Governance Code for Managing “Family” in Indian Family Businesses
Dr. T R Madan Mohan, Sharadha V & Mukund Mohan K
The authors are experts in the field of Business Management. They can be reached at eboard@icai.in
“Most family business are likely to fail as they do not address governance issues. Insufficient planning and preparation on succession, balancing family concerns and business interests, inclusion of non-family members in the Board of Directors, and a host of many other issues relating to family firm governance can lead to breakups and sustainability of many family businesses. Recognising this, many countries have developed best practice code that help family firms to grow and sustain across generations. India does not have a governance code or a national guidance specifically for family-owned businesses. In this paper, we present family business code (FBC) for Indian family business, listed and unlisted, that helps them address all facets of governance and sustainability. Read on…”
Introduction and Macro Context
Family ownership is the most prevalent form of ownership structure in many countries. Family business can be a single-owner firm or large industrial houses. India has a rich business history with a significant number of businesses still being controlled and managed by families (Chahal and Sharma, 2020). Majority of the family business are unlisted companies and sound governance of unlisted companies is key for larger economic stability. Unlisted companies have large borrowings from financial institutions, including public sector banks. Without adequate governance practices, inequality exists between the promoters and stakeholder interests.
Recognising the importance of unlisted companies with effect from April 1, 2021, the Indian government has narrowed the definition of “listed company” to exclude those companies which have only listed their debt securities. Even a large systematically important company that has only its debt securities listed will now be classified as an unlisted company. With this amendment, we expect the role of governance in unlisted companies to be robust and mature to arrest any wrongdoings.
Without good operating norms, families have less direction when conflicts arise (Sinha and Govindaraj, 2020). Many family businesses do not have a clear demarcation between personal and business areas and expectations and responsibilities in the business. Indian culture certainly plays a role in the affairs of family business. With a strong patriarchal presence, preference to male and firstborn is implicit in some family boards. Sometimes, a traditional mindset and cultural factors prohibit women’s representation in the family council or the holding company’s board. Family businesses have their share of intra-family divisions and suffer from nepotism and adhocism. In volatile and testing economic situations, family businesses not only need good corporate governance practices and systems, but also robust family business practices to sustain profitable business.
Good corporate governance of both family and their business are key to survival, growth and sustenance. Family businesses require simple and flexible governance mechanisms that can be adopted and evolve with the family and the business as their needs change. Family business governance is all about preserving the action-oriented mindset that allow the family and its employees to turn an opportunity into a thriving business, also preserve and sustain the business for long-term (Egloff and Bhalla, 2014). Several companies have adopted good governance practices to defuse certain problems in their business management. Several countries have instituted committees to formalise a code of practices for listed and unlisted family businesses as a cornerstone for the creation of sustainable and profitable growth.
“A family business code covers the governance mechanisms for family, interfaces with corporate governance at the business level, professionalisation, limits on insiders, remuneration for family and family members, succession and social responsibilities.”
The Family Business Code (FBC) is a list of mechanisms and rules (or expectations) to which everyone adheres to in a family business. A family business code covers the governance mechanisms for family, interfaces with corporate governance at the business level, professionalisation, limits on insiders, remuneration for family and family members, succession and social responsibilities. Family business code assists family-owned businesses to adopt a holistic approach to balance family and business interests and successfully preserve the business for generations to come.
Family business owners and their board recognise that they need a list of mechanisms and rules (or expectations) to which everyone adheres to in a family business. What they need is a code that is cognizant of the size and development of both family and business and effective enough to meet the evolving business context. They desire to have a family business code that covers the governance mechanisms for family, interfaces with corporate governance at the business level, professionalisation, limits on insiders, remuneration for family and family members, succession and social responsibilities. Their interest in investing and adhering to a family business code is to adopt a holistic approach to balance family and business interests and successfully preserve the business for generations to come. Family business owners and the boards lack a touchstone for common decision-making to build profitable and sustainable businesses, define boundaries and rules for family and business interactions, and mechanism to preserve long-term ownership of the businesses. Lack of a standardised family business code also limits Governance, Risk Management and Compliance (GRC) professionals in their assessments of a family business and identifying which areas need improvements. Towards filling this gap, we have attempted to develop a family business code for Indian family-owned businesses.
“Lack of a standardised family business code also limits Governance, Risk Management and Compliance (GRC) professionals in their assessments of a family business and identifying which areas need improvements.”
Research Method
We adopted a rigorous two-step approach to develop the family business code:
- International Benchmark Analysis: We first analysed the family business codes of Germany, Switzerland, Italy, Belgium (Code Buysse II), and Gulf Cooperation Council (GCC) countries to generate an exhaustive list of governance variables.
- Empirical Survey & Professional Interviews: We adopted a national survey to reach out to members of ICAI, ICSI, family business owners, academicians, and legal professionals across India, eliciting their response on the appropriateness of each variable and its relevance to family business governance for the Indian environment. We also conducted telephonic interviews with board members, chartered accountants, and family business advisers to capture qualitative insights and operational realities.
Results: 12 Dimensions of the Indian Family Business Code
Based on the interviews and survey, we present 12 core dimensions that emerged as family business code measures for Indian family businesses:
1. Family Business Goals
Refers to the family’s unwritten and written objectives of doing business and include vision, core values, and practices that are embedded in governance and policies of its business including succession plans, way of carrying on day-to-day activities of the business, business ethics, loyalty, employee welfare, and social relevance.
2. Family Governance Structures
Refers to dispute resolution mechanisms and FBC or cousin consortia (CC) or other forms, both informal and formal, that family businesses use to manage their business and family interests. Governance structures bring in professionalism to a family business. This includes family board (size 5–8 members), tenure and rotation of family members, equal representation amongst all family branches or otherwise, women representation on FBC, succession rights of wife and daughters to FBC, FBC composition of family and non-family, non-family and nominated members (with and without voting rights), and family board activism (collective process and access to information and decision-making).
“Family governance structures refer to dispute resolution mechanisms and FBC or cousin consortia (CC) or other forms, both informal and formal, that family business use to manage their business and family interests. Governance structures bring in professionalism to a family business.”
3. Family Governance Processes
Includes number of board representation amongst different siblings, voting rights, nominations, decision rights, meeting rules, accountability of FBC, removal of members from FBC, decision-making, intra-family buying and white knight limitations (restricting one family branch to buy shares of one family tree and vest complete control), and financial reporting and proprietary audits (both internal and external). Compliance and technological changes and advancements are to be managed by one member each for the entire business.
4. Conflict and Dispute Resolution
Includes conflict resolution mechanisms that set means and processes for resolving conflicts amongst family members and the businesses owned by the family. This may include advisory and dictatorial roles, formal and informal dispute resolution mechanisms within FBC and amongst family members, internal members’ mediation mechanisms, third-party professional involvement, and options on when to litigate. The Family council or the Family Business Board (cousin’s consortia) can create or nominate an individual or a group of family members to address conflicts, refer to external arbitrators or trusted advisers for neutral evaluation, and formulate legal recourse guidelines if recommendations remain unaccepted.
“Conflict and dispute resolution includes conflict resolution mechanisms that sets means and processes for resolving conflicts amongst family members and the businesses owned by the family.”
5. Family Ownership Control
Refers to the legal structures and mechanisms adopted to protect the business and family from opportunism and guile. This includes separation of the CEO and chairperson roles for business units, selection criteria for positions owned by family, rotation or stability on FBC, inheritance of shares whenever separation or marriage affects the business, and issuance of dual-class shares to control family voting power and ward off hostile takeovers. It covers dividend distributions, mediation options, restrictions on transfer of shares upon divorce or death, buy-sell provisions, dissolution of companies, spousal consents, and automatic buy-out mechanisms.
6. Family Communications
Includes formal communications through FBC or respective business groups on business and family matters, codes of conduct in formal meetings, communication protocols for sharing and receiving feedback through formal channels only, communication codes for FBC members seeking operational data from business units, and FBC Media policies.
7. Family Rituals and Preserving Identity
Refers to the assets and allocations family businesses make to preserve their identity (cultural or religious grants and activities). Builds and reinforces culture to balance personalities and self-interests across generations using rituals, traditions, and routines. Rituals include annual family meets, “back-to-root” celebrations, and founder’s oath ceremonies that embody cultural, religious, and ethnic practices. Traditions and routines include village festivals, cultural summits, or regular dinners to foster informal bonding. Crucially, these activities must be financed by the Family Business Board through royalties or corpus interest, and not charged to company operational accounts.
8. Corporate Governance of Family Business Units
Includes balance of family and independent directors on the board, occupation and professional expertise of independents, advisory board composition (insiders vs. independent professionals), appointment of women directors, strict separation of Chair (FBC chairperson or nominee) and CEO (professional manager), formal audit, remuneration, and risk committees, board performance reviews, and adoption of robust GRC tools to track and report ESG metrics.
9. Family Member Assessment and Assimilation
Encompasses formal structures and processes through FBC to support each family member in determining their fitment with business units, periodic objective performance evaluations, market-aligned remuneration benchmarks, family member replacement policies from operating units, and career development support for members pursuing non-business or external paths.
10. Succession Management
Governs identification, appointment, election, and induction of successors; rules on adopted children, stepchildren, or situations with no direct heirs; emergency succession protocols; marriage, prenuptial, or divorce implications; eliminating gender bias and primogeniture (firstborn bias); policies on in-laws in business; structured ownership transfer methods; multi-track succession paths (intrapreneurship, higher education, shop-floor training); and involvement of non-family professionals in continuous grooming, mentoring, and exit transitions.
11. Family Wealth Management
Includes creation of family corpus, establishment of a formal Family Office, professional management vs. family involvement in wealth oversight, profit sharing and royalty payments to family trusts, corpus capital allocation rules, percentage of corporate profits reinvested in operating businesses, risk appetite frameworks, buybacks, M&A evaluation, and wealth reporting.
12. Philanthropy and Corporate Social Responsibility (CSR)
Refers to commitment to social impact, key thematic areas for continuous investment, structured involvement of family members, formation of Section 8 / Section 25 Companies or family philanthropic foundations, governance and reporting alignment between foundations and FBC, and reputation management.
Table 1: Family Business Code Assessment Checklist
For family business owners, the code serves as an actionable self-rating diagnostic. This assessment helps boards identify structural gaps and establish a roadmap for directing requisite governance structures, processes, and practices to support sustainable expansion.
“Family businesses and GRC consultants can also use the family business code to develop a family business governance maturity model.”
Table 2: Family Business Governance Maturity Model
Analogous to Capability Maturity Models (Madan Mohan et al., 2020), this framework enables analysts, lenders, investors, and GRC professionals to assess the governance maturity of listed and unlisted family businesses across four distinct evolutionary stages:
| Dimensions | Maturity Stage 1 | Maturity Stage 2 | Maturity Stage 3 | Maturity Stage 4 |
|---|---|---|---|---|
| Family Business Goals | Weak vision, value, and goals alignment | Well defined business and family goals | Clear goals, Family charter, council and business units | Well aligned goals, objectives and outcomes for both family and business |
| Family Governance Processes | Limited Governance structures and mechanisms to manage business and family interests | Presence of a family council, Family Assembly, to manage business and family interests | Presence of a family council, Family Assembly, cousins’ consortia or other forms to manage business and family interests with complete professionalisation of business | All of Stage 3 including clear structures and mechanisms to manage business and family interests including equal representation amongst all family branches or otherwise, women representation on FBC, succession rights of wife and daughters |
| Conflict And Dispute Resolution | Avoiding conflict and no formal resolution | Broad Conflict resolution | Formal conflict resolution mechanisms | Clear conflict resolution with inclusion of internal and external mediators |
| Family Ownership Control | Limited or no legal structures and mechanisms to protect the family and the business | Broad structures and Mechanisms present to protect the family and the business | Clear legal structures and mechanisms that are adopted to protect the business and family | Well defined legal structures and mechanisms that are adopted to protect the business and family |
| Family Communications | Limited or no regular communication within the family members | Informal communications within business groups with no documentation or feedback | Presence of family assembly or other structures to regularly conduct and facilitate formal communications within respective business groups on business and other areas | All of Stage 3 including code of conduct in formal meetings, communication protocols for sharing and receiving feedbacks through formal mechanisms, communication codes for FBC or any of its members seeking information from a business unit |
| Identity Preservation | Little or no importance is provided towards family’s business legacy or identity preservation | Members are broadly made aware of the business legacy, history and what it stands for | Structures and mechanisms in place facilitate irregular rituals, traditions and routines to preserve family identity and culture | Structures and mechanisms in place regularly reinforce the culture to balance personalities and self-interests across generations using rituals, traditions and routines among other forms |
| Governance Of Family Business Units | Limited or no governance within the family Business units | Broad governance over business units with no formal structures to facilitate feedback | Presence of formal structures to outline major details (family and independent directors on board, occupation and professional expertise of independents, advisory board composition (internal and external), women directors, separation of ownership and management | All of Stage 3 including includes number of formal audits, remuneration and risk committees, performance review of boards and adoption of robust GRC tools |
| Member Assessment And Assimilation | Limited or no evaluation or support to members | Irregular performance evaluation and little support to family members on career management | Formal structures present to periodically assess family members in business, remuneration benchmarks and family member replacement policies from business units | All of Stage 3 including assessment of members with their fitment in business and family member career management policies in non-business areas |
| Succession | Weak succession planning | Succession plans with emphasis on a male heir and firstborn restrictions | Succession plans with gender bias but no restrictions on the firstborn | Succession planning and execution without any gender/firstborn limitations taking into account adopted children, no children or heir, and stepchildren |
| Wealth Management | Informal wealth management | Broad wealth management structure | Presence of Family office and a formal Wealth Management mechanism | Efficient Investment council and a Family office with regular reporting on the same |
| Philanthropy And CSR | Limited philanthropy and compliance to CSR | Irregular philanthropic duties with compliance to CSR | Presence of philanthropy, and reputation management | Formal and clear public engagement, political donations and philanthropy |
Detailed Evolutionary Progression of Maturity Stages
Stage 1: Rudimentary Governance
At Stage 1, family firms have a weak alignment of the company’s vision, mission, and goals with limited governance structures and mechanisms to manage business and family interests. Governance is largely ad-hoc, informal, and vulnerable to acute operational shocks.
Stage 2: Emerging Structure but Patriarchal & Incomplete
At Stage 2, broad governance structures to manage business and family interests exist, but with inadequate conflict resolution mechanisms. Wealth management may be ad hoc, it does not tie family members’ remuneration to their contributions, business units have no formal structures to facilitate feedback and communication, and it limits succession strictly to a male heir and firstborn.
Stage 3: Professionalized & Structured Management
At Stage 3, the family business governance is more matured, with a clear definition of company goals, presence of governance structures like family council or cousin’s consortia to manage business and family interests. Formal structures to assess family members in business, remuneration benchmarks, and family member replacement policies from business units are in place; succession plans with gender bias but no restrictions on the firstborn may be in force.
Stage 4: Optimized Multi-Generational Institutionalization
At Stage 4, all fronts of governance and risk management are optimised. Governance structures optimally manage business and family interests, and of all family branches. Succession is based strictly on merit and competence. Formal and informal mechanisms exist for successor identification and preparation for the role. The family business employs mechanisms to reinforce the culture to balance personalities and self-interests across generations using rituals, traditions, and routines among other forms. At this stage, a family office supported by an investment council helps to diversify investment and de-risk family business fortunes from vagaries of the market. Philanthropic engagements and donations are formalised and aligned to support the growth and sustainability of the family business.
“Stage-wise maturity helps family businesses to invest and support appropriate structure, process and systems to drive superior governance and effective risk controls.”
Conclusion
In conclusion, the Family Business Code (FBC) presented here delivers an actionable governance framework that empowers family businesses—both listed and unlisted—to navigate intra-family complexities, professionalize boards, and thrive across multiple generations. Stage-wise maturity provides family boards and GRC professionals with a definitive benchmark to invest in and direct appropriate structures, processes, and systems that drive superior governance, long-term wealth preservation, and effective risk controls.