Family Business Reliance Industries Ambani Family

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. 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 shops across India alone, the company benefits from a low pay rate that is standard in the country. The company is known for low compensation rates among reviews on labor sites such as Indeed.com and the most common characterization of the job is long work hours and low pay. This indicates that the family-owned business does indeed pay low rates and maximize labor potential, as McConaughy et al. (2001) and Sraer and Thesmar (2007) show is what family-owned firms are more likely to do. There is very little waste in terms of expenditure on employees. Rather, a great deal is expected of employees in the company—but because in family-owned firms a merit-based system of reward is more likely to be employed, the incentive for working hard, long hours for low pay is that over time the individual will be compensated at a higher rate if he proves himself to be an industrious, loyal worker for the firm.
In exchange for working hard and putting in the hours for low rates, workers also receive job security, which is something they are less likely to receive from a professionally managed firm. The family-owned Reliance Industries rewards its workers with job security so that they do not need to fear about losing their job if they have been loyal to the company. Other businesses will cut workers and lay off employees as soon as an adverse situation arises because the managers have no personal stake in the company beyond that which is stated in their contract for services. But Reliance shows its employees that it cares about them and this is evident in its response to the COVID 19 outbreak, which has put many people out of work all over the world, including 20 million in the US alone. At the Ambani-owned Reliance, the company is doing just the opposite: instead of laying off workers, it is actually paying those who earn low salaries twice what they earn so that they can manage in this difficult time and be assured of the job security that the company takes so seriously (Ray, 2020).
The fact that Reliance wants to boost morale in this manner shows that it understands the benefits of winning employee trust long-term. Turnover is a costly reality for many professionally-managed companies. The more employees who are hired and who quit translates into more costs that must be paid to HR to find qualified workers and to train others. A constantly revolving door of employees contributes significantly to expenditures. In the Ambani-owned firm of Reliance, that problem is addressed masterfully by the firm because it shows that it valued employee loyalty highly and that it wants to have good relationships with its workers. By making sure the needs of its workers are being met during the COVID 19 crisis, the business is not only enhancing its own reputation among workers but also laying the foundation for long lasting worker tenures and reducing the risk of turnover. Employees want to work at Reliance in spite of the initial low pay and long hours because they know that the company will reward them overtime if they demonstrate loyalty. That is one of the good things that Reliance does for its workers and is one of the biggest reasons the company is able to maximize labor performance: it keeps costs associated with labor low but also takes care of workers with whom it wants to maintain good relations.
The other metric is profitability of acquisitions. Here Reliance has shown that it knows how to acquire strong companies. After starting off in the textiles industry it has grown through strategic acquisitions. With over 150 subsidiaries, this fact can be shown: Aurora Algae, Ethane Crystal, Genesis Colors, GML India Fashion, Indiawin Sports Private, Jio Payments Bank, M Entertainments, New Emerging World of Journalism, and many others are all examples of the lengths the Ambani-owned Reliance has gone to spread itself into various sectors and industries and to shore up vertical integration and horizontal integration strategies. Controlling the means of production, the distribution as well as similar businesses in the industry are management steps that the firm has taken that allow it to dominate across sectors.
The company now controls $140 billion in assets and generates more than $5 billion in net income every year (RIL Annual Report, 2019). This could not be possible with the string of successful acquisitions the family-owned and managed company has made over the decades. This fact bears out the conclusions of McConaughy et al. (2001) and Sraer and Thesmar (2007). These acquisitions have enabled Reliance to grow into an empire, whereas most companies that are professionally managed rather than managed by the family that owns them do not have the same scope and drive to dominate. For instance, Jeff Bezos founded Amazon in his garage and he still runs the company. As the founder, he has had the vision to push Amazon to the top of the online retail sector. The same is true for Reliance, which has come to rise up in so many different sectors that it is truly a business empire—from entertainment to communications to textiles to energy—the firm is now a juggernaut specifically because the Ambani family has been hands-on and highly involved in identifying strategic acquisitions.
It all starts with having a vision and that is what the Ambani family has brought to the company founded by Dhirubhai in the 1960s. That original vision was not just to become a leader in the textiles industry but to move into various sectors using the profits made from the original enterprise and to leverage the good reputation and brand name that the enterprise had enabled the family to build up for itself. Leveraging the name and reputation is important when it comes to acquiring investment capital and to securing strong credit lines that facilitate acquisitions without harming cash flow. The ability to navigate on so many fronts while holding so many strings is a testament to the family’s ability to remain invested in the business year after year.
Granted, the recent public spat between Ambani brothers did bring up doubts about the company going forward, but the intervention of the mother showed that the company could weather the strong wills of the competing brothers well enough and a solution was brokered that was considered a win-win for all. It was an example of, rather than making an acquisition the company was making a division so that both brothers could control those portions of the Reliance empire that suited their tastes.
Thus, again, the ability of the family to maintain control of acquisitions (as well as separations) bears out the argument of the scholars that shows that family owned businesses are more likely to succeed because of the level of investment from the family. When strong-willed brothers engage in disputes it is usually a sign that both have good visions of where they want to take the company—and the solution that was brokered by the mother shows that the family’s business sense runs from father to mother to sons: it is a family intimately well-versed in the arena of business.
Reliance Industries is therefore very professionally managed and even managed more effectively than most professionally managed companies because of the fact that it is still a family-owned empire of businesses. The family controls the future and destiny of the company and 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.
References
Burkart, M., Panunzi, F. and Shleifer, A., 2003. Family firms. The journal of finance, 58(5), pp.2167-2201.
Daily, C.M. and Dollinger, M.J., 1991. Family firms are different. Review of Business, 13(1-2), pp.3-6.
McConaughy, D.L., Matthews, C.H. and Fialko, A.S., 2001. Founding family controlled firms: Performance, risk, and value. Journal of small business management, 39(1), pp.31-49.
Ray, A., 2020. Reliance to pay twice. Retrieved from https://www.livemint.com/news/india/reliance-to-pay-twice-to-those-employees-who-earn-below-rs-30-000-11585033829993.html
Reliance Industries, Limited, 2019. Retrieved from https://www.ril.com/DownloadFiles/Subsidiaries and major Associates of RIL.pdf
RIL Annual Report, 2019. Retrieved from https://www.ril.com/getattachment/2b3a5223-b9a3-4bc1-b9b6-99f9b1e85a07/Financial performance for the year ended 31 Mar, 2019.aspx
Sraer, D. and Thesmar, D., 2007. Performance and behavior of family firms: Evidence from the French stock market. Journal of the european economic Association, 5(4), pp.709-751.