Shareholder capitalism to stakeholder capitalism: Are Indian family firms prepared?

This article was first published in moneycontrol.com, April 18, 2022, Co-authors: Sougata Ray & Navneet Bhatnagar; https://www.moneycontrol.com/news/business/shareholder-capitalism-to-stakeholder-capitalism-are-indian-family-firms-prepared-8371801.html

The debate whether companies should be governed with the sole objective of maximising shareholder value (shareholder capitalism as reflected in the shareholder primacy model advocated by Prof. Milton Friedman) or balancing the interests of multiple stakeholders (stakeholder capitalism as reflected in stakeholder primacy model advocated by Prof. R. Edward Freeman), including shareholders, has been raging for several decades.

Climate disasters, rapidly rising inequalities and COVID-19 have perhaps put to rest the shareholder vs. stakeholder primacy debate and tilted the balance firmly in favour of the latter. Modern corporations, irrespective of ownership, have an obligation to act in the interests of multiple constituents -- viz., ecology, environment, society, and shareholders.

It has been argued in literature, with some empirical validation across country contexts, that family firms are generally more influenced by the ideals of stakeholder capitalism and less by the idea of shareholder capitalism.

Anecdotal evidence in India suggests so. Many times in the past, when there has been the need, family firms in India have risen to the occasion and swiftly aided government and people, be it during the Independence movement, wars, floods, famine or pandemics.

How family firms fare

To measure how family firms fare with various stakeholders, we analysed them on various parameters and found interesting results.

Using a sample of over 6,000 firms, over the last 30 years, we found that family firms underperformed non-family firms in terms of return on assets. This indicates that family firms are, in fact, not very focused on returns. This is congruent with the socio-emotional wealth theory of family firms which suggests that they, at times, compromise on economic gains for non-economic goals of the family. This may not be something non-family shareholders want.

Pledging of shares by family owners is an example. Here, the goals of the family and non-family shareholders may deviate. Pledging of shares enables the family to raise funds against shares as collateral. The funds can be used for the same firm whose shares are pledged or for personal use. This results in a limited downside risk for family shareholders as they have already got the funds, but the minority shareholders risk losing a significant amount of their investments, if margin calls are not met.

Such situations are detrimental to minority shareholders. The behaviour of the dominant shareholders may lead to loss of wealth for other shareholders, and ultimately loss of wealth and control of the firm for dominant shareholders, too.

In the recent past, there has been a significant loss of wealth for all shareholders due to the misguided ambitions and decisions, clubbed with the pledging of shares, by promoters of family firms.

Low scores on social, environment fronts

It is, therefore, not surprising that the governance scores of family firms in the ESG (Environment, Social and Governance) rating, as per Reuters and Sustainalytics data, were found to be lower than those of other firms.

Family firms were also found to have relatively low scores on environment and social categories as well as consolidated ESG parameters. The low social score is somewhat puzzling as family firms in India are known to care for the community in which they operate.

In fact, among a larger sample of firms from a different database, we observed that the CSR spends of family firms are higher than those of non-family firms, suggesting that family firms are more compliant to CSR regulations.

It is important to note that the debate around primacy to shareholders vs stakeholders is not about the reaction of corporations to exigencies or CSR spends. It is not the primacy of other stakeholders over shareholders, but about achieving balance on sustainability principles.

It is not about one heroic act catching media attention, but their every action, every day. It is also not about one bottom line – profit. It is about the triple bottom line – people, planet, profit -- and generating and sharing value for all constituents in a fair and equitable manner.

It is about being purposive without losing focus on profit in day-to-day activities. Therefore, to be a multi-stakeholder-friendly and sustainable organisation, family firms need to adopt the principles of triple bottom line and make ESG their strategic ally. It is no longer an option. It is needed for the long-term sustainability of the firms as well as the business families in order to create and pass on the wealth to the next generation and build and sustain the family legacy.

The authors are from the Thomas Schmidheiny Centre for Family Enterprise, Indian School of Business.

Family Firms in India: Performance and Relevance

This article was first published in moneycontrol.com, April 05, 2022, Co-authors: Sougata Ray & Navneet Bhatnagar; https://www.moneycontrol.com/news/business/family-firms-in-india-performance-and-relevance-8320491.html/amp?ajaxcall=yes

Concentrated ownership of a firm in the hands of a family presents unique opportunities and challenges that impact its performance.

In India, family firms are a dominant force in the economy, contributing significantly to nation-building, the exchequer, creation of jobs and asset creation. Their footprints on the Indian economy are indelible. It is imperative for family firms to perform well, grow profitably, create value and contribute to economic progress if India has to realise its full potential.

Researchers have argued that family firms have better monitoring and lower agency costs than non-family firms, have incentives to take long-term views of maximising firm value, and are value-driven organisations. Yet, many of them are found to be plagued by rent-seeking behaviour, succession issues, lack of transparency and governance, lack of professionalisation, and family conflicts. Understandably, therefore, there is mixed evidence globally on whether family firms perform better than non-family firms.

Using a unique proprietary database of scientifically classified listed family and non-family firms, the team at the Thomas Schmidheiny Centre for Family Enterprise conducted a study on all listed firms in India over the past three decades. The analyses overwhelmingly reveal that on an average, family firms underperform non-family firms.

What are the reasons? Lapses in overall strategic planning by family firms, conflicting intrinsic motivations of family members, lack of professionalisation and governance, and opposing utility functions of management (non-family professionals) and the promoting family could be responsible. Many a time, maintaining control and influence over the firm also pushes the family to take decisions independent of financial considerations. These idiosyncratic strategies and irrational choices, mainly due to the emotional ties that the family has with the firm, may overpower the advantages of being a family firm. The analysis also reveals a negative impact of family leadership on performance among family firms.

While the average trend is negative, there are family firms across industries that have performed exceedingly well. They have withstood the licence raj as well as the winds of change that swept the nation during the economic liberalisation in 1991. There had been widespread apprehensions about the capabilities of family businesses to withstand the pressure of the newly created “freedom” that made them vulnerable to competition for resources, markets and capital. However, many family businesses transformed themselves by taking stock, restructuring their operations, taking advantage of new opportunities, putting the right governance systems in place, and professionalising.

There is much to learn from these businesses.

90% of the listed world 

Despite the underperformance of family firms on an average, their dominance in India continues. Ninety-one percent of all listed firms in India are family firms. Large family firms and business groups have consolidated their positions even more in recent years. As these business families and the firms owned by them are firmly embedded in the society and institutional context and develop patterns of trust and confidence among stakeholders, they have better access to social and financial capital and are willing to embark on enterprises involving considerable risk with a reasonable chance of success. This reinforces the continued cultural, political and social importance of family firms in India, which is not going to diminish any time soon.

However, a vast majority of family firms in India does not possess these constructive characteristics exhibited by the more successful ones. These underperforming family firms must be open to learning from the select others who have been performing well, put in place family as well as business governance systems, professionalise as they grow, delegate management and operating responsibilities to the right persons outside the family, and change with time to adapt and modernise. They need to be made aware of the enormous opportunities and be nudged to overcome their challenges building on their inherent strengths.

Policymakers must be open to framing targeted interventions that are required to create favourable conditions for improving the performance of family firms. Given the importance and significance of family firms in an economy like India, more family firms across industries have to undergo a transformation and start pulling their punches to make India Aatmanirbhar.

Family firms: Preordained to be governed by passion and purpose

This article was first published in moneycontrol.com, March 29, 2022, Co-authors: Sougata Ray & Navneet Bhatnagar; https://www.moneycontrol.com/news/business/family-firms-preordained-to-be-governed-by-passion-and-purpose-8283921.html 

In the face of the challenge posed by phenomena such as global warming, climate change, poverty and inequality, and rapid depletion of natural resources, calls have grown louder for putting stakeholder capitalism over shareholder capitalism that has been practiced by companies for ages.

Social and political unrest in many countries, increased frequency of natural disasters, and finally the COVID-19 pandemic have laid bare the fault lines on which the global economic order rests and vulnerabilities of modern societies.

These developments reinforce the urgent need for companies to widen their canvas of responsibility, do more good, and do good for more constituents by embracing the sustainable development goals (SDGs) of the United Nations.

Corporations and family businesses in India, and elsewhere, have little choice but to shift their focus from only increasing profit to balancing profit with increasing net positive impact on the Environment, Society, and Governance (ESG), marrying profit with purpose.

Corporate governance under shareholder capitalism has traditionally been mandated and designed for maximizing shareholders’ wealth and minimizing agency costs.

Empathy, sensitivity, perseverance and adaptability have, however, emerged in recent years as key traits that board members individually and the board collectively must possess to govern a company from a multi-stakeholder point of view.

Interestingly, these are called feminine traits because women across cultures are found to possess these qualities more than men. Greater presence and participation of women is more likely help a board to discharge its mandate in the new paradigm more effectively.

Reducing inequality and discrimination has also been one of the most formidable social challenges, of which gender is the most pervasive one. Greater gender inclusivity and diversity in every level of corporate hierarchy is going to be a source of competitive advantage for some time before it becomes sine qua non for modern corporations.

In her article for the inaugural issue of the Family Enterprise Quarterly, Dr. Sangita Reddy, joint managing director of Apollo Hospitals, put it eloquently: “In today’s hypercompetitive marketplace, gender diversity is good business.”

How well are family businesses in India positioned in the emerging environment?

Our research at the Thomas Schmidheiny Centre for Family Enterprise, ISB, reveals that family businesses listed on the National Stock Exchange of India showed a greater propensity to comply with the mandate of the Companies Act, 2013, that certain public companies must appoint at least one woman-director on their boards. This demonstrates the resolve of family-run companies to embrace and adapt to changing regulatory requirements.

The identity and image of the family is closely tied to the functioning of the family business. We observe that family firms in India, on average, have a greater than 50 percent stake in their firms, making them personally invested in the reputation of the business, its longevity, and image as a socially responsible, sustainable contributor to society. The ownership control enables them to influence decisions and reorient the board-level discourse towards better outcomes for all stakeholders.

Our research also shows that women directors in family firms are mostly executives. And a family member is at the helm of affairs at more than 90 percent of such firms. The combined effect of these two factors provides business families the management control to implement required changes at the strategy and operational level to adopt ESG-friendly practices.

Demographic changes in business families and at the societal level in India, in recent years, have nudged many family-run companies to adapt, discard primogeniture, promote gender equality and evolve with time to be a responsible corporation.

The enterprising one have defied “from shirtsleeves to shirtsleeves in three generations” while the others have fallen to the adage. It is time more family firms understand that what is good for the society is good for business, and, therefore, good for them too!

Firms founded by enterprising business families are preordained and wired to be long-term-oriented, driven by values, and led by passion and purpose. In an era dominated by shareholder capitalism, family firms, being more patient and not driven by quarter-on-quarter results, were significantly disadvantaged compared to other companies barring state-owned enterprises.

As the world of business swings towards stakeholder capitalism by incorporating an ESG framework, family businesses in India and elsewhere have the opportunity to leverage corporate governance as a competitive advantage. It is time for them to recognize this and seize the momentous opportunity.

Give Her Wings to Fly

This article was first published in the Times of India, March 08, 2022

Men are from Mars. Women are from Venus. There is no denying the differences.

There are obvious differences in size and anatomy. They did matter when it was required that people went hunting to provide food for their families. It also mattered, and still matters, when hard labour or physical strength was/is required. But does the physical strength matter so much when most of the work is automated, digitized, and brain power has become more important than muscle power in most of the industries?

Psychological differences also exist. Research has consistently shown that women are more emotional, sensitive, anxious, and friendlier. Men are more assertive and open to new ideas. This has been found to be true across cultures, indicating that the difference is biological rather than cultural.

There have been women who transcended all biases, disadvantages, and segued into territories reserved for men. This article is about the norm. The norm is that the Gender Inequality Index shows vast inequality between men and women. That many governments and organizations such as the UN are taking steps to bring about gender equality. As a result, we have come far from where we were a few decades ago. Yet, we are far from equality. Change is happening. It’s just not happening at the speed we want it to. Why?

Mindset: We have come a long way from the days when most girls did not go to school and formal school education for girls was a rarity rather than a norm. The male-female literacy gap has consistently reduced from a peak of 26.62 per cent in 1981 to 16.68 per cent in 2011. The Census 2021 data is awaited but this gap is expected to have reduced further due to the enactment of the Right to Education Act in 2009, ongoing efforts for hygiene, separate toilets for girls, and slowly yet steadily changing cultural and societal norms. A good education is the steppingstone to a good career. It gives one the foundation to think creatively and the confidence to charge ahead.

Consequently, women are charging ahead. Though, the gap remains huge. Many corporations are now starting to recognize the gap, acknowledge it, talk about it, and pledge to narrow it. For example, HDFC Bank published data on representation of women at different levels of management in their annual report and set a target for improvement.

All the above are welcome improvements. But there are biases that keep many girls from pursuing an aggressive career. Statements such as, “your place is at home”, “you must come back home by 7pm”, “you must not travel”, impede growth at work and prevent women from utilising their full potential. These are not things people would say to a man.

It is time the society realises that women are not a subset of men. They are their own identities and have their own aspirations. Don’t weigh us down by biases, expectations, and preconceived notions of what is appropriate for us to do.

Mental Load: It is a known fact that women take on greater burden of household chores. Increasing levels of education, awareness, and changing demography has also resulted in larger percent of women in managerial and senior management roles. The gradual shift in mindset has made households more open to seeking external help for chores, outsourcing day care of children, and technology is aiding in reducing time taken to do many chores. Though none of this can be generalized, there is certainly a positive shift in general.

Yet, the percent of women that reach the top management teams in organizations remains dismal. Why? Even though many of us manage to keep afloat when at relatively junior levels in the organization, at senior levels of management, it becomes difficult to balance the requirements of the job along with the expectations at home. Our hands are freer. Our minds remain cluttered. Our load has changed its form, like energy. We may not be doing a lot of work on our own, but we need to get it done. At senior management levels also, most of the work entails getting work done, guiding, and crisis management. Women do that at work, and also at home.

The challenge is that it is difficult to explain mental load. I get asked many times, “what do you do at home? You have help for everything. What challenges?” At other times we are told to simply “ask for help”. The assumption when we are told to ask for help is that we are responsible for that task, not our partner. So, the burden of getting something done remains with the woman.

Another challenge is that we women ourselves have grown up seeing our mothers do more physical work at home, be physically present, and a “Mother India” image of being an ideal parent. This notion leaves us in a shroud of guilt for not being a “good parent”, for having fun, for not sacrificing enough, and for being ambitious. This leads us to greater anxiety, worrying, trying to compensate in different ways, and generally, unhappy.

Men: I asked a few male friends to read Indira Nooyi’s book, “My Life in Full.” None of them said No. But to the best of my knowledge, none of them did. On the other hand, many of them did read Harsh Mariwala’s Harsh Realities. Why? This is a loaded question and points to the unconscious bias that exists in the minds of men, as well as women.

Discounting women and their achievements is the biggest disservice that men, and even women, inflict on women. When men succeed, and their career is their only job, most of the times, it is due to their skills. When women succeed, despite taking on unreasonable share of household responsibilities, it is “because” they have a supportive husband. Family support is a must to be able to work uninhibitedly, for men, as well as for women. Most husbands who help their wives at home make it sound as though they are doing a favor to their wife. They are not. The house and the household belong to the men as well and so must its responsibilities.

While many of us try and create an external support system of creches and daycares and nannies, it only helps us do a 9 to 6 job. Not beyond that.

Last Word: To bring about any meaningful change and achieve true gender equality, mindset must change at the societal as well as individual level, mental load should be acknowledged and shared, and men must equally involve in bringing about change rather than treating it as a “women’s issue”.

Educating a girl child is like giving her wings. But then not supporting her to give her best, is like not giving her the sky to fly, despite the wings.

Immersion in the Tata 'black box'

This book review was first published in the Business Standard on November 19, 2021; https://www.business-standard.com/article/beyond-business/immersion-in-the-tata-black-box-121111801571_1.html

Book: TATA- The Global Corporation That Built Indian Capitalism

Author: Mircea Raianu
Price: 699/-
Pages: 304
Year: 2021
Publisher: Harvard University Press, Cambridge, Massachusetts

A long time ago, I wanted to read more about Warren Buffett. There were a few biographies available in the library. For me, a biography was a biography. I was confused about which one to pick. My immediate boss, a man of books, scholarship, and impeccable manners, told me in his soft and thoughtful voice, “There are biographies and there are authorized biographies.” That got me thinking. I hadn’t known the difference until then. Subsequently, I read the authorized biography of Buffett, The Snowball: Warren Buffett and the Business of Life by Alice Schroeder, and then the others. Having access to the man himself definitely made a difference to the insights in Ms Schroeder’s book.

This experience has helped me differentiate between the latest book on the Tatas authored by a historian of global capitalism and modern South Asia, Mircea Raianu, and other books on the group that I have read over the years. Many of the popular books on the group are written by Tata insiders, for example R.M. Lala, Mukund Rajan, and Harish Bhat. A few others are written by the outsiders but are primarily internally focused. Examples include books by Girish Kuber, which chronicles the Tata family and group, Shashak Shah, which provides an insight into the people practices and culture at the Tata group, and Peter Casey, which is the work of a fanboy. Don’t get me wrong. Each of these books have something unique to tell, for the Tata group is such a giant that no one book can capture all aspects of the family and the group.

This is where Professor Raianu’s book makes a unique contribution. His is a book by an outsider that extensively integrates the activities of the group with the external environment, using internal resources (archives), clubbed with his own research about the global and Indian events and economies. The journey of the Tatas is immersed deeply in colonial, socialist, and capitalist India and the confluence of politics, economics, and society. On the one hand, the Tatas have challenged the Schumpeterian “creative destruction” view by traversing salt, soap, and steel along with software and sky (Tata sky as well as the group’s airlines), on the other, it has traversed the corporation and the state mostly with aplomb, barring a few cases of resistance and inadequate measures and slips. Raianu has been able to extract valuable information from the Tata and other archives that throw light on how each of these aspects played out in the group.

At this point, it is important to mention about the relevance of archiving for corporations. The book and the plethora of information in it points towards the gold mine that archives are and can be if maintained well. The archives should be impartial, accurate, and as far as possible, complete. Corporate archives are often either poorly maintained, or even if maintained well, are closed to scholars. The Tatas must be congratulated and credited for leaving “behind a longer paper trail than any other Indian business” and opening the archives to the public. Other large corporations with long histories must follow suit.

These archives have perhaps been used for the first time for putting together a comprehensive academic history of the Tatas. The 62 pages of references in the book are testimony to the monumental number of records that the author has gone through. As often happens with a haystack of information, organizing it can be daunting.

In the words of the author, “This is not an elite story of great leaders imposing their vision from above, nor a tale of subaltern resistance that looks up at the corporation from below, but an eye-level immersion in the “black-box” of information exchange within the group.”

The challenges for the reader, and perhaps the author himself, stems from these lines. As a historian, Professor Raianu, digs into the meticulously preserved archives of the Tata group, and tries to “reconstruct the conversations, deliberations, and decisions made by several categories of actors…” As a reader, I am left feeling in a “black-box” occasionally. Sometimes, the book is like an abstract painting, left to the imagination of the reader. At other times, it is like what we in India call an “art film”. There is information, sometimes too much of it. It is intellectually stimulating. But too tiring to read for the average reader. Now and again, though, it is good to denounce popularity (commercial cinema) for reality (art movies), even as a reader. Isn’t this the real world? Too much information. The good and the bad. Go make sense of it.

Old Economy vs. New Economy – Indian family businesses adapt well to the digital world

This article was first published in Family Capital on October 5, 2021, Co-author: Ramachandran, Kavil; https://www.famcap.com/2021/10/old-economy-vs-new-economy-indian-family-businesses-adapt-well-to-the-digital-world/ 

Family businesses evoke the memories of a Bajaj scooter or a Godrej lock, in India. Though now they dominate even the sunshine industries like pharma, telecom, biotechnology and information technology with firms like TCS, Wipro, Sun Pharma, Biocon and Airtel being the largest players in their respective industries. Yet, when we talk of new age industries like e-commerce and analytics, we often think of the Flipkarts, the Swiggys, and the Microsofts, all of them either private equity backed startups or non-family firms. Family firms are not yet known in a big way in e-commerce and the next generation wave of technology viz. artificial intelligence, analytics and machine learning.

Belying anecdotal worries about the potential of family firms to withstand the rush of competitive forces in the economy post liberalization in 1991, family firms registered remarkable growth. Removal of restrictions and controls unleashed their entrepreneurial spirit. Taking advantage of the changing business landscape through the 1980s and the big bang reforms of 1991, family-firms built businesses in all industries including in areas otherwise reserved for public sector and the upcoming industries.

Family firms now face another set of challenges different from the ones they faced post-liberalization; that of disruptive technologies and digital economy. The traditional business models are being challenged and the speed of change is nerve wrecking. Some of the unique advantages that family firms possess, like long-term orientation, loyal employees and owners’ passion, may be deterrents to being agile and innovative to cater to the changing market demands. So far, the family firms have been laggards in the race. But will it be the story of the tortoise and the hare? With slow and steady winning the race?

Take the example of Tata CLiQ. In 2007, Flipkart pioneered the e-commerce market in India, with Amazon foraying in in 2013. There were many startups that tried to compete and then either shut shop, consolidated or gave up the dream to become as big as either of them. Five years back, in 2016, the Tata group made a silent entry into e-commerce with Tata CLiQ. It has neither sprinted ahead of Flipkart and Amazon, nor is it the most popular. Yet, it’s gaining ground slowly and steadily. They do not believe in offering deep discounts like the other portals do and have strategies that they know are sustainable. They have been adding more brands to their platforms, have steep revenue growths, and have acquired some well-known existing e-commerce platforms.

Would Tata CLiQ ever topple Flipkart and Amazon to become the number one e-commerce portal in India? We do not know. But what we do know is that Tata CLiQ is here to stay and will benefit from the experience, the philosophy and the resources at its disposal as a part of the Tata group. While Flipkart will have to rely on external funding, the Tata group acts as the venture capitalists for CLiQ, saving them from the pressures of finding funds. Even in the past, the Tatas started their information technology business as a division of the group holding company Tata Sons, in 1968. The company was listed only in the year 2004.

Similarly, many family firms have presence in the new age businesses, albeit in a small and no-frills fashion. Owing to the reputation of the family at stake, they may take them public only when the venture achieves a respectable size. Many of these businesses are championed by the next generation members of the family who are more exposed to the current trends due to their education or interest. The trend has made it easier for the next generation members of the family to do something of their own. It is easier for the family to invest in a member of their own family rather than trust their money with a 30 something youngster with a risky idea. Puneet Dalmia, a third-generation member of the Dalmia Bharat group started the online career portal, jobsahead.com, with funding from the family. It was later acquired by Monster worldwide. Puneet then joined the core family business but continues to act as a venture capitalist for other startups.

Like the Dalmia group, many family firms have become active investors in the startup eco system, either in their own capacity as a family or through the firm. Apart from investing in fields of online education, e-commerce, agri-solutions, investments in emerging technologies and digital space are also popular amongst the families who have been involved in traditional businesses only so far. For example, Premji Invest, the personal investment arm of Azim Premji family, has invested in wide ranging startups- from food (iD fresh foods) to data management and analytics (Data Stax) to e-commerce (Snapdeal). While the family firms may not have direct presence in many of the new age economy businesses, they do have significant stake in many of them through investments. These investments are typically in personal capacity or through the family office, without disrupting the core family business. Though being cautious about their reputation, family businesses monitor the progress closely and may impose certain strategic restrictions.

New ventures by next generation family members and investment in startups by non-family members requires robust governance mechanisms to approve the funding by the family. The buy-in from the investment committee of the family or the family office is important. The venture must be approved keeping in mind the long-term goals of the family. Professional help from wealth managers and experts from financial institutions may be needed to evaluate the financial viability of the proposed venture and subsequently to monitor it. In many cases, the socio-political clout of the proposer within the family influences the decision making, apart from the economics of the proposal. Through sound governance systems and processes the subjectivity can be minimized.

SHARE PLEDGING AND ITS CONSEQUENCES: A STUDY OF INDIAN FIRMS

“Policy makers and investors need to take a more balanced and contextual view on share pledging by family promoters rather than castigating the phenomenon.”

A research study, authored by Dr. Nupur Pavan Bang, Professor Sougata Ray, Nandil Bhatia and Professor Kavil Ramachandran of the Thomas Schmidheiny Centre for Family Enterprise at the Indian School of Business (ISB), highlights the prevalence of share pledging in the Indian context and the possible implications that pledging may present for stakeholders, especially in family firms.

Using data for 1,492 firms listed on the National Stock Exchange of India from 2009 to 2019, the study finds a decline in firm value, higher crash risk and underinvestment in innovation by firms where promoters of family firms pledge their shares. The study also shows how some firms have utilized share pledging by family promoters as a tool to raise capital for strategic projects and create value for the stakeholders.

The various scandals, loss of control of the firm by family promoters, regulatory responses and warnings led to the common perception that all share pledges by promoters are bad. Existing empirical research around pledging of shares is sparse and does not account for the heterogeneity among the possible use-cases of capital obtained from pledging of shares. The study calls for more nuanced studies on pledging to explore this anomaly contextually and to avoid painting all cases with the same brush.

Co-author, Professor Sougata Ray explains that “the commonly peddled negative narrative on pledging often dissuades fact based, informed, balanced, and nuanced debates on its utility, causes and consequences, backed by rigorous research in spite of its ubiquity in India and many other economies of the world. Along with large sample data driven research, there is a need for case study based research on pledging in order to understand the variations of the same.”

The study was released in a webinar in the presence of Dr. Satyanayana Chava, Founder and CEO, Laurus Labs; Professor Prasanna Tantri, Executive Director, Centre for Analytical Finance, ISB; the authors of the study; and industry stakeholders. It has important implications for investors, regulators, board of directors, and even family members. Pledging of shares, coupled with bad decision-making and/or over ambitious growth plans, resulted in complete destruction of family wealth in many family firms. There is need to create awareness and build stronger family governance processes that would put checks and balances with regards to excessive pledging.

Speaking at the webinar, Dr. Nupur Pavan Bang said, “The study provides a clarion call for acknowledging that pledging is an important tool to access financial capital for family promoters. It is a legitimate way to raise entrepreneurial financing amongst family businesses and a source of fund to turnaround the family firm if it is in trouble. Policy makers and investors need to take a more balanced and contextual view on share pledging by family promoters rather than castigating the phenomenon.”

The study lists important implications for stakeholders of family firms, such as, promoters, family members of the promoting family, investors, the firm’s board of directors, and the regulators. A few of them include:

-        Over-optimistic investment plans and over-pledging of shares by the promoters, without pre-planned repayment strategies, are likely to lead to a crisis later.

-        Investors must keep a track of their portfolio and regularly evaluate if the controlling shareholders of the firms in which they have invested have pledged their shares.

-        Board of directors of firms must caution controlling shareholders from over pledging their stakes and should shield the firm from such shareholders if they try to manage the margin calls by taking hasty or short-term view decisions in the firm.

-        The study also has insights for the regulators such as the RBI and SEBI to take more balanced view of pledging when making policies.

-        Further, there is need to create awareness and build stronger family governance processes that would put checks and balances with regards to excessive pledging.

Directors’ competencies: A tall order for India Inc

This article was first published in the Economic Times on August 08, 2021. Co-author: Kavil Ramachandran; https://economictimes.indiatimes.com/news/company/corporate-trends/directors-competencies-a-tall-order-for-india-inc/articleshow/85202226.cms

Recent discussions on the failure of corporate governance and how independent directors (IDs) can be effective have raised concerns about the qualifications and competencies of independent directors (IDs). The implicit message is that IDs with “lower” competencies may be failing in their responsibilities as the custodians of the overall interests of stakeholders. Do the directors of India Inc possess such competencies? Are these competencies enough? Further to the recent order of SEBI related to IDs, in this article, we examine the competencies of the Board of Directors (BoDs) of firms listed on the NSE, as measured by educational qualifications of the directors. We recommend the need to have other criteria for determining competencies of IDs.

Qualifications

As per data from Primeinfobase, 93.75 per cent of directors of firms listed on NSE are at least graduates. Majority of the directors (69.08 per cent) have post graduate technical qualifications. MBA is the single most popular degree at 26.56 per cent directors being management graduates- 16.27 per cent of them from the IIMs. CA, CS, ICWA or LLB come a close second at 24.38 per cent while 21.21 per cent of the directors are engineers. A few of them even have an MBBS degree (1.17 per cent). However, instances of corporate governance failures even at large corporations in India have highlighted that despite the highly qualified pool, corporate governance is wanting. Therefore, qualification does not necessarily mean a good fit. 

Diversity

More effort needs to go into identifying the right people who are a) at least in sync with the latest developments in their own areas of expertise, if not ahead of them, b) are not rubber stamps and not afraid of voicing their opinion, and c) bring diversity to the board discussions. Composition of the board is very important. A board that comprises all engineers or all MBAs or all CAs, while highly qualified, will have no diversity. Similarly, it should also evaluate the requirements of the firm depending on the life cycle that it is at. 

Values

Infosys co-founder Narayana Murthy once openly spoke about his spat with the first non-promoter CEO of Infosys, Vishal Sikka. “If the core values of Infosys such as “leadership by example, fairness, transparency, accountability” were “thrown to the dust, then you have to stand up and voice your anguish and disappointment”, he said. The BoDs need to possess similar attitude or value systems and the skills to be independent, so that they can voice their opinion when needed. Values of a person is not easy to assess and for the regulator to implement. But, SEBI can put some guidelines or conditions for the large corporations to start with, say companies with Rs 10,000 crore plus in revenue, where at least the IDs must have a dossier compiled to confirm that they have demonstrated their independence in thinking and acting, before being inducted into the board. 

Commitment

Often, IDs hold multiple board positions, advise various organizations, and are even associated full time with their own businesses or are employed somewhere. With so many other activities claiming their time and mind space, they may not devote enough time to fulfil their board duties in spirit. It is in the interest of the firm to demand time and guidance from the directors. Hilti Corporation, known for its values, culture, innovation and governance, demands that the board members devote a minimum of 20 days every year to Hilti affairs. In Hilti, a board member’s time commitment could extend up to 40 days if he or she is involved with the executive board, employee activities or any special projects. The remuneration flexibility that SEBI has mentioned in their regulation should make it easier for the firms to pay adequately to the BoDs. 

Conclusion

In essence, there has to be a change in mindset while companies are determining who their IDs should be. SEBI’s order included a more elaborate and transparent process to be followed by nomination and remuneration committee while selecting candidates for appointment as IDs. The amendments also enhanced disclosures regarding the skills required for appointment as an ID and how the proposed candidate fits into that skillset. Determining the “skills required” is tough yet doable. Detailed background check including demonstrated commitment to the practice of values will help create a pool of IDs with the right compentencies. Corporate governance and society’s wealth will be the losers if this challenge is not addressed soon. Industry champions must work with SEBI to set a new threshold for anybody to qualify to be an ID. As Ludmya "Mia" Love, American political commentator and the first black person elected to Congress from Utah and the first black woman elected as a Republican, says, “Difficult things aren’t easy, but they’re worth it."

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.