In peace or at war, family businesses promote families in a uniquely Indian way

Nice article by Shailesh Dhobal on Indian way of doing things. This one is on keeping families interested in their businesses:

A lot has changed with India Inc since the economy opened up two decades ago. The ways of doing business have changed to become globally competitive, and sources of finance, too, have diversified with huge pools of foreign, public and private capital owning a chunk of the big firms listed on the stock markets.

Yet, even a cursory reading of business newspaper headlines of the past fortnight shows how entrenched the old order is as far as families in business go. The Rs 9,000-crore Emami group junked its earlier idea of letting professionals pick successors from the promoter families and instead formed a family board to pick and groom one from the promoter families’ second generation to lead the firm in the future.

The Kapoor versus Kapur fight at YES Bank is playing out in public, with the High Court ruling that went in favour of the bank’s erstwhile co-promoter’s widow, Madhu Kapur, who happens to be promoter Rana Kapoor’s sister-in-law, only accentuating competing positions.

The news narrative at one of India leading food firms, the Rs 7,100-crore Britannia Industries, is how soon the promoter’s son, Ness Wadia, will assume a bigger managerial role at the biscuit maker. Or even at the country’s third largest software firm, Wipro, where Rishad Premji is reportedly being groomed for a role bigger than the one he currently handles.

And when a business scion does decide to take a different path, as Kamil Hamied of Cipla did by quitting the pharma maker recently to purse personal interests, sister Samina Vaziralli is quickly given an expanded role to scotch any rumours of succession plan gone awry. After a glorious three-decade-plus as chairman of the Hero group, when Brijmohan Lall Munjal does decide to hang up his boots, his son, Pawan Munjal, smoothly takes over as the chairman of the group. Yet, elsewhere, the father-adopted son battle over succession only gets uglier at the Rs 10,000-crore Chettinad group.

Now, it will be foolish to suggest that the families stay away from businesses when they still own almost two-thirds of India Inc’s wealth. And it is also true the capitalist system is based on the bedrock of perpetuating ownership.

The author then goes on to criticise the role of families in businesses:

But how about divorcing ownership from management? Yes, the debate is old but it is time to revisit it. There is one argument that separating the ownership from the management model does not work for an emerging market like India where the rules of the game are not well-defined. And more so, the firms are running all right, and if it ain’t broke, why fix it, goes another argument.

Really?

How about the pernicious influence that family-led management invariably brings out in the best of firms? When was the last time you heard an Indian firm sack its owner-manager, or his or her spouse, parent or progeny, who were involved in the business, even if mismanagement is proved beyond doubt? Maybe in some start-ups but rarely in an old, entrenched businesses. Surely, that can hardly be a case for promoting accountability or merit down the line.

And why should the majority shareholder get to pick his progeny as a successor to run the business? Isn’t it a ‘related party’ transaction, in principle, at least, if not in law currently? Why should management succession have a corporate governance carte blanche when all other related transactions of a firm – from sales, investments, loans or leveraging information – are under strict scrutiny and regulation?

Imagine if tomorrow one of the big family-owned firms in the country were to announce that the race for the top job is open for all, including non-family insiders. That will truly herald a corporate democracy. Well, the Tatas did that when a committee was formed to look for Ratan Tata’s successor, though finally the son of the biggest individual shareholder in Tata Sons, the group’s holding firm, was chosen to lead the salt-to-software conglomerate.

Not sure that the criticism is really right. Worldwide too, most companies are family owned as well. There are ways to hide ownership and that is what it is. And then despite separating management from ownership, latter continues to influence the decisions in a big way. Cometh a crisis in the firm, family calls the shots. And then in Asia, we value the family bit much more than the west. We are more comfortable to give businesses to progenies than to an outsider.

The issue actually is similar to debate we have on private vs public ownership. Based on Anglo Saxon dominance, we are always made to believe that private ownership is better than the public one. This is partly due to different history of Anglo Saxon countries and partly a creation of the media. The governments have played a much lesser role in Anglo Saxon world compared to other countries. So private ownership has traditionally played a larger role in these countries. But it is not that private ownership has not had its moments of failure, There have been quite a few but the attention is much more on public ownership failures.

The question is not private vs public or family vs professional,, but how to make the firm perform better given the constraints.

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