March 2014

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Will Your Legacy Live On?

While many Indian family businesses have stood the test of the time, many have disintegrated, largely due to badly managed successions. Companies have split into tiny units, only to turn unviable and go bust. A look at how some of these mistakes can be avoided.
Will Your Legacy Live On?

When Grandhi Mallikarjuna Rao started his business in early 1978 with a single jute mill in Rajam, Andhra Pradesh, he didn’t have the advantages that today’s entrepreneurs do. There were no business advisors, no incubators, no mentors and barely any professionals he could hire to run the business. He turned to his family to help him run his business, the GMR Group—and he continues to do so, even today. Rao’s company is bound by a family constitution, where the details of running the business have been clearly laid out.

“During my days at Vyasa Bank, there were so many non-performing assets,” says Rao. “When I sat with the businessman on these topics, I found out that 80-90 percent of these problems were due to disputes within the family. I strongly believe that just good corporate governance is not enough—one needs good family governance, too.”

GMR Group’s family constitution is aimed at ensuring a smooth transition of business from generation to generation. In line with this, members of the family would, over a period of time, provide only strategic inputs, investment needs and consulting for all the businesses and activities of the Group.

“Family problems do not surface within a day; they emerge over a span of 20-30 years. In Indian families, we tend to lack this vision; we put in place a family constitution where it’s the duty of every founder to ensure good family governance, succession, dissolution, and entry into the family governance,” Rao says.

For Rao’s GMR group, the family constitution will determine who succeeds him. “The three members of the constitution board will decide who succeeds me—I will not nominate anyone. If they do not reach a consensus, we have a mechanism to break the deadlock. Consensus is very important to find a successor. While making the constitution, all of us—including the women from our family—deliberated in the issue. I do not think there will be any problem to find a successor in our case.

FAMILY BUSINESS AND YOU
As a family member, you are on a faster track compared to others. But it is not akin to an elevator that goes from the ground floor to the boardroom; you still have to take the required stops, albeit for a shorter period of time.

Succession Formula

JK Group is one such group that went through a series of difficulties due to succession battles. “The word succession is not fully understood. If it is a family-oriented business, there are two issues to consider: how much you are involved in the family, and how well you gel together. Depending on this equation, your succession plan evolves,” says Hari Shankar Singhania, Chairman, JK Group.

While his brother Raghu Pati is the Vice Chairman and Managing Director of JK Tyre, his nephew Harsh Pati is in charge of JK Paper. “They handle their own verticals, but we have an institutional framework within which they are answerable,” says Hari Shankar.

According to Harsh Pati Singhania, an MBA from the University of Massachusetts, planning and diversification are crucial in ensuring that family businesses avoid clashes. “I do not want my succession to be a crown moving from one head to another. My successors must start from the junior level, because it is a once-in-a-lifetime opportunity. Plus, when you are younger, you have greater adaptability,” says Harsh Pati.

The Family Council

The Dalmias, however, run their family business in a different way. They have a clear cut division of responsibilities for each family member involved in the business. Jai Dayal Dalmia was at the helm of affairs till 1948. After his death, his six sons parted ways to run their own ventures, with Jai Hari Dalmia and Yadu Hari Dalmia taking over the reins of Dalmia Cement.

Now, brothers Puneet Dalmia and Gautam Dalmia—the third generation of the family—hold the position of Managing Director and Joint Managing Director of the Dalmia Cement respectively. “My father and uncle are involved in determining the strategic direction of the company, the capital structure, debt equity ratio and also the culture of the family business. My brother has been involved in the company for the last 14 years, and I’ve been involved for the last 10,” says Puneet.

Puneet initially worked in the family business from 1997 to 1999 and then moved out to start Jobsahead.com, which was sold to Monster.com in 2004. That year, Puneet and his family realized that while the businesses were very profitable, they were not leaders in the segments they operated in. The model wasn’t translating into growth and they felt a need for bringing professionals in. They appointed CEOs to run each of the businesses and corporate office heads were appointed for corporate and commercial affairs, finance, projects and human resources.

With a fresh outlook towards business, Puneet believes one must have processes in place to address the inherent problems of family businesses—without that, there could be disaster. The Dalmia’s have a family council that consists of Puneet, his father Yadu Hari, his uncle Jai Hari and cousin Gautam.

This council provides strategic direction to the company. All operating decisions are not referred to that council; instead, a formal document enlists ten decision categories and 30 decision types that must be referred to the council. Decisions like board nominations, compensations, investment and capital structure are examples of matters that the family council takes up.

The group also has a governing owners’ council that includes the four Dalmias and two other advisors. Says Puneet, “The role of this body is to act as an advisor to the family council on any issue where we need wisdom and another point of view.”

ROLE OF FAMILY MEMBERS
Giving strategic direction; providing resources; setting goals and targets; acting like the glue holding the company together.

Modi’s Mantra

Another Indian group that went through a rough patch during succession was the Modi Group. Founded by Gujar Mal Modi in 1932, the group began to wither away into multiple factions and companies after his death, primarily due to the bitter infighting between his sons. Sudden death meant that Gujar Mal had not written a will for his empire, and it was left to his sons to battle it out.

“We have been in the business for many years,” says B.K. Modi, Chairman, Spice Group. “My father started four companies. I joined the business after studying engineering and, in 1970, started working at a steel plant we were setting up. But I was keen to move out. In 1971, I did my MBA from the U.S. and returned to start the tire business.”

However, after his father expired in 1976, B.K. Modi decided to start a business on his own, as too many family members were vying for the riches. In 1989, he snapped ties with the erstwhile group, barring some engagement with one of his brothers, which also came to an end in 1994. “I then created my own brand, as I saw that my children were not keen on getting into the old family businesses,” he says.

Modi admits that it was his children who persuaded him into branching out on his own and exploring technology-oriented businesses. “My father carried on with the business created by my grandfather, but I didn’t want to do the business that my father did… and I do not think my children want to do the business that I did,” Modi says.

DISADVANTAGES OF FAMILY BUSINESSES:
• Managing succession and growth; splitting of business; bringing in professionals
• Huge societal and peer pressure for growth
• Lack of corporate governance
• Leadership transition risks
• Conflicting visions and strategies
• Slowness in adapting or responding to emerging business challenges
• Limited transparency in matters like ownership, control and related party transactions

©Entrepreneur October 2009

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