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Why Indian Business Families are Hiring Professional CEOs

Why Indian Business Families are Hiring Professional CEOs

How family businesses bring in professional CEOs to manage their empires and outlast the founder

How family businesses bring in professional CEOs to manage their empires and outlast the founder. How family businesses bring in professional CEOs to manage their empires and outlast the founder.

It’s like an arranged marriage—a professional CEO coming in to run a family-owned business, laughs Abhijit Roy. The MD & CEO of Berger Paints India would know. A long-time Berger man, but a non-family member, he’s been at the helm of affairs at the Dhingra brothers-owned paint company for a decade now. “You initially trust and expect that the other person also trusts you. But only after a period of time do you get entrenched in your feelings that I can trust this person more,” Roy says.

It is essentially a succession plan where the promoter sits on the board, has a say in capital allocation, holds majority shares and earns an income through dividends, but leaves the day-to-day operations to a CEO. The professional CEO in a family-owned business has been around in India for quite a few years.

Liberalisation in 1991 ushered in aggressive MNCs into the country, and woke up Indian businesses to how the economy was toughening up—the level of business acumen and technical expertise required to compete were going up in all sectors of the economy—from paints to pharmaceuticals and marketing to finance. A professional CEO to handle day-to-day operations was their best bet, especially if the next generation was not particularly interested, or the business was growing faster than the family could produce qualified members, or there were simply too many family members, as was the case with Dabur India.

“When you get to the fifth generation, there are multiple cousins. To avoid conflict, we thought it best that the business be run by professionals. Liberalisation was happening. If all family members were focussed on operations of this business, then we thought we may lose opportunities in other sectors,” says the FMCG giant’s newly appointed Non-executive Chairman, Mohit Burman. One of the first Indian family-owned businesses to professionalise, its journey had a rocky start when its first professional CEO, Ninu Khanna, left in three years in 2002. But the Burmans were keen to hand over the reins. After some introspection and corrections in corporate governance with Accenture’s help, they chose company insider Sunil Duggal as the CEO. The strategy has since worked for the firm, with a market capitalisation of Rs 1 lakh crore, whose reins passed on from Duggal to Mohit Malhotra in 2019.

Dabur India: With Chairman Mohit Burman and CEO Mohit Malhotra

Several other Indian family-owned businesses such as Asian Paints, Pidilite Industries, Britannia, Cipla, Berger Paints, Marico, RPG Enterprises, Dr. Reddy’s Laboratories and Page Industries have also successfully separated management from ownership. “Normally, professionals are brought in because family members realise that despite their best intentions, they may not be in a position to take the business forward, and that they need someone with the experience, expertise and the drive to do so,” says Rajiv Agarwal, Department Chair of Strategy and Innovation at S.P. Jain Institute of Management and Research (SPJIMR).

For the Dhingra brothers, not only was it crucial to have an organisation run professionally, but it was one of the reasons why they wanted to acquire Berger Paints from Vijay Mallya in 1991. “It was better to have professionally managed companies, because family members in the future may not be interested in the paints business, or there could be an illness or death in the family,” says K. S. Dhingra, Chairman of Berger Paints India. The century-old Kolkata-headquartered company—which underwent several ownership changes by the time it was acquired by the Dhingras—was already being run by a professional, Biji Kurien, since 1980. Not wanting to rock the boat too much, the Delhi-based Dhingras let things be, and infused capital into the company from time to time. “We personally had no experience running a professionally run company, and it was away from our location. People thought we would shift the Berger HQ to Delhi. But we didn’t want to cause any destabilisation,” says K. S. Dhingra.

In RPG Enterprises’ case, it was a combination of Chairman Harsh Goenka inheriting a professional group along with acquiring a number of professional MNCs. As an admirer of the Tata group’s professional structure, he continued his father’s tradition of giving freedom to managers. Today, professionals lead three of the four verticals at the diversified conglomerate. Goenka’s son Anant, however, is the MD of its tyres vertical, CEAT Limited. The Speciality Sector with businesses such as Raychem RPG, RPG Life Sciences and Harrisons Malayalam Limited, has Rajat Bhargava—who has a consulting background—as its President & CEO. “The rigour and outward thinking that consultants bring is very good. I rang up Mr Adi Godrej, who had brought in a few consultants, for his counsel. He gave me good advice to never put consultants on line jobs (like that of a typical CEO). Put them on non-line jobs and move them depending on their performance, he said. With Bhargava, the advantage is that he has CEOs reporting to him, and [he] does not have to run day-to-day businesses,” says Goenka.

Berger Paints India: With Chairman K.S. Dhingra and CEO Abhijit Roy

In these structures, the promoter involvement is usually in big-ticket fiduciary decisions, such as setting up a new factory or acquiring another company, while decisions about launching a new product line or advertising & marketing campaigns are left to the CEOs. “He [K.S. Dhingra] rarely steps into operational decision-making. He calls me once in 1-2 days, just to know how things are. On strategic issues, we always discuss before moving ahead,” says Roy, the third professional CEO since the Dhingras bought Berger Paints. Additionally, the Dhingras continue to handle the overseas businesses, relationships and JVs, but family members can never hold the MD or CEO positions because of a family charter signed to that effect.

“There is no interference at all. There’s 100 per cent empowerment in small and big decisions. It is the management’s discretion to share key big decisions with the family,” says Mohit Malhotra, CEO of Dabur India. The family’s views are routed through the four promoters on the board, and a family constitution restricts the future generations from entering business operations. Rajat Bhargava, President & CEO of Speciality Sector at RPG Enterprises, finds the family-owned diversified conglomerate’s practices no different from that of a typical, non-promoter owned, professionally managed organisation. “There are clearly defined roles of what the CEO is supposed to do; what someone like me at the sector level is supposed to do. A lot is also left to the individual’s style.” The responses of the first-time CEO, and a rank outsider at that, are cautious, much like his working style in the initial days. “Now, I take a lot more decisions on my own, and even the need to keep Harsh informed is a lot lesser now.”

The friction points between a promoter and a professional CEO, if and when they crop up, are usually in the decision-making metrics, says K. Sudarshan, MD, India & Regional Chair, Asia, of global executive search firm EMA Partners. “The ability to make big-ticket decisions is what differentiates a promoter CEO from a professional CEO. The latter usually makes recommendations on a major acquisition or investment to the board. But if things go wrong, the majority shareholder will be the most affected. The ability to assume that risk and make things happen is a major asset the business families bring to the table, which no professional CEO can do easily.”

Of course, promoters offer their suggestions. Disagreements are also not uncommon, but they mostly go with the professionals’ judgement, the CEOs say. For instance, about a decade ago, Roy was unconvinced about Dhingra’s suggestion to acquire a smaller company called HVC—it had become popular in Kerala for the wood-coating products in its portfolio. Berger already had a very strong presence in Kerala and Roy didn’t see enough value in the acquisition. The promoters gave in, but rival Indigo acquired HVC, and it became a significant player in Kerala. “Today also, 35 per cent of Indigo’s sales comes from Kerala. Once in a while he reminds us, ‘Dekho, galti ki aapne. Otherwise, we would have been even stronger in Kerala’.”

Another instance was when RPG Enterprises was looking for a CFO for one of its group entities. It came down to a choice between the CFO of an Indian conglomerate, and one from an MNC. Goenka favoured the former, while three colleagues preferred the latter. “Their reasons were far more compelling, and we went with their judgement. Looking at how well the CFO has performed, I admit, I was wrong and they were right… 80 per cent of the time in a discussion, I’m the one who gives up. I’m surrounded by people who are smarter than me,” Goenka says, with a hint of pride in his voice.

RPG Enterprises: With Chairman Harsh Goenka and CEO Rajat Bhargava

It works the other way around, too. Malhotra talks of the time when they launched Dabur’s famous Lal Dant Manjan tooth powder as a toothpaste on then Chairman V.C. Burman’s insistence, despite not being entirely on board with the idea himself. The fourth-generation Burman family member had managed Dabur’s sales and marketing vertical at one point. “We had set a target of Rs 5 crore for Dabur Red Paste for the first year. We did Rs 20-crore business. Sometimes, their wisdom is very important for us, because they have handled the company themselves.”

Transitions to the top job are also riddled with challenges. Despite having been with the company for 25 years, Malhotra’s ascension as CEO wasn’t easy. “The one year when I was India CEO, before I became global CEO, I questioned all old systems and processes. It was very rough for me, but I stuck to my guns and the company decided to give me a free hand.” He was eventually promoted as overall CEO from a bunch of contenders, but not before he was put through a battery of rigorous tests, including a 360-degree survey of his subordinates, peers, seniors, parents and relatives. “A full dossier was compiled on my strengths and weaknesses. To smoothen the rough edges exposed during the process, I was sent to Portugal for an executive breakthrough programme.” The 10-day curriculum had seven CEOs from different countries coached by 11 experts. He was under 24x7 camera observation as he underwent the training. “When I came out of it, I was naked, so to speak. They knew me inside out. But it taught me to be transparent,” he says. After all, Dabur couldn’t afford to go wrong again, having burnt its fingers with its first professional CEO.

For Roy, crucial lessons came on the road from being VP of Sales & Marketing to COO. “In sales and marketing, you tend to drive people hard. You’re very number-focussed and the results have to come.” The hyperactive Roy—a far cry from the present-day calm version—expected quick results and flew off the handle when the team didn’t deliver. That style doesn’t work with every department, he realised. For example, in R&D you have to give a longer rope and wait for things to happen, he says. With that learning in the bag, Roy’s transition to becoming CEO was more about learning aspects of business he wasn’t familiar with like IT, supply chain and finance.

And Bhargava—who used to handle around 40 clients spanning PSUs to promoter-led companies as a consultant—had a ringside view of the culture at several organisations. “But knowing is not enough. You still have to make a lot of mental adjustments as an executive.” A consultant is taught to never shy away from saying, ‘Mr Client, you are wrong,’ when the need arises. “As an executive, too, you should do it, but not to such an extreme. That fine balance was a big learning.” But he says that Goenka insisted on being on first-name terms right from their first interaction. In fact, he kept a piggy bank in his office to collect Rs 50 from anybody who called him “Sir”.

When it works well, the model reaps benefits for all the stakeholders like the executives, employees, shareholders, promoters and the company. For one, it is entrepreneurial and enables speedy decisions, say the CEOs. “If you are able to convince the key members, the decision-making ends between Kolkata and Delhi, except a few times when it may go to the board. That helps with a faster response in the marketplace,” says Roy. A laser-sharp focus on return on investment and cost-control are a part of the Dabur DNA, says Malhotra. “Most projects have to break even in year one, unlike in an MNC, which may give you a moratorium of two to three years… If we photocopy a document, we ensure both sides are used, not just one.” Besides, the CEOs add, with promoters having skin in the game and a robust corporate governance set up, it ensures that no one has unfettered power. Manpower costs are looked at more strictly, unlike in a purely professional set-up. Longevity and consistency of culture are also advantageous. “There won’t be changes at the promoter level. Values, expectations and context do not change as often as it would in other organisations,” says Bhargava.

From an employee standpoint, Sudarshan of EMA Partners says Indian family-owned businesses have become far more attractive than foreign MNCs in the past 15-20 years. “Most of them have moved towards separating ownership and management. They are some of the top employer brands, and have also provided superior shareholding returns.” He finds them to have a far more progressive approach compared to European peers, many of whom are selling out due to an inability to bring in the next generation or attract the right talent. And Burman says professionalisation has not only rewarded the promoters and allowed them to start many other businesses, it has also released the family from being handcuffed to each other. “That is what has kept us together, because we are each the master of our own wealth,” he adds.

There is no decisive proof that a family-owned, professionally run business is better than a family-owned and -managed one. Ultimately, it boils down to having a professional mindset in either set-up. But a sure-shot route to ruin is when a promoter second-guesses the professional CEO, experts say. “A lot more businesses are professionalising. They will find suitable leaders if they ensure that their firm is of a certain type and calibre, where the professional may want to work. Businesses need to realise it works both ways,” says SPJIMR’s Agarwal.

So long as it is a professional-promoter match made in heaven!

 

@SaysVidya