No longer in Lala-land | Value Research The contempt for 'Lala companies' is giving way to a new respect for entrepreneurial owners
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No longer in Lala-land

The contempt for 'Lala companies' is giving way to a new respect for entrepreneurial owners

Some time back, in a conversation with a couple of business consultants, I heard a series of disparaging remarks about "Lala companies". That's a phrase that used to be heard a lot more in the first decade or so after liberalisation than it is now. Then, whether someone's perspective was that of an investor, an employee, a vendor, or a customer, it was the done thing to frequently complain about having to deal with family businesses. It seemed that everyone was looking forward to a future where every business had become professional.

Since then, something seems to have changed in this attitude. Perhaps everyone discovered that professionally-managed businesses had their own set of problems, or perhaps there's just a new appreciation of the entrepreneurial spirit that the owner-manager brings to the table. Recently, a very interesting American investment manager named Thomas Russo spoke to for Value Research's magazine Wealth Insight. Russo is a well-known practitioner of value investing and has a remarkable 25-year track record of beating the S&P 500. He gave an interesting set of reasons showing why, with the right approach, investors should actually prefer family businesses.

The main idea in the investment approach is that family-run businesses are preferable because through them a primary risk to public market investors, which is agency cost, can be addressed. Agency cost is the likelihood that those people who manage your assets, the shareholder/owner's assets, do so with their interests in mind and not yours, the owner's interest. This arises from the belief that it has been shown, especially over the last two decades, that without the interest and commitment of an entrepreneur, professional managers are increasingly likely to manage not for the shareholder, but for feathering their own nest.

The interesting thing about this idea is that implicitly, there are not two, but three categories of companies here that investors need to be aware of. There are the entrepreneur owned and managed companies, there are companies that are owned by an entrepreneur or a family but run by professionals, and there are the hallowed ideal of modern management--the purely professional companies which have widely held public ownership. Unlike the west, in India, we have formalised all this under the concept of promoter, which actually makes things clearer.

As Russo puts it, the benefit of investing with family-controlled enterprises is that the family can exert dominion over managements in a way that faceless public shareholders cannot. Families have control so they can influence the strategic direction. They have control which allows them to guarantee managers that, if they embark on the right investment programs, they will not run the risk of being displaced from their job if, midway through the investments, the costs of proper long-term minded investments burden shortterm results. Families can provide that assurance to managements and I find that, to liberate managements to dare to be much more aggressive in building for the future.

And then, there's the flipside of family control, which is what Indian investors have always been more wary of, which is family-controlled businesses bleeding companies to their own benefit. In actual fact, without much attention being paid to it, it is this risk that has receded to a considerable degree. It's not that people have simply become more ethical, instead there is the combined effect of greater information flow and the realisation that even as a promoter focussed on personal wealth, it's better to be in the field for long, rather than have a mentality of quick extraction.

Another contribution to the changed attitudes towards family-owned vis-a-vis professional businesses is the general change in attitudes towards owner-managed businesses, driven by the new age of technology businesses. Even though businesses like Google, Apple, Facebook, Amazon or Tesla don't fit the definition of family-owned, they are clearly examples of companies that have got the better of older, professionally-run firms because of the entrepreneurial energy and drive of a founder-owner.

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