Tuesday, April 11, 2017

The art of balancing

This article was first published in Indian Management, Vol. 56, Issue 1, January 2017, pp20-23; co-author: Kavil Ramachandran

Family businesses are akin to children for the members of the family. They see it grow and are usually very attached to it at an emotional level. While the family and the business are different systems, the former thrives on emotions while the latter on logic, yet the boundaries often get blurred with emotions creeping into business decisions and logic prevailing in relationships.

A family business leader, often the head of the family, wears three hats- that of a family member, a manager of the business and the owner of the business. To detach from the other two roles when taking decisions in one can be an onerous task. Succession is one such challenge where the different roles of the family business leader get interspersed and affect the decision making.

Succession is considered to be a process rather than a one off event. The selection of a successor, whether a family member or an outsider, depends on various factors, including the skills of the successor, family and inter-personal relationships, stage of growth of the organization and the current family business leaders’ readiness to step down.

The difficulties to choose the right successor depend on the following:
·         Possessiveness of the founder/owner and the belief of immortality: Just like letting go of grown up children is difficult, especially in the Indian context, so is letting go of the business. The incumbent’s inability to be detached yet involved, to accept that another person may be more suitable and relevant with changing times and to come to terms with the fact that no one is indispensable, often pushes the decision to find a successor under the carpet.
·         Individual values and stewardship: In a family business, values of the family set the tone for the goals of the firm. Similarly, the emotional link of the family members to the business assumes that the successor, if from the family, would act in the best interest of the business. The converse of this acts as an impediment to selecting a non-family successor.
·         Continuity of strategy and or organization culture: Continuity and long term view are the hallmark of family businesses, as is a unique organization culture. A family member as a successor can be groomed over the years to ensure continuity. When Russi M Lala, the biographer of JRD Tata, asked  him if he chose Ratan Tata as his successor because of his integrity, JRD replied, “Oh, no, you can't say that! It would imply that the other contenders did not have integrity. I think he will be more like me” (Source: http://www.tata.in/aboutus/articlesinside/H1mNrxBM8ug=/TLYVr3YPkMU=). On the other hand, the need of the hour might be a change in strategy and culture to keep up with the changing times.
·         Ability to have dispassion (detached passion): Cutting off the umbilical cord may be painful, but is a necessity. Letting go and allowing the successor to assert herself is important. A lengthy transition period, even ten years, may be helpful in easing the current business leader to slowly start taking a back seat and for the planned successor to get more and more involved in the day to day decision making. Dr. Anji Reddy, the founder of Dr. Reddy’s Laboratories had slowly moved into a research role since more than a decade, leaving the day to day management of the business to his son and his son-in-law, when he passed away in 2013. The transition was quite smooth due to the detached passion exhibited by Dr. Reddy (Source: An Unfinished Agenda: My Life in the Pharmaceuticals Industry, K Anji Reddy, Penguin Books Limited, 2015).
·         Resistance to change: When Manoharlal Agarwal, grandson of Haldiram Agarwal, the pioneer of the bhujia market, suggested changes in packaging, branding and expansion into the Capital of Delhi, he faced huge resistance from his father Moolchand Agarwal. Manoharlal, at every step, found ingenious ways to get around the resistance, which he anyways expected (Source: Description for Bhujia Barons: The Untold Story of How Haldiram Built a 5000 Crore Empire, Pavitra Kumar, Penguin/Portfolio, 2016). In a family business, due to the familial ties, decision making which may be good for the business sometimes gets difficult. The family business leader may not be ready to allow the next generation to come of age and may feel unwanted or irrelevant due to changes in the organization.

The above are just a few factors which may impact the choice of a successor. Succession planning has myriad complexities and hence Peter Davis commented that “Smooth Succession” is an oxymoron. He said, “Succession in a family business is probably the most complex management challenge anybody faces” (Source: http://gsappweb.rutgers.edu/cstudents/readings/Summer/Summer/Ballet_FamilySystems/handler_succession.pdf). However, some of the complexities can be untangled by systematically approaching the issue in a timely manner.

·         Clarity of successor’s role and capabilities: Setting the criteria for what are the skills, values, education and role of the successor is as important as finding the right candidate itself. This perhaps is the starting point and if this goes wrong, then the end result cannot be right. A lot of deliberations must be made by the family, along with the board, to come up with the list of criteria to find the best successor for the business.
·         Strong governance for both the family and the business and an independent board for the business: Long lasting multi-generational family businesses are known to practice good governance practices, both in the family, as well as the business. Some families have written constitutions that guide the selection of a successor, like in the Murugappa group, and some others have unwritten codes for succession planning. The board also plays an important role in mentoring and facilitating the transition of management and ownership.
·         Strong policies and processes: Adi Godrej, the Chairman of the Godrej group believes that “While family firms, both public and private, have innate strengths that give them an edge over their public counterparts, these strengths need to be meshed with unique systems to counter the effects of risks identified with family ownership, succession and the management of talent” (Source: http://www.business-standard.com/article/companies/make-virtues-of-family-business-everlasting-godrej-to-family-business-heads-115020700766_1.html) . As the business grows, putting in place the internal controls and professionalizing the firm puts the framework to attract external talent and also to lure the next generation family members to remain interested in the family business.
·         Leader quality beyond doubt: Integrity, skill, passion, values and decisiveness are some of the qualities to look for when choosing a successor. Alignment of the family values and goals with that or the goals of the business would be an important task for the successor. Therefore, the selection process must ensure that the successor can manage for the systems together.
·         Emotional support to exiting leader: It is important to maintain the support of the exiting leader by drawing upon their repository of immense experience and knowledge about the family and the business.

In summary, succession planning takes time and must be done in an orderly manner. The longer the leader stays on, the tougher it is! And more harmful it may be for the financial as well as the socio emotional wealth of the family firms.