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Not future proof, yet

Saumya Bhattacharya     February 15, 2010

A business conference that Grandhi Mallikarjuna Rao, Chairman and controlling shareholder of GMR Infrastructure, attended in 2000 opened his eyes to the common problems that families like his face the world over. It took years of consultation with experts and family meetings to translate that realisation into reality.

In 2004, Rao engaged London-based family business advisor Peter Leach, a 30-year veteran advising business families in the UK, West Asia, Asia and Europe. The task: Write a detailed family governance plan for the fast-growing GMR Group. Then, come up with a consensus for the future of the group that had outgrown its construction legacy taking on big projects—an airport in Hyderabad, for instance.

Three years later (seven after his "Aha" moment of 2000), Rao got what he wanted—a family governance constitution that clearly defined succession, a code of conduct and a transparent, clear-cut distribution of businesses among family members, including his two sons and sonin-law. Today, GMR's family council, lording over wealth estimated at over  $5 billion (the group won mandates for Delhi and Istanbul airports in 2006 and 2007), has become a telling example of succession planning among family businesses in post-reforms India. In doing so, GMR achieved what few in India Inc. have been able to.

THORNS IN THE THRONE

  • Family fears break-up if the word "succession" is brought up.
  • First and third generations are the most difficult to manage. First with siblings and third with sons.
  • Daughters have turned out to be a good succession "Plan B".they are not the first choice in India.
  • Leadership training is grossly missing amongst family companies.
  • Adhocism, also called as entrepreneurial style (by family businesses), is the greatest danger experienced by family managements.
Kavil Ramachandran, Thomas Schmidheiny Chair Professor of Family Business and Wealth Management at the Indian School of Business (ISB), Hyderabad, likens succession planning among business families to a relay race. "In the families where business vision and strategies are openly discussed, debated and agreed upon and where the family members are groomed to take charge based on their capabilities, succession will be smooth," he says.

That is easier said than done, but experts working closely with big and small family businesses on succession say these families are increasingly talking about succession. "The dispute of Ambani brothers seems to have rattled business families enough to scurry for smooth options for succession planning," says one of them, asking not to be named.

And, what is the scale of the challenge? Business families, audit and consultancy firm Ernst and Young estimates, account for 95 per cent of all Indian companies and contribute to 60-70 per cent of India's gross domestic product (GDP). India is going through a phase where the number of family businesses transitioning to the next generation is more than doubling every year. "The reason for this is a strong correlation between economic growth and the growth in entrepreneurial activity within the country," says Anurag Malik, Partner (People and Organisation, Performance Improvement) at Ernst and Young. "A new breed of first generation entrepreneurs, who started 25-30 years ago, is now reaching retirement, and hence grappling with planning succession to the next generation."

The Conundrum
Beyond horror stories of family companies that have ill-prepared their scions to take over, lies a stark reality described as the "shirt sleeves to shirt sleeves" phenomenon. Just 30 per cent of the family businesses survive to the third generation and less than 10 per cent continue generating significant value for shareholders beyond that milestone. In other words, a business family and wealth will likely go back to naught by the third generation.

GOOD FIRST PRINCIPLES

  • Start early, think of succession as a process and not an event.
  • Include objective and independent directors in designing and overseeing the process.
  • Focus heavily on personal development and professional feedback of next generation family members.
  • Set target date for such transition and celebrate the transition.
The transition from the first generation to the second generation largely involves ensuring that the next generation has the right skills and commitment to take the business forward. However, by the time of transition from the second to the third generation happens, the ever-expanding family branches make smooth business succession a significant challenge, says Malik. Experts such as Ramachandran are optimistic and say that transforming economies such as India may be an exception to this universal trend. In rapidly-expanding India, he says, entrepreneurship opportunities abound. "The younger generation is keen to learn and grow big. They get energised also from the winning stories of their peers," says the ISB professor.

Even so, most business families in India are chary of discussing succession. Honchos ranging from Azim Premji to Analjit Singh, Anil Agarwal to Rajeev Singh declined to participate in this story or did not respond to requests. Their reasons may be different, but Indian families, typically, delay the decision and formal communication on succession.

In business families, the biggest problems are related to family structures and the possessiveness that founders have for the empires, however small, they created, says Narendra Patni, a senior member of the Patni family that runs an eponymous tech services firm. Insisting his comments are not related to the recent travails of his family—his son Anirudh recently resigned from Patni Computer Systems, reportedly over differences with a new CEO's style of management—Patni says owners need to realise that "the company does not exist for them and that they are trustees". Unless they are clear about why the company exists, it "will become a lifestyle company—(one) that supports the lifestyle of its owners," he adds.

Patni needn't have to look far. One extreme example of how to avoid that conflict is seen at a tech services company founded by seven engineers, who worked for him nearly three decades ago. The founders of Infosys Technologies, arguably the most respected company in India, resolved early in their entrepreneurial avatars that their children would not work at Infosys. Their offspring would inherit their wealth, estimated at about a combined $2 billion at last count, but not the right to run the business.

RAISING HEIRS

  • Induct the next-generation at the entry level like regular management trainees, but then provide them with a quicker growth path subject to suitability and opportunities (e.g. Godrej scions).
  • Induct by exposing them to a series of challenging assignments, rather than through the regular management hierarchy (e.g. Biyani scions).
  • Another model extensively used abroad is to get the next generation to do a stint outside before joining the business. A global experience helps bring in professionalism and fresh perspective to the company (e.g. Rishad Premji at Wipro).
Such exceptions apart, the Indian family business landscape is peppered with challenges, some unique to the local milieu. A case in point is socalled primogeniture values. The eldest son is almost always the first successor, making succession of other capable people difficult. "The elder brother is considered more competent than younger child and there are examples galore of this around us," says Ganesh Shermon, Partner and Country Head (Human Capital), KPMG India. Daughters are mostly "Plan B" — admittedly, this is changing — and a fall back option in most cases.

Then, there is so much emotion around a person and a business that it ends up damaging the value of the company. The instance of Ranbaxy Laboratories, in which the Singh family running it exited for over $2 billion selling to Japan's Daichii Sankyo after nearly 50 years of founding, is rare, says an executive search honcho preferring to stay anonymous. "The brothers at Ranbaxy have taken the emotion out of their business. They exited when they found value in it." Emotions ran high in India Inc., though. Anand Mahindra, from the family running autos-to-software Mahindra and Mahindra conglomerate, said he was saddened that an Indian multinational business had changed hands. It didn't matter that the Singh boys—Malvinder and Shivinder, who make for the third generation in the business—were building a strong healthcare and financial services franchise.

The Secret Sauce
At its core, say experts, good succession planning stands on three legs—shareholding and ownership, roles the next generation will play, and, finally, who and how the business is run. While a majority of businesses struggle getting this jigsaw right, some do. Take the case of Murugappa Group that has its origins in early 20th century by Dewan Bahadur Murugappa Chettiar. The Chennai-based conglomerate, with some $3.15 billion revenues, was the only Indian business to have won the respected "IMD Distinguished Family Business Award" from the International Institute of Management Development in Lausanne, Switzerland, in 2001. For: The group's transition to a professionally-run corporate house (between 2000 and 2006, it even had two chairmen from outside the family).

Like most business families, the Murugappa Group, too, is not forthcoming on how it runs its family ecosystem. Says a person closely monitoring it over the years: "The secret sauce of Murugappa story is the way they deal with differences among the family members at the level of their council. Whatever the difference, it's clear that the decision of #1, in this case (current) Chairman A. Vellayan, will prevail."

The second ingredient is meritocracy. Across the family, members are given projects to complete and businesses to run. Their performance is closely watched and, when needed, the family council selects the most competent among these members to take over the leadership mantle. "Wherever succession is not linear, there is greater chance of better succession," says KPMG's Shermon.

There are instances, still, of poorlyplanned successions actually creating humungous shareholder value. The split between the Ambani brothers resulting in India's most bitter corporate battle, for instance. Between June 2005, when Mukesh and Anil agreed to a split of the family-controlled business, Reliance Industries, even then India's biggest private enterprise, and now, shareholder wealth (measured by the combined market cap of the companies the brothers control) has gone up nearly five times to about $100 billion—outperforming stock markets by 100 per cent.

Human resource experts call this a rare occurrence. The connection between "creating shareholder value" and "smooth succession planning" is indeed strong. "If the successors are really capable, this may not be an issue—as in the example of Reliance," says Nina Chatrath, Senior Consultant (Leadership and Talent Consulting), Korn/Ferry International India. While there is no one-size-fits-all prescription, one rule certainly helps: If the family is the company ("lifestyle company," as Patni calls it), it will likely degenerate. And, when the family is above the company, the business and family have much better chances of prospering. For GMR's Rao and future generations, then, the seven years spent forging its succession constitution may turn out the most epochal for the group's longevity.

Additional reporting by K.R. Balasubramanyam


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