Business Today

India's Business Families: Redefining the roles

Even as the family business is forced to change to cope with competition, the role played by the family in the business must be rewritten too. Which old functions must it discard? What new responsibilities must it take on? And how should it manage the transition? A prognosis.

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Yesterday, it was the business as family. Today, it is the family as business. And tomorrow, it will be the business of the family to ensure that there is a future for both the business and the family. While radical strategic, operational, and financial transformation is a given for any corporation that hopes to survive the trauma of competing in the post-liberalisation marketplace, India's business houses have yet another agenda for change: rewriting the role of the family. Mirroring the movement of the economy from control to openness, the owners-cum-stewards of the family business, too, must transit from a hands-on role to a hands-off one.

The evolutionary context of business is crying for the involvement of the family to change as well. According to studies conducted by the consultancy firm A.T. Kearney, the typical family business goes through four stages in its development: Entrepreneurial. Functional. Process-driven. And market-driven. Still mired, for the most part, in the first and second stages, the family business house must, of necessity, progress to the next two phases. And, importantly, it is the family that must initiate and implement the changes that are involved. An added motive for change comes from the realisation that the family and the business are essentially two separate institutional systems-with distinctive rules governing their respective behaviours-whose boundaries have overlapped within the business house.

G.C. Burman
G.C. Burman, Managing Director, Dabur
There were differences on how to run businesses earlier, but these differences could be settled amicably. Now, with three generations coming together, it is different.

Sanjiv Goenka
Sanjiv Goenka, Vice-Chairman, RPG Enterprises
It is wise to leave the day-to-day running of the organisation to professional managers today. The family should only provide the overall direction.

K.K. Birla
K.K. Birla, Chairman, K.K. Birla Group
The professional CEO should be an outstanding personality. I give him plenty of autonomy. I only expect him to go by the policies that the board and I lay down, and deliver.
Thus, the exclusive dynamics of family culture and relationships have been imposed on the internal logic of managing a business enterprise, with results that haven't helped the perpetuation of either of the two entities. So, it is now essential for the family to appreciate this distinction and withdraw to prevent the conflicts between the rules, messages, and expectations for behaviour in each system that are weakening business. That's why a series of vital choices over its future role confronts the country's business family as it seeks to make the family business survive.
 
OWNER OR INVESTOR?
For long has the family combined the roles of owner and control of its businesses, oblivious to the possibility of an alternative. That it had to be the (male) members of the family who would be the hands-on custodians of its ambitions was considered self-evident. Particularly since the classic skills needed for conducting business successfully in the pre-liberalisation economy had far less to do with strategy or operations than with lobbying and liaisoning for licences, permits, financing, and concessions.

And virtually the only functions reserved for managers were those of following instructions. With the fortunes of the businesses resting largely on the networking prowess of their owners- which meant leveraging contacts culminating in the corridors of power-the family could not possibly adopt a hands-off approach. Justifies Chakor Doshi, 49, the vice-chairman of the Rs 190.55-crore Walchandnagar Industries: ''When its stake in the business is 20 per cent or more, it is quite natural for the family to have the comfort of being able to intervene in operations and management.''

Today, however, those skills are no longer a fount of competitive advantage for businesses operating in a primarily unregulated economy. For the family to continue on its former trajectory in managing its businesses, therefore, is redundant. Just what, then, should its new mandate be? The single-most important choice must be between the familiar role of the CEO and the unfamiliar one of an investor. Heretical as it may sound, the involvement of the family in managing the business house must necessarily migrate from management to influence, from exercising the powers of the executive to invoking the rights of the shareholder.

The reasons? For starters, managing a company will need specialised skills that demand the complete attention and time of the persons discharging that responsibility. Whether or not the group is diversified- and the focused business house appears more likely to survive than the sprawling one-the competencies needed to lead each business will become less and less portable across companies in the initial stages of the transition of the business house. The same person-read: the patriarch or the eldest of the scions-will, thus, be unable to manage multiple businesses successfully. Says Sid Khanna, 42, managing partner, Arthur Andersen: ''Owners have to distinguish between managing wealth and managing businesses. The family may not be good at both.''

And yet, the family can scarcely afford to recede completely to the background, leaving the field entirely to professionally appointed managers. For, while that might create a portfolio of independent and high-performing businesses, it will not engender a group with shared values and objectives. So as to retain its influence, therefore, the family must seek a different kind of role-which does not compromise the strategic and operational performance of the businesses, but enables it to stay involved in overall strategising and goal-setting. The obvious mantle, therefore, is that of the high-stake investor, who exerts pressure on the management for performance without getting embroiled in day-to-day operations. That involves reviews of strategy and of financial performance, validations of vision and missions, checks of ethical and law-abiding behaviour, and control over financing plans-functions that are critical for a business house. Most important, the competencies that the family can leverage as investors can indeed be applied to diversified businesses. In September, 1997, Vikram Lal, 54, set a precedent at the Rs 916-crore Eicher Group by renouncing all executive posts at the group despite holding 60.53 per cent of its equity, and only heading a seven- or eight-member supervisory board that will guide-but not control-the six companies in the group. Approves Sanjiv Goenka, 37, the vicechairman of the Rs 5,686.20-crore RPG Enterprises: ''Today, it is wise to leave the day-to-day running of the organisation to professional managers. The family should only provide direction.''

MANAGER OR GOVERNOR?
Having withdrawn from the hurly-burly, the second critical function for the family in guiding its businesses will prove to be able governance. Traditionally, the family-managed business has been accused of bending the rules, playing the system, and conniving with a graft-friendly bureaucracy to betray a general lack of scruples in its pursuit of opportunities. So long as that led to no competitive disadvantage, it remained at the level of illrepute.

Chakor L. Doshi
Chakor L. Doshi, Vice-Chairman, Walchandnagar Group
When its stake in the business was 20 per cent or more, it was quite natural for the family to have the comfort of being able to intervene in operations and management

Vikram Lal
Vikram Lal, Former Chairman, Eicher Group
Owner-managers tend to be much more subjective. But when there are professional managers running a company, everything is much more objective. They can be questioned

Parvinder Singh
Parvinder Singh, CEO, Ranbaxy Group
Tomorrow, if I'm not capable of handling the business, I would pull out. Being the largest shareholder, I'm the biggest loser if the company suffers because of me
Today and tomorrow, however, as the business house finds itself competing for capital, people, and customers without special protection, the quality of its corporate governance will be a vital differentiator. And for the family business, in particular, shaking off its classic image will pose a challenge that only the family can surmount.

In fact, setting benchmarks for norms of governance, especially those relating to financial management, will be possible only for the family, not for the professional managers involved in day-to-day management, precisely because the former are the owners. After all, tight governance, aimed at ensuring that the management protects and champions the interests of the investors through sound and honest strategy, systems, and operations, is necessarily the preserve of a detached group of people who, nevertheless, have a sizeable stake in the business. Or, as Lal analyses the issue: ''Owner-managers tend to be much more subjective. But when there are professionals running a company, it is much more objective. They can be questioned.''
 
Tomorrow's actual tasks for the family, accordingly, will include the laying down of codes of conduct to be followed across every company in the group, instilling the values of transparency and accountability, and insisting on rigid conformance to ethical standards. Idealistic as they may sound, these are crucial strategic inputs to the survival of businesses today. For, following such practices not only enables a group to grow an integrated crosscompany culture, it also streamlines and improves the efficiency of the processes involved, such as accounting, goal-setting, and people management.

Observes A.M.M. Arunachalam, 79, chairman, Murugappa Group: ''The basic principle is: professionals should look after the operational side of the business while family members should look after the entrepreneurial side.''

ACTOR OR DIRECTOR?
If the family succeeds in implementing the bifurcation between managing and governance in its businesses-taking on the latter and leaving the former to people trained for the task-it will also have to play the delicate role of managing the relationship between itself and the managers in a way that maximises the benefits for all the stakeholders. A divergence of viewpoints between owners and professional CEOs can only hurt the business. So can a revolt in the ranks, as business family heads ranging from the Rs 32,350.50-crore Tata Group's Ratan Tata to the Rs 2,692.90-crore Jumbo Group's M.R. Chhabria will attest. In this situation, the initiative in clarifying its expectations, its objectives, and its principles to the managers must come from the family. Says Hrishikesh Mafatlal, 43, CEO, Arvind Mafatlal Group: ''I am quite clear that my role is basically to provide direction to the group and to question the decisions on investment proposals.''

Crucially, this communication does not involve cutting in and taking over the reins personally since that will only undermine the effectiveness of the professional manager. On the contrary, the family must play a far more subtle role, influencing and guiding-but not dictating-the actions of its senior managers. In another era, such influence was easily achieved through the feudal relationship that existed between the owners and their employees. Today, however, the family must justify its stance to the managers not by pulling rank, but with business logic. As a result, its members must change the relationship of yore, replacing unquestioned loyalty with professional, reason-based interactions. And for that, the owners must also acquire the same analytical and business management skills that they expect their managers to have-but use them differently.

For instance, although Anil and Mukesh Ambani, the sons of the Rs 8,468.40-crore Reliance Group CEO Dhirubhai Ambani, have MBA degrees from the Wharton Business School of the University of Pennsylvania, and Stanford University, respectively, they don't use their expertise to replace or overrule the ideas and efforts of their managers.

Instead, they wield their knowledge as a tool for communication between intellectual equals, to weigh the merits of managerial decision-making, and to keep those decisions in sync with their own roadmap of the future of the group. Sums up Daniel A. Gauchat, 53, chairman, Amrop International: ''Checks, counter-checks, and strong interpersonal bonds between the family representative and the top management is as important as autonomy.''

DESTROYER OR PRESERVER?
With empirical evidence-in the form of research conducted in the US by the life insurance company MassMutual-suggesting that 67 per cent of family business houses normally split after the second generation takes over, with the proportion rising to 90 per cent by the third generation, the chances of unity in the face of centrifugal forces seem low. While the need to accommodate the divergent aspirations of different individuals has always been a classic factor behind the family split, multiplying that impetus in post-liberalisation India is the fact that scions in their 20s and 30s are equipping themselves with skills and worldviews dramatically different from those of the previous generation. Complicating the situation further is the so-called heiress factor, with daughters-and their husbands-staking their claim for a share of management, a paradigm that's relatively new to the male-centric family business.

All this is translating into a threat, for the business house, of a fracturing of the group, culminating in snapped synergies-such as there were- abandoned economies of scale, and crises of leadership. With 62 per cent of the country's 50 largest business houses already having entered the second or third generation, anticipating, preventing- to the extent possible-and managing the fallout of splits is, therefore, a major priority for the family. All the more so since this is a responsibility that just cannot be delegated to professional managers.

The actual tasks, then, for the family in this context will include drawing up of a contingency plan for carving up the empire; creating alternative avenues of growth for different members of the family without endangering the core group; and apportioning functional responsibilities rather than charge of separate businesses between the inheritors. The Rs 720.94-crore Dabur India, for instance, has appointed management guru Mrityunjay B. Athreya to chart out a future for its inheritors, Mohit, 29; Amit, 28; Gaurav, 25; and Chetan Burman, 25. Says the 56-year-old Athreya: ''The idea is to give the organisation a fresh lease of life by developing these youngsters as professional entrepreneurs.''

Expands Tarun Sheth, 56, the CEO of Shilputsi Consultants: ''If there is a strong value system within a group, there is no question of a split.'' Of course, splits will still be inevitable in many cases, and preventing them forcibly will not serve the group well. That's why the family must also focus on succession planning within its ranks so as to prevent internecine wars or morale-sapping struggles for power. In the so-called professionallyowned company, finding a new CEO to replace an outgoing one is not a problem because of the large pool of managerial talent-both within and outside the company-that can be dipped into. Not so for the family that insists on its bloodline being perpetuated in the corner room. While the increasing compulsions for professionalising the manage-rial functions will, almost certainly, force the appointment of qualified senior managers from outside the family, the business house could well choose to reserve the rank of commander-in-chief for one of its own.

In that case, it is upto the family to sidestep the typical mistakes-a patriarch or founder who just cannot let go, provoking a crisis; or the clumsy planting of a young inheritor in the corner room without giving him a chance to either understand the business or earn the confidence of the people he will manage-and ensure continuity. Says N.H. Athreya, 75, director of the Mumbai-based consultants Modern Management Counsel: ''The founder must ensure that the responsibility for business is handed over not at the fag end of his life, but early on.''

Adds Parvinder Singh, 54, the CEO of the Rs 1,261-crore Ranbaxy Laboratories: ''Tomorrow, if I'm not capable of handling the company, I'd pull out. Being the largest shareholder, I will be the biggest loser if the company suffers because of me.''

Given its new priorities, a crucial question for the business family will, of course, be that of motivation. Just what compulsions must it internalise in order to change its own role dramatically? The answer lies in triggering a megashift in priorities. The traditional business house has always pursued growth, finding the finances for such growth, enhancing the worth of its portfolio, maximising its own returns, and establishing firm ownership control. Threatened by survival, however, those objectives can no longer be primary.

Instead, pride of place must go to the construction of an entrepreneurial culture, the management of human resources, and the orchestration of competitive advantages. The new roles will flow automatically from the pursuit of these changed objectives. Sums up Manoj Badale, 30, consultant, The Monitor Company: ''Indian business families are focusing too much on what to do and too little on how to do it.'' At first sight, a transformation of these proportions may seem a matter of choice. Actually, with survival being at stake, it is a pre-condition. For staying alive.

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