How can family businesses keep themselves from splitting? By separating ownership and management

This article was first published in the Economic Times on March 10, 2021, Co: Author: S.Subramanian;

https://economictimes.indiatimes.com/news/company/corporate-trends/how-can-family-businesses-keep-themselves-from-splitting-by-separating-ownership-and-management/articleshow/81427776.cms 

Affiliation to a business group has many advantages in emerging economies. Access to internal capital, labour and product markets often provide the affiliated firms with competitive advantages in highly competitive markets. Being a part of the same group provides the firms with a common identity, mutual trust in ensuring coordination between the legally independent firms and framing joint-venture norms as in the case of the Tata group. The Tata Group is planning to enter the retail business in a big way, with a super-app, by combining the strengths of various Tata firms like TCS, Cliq, Croma and Trent.

Similarly, the cost of capital is also cheaper for the business group affiliated firms, compared to the standalone firms. One of the mains reasons for the success of Reliance Jio in the telecom business is the access to low-cost capital being a part of Reliance Industries. The access to low-cost capital provides a head-start while entering new ventures or in providing resources to a troubled group firm.

Further, the group firms can always seek proven talent from affiliated firms, immersed in the group’s work culture, to pursue new ventures or resolve problems. When the Murugappa group acquired the troubled CG Power recently, it appointed group veteran Natarajan Srinivasan, a proven talent, as CEO. The appointment was quick, saving valuable time, which otherwise would be spent on a lengthy selection process. Further, he could also quickly tap other proven talent across the group to resolve specific problems at CG Power.

Despite these obvious and proven advantages, why is it that the family business groups split?

Traditionally, in Indian family-controlled business groups, the family members were employed in the group firms at leadership position, by virtue of family membership. This worked well during the license raj era. The competition was limited, and success of the firm depended on the ability to deal with the bureaucracy to a large extent. Being a family member, the executive was able to use the family connections to manoeuvre the bureaucratic maze. The need for family connections to conduct the business to a greater extent worked as the glue that kept the family and the business together, generation after generation. But as the governmental controls came down, the role of connections within the government and bureaucracy started to come down. With increased competition, talent and innovation started to make a difference in the performance of the firm. Thus, it became imperative many family businesses to look outside for fresh ideas and talents to manage the businesses while they remained owners.

Many family businesses continue to appoint their progeny as the successor for the management of the company. All things being equal, it would be the right decision as a family member would bring greater continuity and would be steeped in the values of the family. However, when the next-gen is not the best person to lead the company, either due to lack of capability or willingness, it becomes a disadvantage for the firm and the group at large.

Especially in a business group, the individual capabilities of the family members playing executive role in affiliated group firms and the performance of those firms differ. Differing performances of group firms imply unequal contributions to the business group by the family members. This typically leads to an uncomfortable relationship among family members. This might also become a vicious cycle as the differences between family members may feed on to the poor performance of group firms. Even if all the firms in the group do well, there are often differences between the family members about executive decisions. The differences feed the need for a formal split in the business group.

Many Indian family-owned business groups have undergone split in the last two decades — Thapars, Munjals, Jindals, to name a few. Many of them had family members at the executive positions. Some groups managed the separation seamlessly like the TVS group and RPG group, while many other splits — like Ambanis and Kirloskars — happened after bitter fight among the family members.

We posit that if the advantages of a business group are to be more or less retained, a conscious separation of ownership and management must be made. The family members must restrict themselves to monitoring role (non-executive board positions), leaving the firm management to qualified professional managers. This is not to say that family members should not join the business at all. They should if they are the best talent available to manage the company. There should be a clearly laid out criteria for them to join the business that should be at par with that applicable for a non-family talent pool. Thus, even if the family member occupies executive leadership position, it should be based on merit and experience and not by virtue of being a member of the family. This is easier said than done. However, some business groups, like Aditya Birla group, Burmans and Mahindras have done it successfully, showing the path for other groups.

In the long run, the realization for the need to keep the group together, and subsequent action to keep the ownership separate from the management, will be critical to keep the business group together and reap the benefits of being a business group.