A Love Letter on Family Businesses

This review was first published in Business Standard on July 14, 2021

https://www.business-standard.com/article/beyond-business/a-love-letter-on-family-businesses-121071301411_1.html

 

Book: The Ultimate Family Business Survival Guide

Author: Priyanka Gupta Zielinski

Price: 399/-

Pages: 256

Year: 2021

Publisher: Pan Macmillan, New Delhi

 

The author of “The Ultimate Family Business Survival Guide”, Priyanka Gupta Zielinski, is a lucky [as she admits in the acknowledgments section of the book], successful, second-generation family business scion and she clearly loves being one. Her book is a love letter to and on family businesses.

I write this review as an academician with years of research on family businesses. Therefore, I would like to put this out at the outset that I am an advocate of family businesses myself, though not unaware of the challenges. This is not to say that the author is not aware of the challenges. She is. It’s just that the book is skewed towards the positives. And that is exactly why it is such an important book for the next generation members of family businesses.

I hear from many next-generation members of family firms that they “have it too easy.” The author lays out her fears of making mistakes, losses, letting her father down, in a very vulnerable way. So it’s not so easy after all. Many others don’t want to join the family firm as it’s “not fashionable enough”, “not challenging enough”, “not glamorous enough”, and “not the first option for a career.”

Zielinski lays down many reasons as to why the next-gen should join the family business. She effectively communicates that family businesses contribute in a big way to nation building, creating jobs, supporting local communities, contributing to the exchequer and preserving history and legacy. She systematically creates a strong case for the next-gen to join their family businesses and how there is plenty of opportunity for them to learn, grow and make a difference.

The father-daughter conversations are endearing, realistic, and depict the informal knowledge transfer that is an integral part of family businesses. The book lucidly captures the informal yet important communications within a business family, the stakes of the family in the business and the rich resources basket that the family is for the business and each member of the family. “Shirtsleeves to shirtsleeves in three generations” might be an adage of the past if more family businesses read books such as this!’

The author takes each stereotype about family businesses heads on and turns them upside down to depict how they are actually good business practices. There is merit in what she writes and is true for many family businesses. Yet, many of the family businesses genuinely need to change. An example is the role of that gender plays in family businesses. The author writes that family businesses “have allowed women freedom, flexibility, and job security.” The picture in many family businesses is not so rosy. There is no doubt that family businesses can be important vehicle for upliftment of gender equality. There is a lot greater involvement of women now. Yet, overall, they have miles to go.

The toolkit to “help develop a sustainable framework to empower multiple generations in a family business” proposed in the book is fun, logical, creative and unique. The swiss army knife as an analogy for adaptation is particularly apt for change and having the ability to adapt. The book also provides the readers with some astute survival tools and throws light on how family businesses can make better decisions in difficult situations, such as in a pandemic or when they are pushed against the wall. For most families, survival of the business is extremely important as their entire wealth, reputation, legacy, and many emotions are linked to it.

But, to me, the most important contribution of the book is it’s impassioned appeal for the policymakers to recognize and respect family businesses for their contributions. It stresses on the need for a policy framework that is tailored for family businesses. The author talks about centres for conflict resolution outside the courts. Which is a very important point as the more family matters stay out of court, the better it is for the family and the business. Also, so far the world of management education has designed curriculum for and imported lessons from large multi-national diversified corporations. In this book, the author makes a case for these corporations to learn from family businesses. That is refreshing.

Lastly, in India, and globally, we need champions of family businesses like Zielinski. We need more of the next-gen members who joined their family businesses to come forward and narrate their experiences, both good and bad. As Zielinski’s father would say, “kag padhaya pinjare, padh gaya charon ved – samjhaye samjha nahin, raha dedh ka dedh”, applied to the context of family businesses, it means, if you educate a family business owner or next-generation member like the manager of a non-family corporate, it will not be adequate for him. Therefore, we need more next-gen members to read books such as these when they are in a dilemma whether to join the family business or not.

Ignore Nominee Directors at your own Peril

This article was first published in the Economic Times, July 07, 2021; Co-author: Kavil Ramachandran

https://economictimes.indiatimes.com/news/company/corporate-trends/view-ignore-nominee-directors-at-your-own-peril/articleshow/84196693.cms

On June 29, 2021, the board of Securities and Exchange Board of India (SEBI) approved amendments to the regulations pertaining to Independent Directors (IDs) on the boards of listed companies. It, however, remains mum on strengthening the role of Nominee Directors (NDs) who represent a very significant group of shareholders. As per data from Primeinfobase, institutional investors account for 33.9 percent of the shareholding in NSE listed companies, by value of shares, as on March 31, 2021. Directors nominated by the Life Insurance Corporation of India and other insurance companies, asset management companies, banks, private equity firms, other companies, and the government of India or state governments on the boards of companies is common.

Concerns with respect to independence of IDs have led SEBI and the Ministry of Corporate Affairs (MCA) to frequently enhance the regulatory requirements with regards to the composition, conduct, role, and eligibility of such directors. The efforts to strengthen the corporate governance framework through enhancing the effectiveness of IDs are welcome. IDs are essential for monitoring the agents [firm executives] and protection of all stakeholders, including, minority shareholders. What about NDs?

NDs must act like IDs

The reforms are inadequate if they leave out a significant player like the NDs. NDs represent investing organisations that are public, whose source of funds is public money. Hence, the NDs must play a vital role in upholding the highest levels of governance at the company on whose board they serve. Yet, governance anomalies have emerged in the past in institutions such as the ICICI Bank and Larsen and Toubro that had NDs on their boards.

In this article, we argue that NDs must act like IDs. The significant investment in the company should ensure that they play the role of a steward. More than the IDs, the NDs have a direct and bigger stake in the company. Yet, why do they fall short in monitoring and safeguarding the interests of the investor as well as the other stakeholders? What are their strengths and weaknesses? How can the NDs tap their potential and create opportunities for elevating the governance standards of the company?

Strengths, Weaknesses and Opportunities

Expertise: NDs are non-independent, often non-executive, experienced and highly qualified members. But do they have the relevant experience and qualification to be a good board member? Given the significant stake that the investor has in the company, it will be worthwhile to make well thought through nominations such that there is a fit between the firm needs and the nominee. Many a times, a firm may look for help from the nominee of a private equity firm for expansion into another market, access to networks, and advanced technical knowhow. On the other hand, a nominee from a bank may be looked up to for guidance on raising funds for another project.

Incentive: While the investor has the incentive to ensure that the company performs well, the ND may perceive the board position as an additional responsibility without any incremental incentive. The rewards and remunerations of the ND are not tied to the performance of the company. The ND must be treated as an ID by the company and compensated for their time and efforts to make it worthwhile for the ND to contribute.

Multiple Directorships: Many NDs are members of multiple boards. It is imperative that they do so without compromising on the time spent to prepare for each board meeting. The management of the company should also demand that the NDs contribute to the discussions at the board level.

Conflict of Interest: NDs may find themselves at crossroads in certain situations as they represent the investor, but it is their fiduciary duty to act in the interest of the company. In any such situation where a conflict arises, the ND must fulfil her duties towards the company that she serves as a director. An example of conflict of interest can be in the context of a banker serving as a ND in a company. Incentives of bankers are mostly linked to the quantity of lending, rather than the quality of lending. This in fact enables the promoters to control the firm with very little skin in the game by borrowing heavily. The ND in such a situation should be concerned more with monitoring and ensuring that there is no tunnelling or misappropriation of funds rather than facilitating more loans to the company.

Muscle Power: NDs have their organizational infrastructure behind them to aid them in asking the right questions to the management of the investee company with regards to their long-term investment strategies. They have the voting rights, access to information and the incentive to discipline the managers. The investor must encourage the ND to use the available eco-system, in-house expertise, and technical knowhow.

Conclusion

NDs can and must take on greater responsibility to ensure better governance in the companies they serve. While there is a lot of stress on improving the quality of IDs, equal stress must be put to improve the quality and contributions of NDs. History has proven that leaving the complete onus of NDs only to the institutional investors create major agency costs resulting in lower quality decision making and poor governance. The regulators, investors and the NDs themselves need to realise their potential and take their role more seriously.

Pandemic Puts India’s Diversity Record to a Test

This article was first published in the Risk Intelligence, GARP, July 02, 2021

https://www.garp.org/risk-intelligence/culture-governance/conduct-ethics/a1Z5d000008elqaEAA

The banking system has stood out with high-profile women CEOs, but a national gender diversity index has declined

Gains in gender diversity, among other inequality issues getting high-level policy attention before COVID-19 struck, have been set back since. It is a harsh reality now being faced in India, one of the countries hit hardest by the coronavirus.

The big emerging market’s banks were held out as exceptions to old norms, with several major institutions led by women, but the departures of some of them now stand out, at least symbolically, as reminders of a persisting gender gap.

The global backdrop, as described by International Monetary Fund chief economist Gita Gopinath in the fund’s spring 2021 Finance & Development publication, is that “low-skilled workers, women, and youth – who are vastly over-represented in jobs where social distancing is difficult or impossible – experienced the largest increases in unemployment in many countries, exacerbating pre-pandemic inequalities.”

An IMF working paper in March on women in the so-called she-cession, a study of 38 advanced and emerging economies, found “over half to two-thirds exhibiting larger declines in women’s than men’s employment rates.”

Legislating a Standard

Official measures to promote women’s advancement in Indian corporations included the Companies Act of 2013, Section 149 (1), requiring listed companies to have at least one woman on their board. By 2020, 17% had women directors, up from 4% in 2013.

However, a 2020 gender balance scorecard from 20 First shows that of the 175 executive team members in the top 20 Indian companies, only 6% (11) were women. Seven of the companies had women on their executive teams.

Discriminatory factors can be more or less subtle: exclusionary and “men’s club” environments, sexism in recruiting, males ignoring or disrespecting female colleagues, and pay disparities. In the World Economic Forum Global Gender Gap Index for 2021, India fell 28 places, to 140th out of 156 countries. Women’s labor force participation decreased to 22.3%, from 24.8% the year before.

Iceland is the world’s most gender-equal country, India ranks 140th, according to the World Economic Forum Global Gender Gap Index. India is farther below the population-weighted average (♢) in the Economic Participation and Opportunity subindex.

Exception to the Rule

India’s banking industry stood in contrast to the “dominant norm” of gender asymmetry across the corporate sector. It was one of the first instances of an emerging market employing gender quotas and women leaders to promote diversity. HSBC’s Naina Lal Kidwai, UBS’ Manisha Girotra, Axis Bank’s Shikha Sharma and ICICI Bank’s Chanda Kochhar rose to the top of their respective organizations.

Besides being run by women, these banks employed relatively more women at each level. One study estimated that between 2001 and 2011, hiring of women officers in banks increased to 14.45% from 6.69%, with smaller growth seen in subordinate and clerical positions. By 2019, the banking, financial services and insurance (BFSI) sector was just under 20% women, and 50% parity was projected by 2027 for the 100 Best Companies for Women in India. 

According to primeinfobase.com, there has been a steady increase in the number of women employed as board members in private and public sector banks, insurance companies, non-banking financial companies (NBFCs) and asset management firms. The percentage of women board members on Nifty 100 companies rose to 16% in 2021 from 7% in 2012, while at NBFCs it jumped to 18.43% from 3.68%.

Changes at the Top

Among other things, the trend is credited to one of the largest private banks, ICICI Bank, for nurturing women leaders during a period of economic liberalization and expansion. Chanda Kocchar in 2009 was the first ever female CEO at an Indian bank.

However, Kocchar, Sharma of Axis Bank and Usha Ananthasubramanian of Allahabad Bank had untimely exits due to governance issues at their respective banks. In addition, declining percentages of women board members at two major public sector banks between 2020 and 2021 – State Bank of India’s to 4.5% from 6%, and Punjab National Bank’s to 11% from 14%, according to primeinfobase – could be worrying from a diversity perspective if it is more than a temporary blip.

As investors and other stakeholders continue to be vocal about the need for corporate diversity, and more research reveals the benefits of gender parity, women in the critical financial services sector could lead a real cultural revolution in India. The industry has genuinely gone beyond just ticking off a list of regulatory requirements and token gestures, given its past record of female representation on boards, in senior management positions and at other levels.

HDFC Bank provided diversity data in its annual report, stating, “We strive to create and maintain an inclusive work environment for all our employees irrespective of gender, caste, creed, color, sexual orientation, religion, among others.”

HDFC Bank, India’s largest private bank, in its 2020-21 annual report, disclosed diversity indicators, acknowledging the gaps and pledging improvements. The bank has a target of 25% women in its workforce (excluding frontline staff and sales officers) by fiscal year 2025 and says it is “working simultaneously on talent acquisition, as well as talent retention.”

Women role models in leadership positions give hope and impetus to millions of others to dream big – an impact that can be compounded if the industry stays on course as an exceptional North Star for others.