The 10 Commandments of Family Business 9789351501381

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“Ram brings a lifetime of perspective on family business and entrepreneurship in the Indian context.” John L. Ward, Clinical Professor of Family Enterprise, Kellogg School of Management

The

BY LIBRARY WiLLIAMEBURG REGIONAL

SEP ~ ~ 2015

S)SAGE| 5° SAGE was founded in 1965 by Sara Miller McCune to support the dissemination of usable knowledge by publishing innovative and high-quality research and teaching content. Today, we publish more than 750 journals, including those of more than 300 learned societies, more than 800 new books per year, and a growing range of library products including archives, data, case studies, reports, conference highlights, and video. SAGE remains majority-owned by our founder, and after Sara’s lifetime will become owned by a charitable trust that secures our continued independence. Los Angeles | London | Washington DC |New Delhi | Singapore | Boston

Digitized by the Internet Archive In 2022 with funding from Kahle/Austin Foundation

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Advance Praise

“A must read for members of business families, advisors, educators,

and students interested in learning about the unique paradoxes, challenges, and dilemmas of enterprising families and how the most progressive Indian families are handling these paradoxes while making global gains. The number of templates and exhibits make it a unique source book for business families to go-ahead and implement many ideas.”

—Pramodita Sharma Editor, Family Business Review and Sanders Professor of Family Business, University of Vermont, USA

“This is a book of practical wisdom that will be greatly valued by business families in India and other emerging markets. The 10

Commandments are like 10 rare jewels of family treasure that will help families perpetuate their businesses across generations.”

—H. C. Thomas Schmidheiny Founder and Chairman, Spectrum Value Management Ltd, Zurich

“This is a great book that is long overdue in India. Professor Ramachandran has shared very important insights from his many years of work on family business. He has focused in this book on the

most important 10 building blocks of successful family businesses. I strongly recommend it as a must read for all those associated with family business.”

—Adi Godrej Chairman, The Godrej Group “This book is need of the hour, highly readable and written in a lucid, simple, refreshingly different, and insightful style, and a ‘must read’ for all stakeholders of family businesses.

This book is very topical and timely. It is written more as a practical guide or self-help manual with a set of ‘do it yourself tools like action plans, checklists, and templates at the end of every chapter to enable families to introspect, self-evaluate, and

develop their Family Business Governance—a complex arena of human enterprise, opportunities, and challenges. Every concept is illustrated by real-life caselets or anonymous anecdotes from Indian family businesses. Following the 10 Commandments, business families will mature to perpetuate and institutionalize to sustain through generations and if neglected or not persisted, will be doomed by the 5Ds (dilemmas, deviations, differences, disputes, and destructicn).”

—G. M. Rao Group Chairman, GMR Group “Professor Ramachandran brings out a set of very thoughtful, yet actionable ideas within his ‘10 Commandments’ framework to build

successful and sustainable family businesses. A whole new generation of family businesses will scale up suc-

cessfully in this wave of economic growth. They should use this book as a practical guide to provide business family governance. It’s carefully curated examples add not only color, but insightful real-life perspectives. Given that he is one of the most eminent family business academician and researcher in our country, one could expect nothing less from this narrative.”

—Gopal Srinivasan Chairman and Managing Director, TVS Capital Funds Ltd “The 10 Commandments forFamily Business is a comprehensive and

well laid out tome that has been researched well and written lucidly. Drawing up his vast reservoirs of teaching, research, and consulting experience, Kavil Ramachandran explores, probes, and seeks to resolve the 5Ds that most family businesses around the world face today: dilemmas, deviation, differences, disputes, and destruction.

By capturing the key characteristics of family business across countries, societies, and environments, Kavil is able to provide some

valuable clues and links on how family business can remain dynamic, even in an era of rapid economic, social, and generational change. In Kavil’s own words, the 10 Commandants will help families in churn to start the process of building sound mechanisms, without waiting for a doctor to be available. Reassuringly, this book is not a theoretical foray. The 10 Commandments for Family Business is replete with anecdotal evidence, besides case studies and caselets from India and overseas. Kavil uses these liberally to draw his insights and inferences. The action points, templates, and exhibits at the end of every chapter are especially illuminating. Many family business owners can, in fact, use this book as a ready reckoner and a checklist to professionalize

and lengthen the span of their businesses. In his inimitable style, Kavil hasn’t pulled his punches; he has

been candid and realistic in his analysis—but he is also reassuring and optimistic, like all good writers and analysts should be. I strongly recommend this book not just for owners of family businesses, but also for those professionals who wish to start a

business of their own enterprise someday.”

—Sunil Kant Munjal Joint Managing Director, Hero MotoCorp Limited and Chairman, Hero Corporate Service Limited “A must read for anyone involved in a family business, it provides advice that finds application at every point in a family business’s life cycle.” —Peter Leach Chairman and Founding Partner Peter Leach & Partners LLP

“Professor Ramachandran brings out the essence of having family values and nurturing the same in the business toward its sustained growth and success. The emphasis on communication and dialogue,

trust and transparency in any business regardless of culture provides great insights to be reflected upon across generations.” —M. M. Murugappan Vice Chairman, Murugappa Group

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The 10 Commandments for Family Business

The 10 Commandments for Family Business

KAVIL RAMACHANDRAN

WILLIAMSBURG REGIONAL LIBRARY 7770 CROAKER ROAD WILLIAMSBURG, VA 23188

@SAGE www.sagepublications.com * Washington DC * Boston Los Angeles * London * New Delhi + Singapore

Copyright © Kavil Ramachandran, 2015

All rights reserved. No part of this book may be reproduced or utilized in any form or by any means, electronic or mechanical, including photocopying, recording or by any information storage or retrieval system, without permission in writing from the publisher. First published in 2015 by

lag ©SAGE 8 SAGE Response B1/I-1 Mohan Cooperative Industrial Area Mathura Road, New Delhi 110 044, India SAGE Publications Inc 2455 Teller Road

Thousand Oaks, California 91320, USA

SAGE Publications Ltd 1 Oliver’s Yard, 55 City Road London EC1Y 1SP, United Kingdom SAGE Publications Asia-Pacific Pte Ltd 3 Church Street #10-04 Samsung Hub

Singapore 049483 Published by Vivek Mehra for SAGE Publications India Pvt Ltd, typeset in 11/13 pts Adobe Caslon by RECTO Graphics, Delhi and printed at Chaman Enterprises, New Delhi.

Library of Congress Cataloging-in-Publication Data Available

ISBN: 978-93-515-0138-1 (HB) The SAGE Team: Sachin Sharma, Neha Sharma, Mriga Maithel, Nand Kumar Jha and Rajinder Kaur

Dedicated to all the members ofbusiness families who provided me with innumerable learnin x opportunities

in many different ways over the past years.

Thank you for choosing a SAGE product! If you have any comment, observation or feedback, I would like to personally hear from you. Please write to me at [email protected]

—Vivek Mehra, Managing Director and CEO, SAGE Publications India Pvt Ltd, New Delhi

Bulk Sales SAGE India offers special discounts for purchase of books in bulk. We also make available special imprints and excerpts from our

books on demand. For orders and enquiries, write to us at

Marketing Department SAGE Publications India Put Lid B1/I-1, Mohan Cooperative Industrial Area Mathura Road, Post Bag 7

New Delhi 110044, India E-mail us at [email protected]

Get to know more about SAGE, be invited to SAGE events, get on our mailing list. Write today to [email protected]

This book is also available as an e-book.

—— 2) (3——

Contents

viii.

| THE 10 COMMANDMENTS

FOR FAMILY BUSINESS

List ofExhibits

[1.1 1.2 1.3 1.4

Growing Complexity in Family Business Coexistence of Multiple Stakeholders Amoebic Model of Family Business

TS

Transformation of Family and Business: Need for Compassion and Competitiveness Symptoms Leading to Crisis

1.6 1.7 1.8

Family and Business: Compassion versus Competitiveness

Five Ds to Disaster Not Easy to Remain at the Top: Top 20 Family-Controlled Companies in Terms of Turnover in India

5Be I

Sources of Communication Challenges

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No Man’s Land

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Illustrative List of Family Values

4.1 4.2

Ownership Structure Ownership Options and Involvement in Business

a1

Managing the Relay Race

8.1

Differences in Strategy Formulation and Implementation in Business and Family Strategic Interdependence of Family and Business

134 135

Togetherness Means?

155

Meaning of Togetherness—Survey Results: Generation Gap or Clouded Thinking?

156

8.2 10.1 10.2

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1.1 1.2 Ne

How to Delegate Effectively 360° Feedback on Family Members Family Feedback Aggregation

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Responsibility Allocation Analyzing Capabilities

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Discover Our Values Value Clarification

Creating a Code of Conduct

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Practice of Code of Conduct (for A, B, and C Categories)

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How Do I Fare: Illustrative Analysis of the Practice of Code of Conduct

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Principles of Relay Race for Retirement and Succession Planning Guide to Planning Retirement

95 96

6.1 6.2

Leadership Planning Capability Assessment and Development

8.1

Preparing Strategic Plan for the Business: Analysis of Business Performance for the Previous Three Years Competitor Analysis

sa

S.2 8.3 94

tit 112

Family’s Priorities Analysis

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Planning Family Philanthropy

153

List of Caselets

1.1 2.1

The Murugappa Family

Sudarshan Chemicals: Essential Principles of Professionalization

4.1

Emami’s Takeover of Zandu

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Entrepreneurial Evolution of the Piramal Group

42

under Ajay Piramal Religare Group: Growth History

120 125

9:1 9.2

Aravind Eye Care System

Krishi Gram Vikas Kendra (KGVK)

150 152

10.1

GMR Group

159

Foreword

In The 10 Commandments for Family Business Kavil (Ram) Ramachandran brings fresh thinking, an important distinctive perspective, and a well-seasoned personal philosophical reflections to the study of family business challenges and success. His conclusion—his 10 Commandments—go far beyond a list of conventional best practices. His ‘fundamental principles of success’ or

‘basic pillars’ are more profound. To each he brings new ideas. For each, he wisely counsels, the context of the family and the business needs to be embraced. Implicitly he sees the practice of family business to be more art than prescription. Many have urged Ram to write this book for many years. No wonder: Ram brings a lifetime of perspective on family business and entrepreneurship in the Indian context. Moreover, he has a personal passion for the topic that calls forth his closing chapter plea for family business to be an ‘institution’, continuing social purpose and wealth creation—both for the welfare of all others.

While Ram has broad experience throughout the world; The 10 Commandments for Family Business is full of stories, cases, customs, and philosophies drawn from very successful family businesses in India. Helpfully, the book includes in almost every chapter ‘action points’ for clarity and ‘templates’ for implementation. (He has personally developed more than 20 templates from his own practice over the years.) Doing so makes it possible to pen each chapter

with a memorable story. From India or elsewhere, the reader will readily see their own situation in Ram’s stories. Those stories help emphasize context. In fact, Ram opens the book providing a model for considering context. Basic to that model is to recognize the dilemmas and paradoxes of family business. He emphasizes on two points: family socialism

and business capitalism, and compassion and competitiveness.

xvi

| THE 10 COMMANDMENTS

FOR FAMILY BUSINESS

Such underlying differences, he claims, generate the progression of dilemmas to disputes and destruction. Effective communications intervene that cycle. But more, on communication later. Let me offer a personal model that shows the fundamental contradictions families in business face, especially as they add the third dimension of complexity—that is ownership—to the family and management perspectives. Exclusion Per share

Self-interest Independence Responsibility

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Commitment

Liquidity Prudent Future

Conformity Growth Bold

Inclusion

Per capita Altruism Loyalty Fun Voluntary Individuality

Present

Private Emotional Tradition Past Equality Security

Transparent Rational Change Present Merit Adventure

Given Ram’s emphasis of the inherent differences that form the particular challenges in the book, perhaps consideration on how to resolve them positively would be useful. My book, with others, Family Business as Paradox, offers the method of Polarity Management to constructively discuss inevitable differences. This method serves well, I believe, Ram’s assertion that communication is essential, and, in fact, is his first commandment. In that chapter

he offers a very fresh framework for understanding communications challenges in family businesses. Another commandment capturing particular conviction for Ram is the one on professionalization. No one has focused as much

Foreword

| xvii

attention over the years on professionalization of the family business as Ram. His metaphor on how delegation is like a doubles tennis game, famous and very valuable. He defines professionalism

as “all decisions are taken keeping the interests of all stakeholders as supreme.” When he discussed professionalization and another commandment, preserve and practice values, he raises the question of what to look for when hiring key non-family executives. Two characteristics | have found are (1) does the person have a sense

of idealism for things he/she cares about? and (2) does the person have much more of an ‘internal ego’ rather than an ‘external ego’? Both characteristics can be seen in a resume or interview. One value that permeates every chapter of the book is frust. Ram emphasizes how trust helps strengthen communications. A related

question is how to build trust. With colleague Ivan Lansberg, we think of a list that includes * *

clarity, congruence,

*

consistency,

* * * *

competence, communications, commitment, and compassion.

Compassion is both an emphasis and a core trait for Ram. Nowhere does he that compassion as much as in his chapter on

retirement. Mostly all write about the senior generation ‘letting go’. Ram makes a strong case on how and why to keep the senior generation from retiring. Each chapter offers a new way of thinking about family business principles and the context for these principles. All the chapters

together provide compassion for all the stakeholders of a family business institution.

John L. Ward Clinical Professor ofFamily Enterprise, Kellogg School ofManagement, Illinois, USA

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business the extent to which they practice professionalism. | Develop a plan for further professionalization by analyzing : the roles and responsibilities as of now, and as it should be, using the templates provided. : Discuss with introspection the extent to which family and j

nonfamily executives play the doubles game.

Activity |Information | Consult and | Responsible |Responsible for List Involve in | for Decision |Implementation Discussion

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A well-known brand of a consumer products company that used to be considered as the market leader about 25-30 years ago is struggling to retain its market share in its home state. This company with an annual turnover of 5—6 billion rupees has not been able to introduce new products nor build the organization professionally because of infighting among the third-generation cousins who siphoned out company money regularly to create private wealth, through false invoices. This has led to some of the senior executives also manipulating activities and making private gains, maybe on a smaller scale. Basically, the cousins have no trust in each other, in their honesty and integrity, and believe that everyone else is making more money than them by milking the business cow. Why has this happened? Basically, it is the lack of shared values and resultant absence

of a code of conduct for the family members that have resulted in the mess they are in. While honesty and integrity are critical success requirements among the cousins, they gradually drifted from the practice of it. Of course, externally, they maintain a polished,

respectful image, but inside they are full of hatred and mistrust. As discussed earlier, the five Ds to Disaster have played on the members

44

| THE 10 COMMANDMENTS

FOR FAMILY BUSINESS

over a period of time. To add to the complexity, they do not have a shared vision either for the business or the family. Instead, what

they have is personal greed and guts to follow the directions of it. They forget that family businesses continue as they are because of the shared nature of the vision, values, and code of conduct their

members have among themselves. We have so many such businesses around us that destroy forever the wealth created by their founders or ancestors. The story line remains the same across countries with minor differences. Given

the nature of family businesses where personal relationship among the members plays a key role in their success, members associated should believe in and practice certain values that keep them

together. Honesty and integrity are part of that basket. There are others such as flexibility, compassion, and quality orientation that are required to be part of the personality of the family promoters for building excellent family businesses. In essence, what keep the members of a family together in a business are the values that all

of them believe in and always practice.

WHAT ARE VALUES Values are fundamental, like the DNA of an individual, and reflect the family members’ perceptions about relationships, ethics, morality, views on society, purpose of living, and their responsibility

to society. Values should not be violated by any member in their thoughts, words, or actions. To recall the teachings of Mahavir Jain, the founder of Jain religion, deviations in thoughts from the prescribed norms slowly affect our spoken words that in turn affect the quality of our actions. Hence, there is a need to conform to the values in all our thoughts. Most religions encourage people to confess about their destructive thoughts and actions also for the same reason. It is useful to remember that all long-lasting organizations emphasize the practice of their values. They indoctrinate their members on the values and their practice. Since it is not quantifiable, every member has a responsibility to ensure that they

To Preserve and Practice Values

Exhibit 3.1

— -

| 45

Illustrative List of Family Values

Trust Transparency Honesty Integrity Entrepreneurship Caring/Compassion Flexibility Forward-looking Openness Professionalism Humility Custodianship

SOURCE: Author.

practice the essence of each value with utmost dedication. That is the way for selfishness and individualism to give way to collectivism. Families that gradually drift away from the essence of their values in their thoughts and action pay a heavy price. Traditions and practices reflect the values people believe in. Some of the values that lasting business families believe in and practice are given below in Exhibit 3.1.

VALUES IN PRACTICE Let us make a distinction between desirable, idealistic values and those that we practice now. It will be terrific to have a perfect overlap between these two. We should strive for it. How? We need to first

make a list of the values as we live them in our daily life. Family members should sit together and discuss the extent to which each one of them practices the specific values. This exercise might lead

to some frank comments and feedback. Such opening up and frank discussion will be a reflection of the practice of transparency among family members. At the end of such an exercise, family members will be able to come out with a list of their family values. ‘This exercise

46

| THE10 COMMANDMENTS

FOR FAMILY BUSINESS

should lead to a resolve among all members to not only adhere to the shared core values in their daily life, but also help them work on developing and practicing new values that are somewhat idealistic. For instance, in a rapidly growing business family in South India, the family members have made it a habit to not only read out aloud at their family meetings, but also reflect over the practice of their

values regularly. Template 3.1, given at the end of this chapter, may be used to identify family values and validate their contextual relevance and

continued adherence by the family members. There are a number of ‘ideal’ values listed in the template. This is only for the purpose of illustration. Sometimes, families may prefer to identify five—six

core values that they would preserve under any circumstance. They may have several other values categorized as ‘desirable values’. It is important to note that family members either in small groups or as a whole should first identify their family values and discuss how they practice each value, particularly under testing times. They should question themselves about their resolve to practice the values. For instance, will they breach the family’s trust in them if they are made some tempting offers of money or something else in return for awarding a business to someone? Will the response to such an offer of bribe be different especially when the decision would have been the same even otherwise (and nobody would have

suspected foul play)? Will they care for a family member in trouble even if there have been fights with him/her over something? Will they be flexible enough to accommodate interests of other family members if the basic problem is not about shared values? They may draw examples of pleasant and bitter experiences from the past not only to understand the essence of the values better but also to understand the challenges of practicing each of them. Such a range of questioning has a positive effect of introspection. It can be a strong platform for families to recognize their unique identity and source of reputation. A family business that grew from 22 billion to ®10 billion in seven years was forced to take a decision to split, thanks to the inflexible stand taken by a family member about starting a new venture.

To Preserve and Practice Values

| 47

They have an engineering business with a range of products under one single well-known brand. The series of events, exactly following the five Ds to Disaster, were watched by the entire family with

shock, disbelief, and the feeling of helplessness. ‘The damage was already done and the process of separation is already under way. In spite of the best efforts of some well-wishers, the family had to

appoint a finance firm to value this unlisted company. The moment speculations about the differences in the family were confirmed, it became hot news, and revenues and profits started falling rapidly, thanks to a shift in the loyalty of dealers and suppliers and the poaching of a few key executives by competitors who got a golden opportunity to fish in the troubled waters. This situation was unimaginable in that family a year earlier when all four brothers would vouch for their love and affection for each other and unity in the family. The middle brother’s approach towards any business decision situation got hardened over a few instances of ‘dilemmas’ and ‘deviations’ from expected and accepted behavior, and climaxed when his new venture proposal was opposed by others. Hence, it is useful for families to use Template 3.2, given at the end of this chapter, to check on the adherence of values by family

members from time to time. Let us call it the barometer of family values. Please ensure that you list the values your family has identified through discussion instead of taking a standard set provided here or from the Internet!

FLEXIBILITY VALUE CONTINUUM Let us now look at flexibility as a value and its significance for business families as it is one of the basic qualities required to keep the family together. Some people do not show flexibility in anything because they are afraid of being seen as weak and indecisive;

consequently, they would be taken for granted by others! Let us realize that flexibility is not a weakness; it is a virtue, especially when we remind ourselves that a family is an assortment of different

people tied together by emotions and heritage. There are bound

48

| THE10 COMMANDMENTS

FOR FAMILY BUSINESS

to be disagreements and disappointments, but it is the conscious acceptance of this as the reality in a family context that enables them to be together. Unfortunately, many people do not realize this. They often assume that others would exploit their flexible approach and derive undue benefits. Of course, it does happen so if people do not distinguish between the meaning of the word ‘flexibility’ in three different contexts: flexibility in the practice of basic values, flexibility in approach, and flexibility of goals. We need to always remember what we should be flexible about. While inflexibility is a must in the practice of the family’s basic values, flexibility is required in goals and approaches in general. In any case, we should remember that flexibility does not mean indecisiveness. It is important to know that we are not talking about a uniform level of flexibility in all matters. Flexibility has to be seen as a continuum with ‘zero flexibility’ at one end and ‘complete flexibility’ at the other. In certain cases, there cannot be any flexibility at all. For instance, adherence to issues involving core values of the promoters cannot have any flexibility. Integrity is one such value where there cannot be any flexibility of accommodating people who have compromised integrity. However, instances of lack of adequate preparedness for an important meeting as narrated in the case above

cannot be a reason for a family member to take an inflexible stand. In other words, families need to classify and define the extent of flexibility in adherence to their values and code of conduct that will be permitted. For this, families need to discuss the matter in detail. Families will benefit immensely from developing possible multiple future scenarios and analyses of their implications as the size of the family and business changes. This will help families to understand and appreciate the areas and extent of flexibility required. Yet another dimension is keeping flexibility in the process of doing something while being inflexible about the outcome. For instance, the family may be inflexible about setting up a new business unit belonging to a particular industry, but it can be flexible about the location, size, phasing, and the person to run it for an existing business, so long as the decision-making criteria are clear to all and are adhered to always. Very often, the danger is in not

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having clarity among members about the basic principles to be followed in a decision-making situation. Goal clarity, prioritization of criteria, and evaluation of options against set criteria with different weightage are all critical components to make efficient decisions. Family traditions are another area where flexibility is very much warranted. While values are the foundation on which perpetuity is built, traditions provide the content that makes the family contemporary. For instance, to have a family tradition that the eldest son is to head their business is outdated in a context where competitive capabilities drive business performance. Families should be willing to look at the critical success requirements of a business and choose the best person from within the family or outside to lead the business. This is a typical challenge faced by many Asian family businesses. Lack of flexibility on this front has led many businesses to suffer severely. Similarly, families need to show adequate flexibility on matters related to involvement of women in business now that women are very often equally if not better qualified than men for corporate jobs.

Flexibility Is Not Optional In short, flexibility is not just a desirable quality, but an inevitable quality in these days of dynamism in the different components of the environment. Unfortunately, many family members, particularly

founders, do not realize the significance of this value. Flexibility allows us to control our ego, and be open to new ideas. As men-

tioned in the Upanishad, ‘Let noble thoughts flow from everywhere’ should be the principle every family should follow. The openness thus created is a capability that allows family members to fight challenges of inflexibility in attitude and communication. Many of the challenges of managing transition, particularly during retirement, succession, induction of new members, and development of

major strategies, can be smoothly handled once family members believe and practice flexibility in their thoughts and action. Family members are then skilled to take high-quality decisions in a logical

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way. Families that continue to grow with good governance practices across generations have always realized the benefits of understanding and practicing flexibility as a value. There are major gains from having flexibility as a value shared by all. For instance, we would be open to considering multiple alternatives to solve a problem if we are flexible about the process or means to achieve a goal. We would be able to evaluate the options based on clear criteria. This is particularly important these days when the environment is very turbulent. A flexible approach enables us to build multiple scenarios of an emerging situation that provides us with greater insight into any major challenge we face, on both family and business fronts. In the process, we will be able to not only see the big picture but also improve our ability to make better judgments. Essentially, flexibility means one’s willingness to listen and learn from others. It makes one humbler and in the process, one is enabled to make better judgment, better decisions, and naturally become a better leader. Even about goals, there needs to be flexibility, depending on

the situation, whether it is about family or business matters. In the case mentioned earlier, it was the increasingly hardening attitude of one of the brothers that brought down an edifice that they together were building up. There was no barometer known to the family that detected the growing level of pressure within. With his ego adding fuel to the fire, that particular brother became blind to the need to preserve flexibility as a value in the interest of the family that all of them wanted to perpetuate. Repeated efforts by different people to persuade him to take a flexible approach did not have any result primarily because he thought that it would be seen as a weakness by others in the community and society. He was afraid that he would lose bargaining power within the family too. The net result was a prolonged court battle for rights and access to wealth, all of which made only one party smile, the advocates! We should be aware that the impact of any inflexible position will damage the family the most. Similar to flexibility, one can elaborate on other values and their practice. In the absence of conscious efforts, there is every possibility

To Preserve and Practice Values

| 5a

of people interpreting values from one’s own angle, often based on contextual convenience. This leads to a gradual drift in the practice of values. Hence, families should not only state the key family values, but also explain them in writing with examples. It will be useful to also state what are not allowed under any of the values.

CODE OF CONDUCT AT HOME As you know, one of the major reasons for drift in family businesses is lack of rules and/or lack of strict adherence to them. Let us now look at the relevance of a code of conduct in this context. As a mechanism to practice values, long-lasting families define a

code of conduct for their members. We have seen the Murugappa ‘Charter’ earlier that included their code of conduct. All lasting

collective communities including families and organizations have clearly defined and accepted codes of behavior and conduct that their members have to strictly adhere to. Such a code helps to practice discipline and avoid deviations from the accepted norms, and build smoothness in relationships. A code of conduct (behavior included) is an expression of the ways to practice core values. It also helps build organizational systems and processes; in other words,

clarity on patterns of conduct will lead to predictability and stability in relationships to a great extent. Unfortunately, many family businesses have severely suffered

for want of not only clearly defined values but also principles of

conduct and their practice. Lack of such rules and/or their practice creates a lot of confusion and irritation. It affects the smooth functioning of a committee or an organization. For instance, in a

third-generation family business with interest in different industrial products, trouble slowly started brewing when the six branches of the family decided to move out of their single home and live in

three different places. The decision was jointly taken by all key members to meet the growing space requirements and logistical challenges faced by school-going children. They used to have a joint meeting of all the 14 members every evening in an informal way.

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All key business- and family-related matters used to be discussed and decided there. This practice stopped when they started living separately. Nobody anticipated the implications of not having such daily operational review meetings that sometimes debated strategic matters too. Suddenly, they lost a key (or the most important) discussion and decision-making platform. One of the third-generation members persuaded all to come for a meeting once a fortnight, but this did not continue beyond the first two meetings. Why? Some of the younger-generation members started feeling that some of their uncles talked rudely and blamed each other for no special reason. When they lived together, they had no option, but now that they lived separately, they could afford to miss the meetings, giving

some excuse. It is useful to remember that unpleasant arguments among senior family members even without any major rivalry can lead to irritations in behavior that in turn take the entire family on the path of the five Ds to Disaster. Let us look at a family that benefited from strict adherence to their code of conduct. In a well-known, fast-growing family business from Central India, the father and his three sons have created

very clear rules for themselves after detailed deliberations. None of them is to debate business matters at their joint family home. They debate with passion, but never lose their cool in meetings that are always held in their office. At work, the brothers are all equal, but at home, the hierarchy is based on age. The youngest brother takes any order given by his elders! The need for defining and practicing a code of conduct in the family and business contexts has grown quite rapidly, particularly in recent times, for a number of reasons. Pace of life is one such reason,

leaving limited time for reflecting on the practice of an unwritten and implicit code of conduct by family members both at home and work. There is also another reason. In a relaxed family-work environment, somebody would notice the deviation in conduct. That is not the situation now. People are busier. Hence, we need greater level of structuring and scheduling of everything.

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CODE OF CONDUCT AT WORK Our work situation is different. There, we have nonfamily executives too whose reasons for involvement in the business are quite different from those of the family members. Hence, our workplaces are more structured and disciplined, making it easier to notice deviations from the norms. Action can be initiated quickly and hence, they are less affected by poor practice of any code of conduct. Growth in individualism, disappearance of joint family living, and absence of quality mentoring has drifted families away from a commonly

accepted code of conduct. This is particularly so when such a code is never articulated and understood by all family members, with

clarity on what is ‘right’ and what is ‘acceptable’ in terms of behavior in multiple contexts such as attending office and meetings, and method of communication. Families have to define the principles of conduct of their

members in two contexts: the interface of family and business, and family per se (discussed above). Many of the challenges of sustaining healthy relationships among family members and nonfamily executives emanate from a lack of rules of behavior. This is found to be a problem in all kinds of organizations of different sizes, and should be curbed at any cost for the benefit of both the family and business. For instance, interference of a family member

in somebody else’s area of responsibility at work is breach of the professional code of conduct. Family members may not notice the changes taking place in an organization as it grows big and employs nonfamily executives at senior levels, and the consequential need for respecting the individual capabilities of the team members.

This is particularly so when good-quality nonfamily professionals are employed. In one instance, two brothers-in-law who inherited the founder’s wealth did not share some of the fundamental values that they had identified as that of their families. One such value was trusting each other. As a consequence, one of them detested the intentions behind the creation of a research and development (R&D) unit without his support. This was reflected in his conduct

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and behavior with the R&D Head who felt insulted repeatedly. Soon, the R&D Head left the company, alleging lack of trust in him and lack of freedom to operate. Similarly, in several families, members do not trust other members. In some instances, they have a rule that the credit card statements of one member should be sent to another designated member, more as a mechanism to ensure transparency than to have any control per se. Fundamental to a discussion on the accepted code of conduct of an individual is the set of values the family has identified and accepted. Unfortunately, for reasons mentioned above, values are also not always consciously inculcated from childhood. Values such as humility as a virtue and not a weakness, concern for society, custodianship as against personal ownership, respect for individualism, and openness are often not even discussed in the midst of the rush to grab entrepreneurial growth opportunities or sorting out personal ego clashes. Such breach of conduct arises out of a lack of professionalism and clear rules of delegation defined by the promoter family. As mentioned in an earlier chapter, family members may show a tendency to interfere in others’ job, particularly when it is handled by nonfamily executives, either out of eagerness to ensure that the job is done properly or out of a need to reassure one’s own relevance. On all such occasions, owner executives should take care

of sustaining the dignity of their position through their conduct; otherwise, irritating situations will grow and lead to issues that gravitate to problems affecting their professional behavior, decisionmaking processes, communication gaps and misinterpretation, and avoidable deadlocks. In a number of instances, good-quality nonfamily executives leave organizations that remain midsized forever. Obviously, this will have serious repercussions and implications for the professionalization of the organization and its survival. In the case of a family business from western India, everything was smooth when the business was small. As it grew and the direct interactions between the brothers started reducing, due to their busy work schedule, the overanxious younger brother started pulling up the Head of

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marketing for various minor issues, bypassing the elder brother who handled marketing. Here, the younger brother was clearly violating a code of conduct related to delegation. The elder brother ignored the complaints from his Marketing Manager as he did not want

to make it an issue. Finally, he had to take it up with his brother and father when the manager threatened to leave. Similarly, there have to be rules for family executives to follow

about the use of their language while interacting with other family and nonfamily colleagues. They should not be wearing their family or ownership hats that implicitly accord them feudal powers. They should not forget to leave their ‘ego hat’ at home while going to work. Attending all required meetings, respecting all rules set for employees, and practicing them without fail are critical to build a successful professional organization. Their conduct should reflect their basic human and professional values. This may be found a little difficult to practice initially, particularly by those with insecurity feelings and strong egos, but things will turn out to be good for

everyone very soon. In fact, employees and customers appreciate such expression of maturity and humility, and naturally respect such family members greatly. Family members involved in business should believe in professionalism as a value and agree on the best code of conduct while interacting among themselves as executives and with nonfamily executives. This list should be prepared based on the organizational values and expected critical professional behavior. Similarly, there

should be a set of rules for the conduct of family members at home.

This should be reflective of the family’s values such as love, affection, and compassion. These rules are typically used to run family and business meetings. Maturity in behavior will be clear in families where members wear the ‘professional hat’ while at work and ‘family hat’ at home. They practice professionalism at work and in the process may disagree very strongly with other family members on several matters, but show extreme affection and caring while interacting with the same people at home.

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PRACTICING THE CODE OF CONDUCT A code of conduct (set of rules) should be discussed by all members openly to understand the logic and significance of each of them. Applying principles of scenario-building as used in strategic planning, families should discuss the pros and cons of having a specific code of conduct, given the long-term purpose of sustaining family

unity and prosperity and living the values. Typical challenges of generation gaps in thinking would definitely influence such exercises, and hence, the need to reemphasize the link with the overall

values of the family is high. Since family members cannot be removed from their family membership, it is critical to articulate the conduct principles early on and inculcate their practice. Family members should own the values and codes of behavior voluntarily. There is no point in defining a code of conduct that cannot be practiced. Please review the list of rules in the code of conduct given in Template 3.3 (at the end of this chapter) and develop a list for yourself. You may choose some of them from the list if you believe in their relevance for you. You may obtain some others from elsewhere. In any case, you should develop them based on your goals of having a code of conduct and ability to operationalize them. We need to distinguish between the codes based on values and those based on traditions. While values are retained and reinforced as permanent, traditions do undergo changes over a period of time. For instance, the traditional way of practicing compassion as a value may undergo change over the years. Similarly, respect for others may be practiced differently at different points in time. In India, a personal visit by a family member was a must for inviting

relatives for wedding, but with new and effective communication tools available, and with families living dispersed, it has become

impossible to easily practice this tradition. However, absence of a set of rules that are not practiced can lead to chaos. Practically, families may follow the principles of ABC and define the code of conduct for different occasions. The ‘A’ category will

To Preserve and Practice Values

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include all the most critical areas where there is absolutely no deviation permitted in behavior. All core family values wil] be included here. This is a reflection of prioritization of behavior principles within the family. On the other hand, the ‘C’ category may be more ‘advisory’ and ‘desirable’ in nature, while the ‘B’ category may be inclusive of those rules of conduct that are ‘important’ to be followed in general. For instance, having dinner together every day may be only a desirable conduct than an essential one for sustaining family unity and happiness. But, attending a fortnightly or monthly dinner

with everyone else may belong to the ‘A’ category. You may use Template 3.4, given at the end of this chapter, to collect feedback on the practice of the code of conduct by individual family members. A summarized analysis of the same may be prepared by using Template 3.5, given at the end of this chapter,.

In essence, it is important to know why we need a code of conduct, who all will be covered by it, who will develop it, and who

will ensure its implementation. A code of conduct for the family is a set of rules of behavior describing the way members should undertake their responsibilities and obligations. It will guide us to think and act in a number of ways. At the end, the practice of a code of conduct helps us in

the following: * * * *

Improving the quality of communication Smoother and better decision-making and implementation Better interpersonal relationships Greater efficiency in operations

* *

Managing differences Improved grooming of family members.

All of these help us in achieving our long-term purpose of prosperity

and happiness at home and in business.

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ACTION POINTS Determine key family values and a code of conduct through a process of discussion, if necessary with the help

of the templates provided. ’ Identify one or more volunteers to organize and lead such | discussions. It may be useful to take the help of a nonfamily expert to facilitate the discussion. Decide dates for the review meetings in advance. Administer and compile the inputs for the templates with | all seriousness. This should be the overall responsibility | of the volunteer team. As in the context of a discussion on professionalization, use of the templates provided here has to be done carefully. It is advisable to take the assistance of a facilitator.

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To Preserve and Practice Values

Template 3.3

| 61

Creating a Code of Conduct

Develop your own set of conduct rules based on an illustrative list given below. Categorize them into A, B, and C; A consists of the ‘most essential’ conduct rules, B consists of ‘important’, and C ‘most desirable’. Collect annual feedback on their practice. There should be self-assessment of their practice once a year to make comparisons with self and others over the years. Violation/Non-adherence: Any family member not adhering to the above will be counseled/reprimanded/punished by the family appropriately.

CODE OF CONDUCT: ILLUSTRATIVE ONLY Complete clarity on the essence of family values and their strict enforcement always. Any family member involved in the affairs of the business should continue to be loyal to the family and business both in spirit and action. Do not have any personal/private interest while handling business affairs of the family. Any member having a possible conflict of interests due to martial relationships with another family with a written constitution or not will disclose such possibilities and maintain strict confidentiality on either side. Decisions should be taken entirely based on the interest of the family and business and its stakeholders. Have no active private interest in business outside the responsibilities expressly provided by the family to avoid conflict of interest. Adhere to the legal and ethical requirements of wealth management and not do anything that will affect the family’s reputation. Declare personal passive investments to other family shareholders regularly. All properties of significant value inherited from in-laws, etc., to be regularly declared to family office or key family shareholders. If and when own company shares are publicly listed, then family members shall not acquire own company shares for self from the market, except as part of short-term personal wealth management, and as per legal provisions. Family meetings must always be held in a cordial atmosphere. Hence, meetings may be adjourned to allow members to take time out when discussions get heated. There should not be any personal criticism of other family members in front of others.

(Template 3.3 Contd)

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(Template 3.3 Contd) Respect others always. e Punctuality is important; respect others’ time. © Do not interfere operationally in the others’ areas of business responsibilities. However, this should not lead to creation of silos. ¢ Not to charge the company with expenses that are incurred for personal/ family purposes or those not admitted as business-related expenses. e Read, understand, follow, and uphold the family constitution in its spirit and contents. e Attend all meetings one is eligible and obliged to attend and seek prior permission for leave of absence if required. ¢ Maintain confidentiality in all matters that are agreed to be so or considered to be so. © Do not be actively involved in politics while being actively involved in business. Add rules and guidelines for social behaviors, austerity, and participation in political and religious organizations. SOURCE: Author. Template 3.4

Practice of Code of Conduct (for A, B, and C Categories)

Codes of Conduct

Code 1 (XXXX fill in here)

fill in here) Code ‘n’ (XXXX fill in here) SOURCE: Author.

Please ask all family members to rate themselves and others on the following scale: (1) Never; (2) Rarely; (3) Sometimes; (4) Often; (5) Always. One of the family members or an outside facilitator can tabulate and find out the average score for each member. This will be done like the 360° feedback exercise discussed earlier.

To Preserve and Practice Values

Template 3.5

| 63

How Do I Fare: Illustrative Analysis of the Practice of Code of Conduct

Code of Conduct

Rating by

Personal Development

Average Score Given by Others

SOURCE: Author.

This template is derived out of the exercise of completing Template 3.4. For each of the code of conduct, enter the rating that each person attributes to self, and the average score given by others. The purpose of this exercise is to prepare a plan for further improvement of each individual in terms of the practice of the code of conduct decided by the family.

The much-publicized case of Rana Kapur of YES Bank in India not entertaining a request of Shagun Kapur Nogia, his niece and daughter of equal partner, the late Ashok Kapur, for a board seat! is reflective of the complexities that joint ownership can lead to. In this case, two brothers-in-law, Ashok Kapur and Rana Kapur, set

up YES Bank with approximately equal ownership of 13 percent and 12 percent, respectively. Ashok Kapur was killed in the 26/11 terrorist attack in Mumbai in 2008. While the bank went on to become one of the most rapidly-growing private sector banks in India, the relationship between Rana Kapur and Ashok Kapur’s family deteriorated. Whatever be the reasons, Shagun Kapur’s attempts to join the board of the bank were effectively resisted by Rana Kapur. There was no representation of the Ashok Kapur branch on the board ever since he was killed. The whole matter then moved to the Bombay High Court. It became an unfortunate ugly battle in the public.

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Madhu-Kapoor-can-challenge-Yes-Bank-AGM-resolutions-in-court.html (last accessed on October 20, 2014).

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Without getting into a debate on the merits of the case, let us look at some of the deeper questions of relevance to the family business in general. Why did this happen? What are the implications of such confusion and acrimony for the family members? Could this have been avoided? We will discuss in this chapter how ownership management is critical for the success and survival of family businesses and the rights and responsibilities of shareholders. We will also see what can be done to ensure that cases such as that of YES Bank are prevented.

OWNERSHIP CONCERNS Business ownership is particularly an area of concern for all parents and their children. After all, they are all in business for creating individual and collective wealth. Naturally, ownership clarity and resultant entitlements are very important for family businesses.

Ironically, one of the topics family members often find too sensitive to discuss is the ownership structure of their business. “Who owns

how much of different business entities and why’ is most often not discussed openly in joint family holdings, especially when the founder is still leading the business. Sometimes, the question is about ‘why I do not have any shares though I am contributing to the creation of wealth’. In a slightly different way, the question (or

concern) would be about the justification for the existing proportion of holding by different members for a variety of reasons. There is another concern: ‘How can I trust him without any legally valid document?’ The days when everything was based on trust in the other person’s intention and integrity seem to be disap-

pearing (or already gone!). Cases such as that of YES Bank add to such concerns. There are also new concerns about the stability of

marital relationships. Under the changing sociocultural context, it is useful to have not only clarity but also legally validated documentation for existing and permitted ownership structure for all family businesses. Overall, there is growing concern about future inheritance of

ownership, particularly with increasing complexities in the structure

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of family relationships. This is especially so when family elders are singularly focused on building rather than distributing wealth. Here, the assumption is that everything is for everybody, in the most socialistic way. Given that the joint family system is rapidly undergoing changes, and that people are increasingly concerned about protecting their private personal wealth, there is a greater need to have clarity on the ownership structure, that too with all the wealth reinvested in the business. Solution to any such concern has to be based on collectively agreed logic that is understood and accepted by all stakeholders through open dialogue and discussion as the means for preserving family unity and peace. Otherwise, members will draw their own conclusions, not necessarily based on facts, and not always synergistic and positive. There are also instances of turf war when some key family member dies, as in the case of YES Bank, creating imbalance

in the power equation. This is yet another instance of the effects of the five Ds to Disaster. Let us realize that ownership-related challenges can be addressed smoothly with some careful thinking and collective action on the part of all involved. Some of the other specific reasons for the concern about one’s own share in the business are the following.

*

*

Individual need for financial security for the present and future drives family members to get worried. This is particularly high when the family’s collective or the individual’s private wealth situation is not very secured with most of the wealth blocked in business. This will be greater if the business is facing unattractive uncertainties in different ways. The need for social and family-level recognition based on the assumption that people with ownership control have certain level of influence, if not more power.

*

The feeling that ‘Even though I am working and contributing more than others, I do not get rewarded appropriately in terms of ownership’. This will be greater if the salary and perks are not fixed based on the value addition provided. Let us remember that in most family businesses, compensation is

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fixed based on seniority and age and not based on competence and contribution. In several instances, salary per se is still not a big amount, though there may be a number of perks available. Since these factors are neither mutually exclusive nor related to each other, the extent of their influence varies

*

from family to family. Dividend will come directly to personal bank account! That is a great source of economic freedom!

For family elders, particularly the founders, the term ‘togetherness’ encompasses everything. Their focus is normally on preserving and growing the family wealth together. Typically, for business families, all their different businesses are parts of the basket of

portfolio of businesses, all owned by the family as a unified entity. Consequently, the need to allocate and define parts of the family’s wealth in the name of different family members based on sound logic is not always felt. Unfortunately, this assumption is not always built on strong and lasting foundations.

HOW TOGETHERNESS ASSUMPTIONS CREATE CONFUSION Typically, for founders and their children (and sometimes the next generation too), business operations and success in the market place are assumed to be more important to the family than clarifying the internal structuring of ownership: They believe in the value of togetherness to the core. This is also driven by the need to pool as much of the wealth as possible to grow the business, especially when

the pool itself is small. Consequently, new companies get formed as separate entities, very often for regulatory reasons or matters of convenience. Sometimes, this is considered as a convenient way

to create separate businesses for siblings to operate and inherit in future. The trouble starts with multiple investment companies and cross-holdings of shares when the family leaders allocate shares to other family members including the next generation without

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bothering too much about the possible implications of long term inequity. As witnessed in many cases over a period of time, business ownership structure becomes a cause for dilemma and dispute for some family members. The infamous split of two of the wealthiest brothers, Mukesh and

Anil Ambani of the Reliance group, was entangled in complicated ownership structures.? The family had several investment arms, created apparently for taxation purposes, but with the assumption

that the visionary family would remain united forever without any possibility of a division. There could be huge financial implications arising out of share valuation and ownership transfer in such situations. In the Reliance case, the brothers had to swap manage-

ment control too of certain companies while arriving at a settlement. In essence, it can be not only time- and money-consuming, but also

murky and unpleasant, leaving lasting scars on their relationship and reputation. Besides, differential business performance is another

critical factor to consider. We know that business performance

does not remain equal for all business units for all time to come. For instance, the fortunes of four different businesses owned by a

family normally do not remain the same always as they are driven both by market conditions and quality of leadership. Family decisions are often driven by convenience and level of interest of individuals concerned, and not necessarily based on capabilities. In several cases, the smartest sibling is not always asked to manage the toughest business. Questions may be raised by some family members about the need to slog for a business that is not owned or controlled by him. Also, another impression created among the family members would be that the business managed by that person belonged to him, particularly if the same person manages the business continuously for many years. This is often without verifying the facts. In all these cases, confusion grows when family members start thinking only about themselves and their branch of the family instead of the whole family as a single unit. This may ? Hamish McDonald, Ambani €¥ Sons: The Making of the World’s Richest Brothers and Their Feud (New Delhi: Roli Books, 2010).

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be called the ‘silo effect’ of family business wherein members think in terms of specific silos or areas and not the whole business. ‘This is particularly a challenge when there are children and cousins involved, and family branches live separately.

Even in families with a single child, there can be major ownership-related concerns between parent(s) and the child, either for

want of a cordial relationship or for gender-related reasons. There is growing reservation among family elders to pass over considerable part of the ownership to their children or other family members when they are still active or alive. They tend to retain a certain portion with themselves until their end. This is reflective of the current social trends of children expecting a share in ownership when they are on board, and also in some cases of not taking care of their parents emotionally or financially later in life. Complexity may get compounded when one is concerned about a son-in-law getting possible ownership through marriage of the daughter. Yet another scenario is the emergence of a skewed ownership structure within the same family because of the differences in the number of children each family branch may have. For instance, a family starting with complete sense of ‘togetherness’ and equal ownership among three branches may have, after one or two generations, one cousin holding a third of the entire business if that branch has been having only one child in each generation, whereas the others had more than one. This could lead to the creation of avoidable political atmosphere and behavior in the family. Indeed, it is not possible to avoid such situations. Hence, families need

to develop strong governance mechanisms to minimize or avoid destructive thinking among the members. There is also the possibility of silent concerns growing if all the family members are not actively involved in the operations of the business. It would not be an issue when the business is small. But perceptions and attitudes may change if the size of the cake grows and interest in their stakes goes up. For example, in a secondgeneration family business in South India, there are two daughters of the founder. One of them lives in the United States and the

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other is operationally involved in the business. Over the past few years, the turnover went up from %500 million to over %5 billion! Now, the US-based sister has started making enquiries about the performance, profits, and surplus investments of the business, for the first time! You cannot predict the direction of the wind at this stage, but there is some wind which may gather strength in future! Her father would prefer to believe this as a good thing for the future of his family and entrepreneurial initiatives. Of course, the daughter who slogged to build the business with her father would not like to think so, and would like to see her contributions recognized in a different and definite way. This is where our suggestion (discussed later) to reward capital appreciation or gratuity becomes relevant. There have been several cases where the demise of one key owner left a vacuum that created confusion about ownership and management among one or more of the other owners. Besides Reliance, this has happened in several large organizations at different points in their history.

ADDRESSING OWNERSHIP CONCERNS Most of the ownership-related concerns arise due to lack of a clearly articulated long-term purpose of owning the business that is shared by the family. Family business leaders should be clear whether the business is only to create wealth for a comfortable living for self and/or the family, or to build it as an institution for perpetuity. It can as well be a combination of both. In most cases, such clarity

evolves over a period of time, but it is important to work towards it consciously. So long as the business is a means to create the family’s current wealth, individual interests and concerns will play a dominant role. Ifinstead, the owners are there to not only enjoy the current wealth but more importantly to perpetuate the family wealth, individual holding pattern would not matter much. In the latter case, family members will continue to enjoy the fruits of their ownership. In other words, they will have access to consume the milk but

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without the authority to sell or slaughter the cow that gives the milk. In most cases, such trusteeship assumptions are not explicitly articulated. In a trusteeship role, you are holding the wealth in trust for others. You are responsible for protecting, preserving, growing, and handing over the wealth to the next generation. You do not own it! Some of the respected business families that have successfully transcended four—five generations or more have upheld the trusteeship value of ownership. In some cases, they have accordingly redistributed their holding among cousins more or less equitably to maintain parity in later generations.

GRATUITY: REWARDING INDIVIDUAL CONTRIBUTION TO WEALTH CREATION There is a need to make necessary changes in the ownership structure as the society’s perceptions of ‘what a family is’ and ‘what

togetherness means’ change. We are experiencing growing individualism, replacing the concept of collectivism that grew out of

the need for sharing of different things for survival, economically and emotionally. As long as this trend continues, there has to be

clarity about the principles and process of acquiring and relinquishing ownership. For a variety of economic seasons, such as

scale advantages of brand, capital, management talent, and other resources, and for a number of emotional reasons, such as the good

feelings of equality and sharing, families may prefer to keep the family’s business wealth together. That means there is a need to have collective ownership of all businesses, but with clarity about

the extent of individual ownership. There is growing recognition among families, particularly the younger generation, for the need to reward those family members actively involved in the management of the business compared to those not involved. An effective way to reward the contribution is by creating a gratuity mechanism. This can be done primarily in two ways.

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*

FOR FAMILY BUSINESS

One, incentivize performance through significant salary hike

or variable salary. Here, there will be a formula worked out by which people holding different levels of responsibilities

will be monetarily rewarded. This should not be entirely

*

based on a profit formula. Instead, it should be based on the efforts and returns, all expressing the family’s gratitude to the persons concerned. Two, issue shares, maybe not voting, to the person based

on the value addition made. This could be by allocation of certain number of shares for achieving prefixed targets (nonmonetary too). There could be legally permitted ways

- to implement such a plan. There are possible combinations of these also possible. In all these approaches, the effort is to encourage family members to be entrepreneurial and reward their efforts. Once such a model is created, it will be possible for family members to join the business and leave it at any point in time with the full understanding about the benefits that accrue to them. In any case, it is important for family shareholders to agree in writing on the criteria followed for practicing such ‘gratuity’ models.

HOLDING COMPANY OWNERSHIP MODEL Ideally, some form of holding company model is found as an effective vehicle to hold together all the shares of the different branches of the family. Most family businesses that have lasted multiple generations tend to adopt this model. The Merck family that controls more than 70 percent of the global pharmaceutical giant E. Merck KG, Germany, has found this as the best ownership model in their

journey through 11 generations.* More than 150 family members hold shares in their privately held holding company. They have * Speech delivered by Dr Frank Stangenberg Haverkamp, Chairman Family Board and Executive Board E. Merck KG, at the Third Asian Invitational Conference on Family Business, Indian School of Business, Hyderabad, 2011.

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created clear and strict rules governing various dimensions, making it extremely difficult for anybody to exit. Apparently, there has been

only one such case in the past half century or so! Several midsize family businesses have realized the benefits of this model and are increasingly adopting this. This gives the family a lot of freedom to look for appropriate ownership and management structure in any of the group companies. For instance, there can be an international joint venture, a publicly traded company, and a completely private partnership firm, all working under the umbrella of the holding company. Strategies of the holding company will be developed by family representatives that allow them, if required, to acquire or divest from subsidiary companies as they wish. There can be intercorporate investments too across the business units as per the policies of each (see Exhibit 4.1).

The holding company model is conceptually very attractive, but families should keep in mind legal and tax implications of merging or transferring all individual holdings into a holding company and reallocating the shares in specified proportions. It can take different legal forms such as a private beneficiary trust or a charitable trust, or

a company or partnership. There are advantages and disadvantages for all. A number of families seem to be keenly looking at the trust model to perpetuate their family businesses.

Exhibit 4.1

Ownership Structure

Family Branch

Family Branch

Family Branc

Holding Company/Trust

Joint Venture |

SOURCE: Author.

Public Limited.

Private Limited

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Private beneficiary trusts can hold shares in the holding company or individual companies, and can distribute the income among the defined beneficiaries. Some families use the trust income to disburse as share of profits, and/or to meet some of the general expenses of the entire family, including retirement and health benefits, family marriages and philanthropy. The purposes for which the trust income can be used will have to be specified in the trust deed. There are several less-known family businesses that already have taken the trust route, and more are showing inclination towards it. This is also a reflection of the value of social trusteeship the Tata group has been practicing for the past five generations of their existence. Families that see the role of their business as a major contributor to the society rather than primarily creating wealth for themselves tend to create one or more public trusts (or a non-profitmaking company) to hold shares in the business. Multiple trusts

under the Tata umbrella that hold 86 percent of the shares of the Tata Sons,‘ the holding company of the Tata group, reflect this goal.

PERFORATION MODEL OF OWNERSHIP Several families do not follow the holding company model. There have been several recent instances in India of families adopting, what we can call, a ‘Perforation Model of Ownership’, apparently for want of clear ideas for addressing possible differences in operational strategies. Under the Perforation Model, individual family members hold in their personal names most of the holding of the family in the particular company that they personally manage, leaving a small portion for other family members to hold individually or collectively. Under this, the various branches of the family hold 60-80 percent of the shares of the company (ies) that each branch manages. The remaining portion of the promoters’ holding is held by each of the other branches in small quantities or in a holding company. This will 4 Kavil Ramachandran,

School of Business, 2011.

“Tata Group: The Succession Dilemma,” Indian

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ensure that the branch that is responsible for driving the destiny of a particular company (or companies) derives the fruits of their efforts, good or bad. This gives concerned individuals a lot of freedom to operate without being supervised by other family members. As the head of one such branch noted, it gives entrepreneurial freedom to explore and possibly win: “It boosts my ego a lot!” There is another side to it too, not often openly discussed. At any point in time, those who cannot withstand other family members questioning them on strategy or performance can buy back the remaining shares and walk out. Hence, the name Perforation Model!

This is like a loose coupling. Essentially, this is tantamount to reliving the entrepreneurial stage in respect of ownership and

management as it gives freedom to the person in charge to run the business the way he likes. Unfortunately, lasting empires are rarely built from such initiatives. While this appears to be a simple solution, only rarely has this model worked effectively, to everybody’s

satisfaction, and also lasted for long. They do not show signs of maturity that enable them to create institutions out of business organizations while simultaneously creating personal and societal wealth. Lack of trusteeship feeling among family members and absence of centralized holding of shares of the family may lead to challenges of addressing effects of cross-holding. This is particularly when different family members manage businesses owned by other family members.

AMOEBIC MODEL Again, stability in ownership structure depends a lot on the family members’ clarity about the time horizon of the existence of the business. Families with a short-term horizon would look at business as a means to create a decent amount of wealth for the family. They tend to follow an ‘amoebic model’ of ownership that involves breaking up of family wealth in almost every generation. In an amoebic model, businesses tend to break up as they reach

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certain size, like an amoeba that breaks up as it grows in size (see

Exhibit 1.3). Amoeba always remains a unicellular organism. While most of the perforated branches remain small to medium in size, some do break into the big league, depending a lot on the particular individual driving it. On the other hand, families with a clear vision for building a business for perpetuity will have a long-term horizon in mind. They will develop clear ownership structure and governance mechanisms that support such a vision and the related strategy. Unfortunately, most families do not think of these issues and develop a clear picture, primarily for want of

clarity on how to go about doing it or availability of good-quality professional support.

WHY SHOULD OWNERS MANAGE THE BUSINESS Most business families believe that their members should be deeply involved in the operations of their business. This was never asked as a question in most Asian countries till recently. It has always been considered as a right as well as a responsibility especially when nobody could be as passionate as the family members. The scenario is changing with shrinking size of families and growing complexities of business, often resulting in a shortage of passionate and compe-

tent members to work in the business. Also, several young family members openly ask, “Why should I work in the business?” In all these situations, the answer is, “You need not!” The premises for owners/promoters working in their ventures

are many. Besides having the freedom to build the business as one liked, the person believes (often rightly) that he alone (and his

immediate family) has the passion and commitment to do the same. He is confident about the suitability of his style of functioning. He

knows that he cannot easily trust anybody. Above all, that is his major (sometimes only) engagement that keeps him busy. Also, it allows him a lot of opportunities to account for his expenses,

To Manage Ownership Challenges

| Tg

personal or business. In essence, the owner/key promoter is the operating head as also the head of strategy and governance, besides being the key investor.

When the business is small/medium-sized, it is easy to have all the necessary capabilities for playing all the above roles blended into one who still may be able to manage well. As the business grows and transforms strategically and organizationally, several of its critical success factors do change. That is when ownership rights do

not necessarily make a person a good manager too for the context. Indeed, many of the reasons for the promoter to operationally run the business, such as occupation, monetary rewards, social status,

and trust, may still be true. But the question is whether he is the right person to do so, purely from the angle of the business and protecting its competitiveness.

Most often, such a question is never asked because the best person to ask is the promoter himself! There is an assumption of

indispensability here. It is only under extreme compulsions that such questions are

noticed. However, in several entrepreneurial and family ventures, big and small, old and young, one can now hear echoes of this or similar questions. Emergence of several new and exciting alterna-

tive opportunities is making many next-generation family members sit up and think of their career options. Indeed, there are always solutions if only promoters are willing to listen. Exhibit 4.2 shows the different roles owners could play and the responsibilities assigned to each. A close look at it would show the enormous possibilities owners can explore with or without being

operationally involved. Accordingly, there could be different people playing not the same role in the same business. While somebody may be the operating owner, someone else may be an investing

owner. Naturally, the operating owner should be eligible for ‘gratuity in some form or other.

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Exhibit 4.2

FOR FAMILY BUSINESS

Ownership Options and Involvement in Business

Involvement | Investing in Owners

Active Owners

Operations

Never

Never; some oversight

Ownership

Scattered, small

Significant

Strategy

Accept

Understand and guide

Understand

| Contribute and guard

Governing Owners | Oversight Significant

Operating Owners Lead Significant

| Active partner

Lead

Lead

Lead

Governance

SOURCE: Author.

THE MANY ROLES OF OWNERSHIP Basically, an owner wears several hats. As head of operations, he is an operating owner. Devoid of that responsibility, he is an owner responsible for strategy and governance. In several cases, particularly

in European and American companies, there are major shareholders not involved in anything at all but who continue to enjoy dividends and capital appreciation as investing owners. In other words, the assumption that owners should be involved in the business on a day-to-day basis is largely a myth. We can break it if alternatives including suitably qualified persons can be appointed for the job. It may so happen that the substitute proves to be better than the operating owner! This will not only make the organization better managed but also enable the person to use his time more productively. The promoter can continue to be leading/guiding in strategy and governance. Owners then can have the cake and eat it too! This is not easy primarily because there are several ownershiprelated concerns to be addressed, of which trust in integrity and confidentiality are the most important for any promoter. Of course, they do not want their hard work of years of building the business

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destroyed by a paid executive, an ‘outsider’. The way out is to design organization structure and systems professionally. One has to create robust systems and processes, high-quality internal and external audits, and long-term performance-linked incentives.

OWNER AS ENTREPRENEUR-STRATEGIST Yet another thing owners should do is to think like entrepreneurs and find out opportunities for further growth and improving performance of the existing business, all to make the business more competitive. They should realize that they will be able to start new ventures as strategy/governance owners. Business owners should no longer see operational involvement of their successors as a

responsibility; they should cultivate their interests and capabilities as strategists and investors. Such an approach not only helps grow the wealth but also gets a number of family members connected

with the business in one way or other. This kind of an open approach is found to be exciting for several youngsters who would like to entrust operations with some nonfamily professionals but be involved at the strategy level. As we apply technology more extensively in the business, more robust mechanisms can be developed to operate business remotely but effectively. It will be prudent for business leaders to realize that the wind is blowing in this direction.

PROTECTING FAMILY SHARES: ROLE OF SHAREHOLDERS’ AGREEMENT Families should be clear about handling situations when some family members express a desire to exit at some point in time. As part of governance, they should decide whether family members can sell their stake in the business, and if so, to whom and how.

Most successfully sustaining families have clear policies for this purpose. For instance, increasingly, family share owners formally

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make contractual agreements that restrict sale of their inherited shares to outsiders. In many cases, family members will not only have the first right of refusal, but also the right to buy sometimes at a 10-20 percent discount, and so on. The GMR group promoters have an agreement among the family shareholders to sell shares within the family at 20 percent below market price under unavoidable circumstances.> The Merck family too has such restrictions.® This would discourage to a great extent unpleasant instances of some family members deciding to unilaterally exit from family business for personal reasons. However, it may not be very easy to complete/shut out all exit options as there will be questions affecting fundamental rights of a citizen involved. Creation of a legally validated shareholders’ agreement (SHA)

is a critical part of family business governance these days. An agreement among all the family shareholders on the terms and conditions for transferring their shares within or outside the family is quite crucial these days to build and sustain cohesion and trust. The much-publicized case of the Zandu Pharmaceutical Works Limited takeover by the Emami group in 2008 brought to light the compulsive need to have ownership clarity and norms for share transfer. It was lack of sustained cordial relationship and practice

of governance by the two promoter families that pushed the frustrated Vaidya family to sell their entire share of about 24 percent to the Emami group, without even informing the Parikhs, the other promoter. Please see Caselet 4.1 for some details of this interesting takeover battle. Technically, in most situations, only a private limited company

can have full protection if its Articles of Association amended to incorporate a clause restricting share transfer. However, an agreement even without legal validity is helpful for all to know the entitlements and responsibilities of all family shareholders. * Kavil

Ramachandran,

John Ward,

Sachin

Waiker,

and

Rachna

Jha,

‘Ensuring Family and Business Continuity at India’s GMR Group,” Richard Ivey School of Business, 2011.

° Speech delivered by Dr Frank Stangenberg Haverkamp, Indian School of Business, Hyderabad, 2011..

To Manage Ownership Challenges

Cie

Emami’s Takeover of Zandu

| 81

its

| Zandu Pharmaceutical produced traditional Indian medicines using [| Ayurvedic practices. Two promoter families, the Vaidyas and the | Parikhs, established Zandu Pharma in 1910. The Vaidyas came from

q

a lineage of Ayurveda practitioners and brought their technical knowhow to the firm. The Parikhs belonged to the traditional trading community and brought their business acumen to the firm. Complementing each other, the two families managed the business for about 100 years. However, with the passage of time, the later generations of the Parikhs gained technical knowledge and became firmly entrenched within the firm’s operations. On the other hand, the technical expertise was not effectively passed on to the later generations of the Vaidyas. The Vaidyas lost their expertise and, thus, their importance in the eyes of

| | fF | } | [| |

the Parikhs, who viewed the Vaidya descendants as incompetent. The

7

Vaidyas felt ignored and marginalized; the Parikhs repeatedly denied | their demand for a Director’s position on the company’s board. Pushed into a corner, finally, the Vaidyas sold their stake in Zandu to the 4

Kolkata-based beauty and healthcare company, Emami. The Parikhs viewed this as a hostile move and tried to thwart Emami’s bid for Zandu’s control. Their argument that the Vaidyas should have given them the first right of refusal was not accepted by

a | | |

the court in the absence of any SHA.

|

After a bitter corporate battle, the Parikhs agreed to sell their shares also to Emami at %16,500 per share, a price much higher than the ;

76,900 the Vaidyas received from Emami. For Emami, it appeared to | be a worthwhile investment given the latent value of the underutilized | assets they got in the process. 1 SOURCE: Kavil Ramachandran, Jayshree Suresh, and Navneet ; Bhatnagar, “Zandu Pharmaceutical Works Limited—The Take Over | Bid (Parts A & B),” Indian School of Business, 2014.

Varying Needs of Family Shareholders As families move from one generation to another, and when not all family members get involved in the business for a variety of reasons, there will be differences in the expectations of family shareholders.

q

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FOR FAMILY BUSINESS

A major question often asked is about their freedom to create increased liquidity for themselves. Paying higher dividend is only one of the possible options. Such families should not only provide for a SHA but also have a family fund created to either buy shares of

such people or to bail them out from temporary financial exigencies. You should initiate a dialogue with other shareholders about the long-term goals and implications for all family shareholders and the business at large of the existing ownership structure. For

instance, one of the goals could be continued availability of liquid funds regularly, which could come from a fee for the use of the

company brands. Here, the family could transfer the brand name to a private company or partnership or even a trust which in turn can license the same to the user companies for a fee. Disregarding the profitability of the business, the family will then be paid a fee based on the volume of business transacted. Family businesses significantly gain from developing a clear

long-term purpose of their existence which will enable them to address the challenges emerging out of ownership structure too. Families should not consider the amoebic model of breakup as the

first option to address ownership-related challenges. Instead, that should be only the last option when other options are not feasible at

all. There are several ways of addressing the material and emotional needs of the family, and creating space and freedom of expression and operation among all. Family members should explore these avenues first.

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83

ACTION POINTS

1

Prepare a document that clearly shows the existing owner- | ship structure of the business, by name. . Is there a SHA existing? If yes, distribute it among all |

shareholders.

:

If there is none, initiate discussion among all the adults

|

(non-shareholders included) on the strengths and weaknesses of the existing holding pattern. An expert on law and finance may be able to facilitate such a discussion. Make changes in the holding pattern and legal structure, if necessary. Determine the different ownership roles, criteria for holding the positions, and the reward structure through a process of dialogue and expert advice.

{ | | | 7

| ]

Prepare a draft of the SHA for open discussion and |

finalization. Finalize and distribute the SHA among all shareholders.

The 78-year-old patriarch of a family business mentioned every time I met him that he would retire and relinquish from all responsibilities “at the earliest” or “very soon” or even “next month.” This has been going on for the past five years. He is very energetic and enthusiastic about the family business that he built up over half a century; he wakes up at 4:30 a.m., does yoga, and goes to work at 8:30 a.m. even now for a 10-hour grind. His four children go much later. The patriarch does not have any hobby and is a workaholic. Another case: In a large cousin consortium where there was no retirement age, it was difficult to have an agreement on retirement of the directors. This was so in spite of the fact that the top of the leadership was overcrowded with three cousins in the 60+ age category, two handling the same function, while the next-generation members were knocking at the door. They did not know what to do to accommodate the young generation, and continue to coordinate across several family members, while remaining profitable. During my exploration to diagnose the various challenges they faced, it soon became clear that they were resisting retirement for three reasons. One, they would not have anything else to do post retirement; two,

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they would feel very uncomfortable and restless without knowing anything about the happenings in the company; and three, they would not have any steady income and perks since their dividend income would be quite small. You need to know that they were all provided with fairly liberal executive perks. There are different reasons for people to not retire, but in almost

all cases, there is one thing in common. Retirement is a dreadful thought for most people who are close to the fixed or perceived age of retirement, particularly for those who retire from their positions of power and authority without any clear idea about how they would spend the rest of their lives. This is nothing new. Leadership change has always been contentious for a variety of reasons since time immemorial. Dynasties across the world have failed to survive beyond a few generations for want of smooth retirement and succession policies and practices. Emperors have imprisoned their fathers. Princes have effected coups to capture power. Family business is no exception. This is so in spite of the knowledge every leader has about the need for effecting smooth change in leadership.

THE CHALLENGE OF RETIREMENT It does not matter whether you are retiring yourself or not, but

helping others manage their retirement is a challenge to everybody else. This is because people around the person retiring have a role to play to make the transition smooth and enjoyable. The ecosystem for retirement consists of the cheerleaders of this relay race in family business. Let us understand why it is a challenge and what possible approaches can facilitate successful retirement. Fundamentally, retirement and succession are two sides of the same coin and without the incumbent vacating the leader's seat, there cannot be any question of succession. (We will discuss chal-

lenges related to succession in the next chapter.) The key question then is the clarity the leader and the family have about the timing and process of his retirement. It is easier for effecting retirement of family members other than the leader. Why? Very often, leaders

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do not realize that they themselves have to push for their retirement because of the ‘kingly’ powers possessed by them. Neither the board (even if there is one effective) nor the family would have

the courage or mind to ask the leader in good health to step down, often because of the command and control the person has over the others. In organizations with centralized authority, there will also be the question of indispensability looming large. Besides, explicitly pushing for a retirement deadline is often perceived as the end of the productive life of an individual. Retirement means ‘tired’, with a ‘re’ indicating again, and again! The message is loud and clear: “You are very tired, and so it is time for you to move out and allow other ‘untired’ or smarter people to move in.” This is indeed a disastrous message or thought for someone who has always bubbled with curiosity, enthusiasm, excitement,

and what not throughout the life. This is particularly so when the person has reasonably good health. (Mind you, nobody thinks that they would ever die, especially when their health is fine, and there are far too many people around who are ‘more eligible’ to go.) So, we have a peculiar situation where the leader thinks highly of his relevance and capabilities. Hence, there is no real retirement of leaders in most family businesses, particularly when the business

leadership has the powers to amend any policy! In the absence of any such policy, making any family member retire will not be easy. That is why most companies have one set of retirement age for nonfamily employees and ‘no’ upper age limit for family employees. We have witnessed several leaders of highly reputed publicly held companies moving the retirement goal post from 60 to 65 to 70 and beyond to accommodate their personal aspirations. If such decisions are approved by ‘independent directors’ of repute, we can imagine the situation in a family-controlled organization. They tend to give an impression that the business would collapse without them. They are like lizards that think that the ceiling does not come down because they are supporting it! Hence, the fundamental challenge in retirement is the recognition by the individuals at the top of the need for a change of the operating head concerned.

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In other words, the onus is on the leader to set standards of

behavior. After all, nobody is indispensable in this world! “I am any time available for my son for consultation but I do not offer any advice on my own” should be the mantra. It seems then that such a leader has a clear road map for the future.

WHO TO STEP IN? Another challenge is the difficulty in choosing the best leader among the potential successors. Why? Because most often, there is nothing

like a set of accepted criteria nor a clear leader acceptable to all. The leader and the rest of the family tend to avoid the matter as it may raise unpleasant questions. You are in a dilemma about following emotions when you know very well that logic should prevail. For instance, siblings/cousins may not agree on a common candidate other than themselves as each of them considers himself/herself the smartest. The eldest may be actually less competent than the younger siblings, but the family does not want to upset him and his wife, and bear the perceived embarrassment of explaining to the social network why he was not given the mantle despite, by virtue

of being the eldest, being the most experienced. The issue may be between a son and daughter and the fear of the son-in-law indirectly controlling the business. There are also instances of huge differences of opinion, values, and strategies

between the current leadership and the next generation. In some other instances, and this is a growing segment, the next generation is not inclined to enter the same business, or work under the existing

leader, all creating a different kind of challenge. Yet another concern is the extent of trust the incumbent has in the capabilities of the potential successor (“After all, I am the best

anytime!”). In all these situations, decision dilemmas may lead to eternal procrastination of the retirement of the incumbent with disastrous consequences. Leaders in good physical health often take this as an excuse too to cling on!

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QUEST FOR IDENTITY Sometimes, a more critical challenge is in finding answers to questions such as ‘How do I use my time if I retire? I have no other interest!’. As one grows old, the ability to take risk and flexibility naturally decline, and so it is not normally easy for a person with

enormous powers on hand to vacate the reassured seat and explore new avenues. It is almost impossible for a person with proven track record in one area to start exploration and experimentation in a

new area that may not always prove to be so successful. This may be a perception in most cases and not a reality, but people do not want to take chances. Everyone has the fear of failure in different degrees. This is particularly so for those who have spent a lifetime in a single business. Besides, in most cases, people do not realize or recognize their declining relevance in a changing society. Business leadership offers power to not only spend but also determine the destiny of the different elements (and stakeholders) of the business. Many will be afraid of disappearing into oblivion,

and would somehow like to cling on to their current position. They do not often remember that they have the responsibility to hand over their ‘business child’ to someone to take care. As mentioned,

they do not visualize their end at any time unless ill health hits them really hard. In other words, they have to facilitate change in

leadership and stability of the organization that they have built or helped to manage. As long as some element of insecurity of power and control remains in their minds, business leaders seldom give up their position voluntarily; they follow the path that most politicians follow and convince themselves that they are doing so for the benefit of others!

THE WAY OUT Philosophy has always urged people to respect the realities of the different stages of life from a dependent childhood to probable repetition of the same in old age. You grow to become irrelevant

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or less relevant in most cases. To make people accept this as true, Indian philosophy has defined the five major stages in life as childhood, adolescence, married life, retirement, and monkhood for all

human beings. We have no escape from them even if we pretend that these do not exist nor affect us. The characteristics of our body and mind undergo changes as we automatically and naturally move from one stage to another as we age, always subsequently. Hence, it is important and beneficial for people to voluntarily move into the retirement and monkhood stages as they age. In the five-generation-old Murugappa group, there has never

been any ambiguity about retirement of family members from their positions in the company. Mr M. V. Subbiah, ex-Chairman of the group, who is credited with laying the foundation for the

current surge in performance, did not even think of continuing beyond 65 years because, in a personal meeting, he said that his grandfather, the founder, according to his uncle, had laid the rule that 65 was the retirement age for the family members. Accordingly,

his uncle and his brothers had all done it before him. Behavioral scientists have found that ‘adaptability’ is a major challenge to manage as one grows older. There are two dimensions to it: one, mental preparedness to change, and two, actual change.

People who are aware of the need for retirement in the interest of continuity of the organization and smooth transfer of leadership would (and should) understand the challenges they would face when they have to adapt to changed circumstances. They will speak to others who either have gone through that phase or have knowledge about it. They will get the required awareness, and decide the set of activities they would pursue after moving out of the current engagement. In essence, they build the mental starnina to change.

The second part of implementation is simple. It is a question of defining the process and timing. | Managing retirement is found to be one of the most critical factors that determine continuity and growth of any family business. All businesses have a life cycle, like any living organism, except that the stage of decline can be perennially postponed in the case of a business if the critical competitive capabilities are constantly

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ascertained and provided. The basic message of this analogy is that a business leader has to constantly adapt and remain mentally and physically fit to maintain business competitiveness. This is not always easy, but impossible beyond a point, particularly when the complexities of management and related challenges change as the business grows. In other words, since human capabilities for execution and strategizing change as one gets older, there is a need to introduce fresh and adequately capable talent to rejuvenate the top management pool.

RELAY RACE Both the persons retiring and succeeding have great responsibil-

ity to ensure that the transition is smooth. There has to be clarity about the responsibilities being transferred now and those to be transferred later. The retiring leader should not be interfering in

activities already passed over. Of course, this is possible only when there is clarity about what all things one does consciously and otherwise. For instance, many leaders have tendencies to ask for information, seek explanation, give advice, and sometimes instruct

in areas where they are not supposed to interfere. You ask them about any such instance, and they will always deny it or find some or other excuse, as we have seen in a case in an earlier chapter. Let us look at a completely different case. The Chairman of well-known IT company has redefined his role by moving out of day-to-day management completely. He is deeply involved in the industry association activities. He said, “I have a clear plan to move out of

the company completely by the time I turn 65.” Leadership change involving retirement of the existing and succession by another is similar to a relay race (see Exhibit 5.1). Ina

relay race, different athletes run different laps depending on their individual capabilities and relative competitiveness. The whole race of four laps cannot be completed by one runner, particularly in the context of a business that does not have any definite end; everybody assumes that to be eternal. Hence, it is the responsibility

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Exhibit 5.1. Managing the Relay Race Baton Change Not Easy to Execute

Do homework (Who? Which lap? Why?) Timing of detachment to be clear to the runners Process (and confidence) of detachment detailed out Speed of transition decided Exit role and what next considered Goal congruence agreed upon SOURCE: Author.

of the person running the lap currently to hand over the baton to the next person. This will happen smoothly only if both the runners have confidence in each other’s abilities and have the determination to win the race together and not just any single lap. In the process, the possibility of the current runner holding on to the baton even after the successor runner has held on to it should be ruled out. This will be smooth only if there is adequate preparation of the timing, roles to be played by both, and the process of role changing. In the organizational context, this requires the leader to not interfere once his responsibilities have been passed over to the successor. The need for mental preparedness to adapt is crucial. Template 5.1, given at the end of this chapter, can be used as a planner for ensuring smooth retirement. Yet another dimension to remember is the choice of the next runner and the criteria for selection, as discussed in the next chapter.

The above argument is based on the assumption that the family has a clear purpose of existence for the firm. So long as the goal is to build a business that continuously contributes to the family’s and society's wealth, there is an implicit need to replenish its success capabilities. This also means that disregarding the eventual fate of the business leader, there is an independent identity of existence for the business. The role of the leader is to facilitate its successful sustenance. A number of the problems faced by family businesses can be managed if business leaders realize that the business is different from the persons who have set it up and managed it.

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This is what B. K. Jhawar, who built up Usha Martin Limited with his brother, did as he neared the retirement age. As explained in the case on Krishi Gram Vikas Kendra (KGVK) later in this book, he and his brother moved out of their operational and stra-

tegic responsibilities gradually while increasingly spending more and more time in KGVK. In the process, they successfully inducted their sons into leadership positions in business. They had groomed the children over a long period, which included relevant education and training. The Jhawar brothers continue to be on the board of the company in emeritus status.

FIGHTING THE FEAR OF THE UNKNOWN However, this is not easy for most people because of the uncer-

tainties involved about the future challenges and their ability to achieve their goals. As mentioned earlier, the fear of the unknown is

much greater as one gets old. Family business leaders and those who will be leaders tomorrow should start preparing for their subsequent stage of life early on, say, latest by the age of 55, assuming that all family executives would retire at the age of 60 or 65 or so. This is what Mr M. V. Subbiah, referred to earlier, did when he

prepared for his retirement as the Chairman of Murugappa group. He not only left the board at the age of 65 after comprehensively strengthening the board and the group’s operations, but also went away for a year to the Kellogg School of Management, USA, as a Fellow. He might have wanted to be away from the scene, having completed the responsibilities of its transformation and passed over the baton to the next runner. The Murugappa group has gone from strength to strength since then, and Mr Subbiah has moved on to play several other roles including the Chairman of the National Skills Commission of the Government of India for five years from 2008. Families that make policies for their members’ involvement and departure, and strictly adhere to them, will always find retirement not difficult. Decisions on such matters should be made through a process of consultation.

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ROLE OF A MONK IN THE MODERN AGE Retiring people should try to redefine their possible role in business, family, and society, and think beyond their routine. This will enable them to show more flexibility towards other activities. This could range from pursuing other interests, even peripheral, such as reading, travelling, and teaching, that they could not do earlier, to developing interest in quasi-business activities such as those of industry associations, educational institutions, or govern-

ment policy-making bodies. Families also have to be more sympathetic towards both the material and emotional needs of older

people. For instance, it is unrealistic to assume that someone who has never asked others for meeting their monetary needs would now start asking others for their routine expenses. In the multi-cousin family business referred to earlier, the process of retirement could finally take effect when it was decided that the company or a family

trust would continue to pay the retiring directors the same emoluments including perks till the end of their life. This decision gave them the confidence to discuss the matter and the process in detail. Family members should ensure that the person retiring is well settled with a set of new activities. It will be foolhardy to think that a person who used to spend 10-12 hours at work would be able to start sitting back quietly at home from one fine morning,

that too without any anxieties about the goings on in the business. They should receive regular summary reports and occasional briefing on the business; they should be available for consultation, but they should not dictate. Families may find Template 5.2, given at the end of this chapter, as a guide to accomplish the goal of leader retirement.

In essence, human capabilities slow down gradually as one gets old and it is very difficult for an entrepreneur or leader to real-

ize this and also accept that as the truth unless there is a major health problem. Such people normally have enormous ambition and insatiable appetite for growth and success and recognition. Basically, they always need challenges that keep them busy. As the individuals go up on the overall need hierarchy curve, there should

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be opportunities to accomplish and demonstrate these to the people around them. Hence, creating and developing an opportunity to express oneself is crucial for effecting retirement. Building on the Indian philosophical principle of performing one’s duty with full dedication but with the preparedness to move on to undertake other responsibilities, any leader should identify and move on to do new jobs. Retirement is an unpleasant word for those who never get tired of work. Actually, such people should be only redefining their roles and never retiring. They have only one retirement that is the final retirement from this life! That realization alone will enable them to balance emotion and reason in deciding on such matters that affect them personally.

ACTION POINTS Develop a retirement policy including age, the roles they > will continue to play, the benefits they will continue to F receive, and the mechanisms of keeping them updated

* * > *

on business matters, as part of formulating a long-term strategy for the family in business. It is useful to discuss the importance of having such a policy as part of this exercise. Make use of Templates 5.1 and 5.2 and prepare the ground for implementing the retirement policy. The family should discuss and agree upon a way to ensure implementation of the policy. Review the experiences of implementation of the policy and facilitate smooth transition in a humane way. Discuss the implications of people retiring and not retiring from business, if necessary, with the help of a facilitator. This may not be completed in one sitting!

| — 7 ; F

To Redefine Role but Never Retire!

Template 5.1.

Principles of Relay Race for Retirement and Succession Planning

Determine the critical success factors

for winning each lap.

Select runners of each lap based on the level of competition, terrain, and relative fitness of runners.

Ensure complete understanding between two runners of the adjacent laps of the overall goal and the goals each one of them has to accomplish.

Be familiar with the permitted region at the end of each lap to transfer baton. Decide between runners how and when one will hand over the baton and the other hold on to it. Dry run several times to guarantee smooth transfer of baton at every lap.

SOURCE: Author.

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Guide to Planning Retirement Steps

Action Steps

Decide retirement age through consensus discussion. For many families, this age is 60 or 65 for executive and 65 or 70 for nonexecutive positions. Prepare a list of the existing areas of responsibility and decide on the phasing of transfer of responsibilities with deadlines fixed.

estig : a : Clearly define what all the retiring person will do | a. (and will not do) in the next three years in the

context of the business.

b. c.

Prepare the roadmap of activities. Families should encourage members to have other activities besides business: philanthropy, hobbies such as reading, holidaying, all of which will open avenues for retirees to engage in.

a.

b. C.

Define and facilitate payment of retirement benefits—monetary and nonmonetary: Who? How much? When?

Keep the retired persons informed of key business developments and remove any concerns about the health of their ‘business child’. However, ensure that they do not interfere in operational decisions. Periodical reporting advisable. Focus on building family harmony by engaging with other family members.

SOURCE: Author.

a.

To Successfully ]

~ Succession in Business

D: Anji Reddy, Founder of Dr Reddy’s Laboratories, built up the company as one of the largest Indian pharmaceutical enterprises. He gradually redefined his role as the head of the business and finally withdrew from operations when he was about 60, handing over the responsibilities to his son, Satish, and son-in-law, Prasad. He then continued to focus his attention on research.! Both Satish and Prasad worked together since then to build a worldclass pharmaceutical company, employing over 16,000 people and clocking a turnover of 2115 billion in 2013. Leadership succession is one of the most discussed topics in family business literature across the world because of the challenges involved in effecting smooth succession of the next generation, or sometimes from the same generation, for the long-term success of the business. Succession is the other side of the retirement coin and forms part of the relay race. It should be planned and executed carefully as the challenges involved are different. While ' Anand Jha and Bala Chakravarthy, Dr Reddy’s Laboratories Ltd: Chasing a Daring Vision (Switzerland: Development, 2003).

International

Institute

for

Management

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retirement sometimes involves one individual, succession often

involves more than one person. It is worth mentioning that one of the major reasons for breakup or sometimes failure of businesses in societies such as India is lack of a clear succession plan and/or its effective execution.

WHY SUCCESSION IS CHALLENGING Prisoner of Tradition: Challenges of succession have different shades of culture, logic, and emotion in different degrees. In the absence of anticipation and planning, these challenges get compounded in a dynamic manner. We shall discuss some of the major reasons here. In a traditionally male-dominated society like India, where working for the family business is considered as both a birthright and a responsibility, every male member of the family naturally stakes his claim to working in the business at a senior leadership position and wishes to become the leader with the accompanying benefits of power, image, and position. Girls Ready: In fact, the scenario is changing further with female members of the family, equipped with adequate education and expertise, starting to stake their claim for corporate jobs. It may so happen that the daughter is more competent than the son. Sometimes, girls face the dilemma of whether to step into the parental business or do something different based on the circumstances after marriage. Lack of Interest: Several families face a different kind of challenge. This is lack of interest in the next-generation member(s) to join the parental business for a variety of reasons, including challenges of working under the stifling style of their father or uncle and lack of exciting growth opportunities for the existing business. Emerging alternative career opportunities for the young generation in a rapidly evolving economy are also posing succession challenges. Many youngsters are not keen on pursuing the same business that their families have built up. As discussed earlier, they are guided

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by considerations such as the opportunity to work and live in a more attractive geographical location, opportunity to pursue their interests and passion, and exciting careers (and more salary) outside the existing business. In the process, several of them want to take some precaution to avoid the dangers of parking themselves too in an already crowded (and politically agitated?) family business. This is a reflection of the growing feeling among the younger generation that they should not be ‘burdened’ with the responsibility of carrying family baggage that they may have inherited. People want more degrees of freedom. From a sociological perspective, families in the emerging market

economies are also experiencing the call for ‘freedom’ the way European and North American family businesses have experienced in the past as they got industrialized. As discussed earlier in Chapter 4, families should work on alternative sce-

narios and options while addressing the succession challenge. Eldest the Best: Similarly, for a variety of reasons, such as perceived negative impressions relatives and friends may have about a person bypassed, families still prefer to have the eldest

son as the leader even if he is less competent to be so. Is it not interesting that most societies expect the eldest son to shoulder the responsibility of leading the destiny of the family in the next generation? Here, the assumption has been that the eldest is the wisest and the most capable individual in the family! This may not be acceptable to the more competent (often self-selected!) other family members. This is found

to be a much greater challenge if these are only two or three siblings and the age difference among them is small. Age Gap: Another scenario is when the age gap is very high,

giving a perception to the younger sibling to fight for his equality in entitlements along with his ‘big brother’. Source of Power and Prestige: Very strong insecurity feelings of some of the siblings also are a strong factor that affects smooth selection of a successor. This is particularly so if the leader has a number of discretionary powers or opportunities

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to interpret situations and exercise powers that the others do not have. Similarly, there may be concerns about who would get publicity mileage or networking opportunities and,

that way, ego satisfaction. In an earlier chapter, we had discussed the practice of the ‘Perforation Model’ of ownership, particularly when successors crave for separate identity and opportunity to explore passionate ideas. These are all reflections of lack of transparency among family members; these are examples of lack of policies for many decision-making situations in business. For a number of such reasons as mentioned above, a

decision on the successor may unfortunately get postponed, sometimes eternally or until everybody involved gets frustrated, leading to some desperate actions. In fact, signs of

things not going smoothly will be visible much before reaching a breaking point. Just as the five Ds to Disaster work,

family members facing the dilemma of whether to bring up the topic of succession for discussion with the leader or not tend to keep quiet for a long time until it starts hurting

them. Sometimes, they show their unhappiness through their behavior and loaded statements made in different contexts. The whole purpose behind such an action would be to push the leader to take some action. Let us now look at the combined effect of lack of willingness, preparedness on the part of a leader about retirement, and lack of dialogue and agreement on the part of possible successors. Complete deadlock! What is the basic problem? A close look at this scenario would show that it is lack of goal and role clarity. The family does not have a shared clear goal for the business? Its members are not clear about the roles each one of them can play in making the business a success. Even many well-respected nonfamily businesses have also got trapped in such a deadlock for want of clarity about the organizational goal, and clarity about the kind of person to lead it. Let us be clear: involvement in business does not mean active operational involvement. It could be as a shareholder

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*

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or full-time employee or strategist, as was discussed in the last chapter. How do we address such situations? Not Old Enough to Retire: We had seen the many challenges of retirement in the previous chapter. All of them individually or collectively affect succession too. Ownership Mess: Some of the complications arising out of lack of clarity of ownership could affect succession decision. This is particularly so if there are already tensions prevailing among the possible inheritors about what is waiting for them.

ADDRESSING THE SUCCESSION CHALLENGE Let us take the situation of the dilemma to make or not make the eldest the business head. This is a cultural baggage we have been carrying for centuries. So long as the eldest is a steward with clear understanding of the role of doing everything in the interest of the business, including the need for consulting other family members

on various aspects of business management, there is no big problem. Integrity and commitment to business are also found to be two key attributes of a good leader. Increasingly, this assumption is proving to be wrong. In a society that is rapidly giving way to nuclear families and individualism, the need for agreement on succession and working together is very high. Hence, it is important for families to be clear about the goals of business and isolate the critical success factors of the business. They should then identify the most suitable family member to lead it. Dalmia Cements, controlled by

the Dalmia family based in New Delhi, selected a younger member of the next generation, Puneet, as the CEO because they thought

that he would be the most suitable person to lead the business at that stage in the growth of the business while keeping the family interests intact.?

2 Speech delivered by Mr Puneet Dalmia, at the First Asian Invitational Conference on Family Business, February 2008.

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In other words, family businesses should apply the principle of ‘contextual leadership’ to choose the successor. This means the family would decide who would be the best person to lead, depending on different situations and challenges faced by the business. For instance, while the most thinking mind should be the strategist, street-smartness may be the quality required to take care of marketing, and compassionate approach to employees for addressing matters related to HR. There may be some with unique capabilities to develop social networks. Similarly, the qualities required to lead the business will be found to be different from the qualities required to build harmony and cohesion in a family context. In that sense, there may be a business head different from a family head too. Also, the person leading business negotiations may be different from the one leading strategy. The role of the overall leader is more of a facilitator conducting an orchestra than aggressively pushing with own agenda as if he is the ‘know all’ of everything. Of course, in all these instances, there has to be someone with

whom the buck stops finally to ensure that the family has a clear decision-making process. Families that follow collective leadership will need to be clear about the process of taking decision with or without voting and with what margins. In essence, contextual leaders should report to the overall leader, if these two are differ-

ent individuals.

Create Governance Policies Well-governed families prepare policies and processes for deciding both retirement and selection of the successor. This happens through open dialogue among the family members, normally all family shareholders. A basic assumption behind such open dialogue is the positive and cordial relationship family members have among themselves. In situations where the relationship is under a cloud, it will be useful to address some of the key concerns with the assistance of a facilitator, before or even as a part of developing

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the plan for succession. Hence, it is important to develop as soon as possible very good open dialogue based on clear and shared goals for the business. It is important to remember that several of these factors are dynamically interrelated with vicious or virtuous cyclical implications. In the case of the GMR group in India, the Chairman, Mr G. M. Rao, took the initiative in early 2003 to develop policies

for family governance with three equally capable, next-generation men at the top.° A structured process has been created by them to choose the successor for their different business units, as also

mechanisms to decide matters affecting everybody. This is already in vogue while the founder is still around and is at least six years away from the retirement age, all decided as part of a family exer-

cise to create a constitution. This is a reflection of the synergy the family developed between the business strategy and leadership strategy, all in the context of the family’s goal to keep it all together across generations.

Grooming the Leader The need for grooming the successor is very great in all organizations. In fact, there are two stages when family members will

particularly benefit from grooming. One is before becoming the business leader. This should be a gradual process spread over one or two years. The other stage is at the point of entry into the business. This is the time when youngsters should be imbibed with the purpose of the family doing the business, and the expectations the family

has from the individual. This is similar to the way princes used to be groomed by kingdoms in olden days.

3 Kavil

Ramachandran,

John

Ward,

Sachin

Waiker,

and

Rachna

Jha,

“Ensuring Family and Business Continuity at the India’s GMR Group,” Richard Ivey School of Business, 2011.

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One of the important questions often asked is whether the young generation should have experience of working outside the family business before joining the business. Across the world, experts have

unanimously endorsed the view of the young generation gaining experience from working outside before joining their family business. There are multiple benefits from it such as getting exposure to working in a different (hopefully better) work environment that

is driven by its own unique set of systems, processes, and organizational culture. They will be able to evaluate the positives and negatives of that organization, and develop an approach to analysis of an organization objectively. Besides, they can be outside the glare of attention, and learn what it would be to be an employee. Normally, as a result, humility would grow, and ego (hopefully) would take a

back seat. Unless there are exigencies, all family members should collectively agree on the requirement of successful completion of at least two-three years of working in a reputed and relevant organization as a precondition to joining the family business. Leadership transition should involve the outgoing leader passing over his rich social network to the successor. One of the major unique resources that family businesses have is this network that is normally a combination of business and family connections. It gets strengthened and transformed as the family and business undergo changes. Like a baton in a relay race, this network can be (and should be) transferred to the successor. In other words, the

network will be part of the family, not always identified with any individual. This resource never dies and disappears, unlike in a

nonfamily organization where the core of the network may disappear when the leader or CEO moves out. Clearly, there is need for an open dialogue among family members to clarify the long-term purpose of having ‘some business’ if not ‘the same business’. As discussed in the Introduction,

basically, families should define themselves as in the business of generating wealth, not necessarily in any specific business. As we know, all products are influenced by their life cycles, and hence,

families have to manage their portfolio of businesses or sources of wealth carefully.

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There is tremendous interest in the younger generation of many business families to start their own ventures. Several people believe that they may have to make huge sacrifices in terms of the entrepreneurial opportunities that they would not be permitted to pursue if they have to listen to others in the family and join the existing business. ‘Break up and break out’ seems to be the solution many of them resort to. The other alternative is to quietly accept the fait accompli and join the existing business, and do whatever they are asked to do. This will be unfortunate because it is for want of awareness about the process of achieving their personal goals through systematic decision-making within the family that they go for such extreme steps. For instance, sometimes, people oppose new project ideas based on their perceptions, and not based on logical analysis. Yet another reason is the iron hand of control of the leader or the founder. Families with a clear growth plan collectively decide their growth criteria including those for new ventures and ensure that leadership succession happens smoothly. We need to realize the significant benefits of economies of scale in operating the business together for the family, both monetarily

and otherwise. In any case, business leadership is perceived to provide an

opportunity for individuals to meet their ambitions and ego needs (‘visiting card value’), and hence multiple members may stake claim to be the successor. For the same reason, we are familiar

with instances of what is called ‘return of the Dad in 18 months’ in several cases. Often such reappearances are not direct but in different indirect ways. Many of the ego needs can be addressed if these are also included into any decision criteria, may be with minor weightage. Also, they seem to assume that the capabilities required to lead a business at different stages in its life are the same. This is again out of ignorance about the possible mechanisms for achieving the same goals of satisfying multiple needs without having the need for everybody to declare complete independence and own and run their separate businesses. Besides, the term leadership is not always defined clearly.

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STEP-BY-STEP APPROACH Development and adherence to an appropriate approach can ease or avoid many of the challenges on the succession front. This could include the following steps. The two templates (6.1 and 6.2), given at the end of this chapter, can be effectively used for this purpose. (With minor modifications, the same templates may be used for analyzing organizational development capability and strategic thinking capabilities of the team.)

Develop Clear Goals: To start with, the family should develop clear goals for their own coexistence, particularly the need for working together as one family. Unless there is an understanding among the adult members about coexistence and combined efforts for the growth of the business and wealth creation, there will be fissures and tensions, if not explosion, making succession never an easy process. Families

have benefited immensely from learning and practicing these mechanisms for building lasting families. All adult members, particularly key members of the senior and next generation, should openly and logically discuss the family’s strategy towards business, including implications of continuing with their existing businesses. They should ask themselves questions such as: a. Is the business a source of employment for the family members?

b. Is the business a means to generate wealth for the family members?

c. Is the business a means to keep the family together? d. Or, is it for some or all of these?

This question will push the family members to think of the kind of leader required for the future. Many families are driven by short-term tactics and miss the benefits of a long-term road map of any kind. They have to assign roles and responsibilities for the members based on the purpose of

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being together in business, their competence, and job requirements. Let us recognize that not all fingers of the hand are the same, but together they achieve a lot. Silos Are Dangerous: Silos are found to be dangerous, leading to family and business splits. Family members should, therefore, be willing to rotate roles based on their interest and capabilities; this will enable members to avoid getting boxed into silos in their thoughts and loyalties. Remember that silos give some temporary comfort of noninterference,

but form the first step of a possible future breakup. In other words, all family members involved in the business should know about the activities of others if these are different businesses. The family leader has to encourage objective, open

discussion on business performance by others. People should see this as a constructive mechanism to build their business. Otherwise, such discussions will degenerate into acrimonious situations. It is important to stick to the family values and collectively agreed code of conduct to achieve this. One of the

well-known multigenerational old family businesses in India decided that each business under the group would be run bya cousin. Initially, they found it as a convenient way to ensure

quick decision-making and fix performance responsibility. However, as the performance of some units started faltering, and when some other cousins started asking uncomfortable questions, the environment changed drastically. Finally, they

all agreed that they would effectively dissolve the collective holding company by transferring most of the family shares in any particular company to the concerned family member. In effect, the family moved to the ‘Perforation Model’ of

ownership that we had discussed earlier. Measure Individual Performance: Developing a set of measures of individual performance on an objective basis is found to be a sound approach to ascertain capabilities and identify the best person among all to lead. This will help fix performance rewards if there is an apparent need to do so. Also, this will prevent family members from becoming ineligible

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heroes and ‘unwitty’ victims of any situation. It will be useful to take the assistance of outside experts who are accepted as neutral, if need be, to ensure objectivity in decisions. Indeed, this is easier said than done. What is, therefore, feasible is a

via media solution wherein each family member’s strengths and weaknesses are assessed using a modified 360° method. Rewards are to be bundled into a few buckets, instead of

¢

corrected to the decimals. Get Out of Operations: As discussed earlier, when business expands in size and clear strategy evolves, family members should gradually move out of operations and concentrate on entrepreneurship, strategy, and governance roles. This is not always easy, particularly because of the challenges of

professionalization and difficulties in finding appropriately competent nonfamily executives for heading operations. Also, operational responsibilities give one the feeling of being in charge, power, visibility, and action. In fact, young family

members should move into operational leadership rapidly and develop a road map to move up further gradually. Family businesses that are smaller in size will find it difficult to follow the above suggestion, partly because their existing business may not be so complicated that it needs an external expert to manage, and partly for reasons of dilemmas about doing something else. Also, there would be insecurity of losing their business if it is run by someone else. One of the best things families can do is to first decide on their purpose and strategy as discussed earlier, and then decide who the leader should be, whether from inside or outside.

The bottom line of all these approaches is the willingness of all the family members to see the goal as creating and preserving family wealth above everything. They should recognize the benefits of stewardship for everybody. They should discuss the ways and means of meeting their material and emotional (including ego) needs. In the process, people should show their determination and courage to accept merit as the basis for choosing the person to lead their

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family business. This will ensure that the relay race of retirement and succession will continue smoothly. As mentioned in an earlier

chapter, constant and open communication, if need be with the help of a facilitator, will help facilitate both smooth retirement and smooth succession of leadership. That is the way to go about

winning the succession challenge.

MANAGING SUCCESSION: ROLE OF MENTORING AND COACHING Given that succession is like a ‘make’ or ‘break’ situation for many business families, it is important to have a frank assessment of the challenges involved on the personal front, particularly of the person moving out. Psychological preparedness to play the transition game

is the key to success. Mentoring and coaching are found to be very effective tools to make the process of succession smooth. Let us make a distinction

in meaning between the two. Mentors act as sounding boards and provide general wisdom and psychological support to those who seek their advice (and whom they wish to help). For a number of

senior persons with long years of experience, seeking advice and perspectives from their friends or whom they respect will be adequate. However, in several cases, coaching is found to be the best way out for those who recognize the ‘transition’ to a retired life as not easy. In coaching, the focus is on building specific competences to address specific challenges. It is relevant to mention that executive coaching has evolved into an important part of training and development the world over.

SUCCESSION UNDER DIFFERENT CONTEXTS: RELEVANCE OF THE PRINCIPLES Managing succession need not always involve family members. Indeed, because family executives continue to be family members

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whether they are working in the business or not, their personal challenges of role transition impact the family too, directly. However, the challenges of transition are broadly the same under different contexts, as discussed below.

*

Replacing a family member by a nonfamily professional is found to be one of the toughest challenges of all. There is a combination of retirement-related emotions and trust-related concerns involved in such a transition. A family member replacing another family member is relatively easier and normally smoother. Reconstitution of the board of directors also involves succession, but the challenges are different. Since the board meets only periodically (maybe once a quarter), and that most families consider it as a legal requirement and not as a platform for competitive or employment-related purposes, there may not be much resistance to changes in the board composition. Replacing a nonfamily executive by another is also succession. This becomes challenging when family members have their own ‘favorites’ among the executives or with whom they have built a certain style of functioning. In other words, if the process of management has dimensions other than pure

*

*

level of professionalism (say, political!), then also succession

becomes difficult. There are several instances where the nonfamily executives become very powerful in the business and make themselves ‘indispensable’. This is a dangerous scenario that should be avoided at any cost.

BACTION| POINTS *

Develop a strategy for the business for the next three—five ' years (please see Chapter 8) as it provides clarity on the q

goals and challenges of achieving them. This exercise |

To Successfully Manage Succession in Business

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AUTEAL

gives a lot of insight into the qualities required to lead the business. Decide through open discussion who should be the ‘effective’ leader, and the decision-making

process they should practice. It is advisable to make use of the two templates, 6.1 and 6.2, to make an assessment

of the leadership requirements and the resources available within at this stage. Identify a mentor/coach who can be available for help.

Template 6.1

Leadership Planning Business Mission

Key business goals for the next five years: ile 2%

Si

4 Key Capabilities Required to Be a Successful Leader. List the Specific Capabilities under A, B, C. A. Techno-managerial Capabilities

B. Integrity- and Confidentiality-Related Capabilities me

. Keeping Family's Collective Interest-Related Capabilities.

SOURCE: Author.

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We have been hearing about perpetuating family business for some time now, and the examples given are those that have successfully survived several generations. A basic question to ask them is what enables them to maintain success across generations. Is it the passion and unique skills or technologies, or is it their ability to adapt to environmental changes appropriately? The answer is: it is both. It is their entrepreneurial capabilities that keep them going successfully, of course, with strong family governance practiced. The purpose of this chapter is to discuss the essence of building family businesses as entrepreneurial family ventures, including the

challenges involved therein. Let us first look at what makes some of the multigenerational family businesses tick across generations. Many of the multigenerational ventures have one core business that has remained like a central pillar for generations. For example, E. Merck KG of Germany has been an 11-generation-old pharmaceuticals and chemicals company that has grown to become a global giant. It has remained so through a constant process of innovation, leading to sustained competitiveness across the globe.

Simultaneously, the promoter family has regularly redefined its role

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in this journey. Through a number of governance mechanisms, the family has contributed to the well-being of the organization and, of course, themselves. Global auto giants such as Ford and Toyota have been sticking to their original knitting for long. Here, the assumption is that the promoter family will continue to manage one or more of their ancestral businesses over generations through innovations in their chosen area. In all these cases, the family businesses have retained their focus on successful industry categories with very long product life cycles. They have been able to entrepreneurially adapt and extend the product life cycles to maintain their competitive edge. The families behind them have played their roles as entrepreneurial facilitators.

MANAGING CHANGE Well, as you may have observed in the case of many others, not all families adapt and change. Family businesses that have eclipsed due to lack of product innovation are many. Hence, the questions are: * * *

When is it attractive to continue to do what the grandparents used to do? When should one change? Why? What are the implications of both change and no change?

Of course, nobody wants to follow the path of the dinosaurs! Fortunately, a number of family businesses have realized the deadly effects of blindly sticking to their traditional knitting and have begun quietly but rapidly undergoing a fundamental change; many of them are boldly shedding the garb of protecting and retaining their ancestral businesses, and are grabbing more attractive entrepreneurial opportunities in new industries. At the same time, many have constantly looked for answers to such questions as ‘what business are we in?’. For instance, they ask, “Are we in

the business of cotton or clothing?” Interestingly, this change is witnessed much more in emerging economies like India that have

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strong family cultural roots, where opportunities are exploding across the industrial spectrum.

ONE BUSINESS FOR THE FAMILY OR ONE FAMILY AND ANY BUSINESS This is not an easy debate to win as the dimensions involved are both economic and emotional. The debate should be based on an introspection of the mission and strategy of the family’s approach

to its business. Given that the key decision makers of these business families may not always be managerially equipped or emotionally prepared to take such critical decisions, in general, the journey ahead is not likely to be easy. For instance, in several instances, seniors insist on continuing with the existing activities but are worried about the young generation’s interest in them. Hence, there is divergence in thinking, not about the goal of being a successful entrepreneur,

but the means to be so. A lack of this shift in approach to one’s own family business has led to intergenerational conflicts in several

families with the younger generation aspiring to run some newgeneration businesses, particularly in the service sector (e.g., mobile applications), while the elder generation prefers or chooses to carry

the burden of continuing the family legacy, say, in manufacturing. There is also a growing section of business families ready to admit the reality and move on. As a result, some families have started

scouting for buyers for their existing ventures as part of redefining their portfolio of wealth and activities. Interestingly, some of the parents have started attributing such

deviations in thinking and behavior to the new set of global education and exposure the young generation get these days! This raises two basic questions:

*

One, should a business family weave the relationship among its members and the family wealth around the ownership and management of a few inherited businesses alone?

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Two, can it remain a unified business family by engaging in different activities at different points in time according to the entrepreneurial opportunities existing then, all with the goal of creating and perpetuating monetary and spiritual wealth together?

Answers to these and related questions help families come out with clarity about their purpose of existence.

TRADITIONAL ESSENCE OF FAMILY BUSINESS AND IMPACT OF PRODUCT LIFE CYCLES All family businesses assume the involvement of more than one family member in the ownership and/or management of a business that provides them with a rich source of prosperity and emotional connectedness. Here, the assumption is continuity of the same business(es) across generations. This is based on two critical assumptions. First, once the first generation establishes a business, the primary responsibility of subsequent generations is assumed to be its operational management to maintain competitiveness:

This is considered as maintaining status quo with limited amount of tinkering in product/service features to adapt to customer requirements. Hence, there is hardly any need for significant entrepreneurial qualities to identify new and better opportunities outside the scope of the existing business. Since most owner— managers will be in firefighting mode on a daily basis, their own preparedness to look at new growth options are likely to be limited. After all, that is the only business they know of. Hence, they tend to reinvest in the same business again and again. Second, in a number of businesses, overall attractiveness of the business will remain high

for a long time, if not forever, and the family need not worry too much about its competitive attractiveness.

This may not happen any more smoothly. Let us look at the irrelevance of this assumption in the present day scenario.

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Over the years, life of most products has been shrinking across the board; only those organizations that have constantly addressed customer needs without a myopic eye have been able to adapt, survive, and grow. They have constantly offered significant value to customers regularly. At the same time, structural changes in the industries have led to sharper effects of life cycles at the industry level too. Impact of such changes is very severe in emerging market countries such as India where structural changes are more pronounced. For instance, industries such as infrastructure, real estate, entertainment, IT, and healthcare have become sunrise industries.

We have also witnessed the eclipse of several traditional manufacturing industries such as cotton textiles and metal products. In essence, many family businesses that are relaxing in their comfort zone little realize that the zone itself may disappear without any notice. Here, the key capability required to maintain sustenance and leadership is the family’s entrepreneurial management. This is nothing unusual. Let us remember that the foundations of a family business are laid by true entrepreneurs who identify new market opportunities and start on a different path. In that sense,

the founder himself had moved away from his ancestral wealthcreating activity! The basic implicit message, from the founder to all successors, is not to cling on to a sinking ship, but to grab new opportunities and move on. In that sense, future generations

would be saluting their ancestors by constantly adapting to exploit new and more attractive opportunities. In other words, founders

of family business should be happy if their successors continue to practice entrepreneurship, including, if necessary, by redefining the scope of their business.

That leads to a number of interesting questions to address. Is there not a need on the part of promoters for creating a richer pool of entrepreneurship now when opportunities rise up in the horizon in large numbers? Is there not a need for strategic entrepreneurial approach to decide the future of every business? Will it not involve reconfiguration of businesses or market focus in a dynamic and proactive manner? Indeed it will, if family business has to beat the myth of shirt sleeve to shirt sleeve in three generations! Indeed, family

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entrepreneurship is the only answer! Families have to consciously cultivate entrepreneurial qualities in their members to avoid the dinosaur phenomenon.

EMERGENCE OF ENTREPRENEURIAL FAMILIES It is, therefore, prudent for family businesses to evaluate the attrac-

tiveness of continuing with their existing businesses or move out of them or even reshuffle their portfolio of businesses to maintain overall competitiveness. In essence, what is needed is a shift in the mindset of family leaders. An open and flexible approach towards a decision on starting on new ventures will make family business attractive even to reluctant young-generation members. They should not be governed by the mistaken notion that they should somehow continue with their ancestral businesses while slowly losing competitiveness. There are different models of family entrepreneurship practiced. Two of the many classical case studies of aggressive family business entre-

preneurship of recent years are those of the Piramal group and the Religare group. As shown in the caselets 7.1 and 7.2, both of them demonstrated their keen entrepreneurial qualities in different ways. ¢

*

Constant Adaptation: Families in businesses such as steel and cement have not been affected badly, provided they have constantly improved their technology and value offering. For instance, the multigenerational Dalmia Cements have constantly improved their performance through innovation across the value chain. Grabbing Fresh Growth Avenues: Strategies followed by family entrepreneurs such as Sunil Mittal of Bharti, Krishna Reddy of GVK, and Ajay Piramal of Piramal group underline this emerging trend in different degrees. In fact, the Bharti group exploited the phenomenal growth opportunities in telecom to start with, followed by retail, while the GVK group moved away from manufacturing to grow through hospitality

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and infrastructure. As noted earlier, all these three industries

*

are ‘new-generation’ growth industries. Ajay Piramal exited textiles when he saw huge opportunities in pharma and real estate businesses, whereas the one-time super brand Bhilwara Textiles saw growth opportunities in infrastructure. Dynamic Portfolio Entrepreneurship: In the case of some large groups such as Godrej and Murugappa, change has happened gradually. Interestingly, both these multigenerational businesses that have not witnessed any family split over the generations constantly reviewed the strategic relevance of their portfolio and restructured them. For instance, the Murugappa group divested their Parrys candy business,

and started Cholamandalam Finance when the opportunity knocked. The Godrej group, on the other hand, set up an

infrastructure business that has grown substantially in recent years. Godrej has been entrepreneurial in shuffling businesses even under the same strategic business unit (SBU). For

¢

instance, their entrepreneurial orientation prompted them to acquire brands such as GoodKnight and Banish as part of a strategy to enter the mosquito repellant market. They have subsequently reoriented this SBU to constantly keep up with the introduction of new products. Wealth Investors: One of the amazing transitions in recent times has been that of the inheritors of the Ranbaxy Pharmaceuticals empire after the sudden death of Dr Parvinder Singh, its long-standing entrepreneurial Chairman. His two sons, Malvinder Singh and Shivinder Singh, who did not have their father’s unique relevant capabilities in the highly competitive pharmaceutical industry, sold their 64 percent stake in the company in 2008 to Japan’s Daiichi Corporation for $4.6 billion. They prudently invested the wealth in a number of healthcare ventures through Religare. They control the Fortis hospital group as well.

Several midsize business families have maintained their competitive edge by following one or more of the above approaches.

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Unfortunately, a majority of business families still do entrepreneurial capabilities for want of a combination as family governance, shared goals, clear leadership, Their tendency to procrastinate does not lead them In both Piramal and Religare, the commonalities *

*

*

*

not show such of factors such and liquidity. anywhere. are:

The groups envisioned themselves beyond the traditional businesses that they were in. Unlike most family business managements that are often wedded to their line of businesses, these managements were not averse to exiting their traditional business. They were quick to spot emerging opportunities and identify two-three core business areas—some of those often complimenting each other. Once they zeroed in on their key high-potential business areas, they have refrained from unrelated diversification and have been growing each of those identified businesses in a very professional manner.

ve Pas isce youngestror a three hater of Seth aia Chaturbhuj. The three branches of the third generation operate

E |

independently. Ajay Piramal’s wife, Dr Swati Piramal, and children,

—

Nandini and Anand, are all actively involved at senior positions in | the group.

7

Ajay Piramal is known for identifying opportunities ahead of the | curve. His journey in business started in the early 1980s when he took over the reins of his family’s failing textile business at the age of 29. | Today, he heads a diversified conglomerate with operations in over 30 countries and brand presence across 100 markets around the world. The Piramal group operates across sectors such as healthcare, life sciences, drug discovery, healthcare information management, specialty cee pacckabingy and real estate.eabhe SSTNP alae! pRSOnRa MEGits

| | q |

(CHO 7.1 Contd)

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(Caselet 7.1 Contd)

business portfolio with an entrepreneurial mindset. The theme of Ajay | Piramal’s success story is that of ‘being ahead of the curve’ by making swift and smart moves, many times in defiance of conventional busi-

ness approach/trends. Since 1988, Piramal Enterprises has grown at a Compound Annual Growth Rate (CAGR) of 44 percent at market capitalization, has a revenue stream in excess of $1 billion, and assets of $3 billion. Timeline of Growth and Diversification Initial Stage Early 1980s

An Ailing Textile Group Ajay Piramal takes charge of the Piramal group—an ailing textile business

Diversification from textiles to glass-bottle-making 1984

Piramal buys Gujarat Glass—a glass bottle manufacturer—mainly catering to the pharma sector

Move 2

Exit from textiles and entry into the pharma sector Piramal group exits textiles business and moves to pharmaceuticals

Piramal acquires Nicholas Laboratories (Indian arm of an Australian pharma company) in 1988 at

$4 million 1990

Gujarat Glass merged with group company Nicholas Piramal

Portfolio diversification within pharma operations | | 1991

New Formulation plant is established; Glass division diversifies in non-pharma field

1993

Joint venture pact signed with Allergan, USA, for ophthalmic products

1994

Joint venture pact signed with Sateliec, France, for dental care products

1995

Acquired the bulk drug division of Sumitra Pharmaceutical and Chemicals Ltd, Hyderabad

‘(Ciaselet 7.1 Conta)

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(Caselet 7.1 Contd) An Ailing Textile Group

Initial Stage

Product tie-up made with F. Hoffman-La-Roche

India operations of Boehringer Mannheim (a German Pharma MNC) are acquired Diversification into captive power generation The Glass division commissioned 5 MW captive power plant at Kosamba, Gujarat.

Marketing of consumer healthcare products of MNCs Agreement with Reckitt & Colman for joint marketing of the latter's over the counter (OTC) products in India Acquired the research unit of Hoechst Marion Roussel

(India) Joint venture formed with Boots Healthcare International (BHI) to develop and market consumer healthcare products in India. Entry into real estate sector Piramal enters real estate sector—builds Crossroads— India’s first modern retail mall—and Peninsula Corporate Park—Mumbai's first organized workspace.

Subsequently, these were spun off. Adding to Move 1

Piramal Glass acquires Ceylon Company Ltd, Sri Lanka Entry into biotech sector

Started collaborative research with Centre for Biochemical Technology in the field of gene technology Research alliance established with Hindustan Lever

for developing ‘Cosmoceuticals’ and personal care products

Acquired Rhone Poulenc India Limited (French Pharma Co.’s Indian arm)

(Caselet 7.1 Contd)

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(Caselet 7.1 Contd) Initial Stage

An Ailing Textile Group Acquired ICI Pharma Acquired Global Bulk Drugs and Sarabhai Piramal Adding to Move 1 Acquired a part of The Glass Group (erstwhile Wheaton Glass) in USA

Acquired the global inhalation anesthetics (IA) business of UK-based RhodiaOrganique Fine Ltd Forbes 2005 list of ‘Best Small Asian Companies’ ranks Piramal Healthcare as a high-value achiever

Acquired Pfizer's Morpeth, UK facility Piramal Healthcare listed as global leader by S&P Global Challengers 2007-2008

Multiple acquisitions made to strengthen the pharma business RxEliteinc, the US-based inhalation anesthetic gas distribution business, is acquired. Exit from drug formulations and diagnostics business The generics/domestic formulations business is sold to Abbott Laboratories. Sale proceeds used to expand into healthcare, life sciences, and financial services business

Move 9

Reentered real estate sector with Piramal Realty

Sold the diagnostics division to Super Religare Laboratories Ltd Acquired Biosyntech, a Canadian company, to develop bio-orthopedic solutions Strategic investment in telecom sector | | 2011

Piramal Healthcare acquired 11 percent of Vodafone India (a telecom major)

(Caselet 7.1 Contd)

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(Caselet 7.1 Contd) Initial Stage Move 11

An Ailing Textile Group Entry in financial services sector Piramal Healthcare acquires Indiareit, a real estate focused investment trust with assets under management (AUM) of $760 million Adding to Move 9

Piramal Realty acquires Mafatlal Mills in Byculla, Mumbai. It is one of the fastest growing real estate companies in India with $600 million in assets Acquired Oxygen bioresearch and anaesthetics business of Bharat Serum and Vaccines Ltd (Piramal group is the world’s third largest player in the IA market) Acquired molecular imaging development portfolio of Bayer Pharma Acquired healthcare information management firm, Decision Resources Group, USA Adding to Move 11 Piramal Enterprises started a nonbanking financial company focused on lending to real estate, education, and hospitals

A lead compound of the imaging division, Florbetaben, accepted for review by the United States Food and Drugs Administration (USFDA) and the European Medicines Agency Adding to Move 11 Acquired 10 percent stake in Shriram Transport Finance Co. Ltd (STFC), India’s largest commercial vehicle finance company

SOURCE: http://www. piramal.com/our-history; http://www.dnaindia. | com/money/1833145/report-ajay-piramal-bets-rs-1652-crore-on| shriram-transport (last accessed on November 1, 2014).

:

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Caselet 7.2 | Religare Group: Growth History 3 Malvinder and Shivinder Singh are grandsons of Bhai Mohan Bint, the family patriarch who founded the pharmaceutical firm Ranbaxy Laboratories. They inherited their family’s 33.5 percent stake in Ranbaxy Laboratories after the death of their father, Dr Parvinder Singh, in 1999. The Singh brothers sold their stake in Ranbaxy in 2008 to Daiichi Sankyo of Japan for $2 billion. Since, then, they have

[-

operations in healthcare services, diagnostics business, and the financial services sector. The strategic objective of their healthcare business,

Fortis Healthcare, is to become a global integrated health provider. | The management of Religare Enterprises, their financial services arm,

is completely in the hands of nonfamily professionals. Both brothers are now mainly focused on healthcare, because they view it as the

biggest opportunity not only in India but in entire Asia. Associated businesses such as the Religare chain of Wellness and Pharmacy stores and SRL Diagnostics complete their presence all through the | healthcare service chain. The financial business, under the holding company Religare

Enterprises, is operationally managed by professionals. It has several arms that are into stock and commodity brokerages, wealth management, and insurance. The health insurance business also provides complementarity to the group’s healthcare services. Besides these, they have invested money in some ‘fancy business— such as air charter services—though this is much smaller compared to healthcare and financial services, which contribute most to the group’s

turnover. Timeline of Growth and Diversification Initial Stage

Source of Wealth: Inheritance of Family’s Share in Ranbaxy Laboratories Dr Parvinder Singh dies. Family’s 33.5 percent holding in Ranbaxy is inherited by Malvinder and Shivinder Singh

(Caselet 7.2 Contd)

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(Caselet 7.2 Contd) Initial Stage

1999

The first-ever National Accreditation Board for Testing and Calibration Laboratories (NABL)— accredited diagnostic lab—SRL Ranbaxy at Mumbai Fortis Healthcare—the brothers’ hospital venture— commences. Started first hospital at Mohali, Punjab

Religare (incorporated in 1994) makes an active expansion in financial services—the offerings include broking, insurance, asset management, lending solutions, investment banking, and wealth management

2002-2004

Gradual expansion of Fortis Healthcare—enters Delhi: Commences operations at Noida, NCR Religare Commodities commences retail commodities broking business

Religare Wellness Ltd is launched—a Wellness and Pharmacy Retail Chain

2008

Malvinder and Shivinder Singh sell their family’s 33.5 percent stake in Ranbaxy Laboratories to the Japanese drug maker Daiichi Sankyo for $2 billion

2009

(Casele t 7.2 Contd)

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(Caselet 7.2 Contd) Initial Stage

| Source of Wealth: Inheritance of Family’s Share in Ranbaxy Laboratories

Move 4

Entry into IT solutions for healthcare sector

2009

Religare Technologies Ltd incorporated to provide IT solutions to healthcare sector (The company is now renamed to Healthfore Technologies Ltd) Overseas healthcare business bid

2010

Fortis Healthcare International Pvt. Ltd established in Singapore to take Fortis healthcare business global Bid for Singapore-based Parkway group of hospitals; dropped the bid to a counterbid by Malaysian sovereign fund Khazanah—as price hike in Parkway shares had made the acquisition expensive; the Singh brothers made €320 crores on 23.9 percent stake which they sold back to Khazanah Acquisitions abroad included a primary healthcare provider in Hong Kong, a dental major in Australia and a diagnostic centre in Singapore. Huge greenfield expansion with several hospital projects across India Acquisition of Piramal Diagnostic Services Private Limited Entry into charter aviation and travel services

2010

Religare Voyages Limited launches chartered aviation and travel services

2012

Launched the Fortis Colorectal Hospital in Singapore— Fortis becomes first Indian hospital chain with a Greenfield hospital abroad

SOURCE: Fortis—In the Pick of Healthcare, Business Today, http://

businesstoday.intoday.in/story/fortis-among-the-most-promisingcompanies/1/18668.html;http://www.religarewellness.com/about_ group_companies.aspx; Will the Singh Billionaire Brothers Make It?, Forbes.com, http://forbesindia.com/printcontent/32568 (last accessed on November 1, 2014).

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DOES FAMILY ENTREPRENEURSHIP THREATEN FAMILY UNITY? It is beyond doubt that sustenance of entrepreneurship is vital. However, several families face multiple dilemmas. For instance, a

lot of family history and legacy, particularly in terms of nostalgia of hardship and hard work, remain in the ancestral businesses. Closing

down such organizations tends to bury the history and legacy with them. This is sad, both from the angle of the family’s own evolution

as also from the angle of building the right attitudes and values in the family members. Hence, lack of an emotionally identifiable, inherited, physical business entity with its buildings and factories or

shops naturally raises questions about what would keep the family members together. This is particularly so if the ancestral business had several family members involved in different capacities, and the new businesses are diverse, initiated and managed by individual family members. Family unity will be threatened if members start ventures of their own using private funds. Families will find it difficult to stop it completely. There are different scenarios possible: *

*

Family can provide capital and control its ownership while allowing a member to set up a business and earn through profit sharing; Family can keep controlling interest while allowing the concerned members to own some shares; and

*

Family can operate like a holding company by licensing others to use the brand name for a fee.

In effect, there are different ways of encouraging entrepreneurship in business families. All successfully managed family businesses that follow one of the above models have arrived at generalizable norms, through regular communication and discussion among family members. In all such cases, the family members make some financial sacrifices for the sake of keeping the family united and

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happy. In any case, families should celebrate all entrepreneurial successes together. Deriving value from selling existing assets that will finance new ventures is not always easy. Hence, business families should always think of creating some version of portfolio entrepreneurship that provides better flexibility in terms of their overall activity mix. Families should keep some assets that can be liquidated to finance new ventures. In the end, the key to sustained success is instilling a sense of entrepreneurship in family members.

BUILD SHARED PURPOSE OF BEING TOGETHER Family businesses should introspect and develop a vision that is shared by all the family members. Material and spiritual wealth of the family need to be constantly created and preserved. At the fundamental level, they have to realize that they are only one link in the long chain of generations made by their ancestors, them-

selves, and their successors. They have a duty to preserve and grow the family’s emotional and spiritual wealth and pass them over to their successors. This is not a realization that will come automatically; they have to work towards it. They need to identify

and practice good governance policies that will provide them with clarity of purpose of being together. Such an exercise will enable them to take note of the benefits of having centripetal forces within the family. All multigenerational business families are conscious of the challenges of keeping the family together, as they grow big. Families with good governance practices are found to have commonly shared vision and strategy for both their family and business. Such families, including those referred to earlier, agree that they are together to create wealth for themselves and the family, and share

strong family bonding. They sometimes preserve their history and culture through museums and pictures. Several of them retain their original registered office and furniture, more to remind them

and the subsequent generations of their roots. It is important to

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preserve the roots for anybody, in business or otherwise. In other words, families without a collective vision and strategy are more likely to split apart, particularly in countries such as India where most members of the family would stake claims to be operationally involved in business. They may not need three generations to prove their centrifugal orientation!

WHAT IS IN IT FOR ME Ownership clarity will be another challenge to address. We are all driven by the urge to have more and more of material wealth; there is always the urge to have one’s own private wealth to be identified with. In the context of our discussion on family businesses increasingly becoming business families with their own set of portfolio of entrepreneurial ventures, there is a natural challenge of keeping the family flock together. Hence, another fragile area that needs careful handling is the

common ownership of the family’s wealth. clear about the ownership structure for their especially when new businesses are created ‘Who’ owns ‘how much’ has to be clear to all.

Families have to be different businesses, as separate entities. Ideally, the portfolio

of businesses, young and old, should be controlled under a unified

ownership. While encouraging private ownership for personal initiatives, families should be careful to avoid tendencies to move

away from a common ownership formula for the main company, even when its product mix and nature of activities change over time. We have had a more detailed discussion on ownership structures in Chapter 4. Entrepreneurial families have to be aware of the processes of developing shared goals and decision processes to address the challenges of drifting into amoebic entities. As the size of families shrinks, and personal goals dominate career decisions, it is important to understand the advantages of being part of a business family and derive the benefits synergistically.

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ACTION POINTS

Organize a family meeting to discuss the continued attractiveness of the existing business. Discuss also new business opportunities that are worth starting. This should be done in a dispassionate manner.

Discuss and develop policies for the ownership of any new business, whether it will be all family’s or partly held by |

the person driving it. In either approach, the champion of [ a venture should feel adequately compensated monetarily and emotionally. Develop a mechanism to build the family brand as an anchor for generations to identify with.

Ensure that family has adequate wealth outside the existing business to meet growing funds requirements including

for starting new ventures.

Is it not ironical that several family businesses with strong inherent business capabilities fail to take advantage of opportunities and grow rapidly (if not, at least prevent deterioration of performance), while several others less competitive than them do so? It

is here that we recognize the critical influence of the dynamics of relationship within the promoter family in deciding their business destiny. In other words, lasting success of a business depends as much on the way they build competitiveness in the business as on the promoters’ collective thinking on what they want to accomplish for the family in the long run from the business. Typically, promoter

families face challenges on both the fronts. While on the business front it is more for want of some long-term planning activity, on the family side, it is often the result of lack of family-level processes to discuss and develop a shared strategy. Let us remember that the interdependencies of the goals, aspirations, resources, and

opportunities in family businesses are such that imbalances and inadequacies in any one can get the whole system into a gridlock unless the people involved are extremely careful. Therefore, formulating business strategy in a family business is not the same as it is in a nonfamily business.

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CRAFTING STRATEGY Basically, strategies are crafted over a period of time. They evolve, but the quality of the ‘finished craft’ depends largely on the proactive thinking going behind it. Also, the question is whether there is anything called ‘finished’ since in most cases it is an ongoing process of ‘crafting of strategy’, as described by Henry Mintzberg.! This is where we find huge variations in clarity and quality among business families, for a combination of two dimensions: one, what

constitutes components of a clear strategy, and two, how the family gets to think in terms of a shared goal and strategy. In general, families craft their business strategies in response to evolving business opportunities and/or availability of new human and material resources. Because of the variety of challenges they face on multiple fronts within both the business and their families,

the level of clarity and pace of formulating and implementing strategies naturally varies widely. Families that start running their businesses without such clarity, that too embedded in collectively agreed governance principles of ownership and management for the family’s overall business interests, get into trouble more often. Such a hasty approach may not also reveal the intrinsic cracks within, which may show up later, that too when some of the views on the goals and the means to achieve them are not decided through open consultation. For instance, often, the decision to start a new ven-

ture or an expansion is not decided based on evaluation against set criteria. In several cases, initiatives that do not involve huge monetary resources get started in a small way. As a potter develops designs

for the pots made, strategy for such initiatives evolves gradually. In many families, it is based on the power equation and individual

passion. This could lead to difficulties if some of the proposals of others are not treated on equal footing, and objectively. In other words, investment ideas should be evaluated as part of developing

a business strategy.

‘ Henry Mintzberg, “Crafting Strategy,” Harvard Business Review, July 1987.

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STRATEGY-MAKING AND FAMILY Developing a strategy or some kind of a clear thinking about the future road map is essential for all family businesses. True, the leader plays a crucial role in this, but other key stakeholders from the family too heavily influence the family’s business strategy. With shrinking size of families, responsibility for developing the strategy resides with a fewer number of people. In essence, each family member can, in turn, make or break the family businesses to different degrees. Similarly, a decision to continuously plough back all the surplus into the business for all the good reasons may be viewed as a lot of bad news by the family if the family has already grown in size and age and needs capital at home to finance family investments in education and housing. Besides, the family may treat the venture as that of the person who championed it, and put the entire responsibility for its success on him. This will lead to possible creation of silos and eventual split up of businesses. In other words, while it is

important to have champions for new ventures, it is dangerous to treat them as their own personal assets (or liabilities), all for want

of a long-term holistic approach! Let us recognize that there are similarities as well as differences in the process of strategy formulation and its implementation in family and business (Exhibit 8.1). Families should resist the temptation

of applying the principles relevant for one to the other. Exhibit 8.1

Differences in Strategy Formulation and Implementation in Business and Family _

Feature

Business

Family

Vehicles to Implement in Order of Importance

Structure, systems, business values

Family values, systems, structure

Involvement

Primarily top management

All key members disregarding hierarchy

Goal

Market share, Continuity, ‘comfortable’ financial performance | living/social status

SOURCE: Author.

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It is in this context that we have to address a number of interdependent questions, between business and family, such as those listed in Exhibit 8.2, as part of the process of formulating the business strategy. As you must have noticed, we are constantly looking at the business opportunities and relevant supply of family capabilities to tap them in the process. Indeed, answers to such questions are crucial for the family to decide its strategy towards business. The trouble is Exhibit 8.2

Strategic Interdependence of Family and Business

Discuss the following questions as part of a process of introspection/brainstorming and clarity-building within the family. This exercise cannot be completed in one go. These questions will help families develop a shared goal and approach to manage and grow their business. e What is the long-term purpose of the family being in business? Is it to become a continuous source of steadily growing wealth for the family? And/or is it to provide employment to all family members? Should we take more or less risk going forward? How attractive are the emerging business opportunities? Are we financially secured as a family? Do we have new family members getting ready to join with or without outside experience? Are they all equally capable? If not, what should be done? © Who will lead the existing and new businesses? ¢ What kind of new businesses should we consider to enter into? How do we approve new investment proposals? Do we have clear criteria and processes? © What about possible divestments? How significant is the location and what will be the factors that influence business location, especially if family members will have to relocate? What will be the implications of any decision on business strategy for the current roles and responsibilities of family members? Will the power and status structure change for the better? ¢ What are the family’s views on external funding? Debt? Equity? © What is the investment capacity of the family to finance growth? What are its implications? e Is the portfolio of businesses balanced in terms of the wishes and requirements of the promoter family?

SOURCE: Author.

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that there are not always clear and straightforward answers for them because such questions are hardly ever discussed in most families! Also, in several cases, families do not follow a structured decision-

making and problem-solving approach to arrive at solutions. Again, under the general influence of the five Ds to Disaster that we have discussed, finding answers to some of the questions do not progress; they get parked! Hence, there has to be a disciplined approach to addressing the questions of strategic relevance to the family. It will be useful to look at some of the additional challenges involved in developing a clear business strategy in family businesses. Let us look at a peculiar paradox. While growth opportunities are plenty and the desire to exploit them remains high, many family businesses fail to make definite moves to tap them; ironically, in several cases, presence of such opportunities sows the seeds of

family-level differences leading to disastrous consequences. This happens more often when they fail to find answers to divergent ambitions and ideas posed by different family members, for want of clear vision and growth strategies as well as definite decision criteria at the family level.

WHY DOES IT HAPPEN? In an evolved family business, the role of the family will be woven around the process of identifying growth opportunities and setting up of new ventures, and development of overall business strategy including the portfolio mix and business governance. Even when environmental uncertainties prevail, families collectively decide on the issues, such as new ventures or divestment of existing businesses based on clear selection criteria and nature of involvement of family members. In most cases, the important consideration is the survival and growth of their collective wealth and not the destiny of any particular business. This is important to keep the goal and clarity of process among all the people. However, not all business families are so evolved! To start with,

often, the family members do not sit down and chalk out its growth

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vision (find answers to questions such as: Why are we in business? What do we want to do with our business?), which is fundamental

to developing its strategies, not for want of realization of the need but for a number of small and big road blocks or irritants. For instance, in a multi-business family with members individually responsible for specific businesses, there is high likelihood of not having a common, family-level vision. Each would try to protect

one’s own terrain, thanks to the blinders created by one’s own loyalty to an individual business that is likely to prevent them from seeing anything from a larger perspective and making sacrifices if necessary to accomplish larger goals. Besides, when most family executives are involved in operations,

with no time to think on a long-term basis even about the business that they manage, there may not be anybody with an overall picture in front to evaluate the growth options. A consequence of such fragmented views is lack of consensus on the ‘what’, ‘where’, ‘when’, ‘how much’, and so on of a growth trajectory. Again, while some

members may want to invest further and grow aggressively, there may be others who prefer to avoid further investments, conserve wealth, and enjoy it too. They tend to eternally park the matter for future revisit and would wake up at the wrong time. Also, differences in the levels of understanding among key family members could lead to some people waking up while others sleep, that too

with a lot of differences and conflicts in opinions. Sometimes, families aspire for things beyond their means. This happens particularly when the younger generation knocks at your door for support to bring about major changes. Often, a self-made entrepreneur with commanding powers (that leave very little freedom for their children) would impose his views on others. Sometimes, they clamp down their growth ambitions as

they become older, without themselves realizing it. Families that do not have a policy for the involvement of the next generation in the business may have other challenges also to address. To top it all, lack of clear, futuristic leadership and decision-making processes leads to a clear impasse. In essence, business strategies may not be formed for reasons that are largely non-business in nature!

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Business families are well aware that a lost opportunity does not come back easily. However, they may not estimate the loss in financial terms that will force them to sit back and think. Even if there are log jams, families should develop the habit of envisioning and strategizing. There are several benefits that families derive in the process, one among them being the creation of a business growth path. Sometimes, decisions on professionalization are postponed for want of clarity about the emerging organizational capability requirements and existing supply of talents and the resultant gap between demand and supply. Family members’ reluctance to vacate their existing ‘empire’ when they are unsure of conquering another adds to the challenge. Asa result, family succession remains a neverdiscussed plan. Hence, a clear business road map will (and should)

include possible roles younger members can play. Similarly, the family will be able to groom the younger family members keeping in view the emerging talent requirement. Above all, family mem-

bers not involved in business would know the possible routes of the destiny of their wealth waiting for them to enjoy and take care.

STRATEGY-MAKING PROCESS To start with, family members involved in business should block a

day a month in their calendar for formulating and reviewing business strategy. They should discipline themselves and recognize this as one of the most important ‘things to do’ and keep away everything else and devote time for free and frank discussion on the future of the business. ‘Their ability to remember to leave the ‘family—owner hat’ behind at home and wear the ‘business’ hat during the meeting that has a professional agenda are critical basics to make such sessions successful. It is important to involve key nonfamily professionals too in such discussions. *

Step 1: Prepare an analysis of the status quo using Template 8.1 (at the end of this chapter). A systematic, writ-

ten analysis brings clarity of thought on different dimensions.

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This is important for all the team members, whether family or not, to be on the same page, as an exercise in writing gives a

*

chance for open discussion. The factors that contribute to the creation of the existing situation should be analyzed in detail. Step 2: Prepare forecasts on the competitive attractiveness of each of their businesses from time to time, and critically analyze them. You will find Template 8.2 (given at the end of this chapter) useful to make different kinds of analyses and draw conclusions regularly. In this template, you should write down the three-—five most critical success factors (CSF)

for each business. These could be price, quality of product/ service, product/service features, distribution, and customer

support. You should allocate relative weightage out of 100 points for each of them. This is to ensure that you understand the relative level of criticality of each factor. You should then collect feedback from the market on three-four of your key competitors and yourself on these CSFs on a five-point scale (1 for the worst/Totally Dissatisfied, and 5 for the best/ Totally Satisfied). Work out the weighted average for each of the CSFs. Now, you are ready to compare yourself with your competitors to analyze the competitive landscape you are in. The scores will show you in quantitative terms where you stand in the marketplace. For instance, if your score for ‘quality’ is lower than that of some of your competitors, you have to decide whether you can improve your quality of product or service without affecting the cost structure. Will it be sustainable? Will the effort lead to an improvement in market share? Is it better to retain the current position, keeping the market trends in mind? Are the competitors changing? And so on. You can develop a strategy to reinforce the current situation or to reposition your product/service.

This template is found useful to analyze the competitive landscape at the company level or in different market segments, or even at the individual customer level. You can then prepare a strategic road map for the subsequent three years on a rolling basis.

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This exercise should be done at two levels: One, discussion at the

business level, individually for each business and for the group as a whole if there are several businesses, and two, at the family level

to decide the family’s overall business strategy. This could include support for individual start-up experiments by family members, and expertise available within the family for any specific business. Two, while the former will be a complete business meeting with

the participation of board members and top executives, the latter will be held at the level of the family business board (discussed in Chapter 10). Finding answers to the questions listed in Exhibit 8.1 will be found useful to make this exercise productive. A modified version of Template 8.2 will be found useful for the purpose of deciding which all businesses the family should continue to be involved with or invest in. Here, the CSF's will be familial,

such as value compatibility, funds availability, family employment, and long-term growth opportunity. Family members should avoid taking hard positions while exploring ideas. They should not lose sight of their overall strategic goal of family prosperity as also the fact that they are the custodians of family wealth. The portfolio of activities has to be determined keeping this long-term objective. New business ideas should be objectively evaluated to see their techno-commercial potential based on their ability to eliminate existing and perceived customer dissatisfaction.

MANAGING RESOURCES A good strategy involves developing a competitive positioning of the products and services of an organization in the context of external forces in the environment. This involves an analysis of the existing strengths and weaknesses and the existing and emerging opportunities and threats in the environment. As a part of this iterative exercise (something like a SWOT [strength, weakness, opportunity,

threat] analysis), one should identify the strengths to be created and weaknesses to be eliminated to exploit emerging opportunities

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and/or fight emerging threats or challenges in the environment. In the context of a family business, the family context can be a huge source of strengths and weaknesses depending on how things are handled. For instance, family promoters possess different kinds of resources such as entrepreneurial and leadership talent, trustworthy executives, social network, and family reputation, all of these besides

their financial background. The key challenge is in drawing synergy out of these, especially when personal egos of family members are

fragile. Nobody can ignore them. Successful family businesses do incorporate their influence on the business while developing the business strategy. One of the best ways to address this egocentric challenge is to pool all thoughts and suggestions of all members on a whiteboard as part of a brainstorming exercise. It should then be possible for all family members and nonfamily professionals to look at them as a pool of ideas, independent of who suggested it. Writing down

ideas with detailed, objective analyses enables pooling of thoughts of different people at one place and not in bits and pieces. There has to be a difference between opinion (e.g., “I heard at the dinner last night”) and data-based (facts and figures with logic) knowledge. Intuition has a role to play, but that should not discount the relevance of objective analysis. In essence, the bottleneck in most

cases is the lack of clarity about the process of starting the journey of strategizing rather than the strategy itself. The interface of family and business should be managed dynamically but carefully.

DETACHED PASSION Family executives should show sufficient level of maturity to look at both of them with ‘detached passion’. Passion implies attachment, and so ‘detached passion’ sounds like an oxymoron! In fact,

we need to have the ability to take a few steps back, away from the passionate ideas and projects, and analyze them in a detached, objective manner. That means, people with the ability to think objectively should detach themselves from their pet ideas, opinions,

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and projects, and view them objectively from both the family and business angles. That is how one develops ‘detached passion’. The only goal which is shared by all should be enriching the wealth pool of the family. Nothing else. An approach based on ‘detached passion’ also means that individuals will be able to forget their narrow personal differences and petty egos, and see the big picture and work towards the shared vision and goals. There are plenty of books and manuals available on the process of preparing business plans. Hence, we will not get into the details of planning here.

ACTION POINTS * ° *

*

Use questions given in Exhibit 8.2 for developing a discussion on the business strategy. Organize a meeting of all key family members (especially those associated with the business) to discuss the questions provided in Exhibit 8.2. Meet to discuss the business strategy and performance. Schedule meetings at regular intervals with or without the help of outside experts. Involvement of senior nonfamily executives will not only enrich the discussion but also assure their support and ownership in the decision. Make use of the data collected from filling up Templates

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8.1, 8.2, and 8.3 (given at the end of this chapter) for |

discussion at these meetings.

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