Family Business Reliance Industries Ambani Family Research Paper

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Introduction

Reliance Industries was founded by the Ambani family in the 1960s in Maharashtra, manufacturing synthetic fabrics. The company went public in 1977. Chairman and MD of the company is Mukesh Ambani and the Ambani family controls 46.32% of the company’s shares, which are listed on the National Stock Exchange of India. The company currently oversees 158 subsidiaries and has 7 associate firms with nearly 30,000 employees (Reliance Industries, Limited, 2019). From the 1960s to the 1980s, the company was managed by its founder Dhirubhai Ambani; but after suffering a stroke, Dhirubhai gave control of daily operations to his sons Mukesh and Anil. When Dhirubhai died in 2002, Mukesh and Anil assumed control of management of the whole company. Within two years’ time, a private spat between the two brothers had broken out into the public realm and the company’s share price was negatively impacted. Their mother intervened to oversee a division of the Reliance company, essentially breaking the firm into two separate companies. Mukesh was granted Reliance Industries while Anil was granted the telecoms, entertainment, financial and energy sections of the firm.

Criteria Used by Academics to Assess How to Manage Professionally a Family Business

There are many differences between the family-owned firm and the professionally managed firm. The family will have a personal stake in the success of the business while professional managers will only have an interest that is “limited to the specifics of the employment contract” (Daily & Dollinger, 1991, p. 3). The risk of losing the job is also nowhere near the risk of failure assumed by the family owner, since the business is not just the family owner’s livelihood but also reputation and sense of self-worth. Daily & Dollinger (1991) note that “organizational performance is correlated with compensation in owner-controlled firms but with size in professionally-managed firms” (p. 3). Families tend to reward those who perform will with greater compensation, but with professionally managed firms, compensation is given based on the size and role of the position and not necessarily performance. In other words, family-owned firms are more supportive towards workers who are loyal, high performers than will necessarily be the case in professionally managed firms.

Sraer and Thesmar (2007) show that there is a “more efficient use of labor in heir-managed firms” than in professionally managed firms (p. 709). The reason for this is that family-owned firms and heir-managed firms are more parsimonious with their capital and tend not to be profligate, as the money they spend is money that comes out of their own pocket rather than out of someone else’s pocket. This means that families have an enormous stake in their own companies and they reflect that stake in terms of how they pay for labor and resources. As Sraer and Thesmar (2007) show, family owned companies “pay lower wages, even allowing for skill and age structure” while also making a strong effort to “smooth out industry shocks and manage to honor implicit labor contracts” (p. 3). Thus, family firms are very much more hands-on with the company and involved in the industry, and to preserve their bottom line they tend to “employ more unskilled, cheap labor, use less capital, pay lower interest rates on debt and initiate more profitable acquisitions” (Sraer & Thesmar, 2007, p. 3). Heirs and family run businesses are more cost-conscious in this manner.

Burkart, Panunzi and Shleifer (2003) argue that family owned firms that pass on management responsibilities to heirs instead of to professional managers perform more poorly over time. They use various models to show that professionally managed organizations tend to succeed more consistently because there is no bias in terms of decision-making. The company is more likely to perform well because of the application of general business acumen possessed by professionals that is not necessarily possessed by family owners.

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These findings are at odds, however, with the findings of Sraer and Thesmar (2007) who show that family owners have much more equity in the company and thus are more likely to be efficient and effective decisions.

McConaughy, Matthews and Fialko (2001) corroborated the findings of Sraer and Thesmar (2001) and show through their tests that “controlling for size, industry, and managerial ownership…firms controlled by the founding family have greater value, are operated more efficiently, and carry less debt than other firms” (p. 31). The measures they employed were capital structure, performance and share value.

How the Ambani Family Business is Managed according to Two Criteria

The two criteria used to assess how well the Ambani family is managing Reliance Industries are: 1) use of labor, and 2) profitability of acquisitions.

With nearly 30,000 employees Reliance Industries is a major multinational company, the company still makes good use of temporary and contract workers, with some earning less than 30,000 rupees per month (Ray, 2020). With more than 700 Reliance Retail…

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…it is a point of pride for the family to build strong relationships with stakeholders, including employees and clients, and it makes strategic acquisitions that make sense from a vertical and horizontal standpoint. The company is guided by the Ambani brothers now—but the mother’s influence has been as critical as anything else in preventing the business from being ripped apart by feuding brothers with feuding visions of where to take the company. The mother’s intervention showed that a family-owned business can settle disputes in the simplest and most effective of ways—by keeping it in the family and working out a win-win solution for all. In non-family owned businesses it is much more difficult to work out such solutions because shareholders have to be given a vote and the Board has to give approval and so on. But in the Ambani Empire, when the family gives its blessing on the direction it wants to take, shareholders and the Board fall in line and conform their will with that of the family.

Conclusion

The Ambani family has masterfully and professionally managed Reliance Industries for decades, growing it into the Empire that it currently is today, with more $150 billion in assets and net income of more than $5 billion annually. The company has managed to be this successful through a number of ways, but two criteria that set it apart are 1) its ability to build strong relationships with workers and thus reduce costs associated with labor, and 2) its ability to make strategic acquisitions that have enabled both vertical and horizontal integration across sectors and industries. The company has grown itself from a small textiles firm into a giant of industry, spanning from everything from energy to entertainment and fashion. The company has succeeded so well because it has been family-owned from the beginning. As scholars have shown, when businesses are owned and managed by founders and their heirs they tend to be better run than businesses that are only managed by professionals whose stake in the company starts and stops with the terms of their contract. With families like the Ambanis, the whole of the family name is bound up in the business and thus every decision that is made is made with the awareness that the family’s reputation is on the line and therefore each decision is made with the kind of prudent care required of successful businesses like the Reliance Industries Empire.
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