Ignoring culture can be perilous in succession planning

This article was first published in the Economic Times on December 5, 2017; Co-author- S. Subramanian; https://economictimes.indiatimes.com/familybusinessforum/insights/ignoring-culture-can-be-perilous-in-succession-planning/familybusinessforum_show/61930477.cms

Many of the family businesses in India that were incorporated in the 1980s and 1990s are now 25 to 30 years old. 

Their promoters would be close to hanging their boots and passing on the baton to a worthy successor who would keep the family values intact while ensuring sustainable growth for the company. 

But who would be this worthy successor? Many of the millennials or xennials prefer to start their own entrepreneurial ventures or pursue other interests. This leaves the founder with no option but to look outside the family.

Culture- overlooked factor

Education, proven track-record, vision and strategy for the company are all important in identifying a successor; one issue which is often overlooked is the match between designated successor’s values and the culture of the organization. 

When companies are newly established and smaller, the founders’ values, traditions, beliefs and style translate into the culture of the firm. This culture becomes the unwritten but well-understood code of conduct throughout the firm. 

The founders tend to retain the same culture even after becoming a large organization. Succession in such organizations, with promoters who have overarching personalities is always tough. Due diligence of the successor’s values and its fit with the organizational culture is critical to the continued success of the firm.

Cultural Due Diligence

There are two ways to look into the successor’s cultural fit with that of the firm. Either the new leader’s values should match with the existing culture of the organization. Or, the potential successor’s leadership style should be strong enough to change the culture of the organization, if that is necessary for the well-being of the firm in the changing business environment.

The best way to deal with the issue of culture is for the board of directors to do a cultural due diligence of the organization and match it with the value system of the potential leaders. To determine what should be the organizational culture, an audit of the existing culture and then an assessment of the required culture needs to be undertaken. 

The board of directors would play an important role in facilitating this exercise with the help of company executives or an independent consultant. They also need to decide which core values need to be retained and what new values need to be inculcated for the company to emerge stronger. Based on this assessment, the potential successors need to be evaluated for a cultural fit.

The founders/promoters/board need to be clear about what they want for the company and from the successor. At the Tata group, after an initial failure, Ratan Tata made up his mind to continue with the culture that he created and appointed an insider.

Allowing Change in Culture

In the event the successor attempts to change the culture, the outgoing leader should be willing to stand aside and allow it. When Ratan Tata took over Tata group, the group companies were run by independently minded satraps who treated their respective companies as their personal fiefdom.

 Ratan Tata took a strategic decision that to operate in a free economy and to keep the group cohesive, it was important to remove a few of them and he was strong enough to do so in boardroom battles. He brought in a culture wherein it was emphasized that each company was part of a larger group. Also, JRD Tata, the predecessor of Ratan Tata did not interfere with Ratan Tata’s functioning.

On the other hand, in the case of Infosys, the founders of Infosys who practised frugality even in their personal lives was a stark contrast with the background of Vishal Sikka. Sikka was immersed in Silicon Valley work culture- that amongst others (especially innovation) rewarded the top management very well, much higher than an average employee, going against founders’ idea of ‘compassionate capitalism’. The differences in backgrounds and values resulted in the well-known ouster of Sikka.

Conclusion

It is important to remember that the purpose of cultural due diligence is not to eliminate culture clash- a likely event even in the best of circumstances. Nor is the purpose to find a perfect fit between the organization and the leader. The purpose is to have a fair amount of culture-value debate about what is best for the organization under the new leader, for the promoters to be prepared and to prepare the organization for what is to be expected from the successor.

Take H-1B cuts by the horns

This article was first published in the Economic Times on October 27, 2017; Co-author: Jaya Dixit

https://blogs.economictimes.indiatimes.com/et-commentary/take-h-1b-cuts-by-the-horns/

Former US President George W Bush spoke about democracy and free trade at the ‘Spirit of Liberty: At Home, In the World’, event in New York on October 19 . He spoke of the values that made the US great and said, “conflict, instability, and poverty follow in the wake of protectionism”.

On Monday, the US Citizenship and Immigration Services released a memo that ordered its officers to apply the same level of scrutiny to an H-1B extension request as they had to the initial application, consistent with policies “that protect the interests of US workers”.

Amid these stricter H-1B visa norms and US President Donald Trump’s protectionist agenda, there is an ongoing debate if the Indian government should also put some form of restrictions on US companies. This leads to a broader question — when our trading partner engages in protectionism, then is eye for an eye a good idea?

Protectionism refers to restrictions on foreign goods and capital, including human capital, to reduce or eliminate their access to domestic markets. Countries throughout history have utilised this as a tool under the misguided belief that prosperity comes from helping domestic firms against competition from foreign markets.

While protectionism protects domestic firms from outside competition, it results in inefficient allocation of resources, higher cost for consumers and possible non-fulfillment of demand. On the contrary, free trade allows for goods and capital to flow into businesses where the firms have a comparative advantage.

Competition frees up capital that is tied up with firms that are not good at what they do, either in terms of quality or efficient use of resources. Foster Competition Hence, competitive forces, be it international or domestic, lead firms to become more efficient through consolidation or development of technology and skills.

This, in the longterm, is beneficial to the firm, the customers and the country. So should protectionism be answered by protectionism? Proponents claim that subsidies by international governments are unfair and, hence, we must do something to protect our businesses.

However, eye for an eye strategy in this case leads to a worse deal for domestic consumers who could have enjoyed cheaper products leading to greater discretionary income that can be re-invested into the economy. In addition, subsidies, tax breaks etc. to some, and not to others, exist even within domestic markets.

Furthermore, in the extreme case where an entire industry is displaced, the freed-up capital would be put to its highest valued uses. Any unemployment caused will only be temporary in nature. While painful in the interim, it would lead to better outcomes in the medium to long term.

In the early 1990s, there was a lot of opposition to economic reforms from the informal group of Indian industrialists known as the ‘Bombay Club’. Perhaps they thought, similar to several countries implementing protectionist measures nowadays, that opening up of borders would harm their bottom-line, expose them to competition from companies with better technologies that came from countries that had enjoyed advantages of free market much longer than they had.

Avoid A Counteroffensive Their resistance was unfounded. Indian businesses did very well and contributed significantly to the growth of India ‘even after’ liberalisation.

In fact, after markets were opened to foreign capital and goods in the 1990s, founding of new businesses — both by business groups and stand-alone firms — increased tremendously as shown in a research paper by Murali Chari and Jaya Dixit (‘Business Groups and Entrepreneurship in Developing Countries After Reforms’, Journal of Business Research, 2015, goo.gl/FZDx3V).

When free markets are allowed to function they increase the size of the pie that can be shared leading to benefits for domestic businesses, consumers and the nation. Even if a country erects trade barriers, responding in kind would not be beneficial. For example, in the current case of H-1B visa restrictions, it would not be in India’s benefit to respond with trade and capital restrictions on US companies.

One likely scenario due to the H1B restrictions and other US protectionist measures is that US companies may feel pressured to disaggregate their value chains leading to setting up of more offices, R&D centres, manufacturing facilities abroad.

In such a scenario, countries that provide the most pro-business environment will be benefitted. This is only one scenario. But there could be other scenarios where US protectionism is beneficial for other countries, but not if they respond with protectionism. So then is the protectionist rhetoric a good idea to dissuade other countries from adopting protectionist policies?

For example, is it a good strategy politically to have a rhetoric of tit-for-tat with respect to protectionism, in order to put pressure on US policymakers while having no intention of putting these restrictions in place?

This is a slippery slope, as any policy rhetoric is also a negative signal to US companies that may be trying to find new home for themselves and searching for new markets. Two wrongs do not make a right and neither does answering protectionism by protectionism. The costs of protectionism are far greater, even if not obvious, than the transitory costs of moving to a free market. Free trade works regardless of whether any other country engages in it.

Un-please to succeed

This article was first published in Business Standard on October 26, 2017; Co-author: S. Subramanian

http://www.business-standard.com/article/opinion/unplease-to-succeed-117102501460_1.html

Leaders of family-owned businesses must adapt to the changing times

The role of the family business leader depends on the background of the family, its structure and the conditions under which he assumes that role. Someone who becomes the leader during times when the family and its business is struggling may face very different kinds of challenges than one who becomes a leader in a planned manner.

The challenges also depend upon the preparedness of the leader, turbulence or stability in business and the support of the family as well as the business team. While the role of the leader in the business and the family is shaped by the circumstances, almost all leaders must learn to un-PLEASE to ensure continued success.

·      Please: Allocating resources in a way that takes care of the necessities without demotivating the members, and at the same time keeping the respectability of the family and business intact. Many a times the family members may not be pleased with the decisions, but if it is in the long-term interest of the business and it must be taken, the leader should be able to convince the family members.

·      Loneliness: The authority that comes with being a leader often comes at the cost of loneliness, especially in the case of founder-promoters. The loneliness of the leader would prevent divergent viewpoints coming from different family members and next-generation members that often result in innovation, new venture creation and critical review of resources allocation to adapt to strategic changes in family firms
.

·       Entitle: In financially sound business families, it is often seen that the members or the next generation feel entitled to the business. This is especially not right for companies that have external shareholders. The competitive environment and increasing shareholder activism would not allow such entitlement. A recent example is the attempt by the Singhania family factions to get the prime property owned by Raymond Ltd. at throwaway prices that was defeated by the non-promoter shareholders.

·       Assume: The “license raj” provided continued success for family businesses due to limited competition in the markets. Hence the leaders assume successful business is in their genes. Such assumptions don’t suffice in a competitive environment. Many top business houses that were a part of the Sensex in 1990 are no longer amongst the top, like Thapar, Mafatlal, Modi, Walchand and Kirloskar.

·       Settle: During the days of closed economy, business was predictable to a greater extent. However, recent years indicate that innovation is key to survival. Companies that become complacent soon turn irrelevant. Till 2014, Micromax was a leader in low-priced phones in India. 
   It had a good distribution model that helped it enjoy a lead. In the past two years, Chinese firms like Xiaomi have dealt a massive blow to it with innovative designs, reasonably good quality phones, high-end configurations and innovative distribution at low costs.

·     Establish: In family-owned businesses, the leaders have established authority over the professional top management. The leader’s decision is final, even if it is wrong in the business perspective. Often the Board of Directors too falls in line with the leader for fear of upsetting him. A good leader is one who is able to put processes in place for fair and informed decisions to be made.

The roles and challenges of each leader may differ. However, what cannot be questioned is that he must work for the welfare of the entire family and the long-term interests of the organisation. Whether the decisions are business- or family-related, the leader must be fair to all, there should be no imbalances. In the process, they may end up displeasing a few people. As long as it is in the long-term interest of the family members and the business, it is ok to un-please at times.

Focus on competence, not dynastic succession

This article was first published in Deccan Chronicle on October 04, 2017; http://www.deccanchronicle.com/discourse/041017/focus-on-competence-not-dynastic-succession.html

There are family firms that are owned and managed by family members and have survived many generations, like the 120-year-old, $4.1 billion in revenues, Godrej Group. There are family firms that did not survive transition of leadership to the second generation of family members like in the case of United Spirits. Vijay Mallya destroyed the socio, emotional and economic wealth created by his father Vittal Mallya.

There are family firms that professionalised the management and survived, like the Aditya Birla group and the Tata group. These firms are run by capable non-family business heads or CEOs while the strategic direction for the entire group is provided by the group Chairman, Kumar Mangalam Birla (family member) in the case of the Aditya Birla Group and Natarajan Chandrasekaran (non-family professional but a Tata group loyalist) in the case of the Tata group. Lastly, there are family firms that passed on key leadership positions to only family members and yet did well. Examples include the Reliance group, Bajaj Group and HCL group.

It is very difficult to generalise and say that dynastic succession is bad for family firms. In the end, firms that are well-governed and professionally managed, irrespective of being family-managed or not, are the ones that are sustainable.

It is easier for the incumbent family business leader to appoint someone from the family as his successor, as the family member is believed to be entrenched in the same values and hopefully have the same vision for the company that the incumbent leader does. There would be no cultural misfit, which is possible when hiring a professional CEO as happened in the case of Infosys. While Vishal Sikka was considered to be capable, compatibility with the culture and values that were set by the founders of Infosys became an issue.

While values and culture are important, they alone cannot create and maximise shareholders’ wealth. Passion, qualification and capability to handle the business are important.

The scion should be professionally qualified and be able to retain the “founder’s mentality” or entrepreneurial spirit that had helped build the business in the first place. The successor should also be capable and mature enough to handle a leadership position, understand the importance of good governance, and navigate the firm to greater heights. If the family scion lacks these traits, it is better to look outside for better candidates to lead the company.

Shrinking family size, children brought up in an open environment where they are aware, independent and have interests different from their family business, has forced many family businesses to look for a CEO outside the family. There are two options — choosing someone who has grown up in the ranks in the company, shares the vision of the founder and understands the culture of the company, and second, someone from outside the company who has proved his mettle elsewhere.

The problem in the first case is that the chosen successor has always worked under the shadow of the family business leader and may not be able to handle the various ups and downs if the family business leader is not available to guide, or is there as a shadow.

The problem in the second case may be lack of shared vision and disruptions that may not receive the approval of the family, even if they are good for the firm in the long run.

Hence, the job of finding a non-family CEO is not easy. But it must be done. The earlier the search for a successor begins, the better it is for the family and the firm. The chosen successor should be allowed to work alongside the family business leader for a few years and get acquainted with the vision of the founder, get acclimatised to the firm’s culture, understand the governance mechanisms, discuss the changes that are needed for improvements in processes, systems and structure of the firm, and prepare to do it alone when the transition happens. Or, there should be a clear induction and detachment process developed and implemented efficiently.

The family business leader should be prepared to truly retire once the transition happens. Interference and encroaching upon the decisions of the CEO later on would lead to a lot of confusion and creation of “no-man’s land”, that is, areas where no one takes a decision as the roles are not clear.

The debate is really about competence versus entitlement. Entitlement leads to destruction whereas competence enables the successor, family or non-family, to become the steward of the company, working towards the benefits of all stakeholders and embracing the objectives of the firm. Therefore, dynastic succession is not necessarily bad as long as it is accompanied with merit.

In Indian Politics, Encouraging Signs of Gender Parity

The article was first published in GARP Risk Intelligence, September 29, 2017; http://www.garp.org/#!/risk-intelligence/culture-governance/conduct-ethics/a1Z1W000003rBK4UAM/In-Indian-Politics-Encouraging-Signs-of-Gender-Parity

Traditional social structures continue to limit progress at the grassroots.

In a cabinet reshuffle on September 4, Nirmala Sitharaman became the Defense Minister of India. The elevation of a woman was a positive signal towards the goal of achieving gender parity in India. Sitharaman and two others, Sushma Swaraj (External Affairs) and Smriti Irani (Information & Broadcasting), are responsible for three of the most important portfolios in the Narendra Modi-led government.

Women are under-represented in politics across the world, even as research has found that women in policy positions are more sensitive to the needs of the society and improve governance standards.

In a broader context, gender parity remains elusive.

In India’s historically agrarian society, at least until the service sector started to grow much faster, women contributed significantly to farm production. Beyond farming and allied activities, women mostly stuck to entrepreneurial pursuits like making snacks and pickles, running beauty parlors, tailoring, and teaching at home. These areas were seen as extensions of their roles at home, required low financing, and allowed for flexibility to stay at home and manage home as well as work. These businesses typically remained small. The motivation for working was to enhance the family income or attain a certain degree of financial independence, or it was out of compulsion.

Restrictive home and workplace structures, and societal and cultural contexts, play an important role in women’s decision to participate in the workforce. There is evidence to show that increased participation of women in the workforce results in better economic growth. However, the converse may not be true.

The economic liberalization in 1991 and the high GDP growth rates of the last decade did not really improve the status of women in India. India ranked 125th out of 159 countries in the Gender Inequality Index of the United Nations Development Report of 2016. The country had a pitiful score of 0.12 out of 1 on economic empowerment as per the gender equity index (2012), and only 27% of women above age 15 participate in the labor force.

“A Gargantuan Task”

Dr. V.P. Jyotsna, an obstetrician, expert in gynecological endoscopy and high-risk pregnancy, the Birthplace, says, “A majority of rural women are subjected to lack of education, child labor, early marriages and early childbearing, inadequate health care, and an abject lack of awareness regarding health and nutrition. Various social stigmata – caste based, gender based and religion based – contribute to the lack of empowerment of women in India. To try to empower and strengthen the role of women, one needs to untangle a complex web of age-old traditions. That’s a gargantuan task.”

Governments have taken several steps over the years for attaining gender parity, notwithstanding many that were not taken. For example, changes in law like the daughter's right to property and the duty of a daughter to take care of parents, the Mahatma Gandhi National Rural Employment Guarantee Act that stated that men and women be paid equally and that child care facilities be made available on site, have been introduced. But they were not enough to turn the tables on tradition.

Some organizations are taking purposeful steps to bring down the glass ceiling and make workplaces women-friendly. In fact, many of the traditional businesses are now embracing women from their families as leaders of their businesses. Many companies are electing women to boards to bring in a diversity of views.

Day-to-Day Obstacles

The biggest challenge is in the micro environment, the mindset of the immediate circle of people whom every woman encounters. While many countries have gender parity issues, the problem is amplified in India due to deep-rooted socio-cultural attitudes. In a male-dominated society, family support for men is taken for granted; for women, it needs to be sought.

Familial duties primarily fall on the women. They are born with this sense of responsibility, and the environment around them only exacerbates it. While family and society impose restrictions, many women self-impose restrictions too, on travel and extended working hours, due to a sense of responsibility that they are not able to let go.

A very small percentage of women have achieved the pinnacle of success and become role models for the rest of the Indian women. Dr. Jyotsna says, “It's commendable that ‘some’ women have been blessed enough to escape discrimination at various levels or successfully shaken it off in such a way that they have managed to be on par with their male colleagues.

Inconsistent Progress

“Although their successes are laudable, it is in no way a reflection of the plight of the majority of the women in India. Definitely the proportion of women moving ahead in terms of education, awareness and financial independence is increasing, but not uniformly across all strata. These women who advance in life and depict success stories in the public eye do serve as inspiration to many. Yet the real change is to be seen in the men.”

With women like Sushma Swaraj, Nirmala Sitharaman and Smriti Irani as lawmakers, there is hope that policymaking becomes sensitive to the needs of women. However, in spite of being an eternal optimist, I am reminded of George Orwell’s “Animal Farm”:  

To the horror of the other animals, the pigs begin to walk on two legs, and the sheep drown out their protests with their newly learned slogan, Four legs good, two legs better . . . There is only one commandment now: “All animals are equal but some animals are more equal than others. As the animals peep in the farmhouse windows, to their amazement they can no longer tell who are the pigs and who are the humans.”

The zeitgeist of deep-rooted tradition, religion and social customs cannot change unless the men equally participate in the process by taking collective responsibility of the household work and believing in the cause of gender parity. Continuous interventions at the micro level by men in the lives of women will go a long way to achieve the gender parity that women envision.

Liberalisation led to the Rise of Stand Alone Family Firms, finds ISB Study

White Paper- Family Businesses: The emerging landscape, 1990-2015

Indian family businesses flourished and contributed significantly to the growth of the economy in the post liberalisation era

A study conducted by the Thomas Schmidheiny Centre for Family Enterprise at the Indian School of Business (ISB) reveals that liberalisation led to the rise of Standalone Family Firms (SFFs) in India and they were the primary drivers of accelerating the growth of the Services Sector in the country.

Authored by Dr. Nupur Pavan Bang and Professor Kavil Ramachandran of the Thomas Schmidheiny Centre for Family Enterprise at ISB and Professor Sougata Ray of IIM Calcutta, the study chronicles the evolution of family businesses in India since the initiation of liberalisation in the country. A first- of- its kind, the study traces the progress of Indian family businesses over a 26 year period from 1990 to 2015.  The authors studied 4,809 firms listed on the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) of India as a part of the study.

The year 1991 ushered in a new dawn in the Indian economy with sweeping reforms across sectors. There were widespread apprehensions about the capabilities of the family owned and managed businesses to withstand the pressure of the newly created “freedom”.  However, the study finds that not only did the family firms withstand the new rush of competitive forces in the economy, but also adapted to the changing business environment.

Based on their shareholding and management control, the companies were classified into two categories: Family Businesses (FBs) and Non-Family Businesses (NFBs). Family businesses were further classified into Family business group affiliated firms (FBGFs) and Standalone family firms (SFFs) and NFBs were further classified into State-owned enterprises (SOEs), Multinational subsidiaries (MNCs), Other Business group affiliated firms (OBGFs) and Standalone non-family firms (NFFs).

Key Findings of the Study:

The rise of standalone family firms:  Close to 73 percent of the listed standalone family firms were incorporated in the period 1981 to 1995. In comparison, only 49 percent of the business group affiliated family firms were incorporated in the same period. As the pace of reforms picked up with liberalisation, more and more standalone family firms started to leverage the changing business landscape. While the family business group firms did take advantage of the reforms in the early stages, it was the standalone family firms that emerged as the single largest ownership category in terms of number of firms.

The growth in the number of standalone family firms was driven primarily by the new firms in the services sector. Wholesale trade, financial services and Information Technology were the most favoured industries for the listed standalone family firms. This was reminiscent of the rising contribution of the services sector to the GDP.

Growth of the Services sector: In the financial year 1990, services sector accounted for about 45 percent of India’s GDP while its contribution was close to 60 percent in 2015.  Traditionally, family businesses were strong in manufacturing but they showed an equal penchant for the services sector, when the opportunities arose.  But, standalone family firms were the fastest growing category in the services. It was because of their entrepreneurial acumen that India’s services sector has grown so well in recent years.

While manufacturing and services contributed almost equally to the total assets for family firms, in the case of non-family businesses, the services sector accounted for more than 90 percent of their total assets. Amongst the non-family firms, the State-owned enterprises dominate the services sector with large assets in the banking sector, whereas, the sector accounted for just 18 percent of the total assets of multinational companies.

Family Businesses grew faster and contributed more to the GDP and Exchequer: The study shows that the representation of family businesses grew at a much faster rate than the non-family businesses. In fact, evidence suggests that removal of restrictions and controls in the liberalised era actually unleashed their entrepreneurial spirit.  In 1990, family firms represented 15.7 percent of the GDP in terms of their total income, whereas by 2015, they represented 25.5 percent of the GDP. In comparison, Non-family firms formed 20.5 percent of the GDP in 1990 and 26.6 percent in 2015.

Family firms accounted for 28 percent of all indirect taxes and 18 percent of all direct corporate taxes in the financial year 2015, while non-family firms accounted for 26 percent and 25 percent respectively. Though, the pattern has oscillated over the years, overall, the contribution of family firms has gone up from 1990 to 2015.

Asset Creation: The total assets were highest for State-owned enterprises owing to their monopoly and massive investment by the government, followed by business group affiliated family firms. In 1990, family firms accounted for 24.7 percent of the total assets of all firms in our sample. This grew to 27.7 percent in 2015. The standalone family firms were able to grow in spite of not having the resources available to a group affiliated firm. While the standalone family firms were large in number [of firms], they were smaller in size. This was perhaps due to their focus on services sector which were less capital intensive and also the lack of resources.

Access to capital markets: The average difference between the listing year and the incorporation year for business group affiliated family firms was 14.76 years, whereas for standalone family firms it was 10.01 years. The standalone family firms were probably forced to list earlier compared to those affiliated with business groups due to the capital constraints and limited sources of financing.

The SOEs were the last to resort to equity markets to raise funds. The average number of years taken for SOEs to list was 34.07 years, as opposed to 14 to 17 years taken by MNCs, standalone non family firms and other business group firms.  The study also noted that the average number of years taken for the firms to list has been going down over the years pointing to the ease of access to capital markets due to the regulatory changes post liberalization.

Impending succession challenges: Succession remains the number one concern for most family businesses even today, as the senior management comprises of family members in most cases. It needs to be seen if the family businesses, especially the ones that are at the crossroad to either transition to the next generation or on the cusp of making non-family professionals their agents, survive the change. 

The listed standalone family firms were younger at an average age of 28.73 years than the business group affiliated firms. More than 50 percent of the standalone family firms had been in existence for less than 30 years. The first generation founder would still be actively involved in most of these companies but many of them must be staring at a change of guard in the near future. On the other hand, the non-family firms typically have senior management personnel who are nominated by the board members and appointed for fixed tenures.

The family business group firms have been around for 38.44 years on average and the State owned enterprises have an average age of 54.04 years. The MNCs, other business group firms and the standalone non-family firms have 42.09, 36.9 and 35.16 years of average existence.

Conclusions

The study throws up two important developments that are worth mentioning:

·        One, the process of liberalisation in India enabled family firms to take stock, restructure and open up new opportunities in the services sector, thereby, increasing their contribution to the economy.

·        Two, there was a wave of entrepreneurial spirit that got unleashed due to conducive environment.

Indian family businesses have shown resilience and have been progressed well over the years. They have increased their footprint in the Indian economy. With better governance and more transparency, they will only get better. Their capacity to transcend time is their greatest strength. 

Pep Up Entrepreneurs

This article was first published in Outlook Magazine, October 2, 2017; Co-author- Kavil Ramachandran

https://www.outlookindia.com/magazine/story/pep-up-entrepreneurs/299340

Indian B-schools must have students infused with a ‘launch business’ spirit

Economic liberalisation in 1991 triggered a spurt of entrepreneurial activities in the country, once it was freed from the shackles of the licence-quota raj. It became easier to raise capital through the stock­markets and there was an influx of investment from venture capitalists. The rise of the services sector and the internet meant that people could start businesses with lower capital and reach the customers more easily.

Institutions of higher education, particularly the business schools, became a breeding ground for entrepreneurs. There was a lot of buzz regarding business creation, yet very few became entrepreneurs. Among them, many did so if they could not find a job that matched their education, skill and experience. Only a few campuses made serious efforts to promote entrepreneurship as an alternative to well-paying jobs.

Today, the government’s Startup India programme has renewed interest in entrepreneurship. Alongside, there are Skill India and Pradhanmantri Mudra Yojana, giving tax incentives. According to the Randstad Workmonitor Survey, 72 per cent of the respondents in the 25-34 age group said they would love to be an entrepreneur. Yet, 72 per cent of the fresh graduates or post-graduates joining the workforce do not launch business ventures. The Global Entrepreneurship Monitor Report of 2016-17 reports that India ranks 56th out of 61 countries on “Entrepre­neurship a good career choice”.

Why don’t most potential entrepreneurs take the plunge? Is it a fear of failure or perceived incapability? Do our business schools prepare students for the rigmarole of life as an entrepreneur?

Initiatives like the Society for Entrepreneurship Educators formed by the Indian School of Business in the early 2000s to bridge a gap between the educators (across B-schools) and business owners-managers did not see much traction. Entrepreneurship was not recognised as an independent discipline yet. The faculty in most business schools was either not prepared or not incentivised to drive entrepreneurship on campus.

Similarly, there was little success for schools that started hubs with an objective to bring together different stakeholders in the entrepreneurship ecosystem, such as technology incubators, service providers, venture capitalists, mentors and academicians. For, they were not able to integrate the various spokes in the hub.

As a result, frustration grows on many students who are genuinely interested in starting their own ventures, as they do not get practical support from the ecosystem. They either abandon the pursuit or suffer failure. As many as 90 per cent of Indian startups fail within the first five years, says a study by the IBM Institute for Business Value and Oxford Economics. An integrated environment will reduce the information asymmetry, allow the schools to learn from the experiences and experiments of others and adopt the successful ones. For example, other business schools too can adopt the Maha Mandi event at NITIE Mumbai that has been a highly successful model in “Sell-Think-Learn-Repeat”. Similarly, Judge Business School at Cambridge University has a series of free evening lectures and networking sessions.

At the B-school level, activities, both curricular and non­curricular, that build a wave of interest and excitement in entrepreneurship would create an ecosystem that stimulates innovation, funds commercially viable projects and facilitates mentorship through interactions and internships with industry leaders and other entrepreneurs. At the city or zonal level, several B-schools should come together under one umbrella where organisations such as The Indus Entrepreneurs (TiE) join the journey. There can be events such as the TiE-ISB Connect that create a platform at the regional level for encouraging entrepreneurship among the youth. At the apex level, there should be more integrated programmes that involve multiple agencies like the Department of Science and Technology and the Ministry of Human Resources Development.

Integration at various levels will start a movement for entrepreneurship that will be effective and will lead to a variety of new initiatives at various levels. There will be a complementary synergy thus created to help students take entrepreneurship as a serious career option.

Entrepreneurship should be innovation driven

This article was first published in www.smallisbig.co on September 23, 2017; https://smallisbig.co/2017/09/23/expert-view-entrepreneurship-should-be-innovation-driven-says-isb-associate-director-nupur-pavan-bang/

Lack of jobs leave the youth of a country with no option but to explore being an entrepreneur. India is one such country where more than a million youth enter the workforce every month but only about 61 percent of them are able to get employed for a full year. Majority of unemployed graduates and post graduates cited non availability of jobs matching with education/skill and experience as the main reason for unemployment in the Employment- Unemployment Survey (2015-16), Government of India, Ministry of Labour and Employment. If the education and skills of these youths does not match the jobs available, they are left with no option but to start something of their own. Majority of the entrepreneurial activities in India are necessity driven.

The Government has been promoting its Startup India program, urging the youth to become “job creators” instead of “job seekers”. The youth will see entrepreneurship as an opportunity and not a necessity when they see it as being more satisfying both financially and emotionally (by creating jobs and bringing about change and innovation). Entrepreneurship will be lucrative if the idea (either product or service) offers value to its customers. Only then the business will become commercially viable in a short span of time. Lack of innovative ideas often plagues the students who may be inclined to become entrepreneurs.

There is also the fear of failure. The number of startups in India is very high and so is the number of ventures that fail. Almost 90% of startups fail within five years of their inception. The entrepreneurs are often not ready to tackle the real life challenges. They lack industry exposure and mostly have no one to guide. Low level of funding is also one of the reasons for failure. As per an estimate by FICCI, while the average amount being invested by the angel investors have increased over the years, most of the investors prefer to invest in the range of Rs0.5-1 million.  

The best insurance against all these challenges is an innovative idea. Whether it is a product or service, if it is what the people want and/or it is something that no one else is offering and/or it is cheaper than what the existing players are offering at, the chances of success goes up drastically. Innovation is really the key to a successful business venture!

Politics and the family plot

This article was first published in the New Indian Express on September 21, 2017; Co-author- S. Subramanian

http://www.newindianexpress.com/opinions/columns/2017/sep/21/politics-and-the-family-plot-1660487--1.html

Can political parties in India and abroad find their own Jorgen Vig Knudstorp (Lego), Sergio Marchionne (Fiat Chrysler Automobiles) or Oh-Hyun Kwon (Samsung Electronics)? These people are all successful non-dynast professional CEOs of family-run businesses. Do political parties pick candidates keeping in mind what is best for the party, its growth and purpose?

Typically, communist parties in countries such as China, Vietnam, North Korea and Cuba are run as family affairs. Party leaders pass the baton from one family member to the other and one generation to the next. The descendants of the communist party elites, or ‘princelings’ as they are called, are usually chosen to lead the party, and are given important portfolios in the government and the country when the earlier generation retires or passes away.

It is almost impossible for anybody to rise to the top of the party (and hence the government machinery) unless they have strong family influence in the communist party. In China, four of the seven members in the all-powerful Politburo Standing Committee of Communist Party of China (CPC) are princelings. Similarly, in the Communist Party of Vietnam (CPV), of the 19 members in the Politburo, 11 are princelings. In North Korea, the ‘Kim’ family is in power for the third generation. And in Cuba, after Fidel Castro, his brother Raul Castro came to power.

The above scenario is similar to many family-run businesses all over the world. Closer home, in India, most of the businesses are owned and managed by founders and their family members. The reasons for this phenomenon of family-based succession are culture and the ‘correct fit’.

Asian countries are known for their collectivist family-oriented culture, unlike Western individualist culture. The elders want to pass on what they have earned to the next generation family members. This is reflected in the literature on succession in family-run businesses. The business is passed on from one generation to the next for the family to retain control, even if there are better candidates outside the family for continued shareholder wealth creation.

The founders of the party earned power when they set up the party and they want to pass on that power to the next generation family members. The thought process is that ‘the founders of the party set up the political establishment in the country and even though the government is for the people, the founders and their family members are best suited to enjoy the outcomes and take the mission of the party forward’.

This thought process is more or less explicit in the succession planning in Vietnam. The Communist party’s informal rule set by Ho Chi Minh, the founding father of the CPV, states that priority should be given to the children of the senior comrades, i.e. party elites.

Even if the incumbent leadership of the family business genuinely wants to consider outsiders for succession planning, it does not work in many situations. The outgoing leadership typically has a vision for the company and wants to choose someone who understands and shares that vision.

When they search for a successor, they find it difficult to find an outsider who fits their expectations. On the other hand, they find that their own family member, who has been brought up under their supervision, is entrenched in the same values and shares the same vision. Hence they prefer to pass on the baton to someone inside the family rather than an outsider.

The communist party elites feel the same. It is up to the non-communist parties in democracies like India to decide if they would like to follow this method of selecting successors. It must be emphasised that if the next generation of the founding family is well qualified, as passionate as the founder or incumbent and as suitable to lead the company as an outsider, the family member may be given a preference over the professional as the family member would be well entrenched in the values of the company. But, if the next generation is not well suited for the top job, the shirt sleeve to shirt sleeve in three generations saying may prove to be right!

A look into the various Birla Groups proves an important point. The Aditya Vikram Birla group which appointed professional CEOs with strategic freedom at the business level for most of its companies continued its success story in the liberalised environment, whereas the other Birla Groups which continued with family leadership did not perform as well.

The political parties would do well to realise that the adage will apply to them as well if they don’t learn from the experiences of family-run businesses and make course corrections. Parties that subscribe to dynastic politics can learn from family businesses that choose ‘outsiders’. Family-run businesses are realising the need for change. So should the political parties!

Will Family Businesses Jump on the e-commerce Bandwagon?

This article was first published in www.entrepreneur.com on September 6, 2017; Co-author: S. Subramanian; https://www.entrepreneur.com/article/299866

The family businesses quickly entered the IT industry in the 1990s and today represent 14.31% of Nifty in Market Capitalization

It is interesting to note that out of the 13 different sectors represented by the Nifty stocks, sunshine industries like Pharma, Telecom and IT are totally dominated by family businesses. Though most of the older family business groups like the Bajaj, Birla, Godrej, Reliance and TATA started with traditional manufacturing, metals and energy sectors, almost all of them forayed into the emerging services sector with aplomb and success.

Family Businesses Rule

Out of the 50 companies in Nifty, 32 are family businesses and 11 of those 32 are less than 25 years of age, accounting for 47 per cent of the market capitalization of Family businesses in Nifty. This points towards the swiftness with which families have responded to the emerging opportunities and embraced them.

Entrepreneur Ruling the Scene

The family businesses quickly entered the IT industry in the 1990s and today represent 14.31% of Nifty in Market Capitalization and 74% of the market capitalization of all IT industry stocks in Nifty. To draw a parallel, e-commerce in India is at a nascent stage and start-ups, all entrepreneurs, are ruling the scene in this space. However, what intrigues us is that none of the large family businesses have forayed into it in a major way so far. While they do have a presence in the B2B space, they have so far stayed away from the B2C sector, with the exception of the recent foray of TATAs with CLIQ.

E-commerce Business Boost

With government initiative like Digital India, the internet penetration in the country is set to rise further. The growth rate is already one of the highest at 51 per cent per annum.  This will provide a further boost to the e-commerce business. According to estimates by the Associated Chambers of Commerce & Industry of India (Assocham) and Forrester, revenues from e-commerce market in India is expected to grow to $120billion by the year 2020.

How a Young Team Helps

Typically the ecommerce start-ups are headed by youngsters of less than 35 years age and the employee teams are also usually fresh engineers and MBAs.  This may be essential for a B2C e-commerce venture as the buyers in online stores are predominantly the youngsters. Their behavioural pattern as consumers is very different from that of the traditional buyers.

For example, they rely a lot on social media communication to develop an opinion about the product. And hence having a young team, led by a youngster, is important to understand the consumer mindset and set the right strategic direction for the ecommerce firm. But the traditional family owned businesses tend to have experienced personnel at the very top level. Having very young people lead a venture is new for them and may take some time to culturally accept.

VC-funded Start-ups

Let us assume that a business group does promote an e-commerce business and lets a team of youngsters, led by a young CEO, manage it.  Will that guarantee success? Probably no, as the team may not still get the strategic freedom similar to that of their standalone competitors. Most of the existing ecommerce start-ups are almost fully funded by the venture capitalists (VC), whose expectation as investors are completely different from that of a business family. The VCs’ expectation of success in the start-up that they invest is just about 10 percent or so. Hence they allow the team to take risks, even if it means going to an uncharted territory. The families do not and probably cannot allow such risky moves in their own ventures, there by effectively curtailing the strategic freedom of the top management.

High-risk Strategies

Further, such high-risk strategies have created expectations of high returns from the e-commerce ventures. This, in turn, resulted in the valuations skyrocketing, essentially creating a bubble, and some analysts went to the extent of calling them as Ponzi schemes. The business families, while willing to enter into the sunshine sector, are generally cautious about their reputation.

The entry of Tata Group into e-commerce sector with CliQ, the first such venture by a major family business group, may indicate that the moment has come. What is to be seen is if CliQ is not too late to take on the Flipkarts and the Amazons of the industry which have already established themselves in the market. Would CliQ set the precedence for the other family businesses to foray into the ecommerce bandwagon? And, we would be happy to do a similar analysis 20 years from now to see how many ecommerce companies form a part of Nifty and how many of them will be family businesses!

India Confronts Its Non-Performing-Asset Crisis

The article was first published in GARP Risk Intelligence, August 22, 2017; Co-author: Anisha Sircar

http://www.garp.org/#!/risk-intelligence/credit/capital/a1Z40000003YxRMEA0/India-Confronts-Its-Non-Performing-Asset-Crisis

Central bank deputy governor Viral Acharya is latest to sound the alarm, advocating “tough love” with defaulters

The June 2017 Financial Stability Report of the Reserve Bank of India (RBI) (https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/0FSR_30061794092D8D036447928A4B45880863B33E.PDF), highlighting the outcomes of stress tests on Indian banks’ balance sheets, concluded that India’s financial system is healthy overall, but there are rising concerns about the banks’ non-performing assets (NPAs).

They are the No. 1 priority of the RBI, the central bank’s deputy governor, Viral Acharya, said at the Delhi Economics Conclave on July 22.

The business of banking inherently involves risk-taking. A loan is by definition exposed to the risk that the borrower will not ultimately return the principal and/or interest, as per the loan agreement. In its definition of a NPA, the RBI says that “an asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank . . .”

It is axiomatic that NPAs are undesirable, and when at high levels, they constrict banks’ ability to extend credit. The ratio of non-performing to total loans is often used as an indicator of the health of a banking system and the broader economy.

For the first two decades after liberalization of the Indian economy, non-performing loans were managed well, falling from 14% in the early 1990s to 3% 2004, attributed to policies implemented by the RBI to curb the post-reforms NPA crisis.

However, since late 2011, bad loans have been rising sharply and have evolved into a major threat for the banking sector and the economy at large.

Figure 1

Source: World Bank; http://data.worldbank.org/indicator/FB.AST.NPER.ZS

“Credit Shock” Concern

The RBI report predicted a further rise in the Gross NPAs of Scheduled Commercial Banks (the dominant players of the financial system, under which public sector banks, private banks, foreign banks and regional rural banks are classified) from 9.6% in March 2017 to 10.2% in March 2018.

Even more telling was the prediction that “a severe credit shock is likely to impact capital adequacy and profitability of a significant number of banks” by the same year.

The solvency of a bank – the ability to meet its long-term fiscal obligations – when extended to the potential of disrupted asset quality of banks at a macroeconomic level, can lead to impaired credit growth in the entire economy. In the long term, this can also hamper macroeconomic factors such as GDP growth.

Furthermore, bailing out banks with high NPAs would require infusion of capital by the government, potentially becoming a burden on taxpayers.

Banks with higher retail portfolios (that is, more consumer-oriented) and lower “legacy loan” clients (whose assets have been on the books for long periods of time) usually have better NPA ratios.

Public-sector banks are more exposed to NPAs because their portfolios tend toward infrastructure, real estate and telecom, which are significantly hampered during economic downturns. Private-sector banks are often more vigilant and prudent in their credit appraisal, risk management and loan recovery.

In this light, India’s NPAs are concentrated and growing fastest in public-sector banks. The trend in other banks has also been upwards, but at a lower rate than the public banks. (See: Galloping Non-Performing Assets Bringing a Stress on India's Banking Sector; https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2947557).

Government and Central Bank Actions

Capital infusion, setting up Debt Recovery Tribunals (DRTs) and Debt Recovery Appellate Tribunals (DRATs) in 1993, and the SARFAESI (Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest) Act of 2002 did not help banks and financial institutions recover NPAs.

Over the decades, the RBI has also come up with schemes such as Corporate Debt Restructuring, Strategic Debt Restructuring, 5/25 Scheme, Sustainable Structuring of Stressed Assets (S4A), and the Joint Lenders’ Forum (JLF).

The “Indradhanush” road map was laid out by the government in 2015 to recapitalize banks by asking them to officially recognize top defaulters as non-performing accounts, and make provisions for them, as well as to inject Rs. 700 billion into state-run banks. However, the challenges kept mounting until it reached proportions that threaten the stability of the entire banking system.

In recognition of the escalating nature of the NPA issue, the Banks Board Bureau was set up in February 2016 to improve the governance of public-sector banks. In August 2016, the Indian government issued the Insolvency and Bankruptcy Code 2016 (IBC), which empowered the RBI to speed up the recovery of NPAs in the banking system.

Significant Defaulters

In October 2016, the Insolvency and Bankruptcy Board of India was set up, consisting of the National Company Law Tribunal (NCLT) and Debt Recovery Tribunal to oversee proceedings – the former for companies and limited liability partnership firms, and the latter for individuals and partnerships.

Within a month, the RBI came out with a list of “willful defaulters” responsible for the preponderance of problem loans. As it turned out, 12 companies accounted for around 25% of the entire banking sector’s NPAs.

However, after several banks (particularly State Bank of India) published personal details and photographs of willful defaulters and their guarantors, the RBI cracked down on them, surmising that the banks were not limiting their disclosures to the worst cases. In April 2016, then-RBI governor Raghuram Rajan contended, “Sometimes you default on your credit card bill. Would you like that default to be put up in public? If every time you defaulted, it was put up in public for your neighbors and relatives to see and no reason was given, you might have some concerns.”

In a landmark move announced in May 2017, the government issued an ordinance to amend Section 35 A of the Banking Regulation Act – allowing the RBI to oversee individual cases and directly pressure borrowers into repaying their loans.

Finger Pointing

The NPA crisis has been plagued by a blame game. The center has been blaming the banks for not doing enough to tackle the NPA issue; and the reluctance from the banks’ side seems to stem from an incentive to under-report: Classifying loans as “sub-standard assets” would entail provisioning, which hampers the banks’ ability to lend.

Banks are also wary of creating a negative or aggressive public image, particularly with respect to large corporate loans. Lenders are wary of enquiries by vigilance committees later on, who look into the writing-off of loans on the earliest signs of frailty. This is when the onus is shifted to the RBI – to prevent the under-reporting of bad loans, more thorough and regular inspections into banks’ classified loan categories seems like a plausible preventive measure.

Even though the central bank has been instructing other banks and setting up committees to resolve the NPA crisis, inadequacies and flexibilities in the implementation of regulations have so far not yielded any substantive outcomes.

A July 2017 release by CRISIL suggests that banks may have to take a loss amounting to Rs 2,400 billion, in order to account for 50 massive bad loans to the tune of Rs 4,000 billion. The 50 loans to the metal, construction and power sectors account for half of the NPAs recorded in March this year.

Such haircuts are usually invoked when other resolution strategies don’t work and there is minimal hope of recovering the loans. The intensity of this haircut reflects the challenges faced by India’s banking sector – in many senses, the veritable backbone of the economy.

No Quick Fix 

Recent steps taken by the RBI will take time to show results. The institutional changes may indeed bring about faster outcomes than other restructuring mechanisms so far, but recoveries will still entail taking losses from loans that have not seen the light of day, until now. It is important to note that this is no ordinary crisis: this is a large and complex multi-billion-rupee debt bankruptcy, and requires well-thought-out solutions from the political economy.

Acharya, who is on leave from New York University’s Stern School of Business and has been studying global banking crises for years, has been warning that failure to take decisive action will lead to the kind of financial stagnation that Japan suffered in the 1990s “lost decade,” which has had lasting after-effects.

Italy is currently confronting a banking crisis that is seen as cautionary for India. The establishment of “bad banks” to work out non-performing assets helped Ireland and Spain, and now Italy is looking to the European Central Bank for guidance along those lines.

Acharya’s approach involves establishment of bad banks and taking a hard line with defaulters, which he characterises as “tough love,” to prevent NPAs from becoming unmanageable.

In the final analysis, transactions between honest borrowers and lenders can lead to NPAs. It becomes calamitous when problems are allowed to grow and fester for years and inflict significant pain on bank balance sheets. The resulting macroeconomic credit crunch can then affect money circulation, investments, development and overall economic growth, as India has experienced since 2011. The roots of the NPA problem are widespread, and only time will determine whether the new strategic tools are equipped to solve the crisis at hand.