Family businesses have stood the Marwari community in good stead for as long as one can remember. However, rising instances of fragmentation of family businesses call for a review of some of its time-honoured practices. Noted advocate and solicitor Vandan
Rising instances of fragmentation of family businesses call for a review
of some of the Marwari community’s time-honoured
practices. Noted advocate and solicitor Vandana Shroff, a partner at Amarchand & Mangaldas & Suresh A Shroff & Co, discusses the merits of succession
With inputs from Radhika Gaggar and Rishabh Shroff
THE SUCCESS OF A BUSINESS, more so a family business, is measured as much in terms of its longevity and its ability to survive generations and economic cycles as by its growth and returns to investors. Any disruption in the promoter family has a direct and immediate impact on the functioning of the business and market sentiment. The critical element in the family’s survival as a cohesive unit over multiple generations lies in its ability to formulate and implement a sustainable family governance and succession structure.
The first name in family businesses, the Marwaris, have played a significant role in changing the face of modern India. The business horizons of this traditional yet progressive community range from small trading enterprises to global conglomerates. On the business front, their success is the result of a combination of factors such as vision and the ability to adapt and take risks, on sighting an opportunity. In addition to commercial skills, the family and the community—in which they trust—always act as underlying forces and the safety net. Today, a handful of business houses have already warmed up to the concept of preserving the family institution. Pioneers in this field include the Agarwals and Goenkas of the Emami Group and the Dalmia Bharat Group. After all, their way is not to depend on luck and chance. Instead, they have always much preferred to design their destinies through systematic hard work, transparency and wit.
The family in business In India, with the top ten Marwari-owned companies accounting for six per cent of the BSE capitalisation, business houses, in most cases, are literally synonymous with the family at the helm. Likewise, it is difficult to separate the boardroom from the dining room, with business discussions and osmotic learning dominating dinner conversations. A majority of Indian family businesses, including Marwari business houses, thrive under the owner–manager model, wherein the promoter family plays an active role in the management of the family business.
While reposing trust in family members as business allies and assigning them key positions is a great strength and has competitive advantages, it also comes with its unique set of challenges which include: (i) professionalisation and retention of external talent; (ii) managing expectations within the family, especially the roles of young children and women; and (iii) managing business succession.
Given the interplay of family and business, it is imperative that Marwaris work out solutions. Further, in the backdrop of India’s sociocultural roots and regulatory construct, changing over from the ownermanager model to a pure owner-investor model, wherein the link between the promoter and his company is severed, is some distance away for Indian families. So, instead of emulating western models, the Indian model needs to accept this reality and customise itself accordingly.
Keeping the house in order It is a fairly well-established western construct that if a family business wishes to survive beyond the third generation (i.e., a cousin consortium and beyond), it needs to plan its transformation from a purely owner-manager model to a holistic dialogue that recognises and includes all three dimensions, i.e., family, business and the family in business. Having grown
up in joint families, making sacrifices and compromises to maintain harmony in relationships comes naturally to Marwaris. Barring a few exceptions, it is safe to say that Marwari business families have been fairly successful in defying this western canon in the past with family businesses traversing many generations. However, in the current business, social and regulatory environment, without prescient planning and open conversations, the chances of a family business surviving as a whole in the long-term are dismal, and fragmentation is inevitable.
Accordingly, Marwari business families need to plan and utilise the right set of tools for effective family governance and succession planning. To this end, the structures may range from asset protection, in the form of private trusts (lifetime, flexible or testamentary trusts)—which are oft-used for holding business and/or personal assets of promoter families in an efficient manner—to tools such as family constitutions.
A family constitution is the family’s vision statement or charter (much like a shareholders’ agreement) setting out inter alia: (i) the core principles and values that the family wishes to endorse and uphold; (ii) rights and obligations of the family members with respect to the assets, such as shares and interests, involvement in the management of the business, transfer restrictions, exit, etc.; (iii) establishment of a family council and advisory boards, as required; and (iv) various other policies— related to lifestyle, philanthropy, investment, public relations or communications— relevant for the family. For instance, the family constitution can set out guiding principles for the induction of the next generation into the family business and provide clarity on the role of each member of the family, including, in keeping with the times, that of women in Marwari families.
Further, family offices may be set up to undertake a wide range of activities such as investment advisory, succession planning, tax planning and related services. All of the
In the current business, social and regulatory environment, without prescient planning and open conversations, the chances of a family business surviving as a whole in the long term are dismal and fragmentation is inevitable.
above, together with any special need that a family may have (such as philanthropic endeavours) can, and ideally should, be tied together to function as a comprehensive governance package.
Apart from educating the younger generations about the technical skill set required, conscious effort must be made to impart stewardship skills and inculcate necessary family business values through a formal grooming process as well as by conditioning from an early age.
In the boardroom
The survival and success of Marwari business houses in today’s fast changing legal environment is largely dependent on the skills and attitude of the head of the promoter family. Equally important is role clarity. For instance, in business conglomerates spanning multiple verticals, it is not uncommon to assign different portfolios and businesses to different family members. What keeps them united is the family code which may be formally recorded in the family charter.
Recognising that there is no formalised succession plan for appointments to the board and senior management, the Securities Exchange Board of India has proposed that all listed companies set forth a succession plan to mitigate the adverse impact caused by the sudden death of the promoter.
Other key challenges faced by Marwari family businesses include refraining from foraying into sunrise sectors and preserving external talent while also retaining a meaningful role for family members. In order to stay ahead of competitors, Marwari business families should consider diversification and venture into sectors such as Information Technology, telecommunications, media and financial services. Although many Marwari business houses have already embraced professionalisation, many more will need to do so in order to consciously create an environment for talent creation and retention. At the same time, the next generation should be able to hold out on its own on the basis of its merit and a combination of factors like education, exposure and grooming, as opposed to lineage.
The road ahead
The instinct for entrepreneurship is deeply ingrained in this leading Indian business community which is wellknown for its risk appetite and ability to seize opportunities. This needs to be supplemented with foresight, preparedness and bespoke structural solutions to enable the community to continue to flourish in India and globally.
The designing of the family governance model and its implementation is an ongoing process, and while the issues concerning Marwari business families across India may inherently be the same, customised governance mechanisms need to be tailored to suit the unique requirements of each family. Intrinsically linked to the family business, effective family governance and succession will result in the institutionalisation of longterm corporate ownership and control of family businesses, which in turn is imperative in keeping both the Marwari enterprise and legend shining.
R S Agarwal