India's family businesses succession plan should be more refined

As Indian family businesses become multinational enterprises, they need to refine their succession procedures, says S. Manikutty.

Succession planning in Indian family businesses has always been a delicate subject. This is largely due to the difficulty of separating the family from the business in India. Family is all about relationships, while business is, to a large extent, about dispassionate decisions based on logic. And these considerations may not always go hand in hand. In India, the eldest son expects to inherit the business from his father as a matter of right. The problem arises when the eldest son is not necessarily the most capable, or the other siblings do not accept the state of affairs.

Today, Indian firms, in general, and family firms, in particular, are seeking opportunities globally. Indian family multinational enterprises, or MNEs, now are many: Bajaj Auto, Bharat Forge, Mahindra & Mahindra, Crompton Greaves, Wipro, Dr. Reddy's Laboratories and Ranbaxy, to name a few. This poses new challenges for Indian family businesses regarding succession planning.

Manikutty's take

  • Family quarrels over succession can have several adverse consequences for the company
  • It is important, while the patriarch is still alive, to spell out the succession plans
  • Family councils can discuss the business issues and draw up a family constitution
  • It is important that the family members know the succession plan
  • Ownership issues can make it diffi -cult to raise capital for the growth initiatives of the firm
That is why it is important, while the patriarch is still alive, to spell out succession plans. This can be facilitated by the existence of family councils to discuss the business issues (not purely family issues) and by drawing up a family constitution. It is not necessary to announce this plan to the outside world, though it may be good to announce the existence of such a plan. It is more important that family members know of the plan. It may also be useful to put it down in writing and make it into a legal document so that battles are avoided later. But such formalisation is more of an exception than the rule. I suspect that the patriarch defers the decision primarily due to his reluctance to face likely protests from some of the family members.

Relationships with overseas companies and government agencies are becoming complex. These require dealing with new vendors, customers, intermediaries and regulators. These bodies look for stability and predictability in their relationships and need to be assured that they can trust their Indian partners. Lack of a succession plan obviously increases uncertainty. All these entities would like to know not only whom they have to deal with now, but also in the future. A ruinous family quarrel over succession will hardly inspire continued trust.

It can have several adverse consequences for the company. For example, long-term loans are needed for a firm's expansion, but to provide them, the lender would want to know the long-term plans of the firm. If there are any ownership issues, it may become difficult to raise capital for the growth initiatives of the firm. In the case of one pharmaceutical company, for example, founded by two brothers, the lenders backed out, when it became known that the brothers had major differences of opinion, and the firm went into liquidation. Some family-owned companies in India are trying to preempt such a possibility. Wipro, for instance, seems to be slowly giving final touches to its succession planning and looking beyond Azim Premji.

An interesting impact of globalisation is the need for multiple and very different skills at the top. This provides a unique opportunity for a family firm. It can plan for a group of people who can be groomed to acquire different skills. For example, one of the family members can specialise in international marketing, while another can specialise in legal issues in international business; a third can specialise in technology. As different family members have different skills and aptitudes, it will be beneficial for the company if all can contribute according to their strengths. The Bajaj family seems to have grasped this point, and it has a neat arrangement between the two sons of Rahul Bajaj, capitalising on the skills of the siblings. Such groups of family members can be expected to stay together - at least the chances are higher with a family as compared to a group of outsiders.

Different family members can even be groomed to work as CEOs of their overseas companies, with only a loose coordination with and control from the top. For instance, in the Apollo Hospitals Group, the daughters of Dr Prathap Reddy are managing different hospitals fairly independently, under the father's guidance. It is not altogether inconceivable that some of these companies become independent companies in their own right, but the family can protect its interests through cross-holdings.

I believe family businesses have unique strengths which, when managed properly, can make them formidable competitors. How a family MNE leverages its strengths as a family when it is globalising will depend on the family's values. But one thing is certain: family businesses, when they become MNEs, will need to refine their succession procedures and find new ways to leverage their strengths in a planned manner.
The author is a professor at the Indian Institute of Management, Ahmedabad