Reliance Industries: Managing a Family Business Empire

Introduction

Reliance Industries was founded by the Ambani family in the 1960s in Maharashtra, initially manufacturing synthetic fabrics. The company went public in 1977. Its Chairman and Managing Director 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. 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 full control of the company. Within two years, a private dispute between the two brothers had broken out into the public realm, negatively impacting the company's share price. Their mother intervened to oversee a division of the Reliance company, essentially splitting the firm into two separate entities. Mukesh was granted Reliance Industries while Anil received the telecommunications, entertainment, financial, and energy divisions of the firm.

Academic Criteria for Professionally Managing 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 "limited to the specifics of the employment contract" (Daily & Dollinger, 1991, p. 3). The risk of losing a job is also nowhere near the risk of failure assumed by the family owner, since the business is not only the family owner's livelihood but also their reputation and sense of self-worth. Daily and 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 high performers with greater compensation, whereas in professionally managed firms, compensation is based on the size and nature of the position rather than necessarily on performance. In other words, family-owned firms are more supportive of workers who are loyal and high-performing than is typically 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 is that family-owned and heir-managed firms are more parsimonious with their capital and tend not to be profligate, as the money they spend comes out of their own pocket rather than someone else's. This means that families have an enormous stake in their own companies, reflected in 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 far more hands-on and industry-involved, 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 management responsibilities to heirs rather than to professional managers perform more poorly over time. They use various models to show that professionally managed organizations tend to succeed more consistently because decision-making is free from nepotistic bias. The company is more likely to perform well due to the general business acumen possessed by professionals, which is not necessarily possessed by family owners. These findings are at odds, however, with those of Sraer and Thesmar (2007), who demonstrate that family owners have considerably more equity in the company and are therefore more likely to make efficient and effective decisions.

McConaughy, Matthews, and Fialko (2001) corroborated the findings of Sraer and Thesmar and showed through their empirical 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.

Labor Use at Reliance Industries

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

With nearly 30,000 employees, Reliance Industries is a major multinational company that still makes extensive 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 pay rates that are standard for the country. The company is known for low compensation rates, as reflected in reviews on labor sites, with the most common characterization being 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 typical of family-owned firms. There is very little waste in terms of employee expenditure. Rather, a great deal is expected of employees — but because family-owned firms are more likely to employ a merit-based reward system, the incentive for working hard and long hours at low pay is that the individual will be compensated at a higher rate over time if they prove to be an industrious and loyal worker.

In exchange for working hard at low rates, workers also receive job security — 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 loyal employees need not fear losing their positions. Other businesses cut workers and lay off employees as soon as adverse conditions arise, because managers have no personal stake in the company beyond the terms of their contract. Reliance, by contrast, demonstrates that it cares about its employees. This is evident in its response to the COVID-19 outbreak, which put millions out of work worldwide. Rather than laying off workers, Reliance took the opposite approach: it paid those earning low salaries twice their normal wages so that they could manage through the difficult period and remain assured of the job security the company takes so seriously (Ray, 2020).

This effort to boost morale demonstrates that Reliance understands the long-term benefits of earning employee trust. Turnover is a costly reality for many professionally managed companies. The more frequently employees are hired and then quit, the greater the costs borne by HR in finding qualified workers and training replacements. A constantly revolving door of employees contributes significantly to operating expenditures. In the Ambani-owned Reliance, that problem is addressed effectively: the firm signals that it values employee loyalty highly and wishes to maintain good relationships with its workers. By meeting the needs of workers during the COVID-19 crisis, the business not only enhances its own reputation but also lays the foundation for long-lasting employee tenures and reduced turnover risk. Employees want to work at Reliance despite the initial low pay and long hours because they know the company will reward demonstrated loyalty over time. That is one of the most important reasons the company is able to maximize labor performance: it keeps labor costs low while also taking care of the workers with whom it seeks to maintain strong relations.

Conclusion

The Ambani family has masterfully and professionally managed Reliance Industries for decades, growing it into the empire it is today, with more than $150 billion in assets and net income of more than $5 billion annually. The company has achieved this success in a number of ways, but two criteria set it apart: (1) its ability to build strong relationships with workers, thereby reducing 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 from a small textiles firm into a giant of industry, spanning 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 managed only by professionals whose stake in the company begins and ends with the terms of their contract. With families like the Ambanis, the family name is bound up in the business, and thus every decision is made with the awareness that the family's reputation is on the line. Each decision is therefore made with the kind of prudent care that characterizes successful enterprises like the Reliance Industries empire.

References

Burkart, M., Panunzi, F., and Shleifer, A. (2003). Family firms. The Journal of Finance, 58(5), 2167–2201.

Daily, C. M., and Dollinger, M. J. (1991). Family firms are different. Review of Business, 13(1–2), 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), 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 and major Associates of RIL.pdf

RIL Annual Report. (2019). Retrieved from 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), 709–751.