nl-sep2017

The interface between family and business in India is the stuff of folklore. Books, and to a lesser extent, movies, have sought to capture the frictions, fissures and failures that dot corporate history. At the same time, some business families have put in place sound structures that recognise and respect the roles of family and business, leading to a harmonious and a mutually rewarding relationship. Sanjeev Aga and PM Kumar shed light on this timeless topic.

M. Damodaran
Chairperson, Excellence Enablers
Former Chairman, SEBI, UTI and IDBI

Sanjeev Aga
Independent Non-Executive Director on Boards
and Former Managing Director, Idea Cellular

P M Kumar
Former Business Chairman and Board
Member, GMR Group

The family impulse is hard wired from our hunter-gatherer yesteryears, and is a key business driver. But, a corporate is founded on the impersonal principle that an equity share is an equity share, and the corporation is distinct from its shareholders. This dialectic between “family” and “governance” determines outcomes; like Longfellow’s little girl with a little curl “.. when she was good she was very, very good; but when she was bad she was horrid”.

Most businesses see the light of day because some entrepreneur once played owner manager. Family members expand capital and management bandwidth. Businesses, as they grow, may bring in non-family shareholders, lenders, and managers. But the family retains a headstart in knowledge and relationships.

The late CH Choksey likened the paint company mascot Gattu as his son, his legacy!

Despite tailwinds, family businesses live shorter lives! Because not every family successfully scales. There is the psychological dimension, to shed the maalik naukar hangup if there was one. The managerial dimension, to size up unemotionally the management needs of the business and then to provide them. The integrity dimension, nothing corrodes the soul of a corporate more than poor integrity. And the family feud dimension; divergent goals, divergent calibre, what have you!

Directors may want to ponder on, before their company steps on a land-mine.

Refreshingly, past learnings are not lost. Far-thinking family businesses are constituting family board equivalents with structures defining roles, goals, participation, voting, supervision, earnings, management and succession planning. A smart way to eat your cake and have it too!

Family owned businesses have outperformed their non-family counterparts across several business parameters. Their strengths include commitment, knowledge, continuity, reliability, pride and entrepreneurial drive. However, many family owned companies have a short lifespan and 95% do not survive third generation ownership.

Poor governance, leading to premature mortality, arises from:

1. Complexity: Adding family issues to business increases complexity. Family splits and tensions occur when the business hierarchy and rules do not match the family hierarchy. They have to deal with conflicts of interest, ideas, perspectives and priorities arising from roles that family members have to play of being owners, managers and family members simultaneously.

2. Informality: Because many families run their businesses themselves, there is usually little interest in articulating policies, processes and procedures in the areas of business, family and ownership. Over time this leads to inefficiencies and internal conflicts that threaten business continuity.

3. Lack of discipline: The owner and ‘entitlement’ mindset leads to a lack of discipline among family members.

A well-functioning governance structure will mainly aim at:

* Discovering, renewing and communicating family values.
* Keeping family members informed and abreast of business accomplishments and challenges.
* Ensuring participation in decisions and ensuring communicating rules and decisions regarding benefits and establishing a proper communication channel, as also having a fair process for managing differences.

The major constituents of a family structure are the enunciation of policies and principles governing issues such as employment, entry, exit, decision-making making, succession etc, providing for family institutions such as a family council, family assembly etc, appointment of an advisory board that challenges family perspectives, processes for a leadership pipeline, and agreed processes for managing differences.

READERSPEAK – Seeing Value in Evaluation

“S Sandilya, Chairman, Eicher Group”
“But I presume the challenge is what next. How do we make the process meaningful? Will the Government be willing to change the law to make it more positive in terms of the intention rather than the negative connotation it seems to focus on.”

“Sabyasachi Hajara, Former CMD, Shipping Corporation of India”
“Very well articulated indeed. Totally agree that undertaken objectively and effectively, evaluation can add great value to the functioning of the Boards”

“M K Chouhan, Vice Chairman, Global Advisory Board, Asian Centre for Corporate Governance and Sustainability”
“It’s insightful and reflects the fact that you have your hands on the pulse of the ‘Psyche’ of Indian promoters, IDs and board behaviour!”