Towards better corporate governance of family businesses
It is important to first understand a little about the history of business in India, as that has impacted our family business evolution. In the 1800s Indian business comprised of only traders and farmers. From the late 1800s till the time of independence in 1947, there was a birth of entrepreneurship and small-scale manufacturing. Post independence and the departure of British, Indian industry took shape.¬† And in 1991, the Indian economy was liberalized and businesses were given the freedom to grow and compete, resulting in a much healthier environment that we are in today.
Our family has its roots in business from the early 1800s.¬† We are traditionally from Rajasthan in Western India, which has been a cradle for traders in the early part of business in India.¬† In the early 1800s, a significant part of trade was conducted by the East India Company, in Calcutta, the prime British business entity in India.
The first of the seven generations of our family, Ram Dutt Goenka, moved to Calcutta from Rajasthan in 1820. He grew his business links with the British and became a money-lender to the British. The next two generations continued this tradition and when the British departed, they left behind a few businesses for the family to manage, primarily textiles and commodities.¬† Our family also held some important positions in industry and in society such as Sheriff of Calcutta, the first Chairman of the Imperial Bank of India (now know as SBI) and President of Federation of Indian Chambers of Commerce.¬† The fourth generation, my great grandfather, Keshav Prasad Goenka (also known as KP) became associated with the British trading house known as Duncan Brothers and took pioneering steps in setting up new industries in India.
In the late 70s, KP for the first time decided to demarcate his businesses to his three sons. That was the first parting of ways in the family and was done very smoothly.¬† Rama Prasad Goenka, aka RPG, the eldest of Keshav Prasad‚Äôs sons and my grandfather, inherited the Carbon Black business and the Cables business.
RPG was the true visionary in the family. He grew the group from a INR 60cr turnover in 1979 to INR 6000cr group when he retired in 1995.¬† He introduced acquisitions to the Indian environment.¬† In 1979 he formed RPG Enterprises, the group as it is known today. RPG realized that in a highly controlled license era if he had to grow he had to acquire existing companies rather than to spend a lifetime waiting for licenses. Through a string of acquisitions beginning in 1981, RPG Enterprises became one of India‚Äôs fastest growing business houses in just a decade. RPG was skilled at identifying potential businesses for acquisition and infusing modern management. He would turnaround bankrupt companies and make them leading companies in their field. He did very little balance sheet analysis. He went by a pulse, an assessment of one or two vital parameters and largely by gut. By 1990 he acquired leading companies in tyres, power, telecom, transmission and entertainment sectors.
Large multinationals were highly enamored by RPG‚Äôs entrepreneurial spirit and rushed to him to forge Joint Ventures. Prior to 1992, MNCs could not own companies in India on their own due to investment restrictions. By the early 90s there were about 36 Joint Ventures that RPG had. Many of them were with Fortune 500 companies. For most of the 90s, RPG Enterprises was India‚Äôs 4th or 5th largest Family business house.¬† At an early age of 60, RPG decided to handover the baton of Chairmanship to my father Harsh Goenka.
My father and his younger brother, Sanjiv, were responsible in converting the group into a modern enterprise. When my father took over, he felt that we were in too many businesses and it was telling on the management bandwidth we could provide.¬† He then decided to restructure the group. Businesses, which required similar competencies, were structured into sectors. We exited several businesses where the fit within a sector couldn‚Äôt be established.¬† We had to let go even if there were emotional connections. This was not easy. Despite that, by late 90s the group was in difficult times. Reasons were several. It was highly leveraged due to the acquisitions, and the operations were finding it difficult to finance the interest cost. A number of the new businesses became unviable. As with all leading corporates, the impact of liberalization was felt across all our businesses too. Initial threats were from multinational companies. Then came global market forces, global efficiency standards and global quality of services and products.
Overall I would say that for RPG the last decade was a period of consolidation and realignment of businesses and focus.¬† In addition, last year, my grandfather decided to separate the ownership of businesses between his two sons.¬† This as well, was done in a fair and transparent manner and well accepted by both the brothers.¬† My uncle now runs the Power, Carbon Black, Retail and Entertainment businesses.¬† While my father runs the Tyre, Infrastructure, Software and Pharmaceuticals businesses.
So this is our story.
I will now highlight some key aspects of Governance that are important for the continuity and success of families and businesses.¬† There is one fundamental issue that we must recognize that businesses and families are quite opposite.¬† Families are all about equality, fairness, emotions, dependency, hierarchy, love.¬† Whereas adjectives used to define a business would be meritocracy, rational, self sufficient, ROI.¬† While families are more socialistic, businesses are more capitalistic.¬† Keeping this in mind, there are bound to be challenges in running a family business. Therefore, it is essential put in place strong governance practices before the need arises.¬† This to me is my biggest learning‚Ä¶.put in place rules and policies Before the need arises!¬† Most families realize the importance of setting rules when it is too late.
I would divide governance into three aspects: governance of the business, governance of families and governance of ownership.¬† I will cover governance of business more in detail than governance of families and ownership.
Governance of Business
I have divided business governance into 5 key areas:
1.¬†¬†¬† Composition and Criteria of Board Members: The independence of the Board of Directors is increasingly becoming important. If you looked at our boards in the early period, most board members were yes-men. There was an unwritten sense of going along with the indications one got from the owners. There was rarely any dissent.
One of the mistakes of our past was our process of funding acquisitions.¬† Generally, one listed company acquired shares of another target company.¬† Eventually, we ended up with each of our companies holding substantial investments in other group companies. The process followed was within the law, but not something that is positive from a corporate governance view. Banks raised a lot of noise. Share markets began to undervalue our stocks. We could not do much about it at the time since we did not have any way out of it.¬† Over time, we have managed to clean up the balance sheets of all operating companies by de-linking the investments.
We realized the need to make the statutory board a more effective mechanism. The Board consists of about 12 members of which 2 are generally from the Group. My father is the Chairman. The other members of the board are a mix of eminent specialists, professors, bankers, domain experts, industrialists and so on.¬† But more importantly the board members now know they have a voice of dissent as well if necessary.¬† They provide us tremendous value as we use them as a sounding board, use them for strategy planning and help building relations with the external world.¬† Our Board Meetings, which used to last 20 minutes, now go on for 6-7 hours sometimes.¬† We also set up a strong Internal Audit system, which reports directly to the Board.
2.¬†¬†¬† Strategic Goals:¬† The process of setting strategy should be transparent and untainted by personal interests, passions and emotions of the owner.
In our case, a top level Management Board takes major policy and strategic decisions.¬† The MB comprises of both family and professionals, but largely non-family professionals. From family it is only my father and I who are on the Management Board.¬† We have transitioned from a period when personal favorites of the owner were preferred to a probably more competent but less loyal person. Professionalizing management has truly helped us in making quality strategic decisions. Professionals, at senior levels, typically have excellent educational backgrounds from IITs or IIMs and their attitudes are very different. They also bring in vast experience in running businesses.¬† They are less likely to be limited by the “emotional and sentimental” influence on decision making which might influence the process of the owner.
3.¬†¬†¬† Successor Selection Process: It is important to have a clear process in place for succession planning, especially when there are siblings involved.¬† Shareholders and customers couldn‚Äôt care less about the nature of management, as long as they deliver results. What is required is ‚Äúbest of breed‚ÄĚ managers, whether they are professionals hired from outside to run the business, or owner entrepreneurs who are qualified and trained to manage the businesses. In India, we see today a large number of business houses ensuring that the scions of the families are groomed properly before being entrusted with the reins of the companies that they have to manage. It is the partnership of these ‚Äėowner professionals‚Äô with their team of ‚Äėprofessional managers‚Äô, which will help take Indian businesses forward.
In our case, when I completed my education, I did short stint in investment banking in Hong Kong and then at Hindustan Unilever, where I could learn how other firms work, some best practices and also start from bottom up.¬† When I joined the group in 2004, I started as an Area Sales Manager in CEAT.¬† Over time, I took larger roles across group companies and after about 6 years, I moved as Deputy Managing Director of CEAT. I have been subject to targets and budgets like everyone else. This has helped me gain very valuable insights into the working of the group and its processes and also earn the respect of the employees.
However, there is no one right way of succession planning. Some believe that ‚Äúyou cannot expect the family to consistently generate competent top managers‚ÄĚ.¬† Therefore, based on the beliefs of the family, a plan must be put in place well in advance, so that they safeguard the long-term interests of the family and the business.
4.¬†¬†¬† Employment Rules: There need to be rules of qualifications, performance review, membership, severance and retirement for family as well as non-family members.¬† One of the most common frustrations of sons are when the father sticks around the business till he is 90.¬† The son has no control or freedom till he is 60!¬† ‚ÄúLetting go‚ÄĚ, is one of the biggest areas of conflict between father and son. I admire my grandfather, who despite being so passionate about business, retired at the age of 60 and gave complete control of the business to his two sons. On performance management systems, we have found rational assessment systems very useful in determining performance. We now use the Balanced Scorecard System in addition to a half yearly meeting where we determine promotions, succession planning and non-performers.¬† This removes the aspect of emotion, personal favorites and allows objective and fair decision-making.
5.¬†¬†¬† Company Conduct: We have made sure the rules of the game are clear to one and all. RPG was amongst the first in India to implement a detailed Corporate Governance Policy across its group companies. We then worked on increased transparency in reporting. This is evident in the annual reports the group companies.¬† Charitable giving is another area which families can be involved in.¬† Charity is a way to promote family values, to provide meaningful employment to family members not active in the business.¬† For example, my wife heads the Corporate Social Responsibility initiative for our Group.¬† How the company conducts itself in the eyes of its stakeholders is important.
Governance of Families
Governance of families is generally the most ignored area and often lack of it is the reason for family and business breakdowns.
As generations go on, the family expands, and more and more people join the business. This of course, lends itself to more conflict opportunities.¬† In the west, families tend to resort to forming a family council and constitution for (a) Conflict resolution, (b) Listening and communication guidelines, (c) Decision making process (d) Conduct with each other in public (e) Conflict of interest and non-compete agreements.¬† The councils often oversee the family offices, which may be involved in getting the family together, sometimes hundreds of members around the world.¬† These get-togethers help bond the family together, to discuss family and business matters and expose the young children to the realities of running a family business.¬† In the East, it is often difficult to set such rules on paper.
In our case, while we don‚Äôt have a formal system, we necessarily get together twice in the year during our annual summer vacation in May and during Diwali in October.¬† This has helped develop a strong bond between our extended family.¬† My grandfather was so affected by the battle between the Ambani brothers, that he felt that it would be best to separate the businesses between the brothers while relations are strong and he is alive. Last week, my father called me and asked me all the potential conflicts both of us could have in the future and how we could avoid them.¬† Such open communication fosters strong family relations.¬† Therefore, whether formal or informal, there should be a mechanism for conflict resolution, decision-making and communication.¬† These are often ignored and must be given as much importance as business governance.
Governance of Ownership
There are different types of owners from operating owners to passive owners.¬† Most groups in India have infused professionals in key functions and the owner‚Äôs role is basically in giving a strategic direction to the group in terms of identifying the portfolio of businesses they want to be in and in providing the resources of capital.
In the west, again, family governance has been formalized by creating an owner‚Äôs council and charter, which generally cover (1) Conditions for ownership (2) Business valuation methodology (3) Rights and responsibilities of non-employed owners (4) Dividend distribution.
The owner/s can bring in the value systems into the organization. The entrepreneur is able to weave a uniform thread of values across the organization by exemplifying what he believes the organization‚Äôs values should be. There is a certain charisma attached to the founder and in the eastern hierarchical culture, people tend to rally around his vision more easily. The strength of family managed business is its commitment to the vision, values and entrepreneurial ethics. The family plays a key role in inculcating these values.¬† For example in RPG there is a well-communicated values statement, which people associate with the Chairman Emeritus and the Chairman.¬† Our experience in India has been that the markets and the investor community in general have shown a favorable disposition to family managed groups provided they were seen to be practicing good governance.
To conclude, I believe that there is no single governance system.¬† Rules, policies and procedures can be different in different circumstances.¬† They arise from a mix of family practical needs, generational patterns, from culture and from community and society.¬† The key to effective governance depends on the adaptability of the roles of the management, board and owners and its alignment with the strategic environment of the business.
Despite being in the seventh generation, we still learn everyday.¬† It is most important to anticipate issues in advance and put in place the policies before the need.
Anant Goenka is the Deputy Managing Director, CEAT Ltd. The article is an abridged version of a speech he delivered at a workshop arranged by IFC and Bangladesh Enterprise Institute on January 08, 2012.