The Hindu Business Line : Family-managed businesses: Perceptions and reality

After watching Madhur Bhandarkar's Corporate one is convinced that he is a master of his craft. He cleverly peels off layer after layer that covers the dirty games played out in the business world in the name of competition and profit. "Watching the sequence of events in Corporate makes for a brutally chilling experience for moviegoers who are unfamiliar with the corporate culture," wrote a movie critic. The critic went on to say: "The film is a must-see, especially for all those aspiring professionals who are ready to do anything to be at the top. It subtly conveys the message that one should not compromise one's principles." The key phrases are `dirty games... in the name of competition and profit' and `corporate culture'. So the verdict is out — corporate culture is brutal and business people would do anything to achieve their objectives. Aspiring professionals should watch out when they work for businessmen.

Juxtapose this with what Gurcharan Das wrote in a recent column: "Two weeks ago I was invited to a glamorous event in Manhattan celebrating the launch of a special issue of the prestigious Foreign Affairs magazine titled, `The Rise of India', to which I had also contributed. A knowledgeable and well-heeled audience heard our moderator begin with Jim Rogers' famous line that he wouldn't invest in India because `it had the worst bureaucracy in the world'. An odd note to begin an event honouring India's rise! It soon became apparent, however, that we must be celebrating the rise of a `private' India."

There is no denying that the rise of India now, and of China earlier (or for that matter that of the advanced economies) is due to private enterprise. They form the bedrock of the economies and family-owned enterprises occupy `commanding heights of the economy', to borrow Nehru's description of the public sector. The ownership of such enterprises vests with the members of the founding families, as also the management in most instances. It may perhaps be pertinent here to define what I collectively call `family-managed businesses'. These are businesses and business groups in which a family or group of families have considerable shareholding and top management positions are held by family members as opposed to their only exercising shareholder rights and they, compared to other employees, move on a substantially faster track to occupy senior/top positions only by virtue of being a member of the family (families). However, from time immemorial, individuals who had anything to do with wealth or money have been looked upon as `evil' — take Shylock in the Merchant of Venice or reference to business leaders as `robber barons' in the US in early 20th century. In the post - medieval Europe, it was the spread of Calvinism, which managed to take some of the viciousness off it. There is this widespread tendency to smear all business people with a tar brush once they become successful. Look at the venomous scorn showered on the much admired Infosys by a former Prime Minister of the country. A columnist quotes a social activist of Bangalore: "Is Infosys a real estate company or an IT firm? I fail to understand why they are greedy for land."

This attitude is further exacerbated when members of a founding family occupy senior lucrative positions of an enterprise. I am even tempted to suspect that most of these inimical feelings are spurred on by sheer envy of their success and enormous wealth, which every one of us would probably have sacrificed an arm to achieve.

Let it not be misunderstood that I hold a brief for all family-managed companies. Nor am I saying that all of them are paragons of virtuous corporate governance. It is only my submission that they should not be looked upon with suspicion just because they are family-managed. It is a truth that needs to be universally acknowledged — family-managed enterprises occupy a predominant position in all economies, whether they are occidental or oriental. It is equally true that as in politics or the professions, tamasik (avaricious) tendencies do dominate many of them as do bad governance in many governments or professions.

I recall an exchange with an MBA class I was teaching in a Chennai college before the days of the IT/ITES boom. Almost all the students wanted to get placements with `professional-managed' companies and almost nobody wanted to join a `family-managed' company. I asked them to list major groups/companies in Chennai that they could work for; they then realised that barring a few, most of them fit the `family-managed' definition. I asked them whether they thought that they were well managed; they had to concede that they were.

Usually, the trials and struggles the founding families go through while building a business are not known to the public and are seldom talked about. Very often, to use a local expression, even the much sacred thalis of the ladies in the family are pledged to steer the business through difficult shoals. It is only when the trappings of wealth are in evidence that the press starts showing an interest in them. Thereafter, whatever they do becomes news! It is indeed an acceptance of the fact that ownership encourages a higher sense of responsibility and hence performance that ESOPs and the like have become the order of the day. It is also important that ownership is visible and felt. After all, we the citizens are the true owners of all public property; but does it enthuse us to take good care of it?

In fact, in my view, the greatest benefit of family-managed groups is the sense of responsible behaviour it promotes thanks to the sense of ownership. I can hear many of my friends protesting that much of the investment in such enterprises is public money and the managing families benefit from it disproportionately. True, but they are less likely to harm the enterprise than persons who have no ownership stakes whatsoever or very diffused stakes.

These days, companies have their sights on the stock market ticker tape, quarterly results, earnings guidance and what have you in the name of disclosures, better corporate governance et al. I shall not go into `the good, the bad and the ugly' aspects of these practices since that is not my objective here. We have all seen numerous instances of managements sacrificing the long-term in favour of immediate gains and short-term corporate results with disastrous consequences. Family members occupying top positions in corporates are less susceptible to this malady since they are less affected by this and since they know that jeopardizing the long-term future could hurt most those they hold dear; themselves and their personal heirs.

A frequent accusation made against family managements is that they tend to act very arbitrarily, and based on personal biases and predilections. Over the last three-and-a-half decades, I have consulted for organisations of various hues from large government departments to MNCs to big and small business enterprises and I am afraid that none is immune to this. I have seen politicians and senior civil servants in government companies and CEOs of MNCs (why, even their spouses!) acting in the most cavalier fashion with company personnel, making the abusive treatment often meted out by a small-time car mechanic to his helpers look urbane and benevolent!

One could argue that there are no recourses for grievance redressal in family-managed companies whereas in the other companies there are mechanisms to prevent or set right wrongs done to individuals. One needs to only ask people the misery they have had suffered and the time and effort they expended before they got justice; please ask the engineers who were suspended for disconnecting power to the Maharashtra Chief Minister's residence for non-payment of bills or the policeman who stopped a minister's son for over-speeding for their experiences.

It is a general grouse that scions of business families are put on a fast track within their companies. I do agree that it is blatantly unfair if the incumbent is not qualified or is not groomed properly to occupy the position. But I have noticed that when this is done, there is much less disturbance in the system and rumbling than when a person, a non-family member, is brought from outside to occupy the same position over the heads of present internal personnel.

The bottomline is competent corporate management. It should be accepted that good management practices are not the monopoly of the so called professional-managed enterprises, but exist in good measure in family-managed enterprises too as is evidenced by the galloping growth of India Inc, dominated by the so called family-managed groups.

(The writer, an alumnus of IIM-A, was earlier with the consultancy division of ASCI, Hyderabad and a Director, A.F. Ferguson & Co. He is currently Director, Startup Focus Ltd, which specialises in strategic planning and counselling for family-managed companies and M&A. This is the third in a series of articles on family businesses by him)