Promoter-led firms grew faster than professionally-led ones since 2013

Growth in profits show an even wider gap than sales in the last 5 years

Professionally-managed companies lagged promoter-led ones over the last five years. Both sales, as well as profits, saw higher growth in promoter-led companies since the financial year ended March 2013, shows an analysis of firms forming a part of the NSE Nifty50 benchmark index.

There is an absolute difference of over 10 percentage points in sales for companies under consideration. Sales for both sets of companies took a hit in 2015-16. However, it was promoter-led companies which seemed to come out on top by the end of 2017-18.  

The gap between the two is even wider if one considers net profit of 42.5 per cent.

This is despite a fall in 2015 in promoter-managed companies’ total profits under consideration due to losses at Vedanta following an impairment hit in the fourth quarter because of the write-down of assets related to its acquisition of Cairn India. However, a subsequent recovery has seen promoter-led companies overtaking professionally-led ones in their profit increase over the last five years.

However, there may be variations with changes in sample and period under consideration. For example, a 2018 study entitled ‘How Family Ownership Impacts Firm Performance: A Study of Listed Firms in India’ said promoters don’t really help their firms do better despite having skin in the game. In fact, they weigh on firm performance.

“We observe that family ownership, in general, has made negative contributions to firm performance. We, therefore, conclude that family ownership and control per se are a significant impediment to firm performance for the listed firms in India,” said the authors Nupur Pavan Bang, Kavil Ramachandran, and Anierudh Vishwanathan in the ISB working paper.

Another study in September 2018 study from financial services major, Credit Suisse Group, said family-owned firms tend to outperform broader markets.  It noted that family-owned companies have outperformed their non-family-owned peers in every country since 2006, when looking at the Asian region (excluding Japan).

India figures among the countries with the best-performing family-owned companies. Other countries in the list include Germany, Italy, and China.  A long-term focus on growing revenues and funding of innovation from its own cash are some of the reasons that such companies tend to do well, said the report.  

“Greater family ownership also tends to increase the use of longer-term financial targets for management remuneration, and family-owned companies prefer conservative funding structures for investments,” said the report entitled ‘The CS Family 1000 in 2018,’ put together by authors Eugene Klerk, Richard Kersley, Maria Bhatti, and Brandon Vair.

Amit Tandon, founder and managing director of IiAS, said one might find evidence for both, depending on the parameters of the study.  Ultimately it depends on many factors, including the state of the company, the stage of development of the economy in which it operates, and the quality of management that might be brought in. A good manager can add a lot of value, while a competent family member can also do well because of the long-term vision that the person brings to the table. “It’s very difficult to go with one view,” said Tandon.