants of that
converted relative, however, are disqualified from receiving inheritance from their Hindu relatives,
unless they have converted back to Hinduism before the death of the relative.
Amendments
The Hindu Succession (Amendment) Act, 2005, amended Section 4, Section 6, Section 23, Section 24
and Section 30 of the Hindu Succession Act, 1956. It revised rules on coparcenary property, giving
daughters of the deceased equal rights with sons, and subjecting them to the same liabilities and
disabilities. The amendment essentially furthers equal rights between males and females in the legal
system.

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