The Hindu Business Line : Striking a perfect balance

Large business houses spanning three or more generations face the challenge of growth and sustenance due to different issues in family businesses. In a recently held conference at the ISB, speakers from family businesses running into as much as five generations, shared their experiences. Adi Godrej, Group Chairman, Godrej Industries, expressed his views on various issues related to family business in an interview with Professor K. Ramachandran, Thomas Schmidheiny Fellow of Family Business and Wealth Management, and Clinical Professor at the ISB, during his visit to the ISB for the conference.

In your business history, of 110 years, have you faced any challenges of management succession across generations?

No, we have not faced any major issues. For us, succession is not just a question of who heads the family group, but it is also the question of who heads what business, who is assigned what tasks and so on. Of course, there have been issues in the past and we continue to have discussions around certain issues. But, we have had only three group Chairmen in the last 110 years.

My grandfather was the first Chairman, followed by my uncle Sohrab, the eldest in his generation, who was the Chairman for many decades. In 1980, when he passed away, I took over as Chairman. So, the eldest in each generation takes over. We have different people as Chairmen of different companies in the group. Different family members supervise different companies in the group. While there have been no major issues, we have had discussions on how exactly succession takes place.

One of the major problems faced by most families is succession to the next generation.

We now have to decide as to how issues related to succession to the next generation would be handled. To my mind, the best way in the long run, is to have some help from outside experts. Advisors, who know the business and the individuals well, are best suited for this. Ultimately, the family can decide what they want, but an outsider’s advice might be useful as the family gets larger in size.

Do you have a formal grooming system for the younger generation to take specific positions in the group companies?

We do not have a formal written constitutional grooming method, but we insist on certain things. First, we ensure that the youngsters joining the business are well-qualified, at least as qualified as our top management trainees. Second, we put them through a training period like regular management trainees. However, there is a quicker growth path for them, subject to suitability. We invite them at a very early stage to attend the senior management committee meetings because we expect them to take on responsibilities at an early stage.

Is there any positive or negative impact of this on the non-family professionals?

It is difficult for me to tell. We have a number of non-family professionals heading each of the businesses. We have created a strong growth path for the non-family people in the group. The number of family professionals in the group is only a small fraction, less than one per cent of the total number of professionals working in the group. Family members don’t dominate in terms of numbers. We also have very strong employee stock options for all our senior teams. It is difficult to say whether they feel any pressure from family members having a faster track, but I am sure even if there is such a feeling, it is not likely to be much.

However, we would consciously avoid situations where a non-family Managing Director of a company, in which a family professional has worked earlier, has to report to that person later as a subordinate. We would ensure that the transition is smooth and by and large accepted. Non-family professionals must also flourish.

Have you derived some benefits or advantages of a joint family, although you may not be living together?

We have never acted or lived like a joint family. We are quite independent in the way we live; we only are joint owners of the business.

Is the family or business leadership based on seniority within the extended family?

That is right, but that is only for business purpose, not for family management purpose. We do not make individual family decisions like a typical Hindu joint family. The Hindu joint family has very strong legal sanctions and protections, and there are very strong legal reasons like Hindu Undivided Family (HUF) supporting them.

You have a major involvement in family philanthropy. Different members of the family are involved in it. Is there a common strategy created for this?

Yes, first of all 25 per cent of the shareholding in our parent company, Godrej and Boyce (our oldest company with a wide ownership of shareholding in many other group companies), is owned by the Feroze Shah Godrej Foundation, which is our main charitable trust. It regularly receives large dividends from the parent company and that funds a fair amount of our philanthropic activities. In addition to that, we have various other trusts. Group companies also undertake independent philanthropic work.

Is there a reinforcement or revisit of these activities from time to time?

We do revisit it from time to time. In the philanthropy field, there has not been much debate against our stand. I think our earlier stand is vindicated and supported.

As part of growing up, do the younger members spend time in some of these institutions?

Well, from time to time they have done that, but it is not something that we mandate or expect. Most of the spouses in the family take an active interest in the philanthropic activities.

That brings up the other question about the involvement of women in your business or in the family charity work.

All the women in our family have equal ownership in business. Women are at par with their brothers and we have no gender differentiation in our family. Women are encouraged to join the businesses if they are suitably qualified. We generally expect the inheritance to go to the direct descendants, and not to their spouses.

Many people think that in-laws should not be part of the family business. Is it a social, cultural issue specific to India?

Yes. In the Hindu family system, when a girl marries, she leaves the family and becomes a part of another family. Traditionally, girls from business families married boys from other business families. Therefore, in such joint families, even inheritance to women was rare. Nowadays, things have changed. Women do inherit, but not shares in business. They often inherit cash or jewellery, etc. This is culture-specific. In our family, women have been inheriting from the very beginning, but women have started joining the business only in the fourth generation.

In the Indian context, is family wealth management appreciated? Is it being taken seriously?

Earlier, in most Indian businesses, most of their wealth was invested in business. During the socialist era, the taxes were so onerous that people had great difficulty just keeping the businesses together. There was no question of wealth management. There was not much wealth being created and if it was, it was created illegally. In our case, even today most of our assets are in our business. We do own property, houses, etc. But, almost all our wealth is in our businesses. We have not invested in other businesses, we don’t have portfolio investments. We feel that we understand our businesses very well, so investing in our businesses will increase our wealth better than having outside wealth management advisors.

Is there a general trend among business families towards taking outside expertise for wealth management?

In India, it is so. Especially when some very wealthy people sell their businesses, they invest the accumulated cash or wealth with outsiders.

Many families get to a breaking point, when they transcend from one stage in life cycle to another, or if there are more family members coming into the business. How can this be proactively stopped or prevented? Do you have any advice?

Two things should be very carefully handled. I don’t think there should be too many family members in the business. From the very beginning they should professionalise, unless it is a very small business like a proprietorship.

As soon as the business assumes a certain size, the percentage of family members in management should become small. If it gets high, then there will be issues of professionalisation and issues of strategy, etc. What happens usually is people, because of trusting their own family members more than outside professionals, tend to induce family members to join the business. But, that should be avoided.

One of the other problems is that visiting card value is very important in Indian society. In other words, if one is part of the Godrej family, he should also have a Godrej directorship somewhere.

I think that is a bad attitude, it should be avoided. Another way to encourage a family member, if the family business is not growing very strongly, is to provide him or her with the funding to start a business of their own, or encourage them to take a professional life elsewhere. I feel strongly that the number of family members in management should remain small. I also feel that when you move from a proprietorship to a limited company, it is very important to induct good professional managers. It is the right stage to do it.

(This interview has been excerpted from the March issue of ISB Insight, the journal of the Indian School of Business, Hyderabad.)

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