Managing Differences in the Family to Prevent Destruction of Business and Wealth

This article was first published in the Economic Times on March 08, 2023, Co-authors: Navneet Bhatnagar, Sougata Ray; https://economictimes.indiatimes.com/news/company/corporate-trends/managing-differences-in-the-family-to-prevent-destruction-of-business-and-wealth/articleshow/98481901.cms?from=mdr 

Recently, the Hinduja brothers decided to put an end to their long-standing dispute over family wealth. The Singhanias, owners of Raymond, have also shown signs of a reconciliation after a bitter dispute between the father and son. Managing a family business is often more challenging than steering a non-family enterprise. This is because family businesses are an amalgam of two inherently distinct subsystems. While business is an economic system, the family is a social system. In the initial phase both the family and business are simple systems. As time passes by both grow to become complex and complicated. While businesses expand in size and enter new segments and markets, families increase in size, extend into branches, or forge new relationships (in-laws). New generations emerge, often with distinct ways of thinking and analysing than the previous generations. Therefore, it is very natural for differences to emerge within the family. If these differences are not addressed properly, they turn into deep discontent and surface later as full-blown conflicts. Repeatedly, Indian family businesses have seen bitter feuds in the past, which has ruined large business groups and their legacy- the Modis, the Mafatlals, and the Singhs of Ranbaxy group- to name a few.

Many a times, the roots of such differences lie in the family sub-system. The socialist nature of the family accords equal rights and status to all its members. However, business, rooted in capitalism, rewards the more meritorious members. Differences arise when some family members feel that they are not being equally rewarded, or their opinions are not valued, or their needs remain unmet. Differences emerge when the roles, rights, and responsibilities are not clearly understood by the members. This happens due to lack of clear policies, that leads to decisions being made in an ad-hoc and inconsistent manner. When left unaddressed, these differences turn into a deep sense of ‘perceived’ injustice and bitterness. Often, these pent-up emotions get triggered into outbursts at a tipping point that ‘breaks the camel’s back’, leading to a cascading effect of deviations in action, poor decisions, and destruction of wealth and family legacy.

Is there a way to avoid this ‘differences to destruction’ trap? The answer lies in robust governance and clear communication mechanisms. It is important to create effective governance structures and mechanisms both for the business and family. Governance mechanisms must be embraced in true spirit and not just to meet regulatory requirements. High quality governance based on strong values can resolve most issues right at their emergence. Some measures that could help family businesses minimize the impact of family differences include: adopting the policy of fair treatment to all family members, clear and transparent communication within family and with all stakeholders, decoupling critical business and family issues, establishing fora for communication and raising concerns (such as a family council or forum), adhering to policy-based family governance rooted in a family agreement, charter or constitution and developing shared-clarity on ownership rights. A well-defined conflict resolution mechanism can ensure that the differences are resolved before they turn into a major problem and the business interest is not affected.  

Two examples that may be cited here are: the structured succession planning initiated by Mukesh Ambani-led Reliance group and the recent amicable restructuring of the TVS group. Reliance is adopting a holding entity model that will own and control the family's businesses-refining and petrochemicals, retail and e-commerce, telecom, and green energy. The family members will own stakes in this entity and serve on its board. However, operations will be managed by non-family professionals. This planned shift from operations to ownership and governance will keep the next-gen family members focused on strategic issues. This decision will minimise differences that may emerge in the family due to operational issues of the business.

In the TVS case, the four family branches decided amicably to re-align the ownership of their group companies. Earlier all the TVS group firms were grouped under three holding firms and there were lot of cross holdings among the four family branches. The family decided to merge all three holding firms and then demerge into four holding companies, one for each family branch. Each resultant holding firm will own the businesses managed by that branch. Besides this, the agreement also envisaged to included clear terms of the use of TVS brand, and non-compete agreements among the family members.

In the Indian context, which continues to witness fierce battles for rights over control of business and family wealth, the proactive planning and implementation of structured mechanisms adopted by both Reliance and TVS groups are inspiring examples of ringfencing the business from potential family disputes.