Indian family businesses: Governance begins at home

Regulatory measures like the Companies Act of 2013 and the Companies (Restriction on Number of Layers) Rules, 2017, were designed to curb excessive complexity. Yet, while these rules aim to check concentration, they overlook a more critical issue: governance.

As the paper notes, family business groups, regardless of size, often share a common design principle: intricate “interconnected governance structures” that consolidate control through concentrated ownership.

These structures may make business continuity easier in the short run, but unless carefully stewarded, they risk entrenching poor decision-making, succession disputes and opaque accountability.

Why does this matter today? Because Indian family businesses are navigating multiple transitions—generational, structural and financial. Many are preparing for initial public offers, courting private equity or exploring succession. Regulatory scrutiny around related-party transactions has increased. Next-generation members are demanding clearer roles, merit-based advancement and purpose beyond profit.

Amid this churn, families are rushing to adopt governance tools, hoping these will future-proof the business. However, governance in promoter-driven companies and family businesses is not one-size-fits-all.

Family firms face unique internal agency problems quite different from the classic principal–agent conflict, where managers pursue their own interests at shareholders’ expense. In family firms, founders may act out of parental altruism, favouring children even when it harms the business. Siblings and cousins may engage in family opportunism, extracting private benefits or hoarding power. The effectiveness of governance tools hinges on understanding these conflicts and the firm’s lifecycle stage.

Indian family businesses urgently need to understand this. Governance failure in family firms is rarely because of missing rules. More often, it is due to unresolved relationships.

Early-stage family firms often run on trust, charisma and shared ambition. But as the business scales and the founder ages, these invisible levers weaken. Younger members want autonomy. Non-family professionals want clarity. Ownership begins to fragment.

At this point, informal trust must evolve into formal governance—forums for dialogue, decision-making norms and dispute resolution mechanisms. And later, as ownership dilutes and family involvement reduces, the business must transition again—towards institutional governance with independent oversight, performance accountability and delegated authority.

But here’s the catch: Governance mechanisms are not interchangeable. A board cannot fix a sibling rivalry. A constitution cannot resolve a lack of emotional readiness. A 2017 study by Aaken, Rost and Siedl (shorturl.at/XmoPS) rightly warned against the blunt import of governance tools without an assessment of their fit.

So what does good governance look like in this moment of flux? It begins with a sense of shared purpose, which precedes structure. Why does the family want to stay in business together? What values do they share? What trade-offs are they willing to make—say between profit and legacy? Without alignment on these vital questions, governance tools won’t work.

Governance also requires both management and ownership competence. Being a good owner is a learnt skill. Yet, in India, successors are often thrust into leadership without adequate preparation. Families must invest in the next generation’s development, not only through MBA degrees, but through lived exposure to decision-making, conflict and ambiguity.

Equally essential is emotional maturity. Governance in family firms is fundamentally about managing multiple loyalties—to the business, to the family and to oneself. It means having hard conversations early and learning to let go with grace. This cannot be outsourced to advisors. It must be lived and led from within.

Good governance is also adaptive. What a founder-led business needs is very different from what a sibling partnership or a cousin consortium requires. Over-governing a young tightly knit firm can breed resentment. Under-governing a sprawling third-generation group can spell disaster.

Finally, families must resist the urge to conflate governance with professionalization. The two are not the same. A business may have a professional CEO, but without clarity on family expectations, unresolved succession plans or informal interference, chaos is likely to follow.

As the IZA study reminds us, India’s economy continues to be shaped disproportionately by family business groups. If India’s family businesses are to remain not just enduring but enriching forces in the economy, governance must evolve from a box-ticking exercise to a deliberate, values-driven practice.

The future of India Inc may well depend on what happens not just in boardrooms, but around family dining tables.

These are the author’s personal views.

The author is professor of economics and policy and executive director, Centre for Family Business & Entrepreneurship at Bhavan’s SPJIMR.