STAY­ING REL­E­VANT

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

Marwar - - Contents -

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

plan­ning.

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

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