The succession question
Management trusts have their drawbacks
Reports that some corporate groups are attempting succession planning by setting up management trusts have turned the spotlight on this novel mode of corporate governance in the family-owned enterprises that dominate Indian business. At least two groups are said to be considering this structure— the Ambanis, which run India’s largest listed conglomerate Reliance Industries Ltd (RIL), and Chennai-based Shriram group, which runs several large finance companies. Their motives for doing so are principally driven by the need to ensure smooth succession and avoid the family feuds and splits that accompany the passing of the founder-promoter — a fate that befell the RIL empire after the death of Dhirubhai Ambani.
The Ambanis are reportedly planning a family trust on the lines of the Walton family, which owns Walmart, that retains board-level oversight and outsources management to professionals. The Ambani succession plan was reported in the media, and the company and /or the Ambani family has not yet responded to the report. Under the plan, Mukesh Ambani, his wife, three children and some trusted advisors will have stakes in the overseeing entity with board-level representation, while management of the oil-to-telecom giant will be run by professional managers. The Shriram Ownership Trust, which owns almost 30 per cent in Shriram Capital, the group holding company, will have as its members the managing directors of key group companies. In the interests of parity, there will be no chairman but founder R Thyagarajan will act as “mentor”.
The key question that arises is whether family-owned trusts can preclude succession disputes and create clear management structures that differentiate between board-level intervention and promoter interference. Whether populated by family-members or professionals, management trusts appear to create an additional layer of opacity between ownership and management. The Walton family experience suggests that the success of management trusts largely depends on the inclination of the family/trust members in respecting the spirit of the system rather than on any checks and balances implicit in the institution of the trust itself. Although Walton family trust members have mostly operated with a light touch, the founder’s grandson-in-law did become chairman of the retail giant in 2015. Given that the Walton family owns nearly 50 per cent of the conglomerate, questions have rightly been raised about the nature of the arm’slength relationship between the promoters and the management.
These questions would apply as much to any future Ambani management trust, especially given the fact that Mukesh Ambani and his three children hold conspicuous managerial positions at the moment. The Shriram trust is clearer in its structure but the role of a family “mentor” does add a degree of uncertainty. The short distance between the trust and managerial power has been amply demonstrated in the inordinate power that the Tata trusts wield over India’s largest corporate empire via its two-third shareholding in group holding company Tata Sons. This holding structure has been complicated by the fact that these trusts also enjoy tax exemptions on account of being charitable in nature (this is a historical benefit accorded only to a few big trusts, including ones from the Tata and Birla groups; charitable trusts in India cannot hold shares in private companies and are only allowed to receive such shares by way of donation with an obligation to dispose the same within one year). The fact is that there is no magic bullet to wean India’s conglomerates from the family way unless they consciously choose to do so. In the US, a stiff inheritance tax encouraged the wealthy to divide their assets among their children well before death, a process that played its part in professionalising managements in the companies they founded. That could be a route for India to consider.