An Unmissable Journey For Family Business Owners & Scholars

This review was first published in the Family Business United on August 22, 2023; https://www.familybusinessunited.com/post/an-unmissable-journey-for-family-business-owners-scholars

About the book:

The Cartiers is the revealing tale of a jewelry dynasty's four generations, from revolutionary France to the 1970s. At its heart are the three Cartier brothers whose motto was 'Never copy, only create' and who made their family firm internationally famous in the early days of the twentieth century, thanks to their unique and complementary talents: Louis, the visionary designer who created the first men's wristwatch to help an aviator friend tell the time without taking his hands off the controls of his flying machine; Pierre, the master dealmaker who bought the New York headquarters on Fifth Avenue for a double-stranded natural pearl necklace; and Jacques, the globe-trotting gemstone expert whose travels to India gave Cartier access to the world's best rubies, emeralds, and sapphires, inspiring the celebrated Tutti Frutti jewelry.

Francesca Cartier Brickell, whose great-grandfather was the youngest of the brothers, has traveled the world researching her family's history, tracking down those connected with her ancestors and discovering long-lost pieces of the puzzle along the way. Now she reveals never-before-told dramas, romances, intrigues, betrayals, and more.

The Cartiers also offers a behind-the-scenes look at the firm's most iconic jewelry- the notoriously cursed Hope Diamond, the Romanov emeralds, the classic panther pieces, and the long line of stars from the worlds of fashion, film, and royalty who wore them, from Indian maharajas and Russian grand duchesses to Wallis Simpson, Coco Chanel, and Elizabeth Taylor.

Published in the two-hundredth anniversary year of the birth of the dynasty's founder, Louis-François Cartier, this book is a magnificent, definitive, epic social history shown through the deeply personal lens of one legendary family.

Review:

Francesca Cartier Brickell's magnum opus, "The Cartiers," creates an enthralling narrative that captivated me from the very beginning. As I delved into the book, I felt part of the Cartier family, standing shoulder to shoulder with the family members and the illustrious figures that shaped their history. The author masterfully blends historical facts with personal accounts, transporting the readers to the grand salons and dazzling soirées of the Belle Époque, where the Cartiers' creations adorned the crème de la crème of society.

This book is an enchanting exploration of family, business, artistry, and the timeless allure of the Cartier legacy, the brilliance of a dynasty that, while no longer owned by the family, continues to thrive as a testament to their enduring legacy. This must-read book offers invaluable insights and profound lessons for family business owners and scholars, making it an essential addition to any family business library.

The book delves into the heart of family dynamics, the unique opportunities, and challenges that being a family business pose. The nuances of sibling camaraderie, complex relationships between cousins, shared vision and family governance, and the circumstances leading to selling the family members' stake in the business, have been poignantly narrated.

I can safely say that I have read thousands (at least a thousand plus some more) of books in my lifetime. Many of them are good. Few are extraordinary. And a handful are books that transported me to being a witness to the journey, the story. Buddenbrooks by Thomas Mann was one such book. The Cartiers is the other. While it is not right to compare both, they are both magnificent in their own right. One significant difference is that Buddenbrooks is fiction, while the Cartiers is reality! And the reality is stranger rather more interesting than fiction in this case.

In this fan-girl account and book review, I dwell upon my journey with the Cartiers in the following paragraphs. In the process, I highlight a few aspects where Cartiers provide living proof of the theories in family businesses.

Traveling back in time

One of the book's most compelling aspects is the portrayal of iconic personalities who adorned Cartier's jewels. From Princess Grace of Monaco to the incomparable Elizabeth Taylor, their stories intertwine with the history of the pieces they wore, elevating them to objects of profound significance, and transporting the readers to the world of passion, resilience, opulence, and elegance.

Brickell's meticulous research and intimate family anecdotes allowed me to travel back in time to participate in the Cartier journey. I was there when the fire broke out in the Cartier store leading monsieur Louis-François Cartier to be risk averse. I felt his pain when his only son Alfred traveled to the US, and he pined to be reunited with him. I witnessed Alfred convincing his eldest son, Louis, to marry a Worth as it would benefit Cartier's name and business. I celebrated with Alfred when Jean-Jacques Cartier, his first grandson, was born (albeit with a tinge of guilt. But I had traveled back in time to 1919, you see! I can't really blame myself for being a part of the patriarchal society back then).

I rooted for Jacques to return to the business. I cried out aloud. "Oh, come on, Jacques. Cartiers needs you. Come back soon." I felt one with Elma and Nelly, like the third band of the Trinity ring.

I witnessed the Eiffel Tower being unveiled and felt the anxiety of Pierre and Nelly aboard a ship from New York to London when they heard of the Titanic sinking. I traveled to the durbars of the Gaekwads and the Nizam of Hyderabad with Jacques.

When Jacques passed away, I sobbed uncontrollably. I felt the pain of Nelly and Jean-Jacques. I paid my obeisance to the genius of Louis. I felt the loneliness of Pierre, who lost both his brothers within a year.

Adapting on the go

The Cartiers' journey mirrors the ever-changing landscape of world society, as their creations adorned monarchs, celebrities, and the crème de la crème of society. Good jewelry touches every who's who, from the Czarinas to the Kings, the Nizams, the businessmen, Elizabeth Taylor, the Beatles, Elton John, and more recently, Deepika Padukone.

As demonstrated in their successful multi-national transatlantic operations, the Cartiers' ability to embrace change and adapt to evolving markets aligns with the "Dynamic Capabilities" theory, allowing them to thrive through turbulent times. As the Romanovs fell and the bodice gave way for practical clothes for women, as the war raged and even the wealthy preferred a more austere way of life, as the Maharajas in India paved the way for democracy and the rare pearls gave way to cultured pearls, the Cartiers kept adapting through their designs, prices, and products.

Expression of feelings and archiving

Francesca Cartier Brickell found a trunk of letters in her grandfather's cellar. These letters formed an important source of information for her book. The letters provided her with the raw emotions expressed by the writer. When Louis-Francois wrote to his son Alfred, "I don't need to tell you that I long for your return. You and I are inseparable…," we can feel him pine for his son. I could imagine Pierre fuming when he wrote to his nephew, Claude, "…the consequences, serious for you and regrettable for us."

While the means of communication have increased, they have become instant, will future generations have such words of expression to recreate the journeys of the 21^st century, which will be history in the future? Will we have saved WhatsApp messages and phone calls? Do the torchbearers of business families today express themselves so openly through emails? The reality is not lost on any of us.  

We are in touch more but express less. We talk more but communicate less. We write more words, but they mean less. We have more storage, but we have no records of emotions.

The book is a testament to the importance of writing, expressing, and archiving. This art is dwindling and will cost legacy building dearly in centuries to come.

Familiness and Resources

At its core, "The Cartiers" is a profound exploration of the power of family unity and vision in shaping a lasting legacy. The Cartiers' unwavering belief in brotherhood and collaboration embodies the concept of "familiness," where the family's collective strengths drive their entrepreneurial endeavors to remarkable heights.

The book delves into the heart of the Cartier family, exposing their triumphs and tribulations, successes, and challenges. Brickell brings forth the complexity of family dynamics, painting a vivid picture of their relationships and the impact of their shared passion for jewelry. The interplay of personalities between the Cartier brothers – Louis, Pierre, and Jacques – was a driving force behind their success, where creative vision, sales acumen, and financial acuity converged harmoniously. It propelled them through challenging times, navigating global conflicts, economic downturns, or changing consumer preferences.

On one occasion, Pierre recognises their strength, "We brothers are very close, that is our strength" (pg 131). Jean-Jacques added, "Pierre was a brilliant businessman. He didn't have Louis' creative vision, but then again, Louis didn't have Pierre's ability for selling or his understanding of finance... But Pierre understood the markets and he understood people's motivations. Cartier needed the mix of different talents, you see, that was one of the reasons that it did so well" (pg 243).

It's not that the brothers did not have differences or fights. They did. "The trade knew how tight the Cartier brothers were. That was important. It was one of their strengths-when dealing with one, you were actually dealing with all three. They had a lot more bargaining power that way", said Jean- Jacques (pg 330). This crucial lesson in unity is a beacon for any business family seeking to thrive across generations.

The Cartiers also demonstrate the resources acquired through marriage in a family business. All three sons of Alfred Cartier, and Alfred himself, married into families that benefited the Cartier business. The strategic alliances forged through marriage enhanced their reputation and helped them build strong family social capital. The Cartiers' embrace of such unions underscores the importance of carefully curated partnerships and their role in building lasting success.

Family governance and togetherness

In 1906, "Not wanting any arguments between his sons, Alfred had a dispute resolution clause built into the firm's constitutional documents. If there was a disagreement between Louis and Pierre, the matter should be resolved by either Alfred or, interestingly, Louis' father-in-law, Jean-Philippe Worth." There was even a family council in place. Most business families don't have a stated dispute resolution mechanism or a constitution, even today! They must have one! The Cartiers' shareholding also changed and kept up with the growing multi-national transatlantic operations.

However, the presence of family governance mechanisms did not prevent the Cartiers from eventually selling off their stake in the firm. I think one reason the family sold out their stake was the dwindling bond within the fourth-generation members, their bond with the business, and the passion to keep it in the family.

The fourth generation of the Cartiers grew up apart due to the third generation primarily living in three different far-off cities. They did not have the same bond as the third generation, which had grown up together. Brickell laments, "But whereas three close brothers with complementary talents could survive the storms life threw at them, from a huge global conflict to a great depression, the cousins, lacking the same bond and shared upbringing, found the challenges of the postwar world overwhelming" (pg 539).

I also felt the pressure on Claude, Marion and Claudel, and Jean- Jacque to live up to their predecessors. Each one of them handled it differently. The tussle between Pierre and Claudel was unfortunate. But who was wrong, and who was right? I felt anger towards Claudel, but could I blame him for being different from the rest of the flock? I could feel the weight on his shoulders and the rebellion, perhaps because of it.

In the end, family bonding, pride in the family name, and shared values keep the family and the business together. Brickell wonders, "Perhaps, as a unified family, the Cartiers might have adapted to the changes sweeping through the luxury world, but apart and alone, they could not" (pg 536). Perhaps. It is difficult to say in hindsight. But I would like to believe it too.

From the time Louis shifted to the US, accounts of his lifestyle there did not leave me with a good feeling. After that, the sale of New York and Paris branches did not surprise me. The writing was on the wall, in a sense. His last will and testament read, "Division in families creates ruin and misery. I command my heirs to maintain harmony among themselves and with their cousins " (pg 381). Unfortunately, Louis' caution could not prevent the sale of the New York Maison by his son, the first nail in the coffin.

Resilience

The book weaves through tumultuous events such as the World Wars, the sinking of the Titanic, and the great depression, where unforeseen circumstances and personal emotions intertwined with the fate of the business. Their united front and complementary talents fuelled their resilience through trying times.

I shared the family's despair as the war raged, with Jean Jacques on military service, Louis and Jacques not keeping well, important clients fleeing from London, Paris, and as America joined the war. I watched in horror as Milton Heath was bombed.

This period seemed so much like the Covid times. Family members worrying about each other, and businesses shut down completely. I would probably not have understood or related to what the Cartiers were going through if I had not lived through the Covid era.

The Cartiers survived these periods and came out stronger each time due to their vision, passion, innovative strategies, and togetherness.

Innovation

From a humble beginning in Paris to the global prominence of the brand, the Cartiers built an empire, one gemstone at a time. The Cartiers' unwavering dedication to craftsmanship and their innate ability to cater to the desires of royalty and celebrities alike are portrayed with such vividness that it's almost palpable. Their creations become more than just jewelry; they transform into symbols of love, power, and human emotion.

Louis's "Never copy, only create" mantra ran through the entire organization, irrespective of the location and the brother handling the business. The Cartiers' devotion to their craft and innovative spirit is encapsulated in their iconic creations, such as the Trinity ring and the Tank watch, which symbolize enduring love and timeless elegance.

While change is the only constant, and the Cartiers kept adapting to the changing customer preferences, the Cartier style remained a constant.

Other stakeholders

Brickell's attention to detail illuminates the family's commitment to their craft, evident in their unwavering focus on quality and customer relationships. I traveled alongside the Cartiers and witnessed their interactions with esteemed clients. These accounts underscore the importance of nurturing relationships with customers and the role of exceptional service in elevating a family business to new heights.

The book also delves into the profound impact of dedicated employees, showcasing how their passion and loyalty contributed to Cartier's reputation for unparalleled craftsmanship. The Cartiers' commitment to nurturing a talented and loyal workforce exemplifies the "Family Human Capital" concept, where family members' and employees' shared values and dedication contribute to the company's sustainable growth.

All three brothers relied heavily on their loyal employees, entrusting them with substantial responsibilities and giving them a free hand to run the business. The Cartier brothers empowered their team and nurtured a culture of excellence. Allowing them to excel in their roles and contribute to the company's growth was instrumental in building long-term success for the family firm. I deeply appreciated the role of employees like Toussaint, Jacqueau, Muffat, Glaezner, Hasey, Bellenger, Devaux, and many more in keeping the Cartier flag flying high in war and peace, in times of family unity and otherwise.

At one time during my journey with Pierre Cartier, I asked him incredulously if Jules Glaezner actually arranged for the stars of a hotly anticipated play to wear Cartier jewels on stage during their performance, then invited "several carefully selected clients, to attend the performance in a special box with him"? Glaenzer had actually selected the jewels for the actors with these clients' tastes in mind. After the show, he went backstage with his guests to meet the actors and collect the necklaces, bandeaux, and bracelets. He then announced that carrying such a huge amount of valuable jewelry would be too risky. Instead, he proposed that each of his female guests select an item to wear for the remainder of the evening and that he would collect it from each of them the following morning. He then took his guests out to a nightclub, where, as intended, their jewels were much admired. The next day, a Cartier delivery boy called at the guests' homes for the jewelry only to find that each woman had decided to buy what she had been wearing the previous evening (pg 253-254).

It was usual for multiple generations of the same family to work at Cartier. Many Cartier employees in all three branches worked for them for decades.

Indian connection

Being an Indian, I cannot but devote a sub-section to the role the Indian Maharajas played in the Cartier's rise. Though, it's not without the realisation that it was the period when the struggle for independence from British rule was underway, and the grandeur of the Indian royalties seems misplaced. But then, really, who am I to judge?

The book's portrayal of the Indian Maharajas and their penchant for extravagant jewels adds a mesmerizing facet to the Cartiers' journey. I traversed the opulent durbars of the Gaekwads, the Nizam of Hyderabad, the Maharaja of Patiala, and the Maharaja of Nawanagar, alongside Jacques. Jacques's escapades to India seem like a dream. Imagine him bringing his Rolls Royce to India! I am thinking of his Rolls Royce on roads where there were no roads!

India was once called the "golden bird," and the intertwining of the Cartier's legacy with the wealth and grandeur of Indian royalties was, therefore, no surprise. Yet, the extent left me gaping in awe. When Muffat was summoned by the Maharaja of Patiala, Maharaja Bhupinder Singh, and he opened one gem after another from a trunk full of gems, Paul Muffat tried to hide his awe. I did not. I stood there with my mouth open!

Conclusion

I read the book with a childlike awe and wonder. I did not want the book to end. Francesca Cartier Brickell's extraordinary narrative has etched an indelible mark on my soul, allowing me to traverse time with the Cartiers, witnessing their triumphs and sharing their heartaches. When I stood alongside Brickell at the crypt, my eyes were wet. I felt the connection with the Cartier ancestors more deeply than she would have realised that any reader would.

For family business scholars, "The Cartiers" is a treasure trove of examples that compliments the theories. The book offers a rich tapestry of the Cartiers' experiences, exploring topics such as familiness, succession planning, intergenerational collaboration, the role of communication in maintaining family harmony, family constitution, and the intersection of family and business values. These lessons provide a unique opportunity for scholars to delve into the complexities of family enterprises and draw inspiration from a remarkable family business and the family that created and nurtured it.

For the family business owners, "The Cartiers" is a timeless journey that will speak directly to them, offering a profound understanding of the enduring power of unity, passion, and vision. They will find themselves nodding in recognition in many places as if looking into a mirror reflecting their experiences. It provides invaluable lessons, and a poignant reminder of the lasting impact a family's commitment can have on generations to come.

In conclusion, "The Cartiers" by Francesca Cartier Brickell is an exquisite literary gem that navigates the depths of family business dynamics with grace and insight. I have read numerous books on business families. But none is as exquisite, fascinating, and emotional as the journey of the renowned Cartier family through the ages!

When a Corporation Traverses 100 Years Sans a Formula

This article was first published in Outlook Business, August 1, 2023; https://www.outlookbusiness.com/the-big-story-1/lead-story-8/when-a-corporation-traverses-100-years-sans-a-formula-6810

Centennial companies have weathered the storms of time, evolving their ownership structures to adapt to the changing dynamics at the macro, meso, and micro levels- socio-economic-political-institutional, business and society, and family levels. A few factors include the institutional framework of the country, industry-specific dynamics, profitability and earnings trends, corporate governance practices, family, state, or foreign multinational company ownership, and mergers and acquisitions.

The evolution of the ownership structure is essential to navigate the challenges thrown by the dynamic environment, and its implications extend beyond financial performance. It influences firm strategies, value, dividend policy, corporate governance, corporate social responsibility, environmental sustainability, and industry dynamics. This article looks at some factors that have transformed ownership structures in long-lasting companies.

The Great Family Sagas

Family ownership has been a prevalent characteristic of many long-standing Indian companies. Many of them have surpassed the century mark and, yet, have retained family ownership, symbolizing their resilience and commitment to legacy, despite the challenges faced during inter-generational ownership and succession transitions.

The ownership structure has evolved from individual ownership to a holding company or trust for reasons such as separating ownership and management, facilitating succession planning, protecting family assets, optimizing taxes, and enabling business expansion. These transitions are driven by a desire to ensure long-term sustainability, enhance governance practices, and secure the family's wealth and legacy in the evolving business landscape.

Examples include a) Bajaj Group, which transitioned from individual family ownership to a holding company structure with Bajaj Holdings & Investment Limited (BHIL) as the apex holding company. This restructuring facilitated a more streamlined approach to managing the diverse businesses and enhanced corporate governance; b) the Murugappa Group transitioned to a family trust structure, the Murugappa Chettiar Trust (MCT), to ensure seamless succession and preserve family values, and; c) the Godrej Group has utilized a combination of family trusts and holding companies to optimize tax efficiency and facilitate estate planning. This structure allows for efficient wealth management and seamless intergenerational transfers.

Going Public

Large, long-lasting companies do not need to go public. There are ample examples, such as Parle Products or the Serum Institute of India, that have chosen to remain privately held perhaps to a) retain control- by staying private, families can make strategic decisions with a long-term perspective without being influenced by short-term market pressures, and b) to avoid the regulatory requirements and public scrutiny that come with being a listed company- staying private offers greater flexibility and autonomy in decision-making, allowing companies to operate with fewer regulatory constraints and disclosures. This can be advantageous for companies that prioritize confidentiality or have unique business models that may not fit the public market's expectations.

However, as they grow in size and complexity, most companies venture into the realm of public listing, embracing the benefits of wider ownership, enhanced corporate governance, and often valuable insights from institutional investors. Public listing allows firms to access capital for fuelling expansion, streamlining systems, processes, and structure, adhering to stringent corporate governance standards, promoting transparent practices, and greater financial discipline. Bombay Stock Exchange (BSE), India's oldest stock exchange, transformed from a secretive club of brokers to a publicly listed company.

Going public may dilute the family's ownership and control over the company. However, some families view the benefits of accessing public capital, enhancing liquidity, and widening the shareholder base as a means to achieve their long-term vision for the business. Reliance and the Aditya Birla Group have used Initial and Follow-on Public Offerings to fuel expansion plans and fulfill the vision of becoming a global player across diverse businesses. While Infosys went public in 1993 to adopt best-in-class governance practices, enhance transparency, and build trust with investors and clients.

The Shape-Shifters

Mergers, acquisitions, corporate restructuring, and strategic alliances have significantly altered ownership structures and dynamics in the corporate world. Founded in 1892, Britannia Industries went from a humble bakery to a confectionery conqueror through strategic alliances and acquisitions, including a merger with the biscuit division of a British company. These strategic moves strengthened its market presence and transformed its ownership structure.

Similarly, Hindustan Unilever Limited, formed through the merger of Lever Brothers, the Indian company Hindustan Vanaspati Manufacturing Co., and United Traders Limited in 1956, exemplifies the impact of a merger on ownership structures. Tata Group's Indian Hotels Company Limited, established in 1903, in its 120 years of existence, has entered several partnerships, strategic alliances, and mergers and acquisitions to become the World's Strongest Hotel Brand and the largest hospitality group in South Asia.

Each of these activities impacts control, shareholding structure, and governance, reshaping the companies' landscape.

Shareholder Activism

Institutional investors and shareholder activism have become key players in the ownership narratives of Indian companies. In the case of Satyam Computers 2009, shareholder activism played a crucial role in exposing fraudulent activities and seeking justice for the shareholders. After the scandal came to light, several institutional and individual shareholders of Satyam, including mutual funds, pension funds, and retail investors, actively pursued legal action and sought remedies for the losses incurred due to the fraudulent practices of the company's management. They filed lawsuits against the company, its management, auditors, and other involved parties. As a result, the founder lost control of the company, and subsequently, the company was acquired by the Mahindra Group through a competitive bidding process.

Making Their Own Stories

The evolution of ownership patterns in long-lasting Indian companies is a captivating case study with important implications for the broader business landscape.

The ownership journey of these companies teaches us that there is no one-size-fits-all formula for success. The enduring family-owned businesses remind us of the power of tradition and the importance of nurturing strong family bonds. The public listings highlight the advantages of opening up to the world, attracting diverse shareholders, and embracing corporate governance principles. The shape-shifters prove that strategic alliances and acquisitions can rewrite a company's destiny. And shareholder activism reminds us that no company is safe from the demands of its shareholders, regardless of its age or legacy.

The evolving ownership patterns in Indian centenarian companies are a testament to their resilience, adaptability, and ability to thrive in an ever-changing business landscape. Their stories provide valuable insights and inspiration for companies of all ages, urging them to embrace change, write scripts, and captivate audiences with ownership journeys.

Of Sultan, Succession, and Family Businesses

It is no secret that I am a Bollywood aficionado. Until a few years ago, I claimed that I watched 95% of all released Hindi movies. That statement no longer holds as I have gotten busier, and the number of movies released yearly has also increased. Like many other things, I cannot keep up and often prioritise. Though, I make it a point not to miss any top releases. I even watched Lal Singh Chaddha on the big screen (please imagine the cringing emoji)!

"Kisi ka bhai kisi ki jaan" was released on Eid this year, as most of Salman Bhai's movies do. I had a serious conversation with myself. After much deliberation, I decided to give it a miss. I guess the decision itself was a no-brainer. The question troubling me was, "Will I still qualify as a Bollywood junkie if I gave it a miss?" Guess some questions are best left unanswered.

For old-time's sake and all the Salman Khan movies I have enjoyed, I decided to revisit Sultan. I must say that I thoroughly enjoyed watching it. I keep re-watching a few movies, especially when I am short of time and know precisely what I want to watch. Somehow, while Chak De and Dangal are top of the list of movies I have watched the maximum number of times, Sultan never made it to that list. I shall correct this miss now.

So, I started watching Sultan. The movie starts with a boardroom scene. Aakash Oberoi (Amit Sadh), son of billionaire industrialist Gyan Singh Oberoi (Parikshit Sahni), was struggling to convince investors to support him for another six months. Aakash was convinced about the potential of Pro-Takedown Wrestling. However, Cricket seemed to be the only sport that pulled the public in India. He had only six months to prove himself. Here, a scene caught my attention, which I missed in 2016, when I watched it in the theatre, as I missed the movie's first 10-15 minutes. Also, my family business antenna is much more sensitive now.

Back to Sultan. It is a conversation between the father and the son in the Pro-Takedown arena.

Aakash tells his father, "Dad, you were right. This sport has no future."

[Lesson 1: The older generation has the experience and should not be written off, even if they do not have fancy degrees.]

Gyan replies, "There is a future. You just cannot see it."

[Lesson 2: Once the next-gen admits their older generation was right, they are again proven wrong. At this point, the older generation comes all out to support the venture by the next-gen.]

In a contemplative mood, Aakash replies, "You know, this sport is a hit worldwide. Westerners are crazy for it."

Gyan counters, "We are not Westerners. This is the problem with your generation. Everything important seems 'cool' to you."

[Lesson 3: Understand the local market.]

A confused Aakash asks, "What are you trying to say, Dad?"

Gyan explains, "I am trying to say that this sport does have a future in India. But not in the hands of Westerners. India is a country with different values. It is a country where own people, relationships, and patriotism are valued. When an Indian really beats a white man in this stadium, that is when all your seats will fill up."

[Lesson 4: Appeal to the emotions of people.]

Of course, the rest of the movie is about how Sultan (Salman Khan) goes on to win the Pro-Takedown Wrestling championship. And how Gyan is proud of his son, Aakash.

The scene that I have narrated above seemed so natural. I could visualise family business leaders having such conversations with their scions. It is common for them to oppose an idea if they do not understand it. However, it is also common for parents in India to go all out to support their children once children have jumped into something. The investors come on board because of the family's reputation and connections. The next generation faces steep media scrutiny as they are constantly compared to their successful parents. The previous generation's experience is readily available and invaluable (Gyan suggested to Aakash that he should get Sultan to compete).

Furthermore, a peer group that can extend support when needed (like getting sponsorship for Sultan from Kukreja, a friend). In short, a rich resources basket. The movie also depicts how the next generation is conscious about losing money, living up to expectations, and making their own mark. It is not easy for them.

The reason the scene between Gyan and Aakash struck a chord and stayed with me long enough for me to write this piece is that I have been watching season 4 of the popular HBO series Succession. Even though the first three seasons were nowhere close to how Indian business families are, in my humble opinion. Watch out for another article on the series "Succession" and Indian business families. Coming soon!

As Gyan said, "We are not Westerners." It is time our producers, directors, and scriptwriters came up with an indigenous "Succession" series. I hope someone is listening. Bollywood!

ESG and Stakeholder Capitalism: Seeking Value for All

This article was first published in Outlook India on May 09, 2023. Co-authors: Moksh Garg, Sougata Ray; https://www.outlookindia.com/business/esg-and-stakeholder-capitalism-seeking-value-for-all-news-284879

Nobel Laureate Milton Friedman, in his famous essay "The Social Responsibility of Business is to Increase its Profits," published in the New York Times magazine in 1970, famously wrote, "There is one and only one social responsibility of business--to use its resources and engage in activities designed to increase its profits..."

Compare this with the Statement on the Purpose of a Corporation adopted by 181 CEOs of America's largest companies in 2019. The Statement declared, "…companies should deliver long-term value to all of their stakeholders – customers, employees, suppliers, the communities in which they operate, and shareholders."

Post the Covid19 pandemic, calls for "stakeholder capitalism" has further picked up the pace. Gone are the days when economic profits alone determined a firm's success. The for-profit entities are being held responsible not only for the bottom line but also for the activities through which they create shareholder value and the value they create for other stakeholders. As a result, it is no longer surprising to see them getting mired in controversies or even attacked by their shareholders over broad-ranging social issues. This has led shareholders and the wider investor community to take stock of businesses beyond traditional metrics.

Measure accurately and improve

The method to measure economic profits has been established and standardised for long. However, measuring stakeholders' value creation is still in its infancy. And, what cannot be measured, cannot be improved, managed, or controlled. Therefore, combined with changing social dynamics and the issue's salience, many rating agencies and data providers started providing ESG ratings for companies.

At the most basic level, ESG ratings aid investors in comprehensively evaluating a firm by analysing it across its three major dimensions: environmental, social, and governance actions and impact. While ESG, in spirit, is a step in the right direction, it has been wrestling to drive a commensurate impact worldwide. There are significant roadblocks impairing its overall uptake and effectiveness. Two major hurdles are the lack of standardized disclosures by corporate and inconsistent measurement criteria employed by the ESG rating providers (ERPs).

Disclosure: Our research at the Thomas Schmidheiny Centre for Family Enterprise, Indian School of Business, suggests that less than 4% of the total publicly listed Indian firms have been assigned ESG ratings between 2014 to 2021. We arrived at this figure by consolidating three different ERPs, i.e., WRDS Sustainalytics, Thomson Reuters, and CRISIL. The reason for the low coverage of companies by ERPs is that ERPs rely on publicly available data to make assessments. However, most companies – especially the medium and small-sized ones – do not track their ESG activities, let alone disclose them publicly. Even companies that make complete disclosures do not follow any standard procedure, making their interpretation subjective and comparisons across companies challenging.

Measurement: While comparisons across companies are difficult due to a lack of standardised disclosures, how information for the same company is compiled, measured, and converted into an aggregate score differs quite a bit from ERP to ERP. A study conducted by researchers from MIT, published in the Review of Finance, reported steep inconsistencies in the ESG ratings assigned to a business by different agencies (Berg, Koelbel, & Rigobon, 2022). In many cases, firms are assigned highly inconsistent ratings by different ERPs owing to differences in methodology, scope, or weights (importance) assigned to attributes. The divergent estimates about the same underlying entity add to the confusion and defeat the very purpose of these ratings.

Sample: The number of firms assigned an ESG rating in India (by the three ERPs cumulatively) is a minuscule percent of all listed firms (4%). Further, because we cannot compare the ratings across ERPs, research must be done using the data from just one ERP, reducing the number of companies that can be studied even further. Additionally, the number of years of data available for each ERP varies. In such a scenario, the reliability and generalization of research become questionable.

ESG ratings and their effectiveness are subject to substantial political debate in the West. The opposition has openly attacked ESG for its overly ambitious vision but deeply flawed implementation. Some critics have even questioned the morality of ESG by calling it a fabricated tool to legitimize greenwashing. However, in our opinion, although ESG is undoubtedly far from perfect, it remains one of the most potent ways to reimagine businesses in a society fraught with grand challenges.

In line with the old saying "do not throw the baby out with the bathwater," we expect that in the Indian context, SEBI's mandate for BSE Top 1000 companies to report their ESG activities as part of the Business Responsibility and Sustainability Reporting (BRSR) shall alleviate some of these concerns. However, it is time that companies understand the spirit of ESG, and even those companies that do not fall under the purview of BRSR voluntarily disclose the steps taken toward a more sustainable future. Let us actively work towards addressing the pitfalls, bringing more standardisation to disclosures and objectivity to measurement.

What Family and Non-Family Businesses Can Learn from Each Other

This article was first published in the Economic Times on April 05, 2023, Co-authors: Navneet Bhatnagar, Sougata Ray; https://economictimes.indiatimes.com/news/company/corporate-trends/what-family-and-non-family-businesses-can-learn-from-each-other/articleshow/99276293.cms

Indian economy comprises business organisations belonging to diverse ownership categories. On one hand, these include the traditional family-owned firms, such as those owned by the Tatas, Godrejs, or Birlas. While on the other hand, there are non-family businesses that are owned by the state (ONGC or SAIL), or multi-national corporations (HUL or BATA), or have diversified set of owners (L&T or Infosys). Both the family and non-family businesses have had a track record of successes and failures. There are significant learnings that each of these categories of businesses can share with each other and benefit from.

Family-owned business is the dominant form of business organisation in India. Ranging from large industrial houses to medium and small enterprises, family businesses form the backbone of the Indian economy. Over 90% of all listed firms in India are family-owned businesses. There are several lessons that non-family businesses can learn from their family-owned peers:

1. Long-Term Orientation and Patient Capitalism: Known for their resilience, many Indian family businesses such as, the Tatas, Birlas, Burmans, and Murugappas, have survived for five generations or beyond. Their long-term orientation and patient capitalism helps them assign greater significance to long-term gains compared to short-term returns. Long-term orientation of family business facilitates radical innovations which require longer time horizons to fructify and earn profits. Globally, this phenomenon is observed in some of the most innovative family firms in the pharmaceutical industry like, Merck of Germany or the Swiss, Roche group. Patient capital investment provides for longer gestation periods and enables a family business to outperform competition in the long run, thereby helping it sustain longer. Businesses operating with a short-term perspective react to the emerging trends to earn a fast buck, often at the cost of long-term gains. On the other hand, research has shown that a family business with long-term orientation in its vision and strategy conducts extensive environmental scanning to anticipate long-term trends and prepares itself to take quick actions when opportunities emerge.

2. Strong Stakeholder Relationships: A set of strong stakeholder relationships is another characteristic that sets family businesses apart from their non-family peers. On account of personal engagement of family owners, family firms often have long-standing relationships with their suppliers, distributors, customers, and employees. Family businesses are also known for their community embeddedness and family identity. There is mutual trust and dependence on each of their stakeholder communities, which helps family businesses overcome challenges caused due to uncertainties in business environment. This strong stakeholder cooperation was amply visible during the pandemic times when many family businesses witnessed a quicker rebound to business operations and profits.

3. Family Values in Practice: Most important lesson that family businesses offer to their non-family peers is their strong roots in family values of custodianship. Being firmly rooted in family values helps family businesses develop shared vision and goals, define clear and cohesive purpose for being in the business, and values drive the policies and practices in the family business. Values provide a moral compass, inspire exceptional performance, and help family businesses achieve stability and maintain consistent behaviour. It helps them overcome adversities and guides them through ethical dilemmas in a constantly evolving business environment. For instance, in our qualitative research on ‘family values in practice,’ the house of Tatas and the Godrej group were found to command respect and committed stakeholders mainly due to their conduct rooted in a strong value system, which was passed on from one generation to another.

Family businesses can also learn several things from effectively managed non-family businesses:

1. Professionalism: Professionalism has two dimensions: organisational professionalism and occupational professionalism. Effectively managed and organised non-family businesses exhibit high levels of organisational professionalism, which entails clear hierarchy of authority and decision-making, standardised procedures, clear roles and responsibilities and assessment of executive performance. Occupational professionalism entails managerial conduct that adheres to principles, values, and ethics. While practicing occupational professionalism, managers of non-family firms exhibit self-discipline and gain collegial authority. Professionalism is intricately attached to an organisational culture of excellence and merit. Thus, family firms can enhance routines, managerial outcomes, control, and productivity if they imbibe professionalism.

2. Capability and Resource Orchestration: Another aspect that family businesses can learn from non-family peers is ‘capability orchestration for scalability.’ A firm's ability to orchestrate appropriate capabilities and resources required to achieve certain strategic objectives is critical to its success. Non-family firms are known to have effective capability orchestration because of a diverse and qualified workforce comprising professionals that come from different backgrounds. They can quickly garner resources and tap capabilities to create value for the customers and owners. Owing to their capabilities and resource orchestration skills, non-family firms can also quickly scale-up their operations. Family businesses that aim for growth can learn these from their non-family peers.

3. Decisiveness and Accountability: Well structured decision-making process, high quality of professional employees, clear evaluation rubric for key business problems and professional approach to dealing with management situations enhance the decisiveness of non-family businesses. They also have high levels of accountability for the targeted outcomes of executive decisions. If the desired outcomes are not achieved, they immediately adopt corrective measures. This ensures that they stay on course to achieve their strategic objectives. Family firms are often blamed for being indecisive and for poor accountability norms and practice. They can considerably benefit from adopting the decisiveness and accountability norms followed by non-family businesses.

Thus, both the family and non-family businesses can enhance their performance outcomes through their constant effort towards mutual learning. 

Leveraging the power of an independent board

This article was first published in the Financial Express on March 14, 2023, Co-authors: Navneet Bhatnagar, Sougata Ray; https://www.financialexpress.com/industry/leveraging-the-power-of-an-independent-board/3008998/

Governance failures often jeopardise businesses, including family-owned firms. Family businesses are often blamed for poor corporate governance and oversight. In India, well known and established family firms have come under the regulatory scanner for opacity in financial dealings, related party transactions, and appropriation of minority shareholders’ wealth.

For corporate governance and monitoring issues, the buck stops at the apex governing body of the company, that is, its board of directors. The board of directors of a company determines its purpose, broad policies, and oversight mechanisms. An effective board ensures that executive decisions are made in the company's best interest. It is critical for the board oversight mechanism to assess the impact of executive decisions on shareholders and other stakeholders.

Aimed at improving corporate governance, the Companies Act 2013 stipulates the appointment of Independent Directors as non-executive members who can objectively scrutinise executive decisions and management performance. While monitoring the firm's reporting mechanism, independent directors are expected to evaluate and check the robustness of financial controls and risk management systems. They must uphold high ethical standards, integrity, and probity. Independent directors are not supposed to receive any monetary benefits except their fees. They are appointed for a five-year term and can not hold more than two consecutive terms.

Corporate governance standards were expected to be elevated through these legal provisions. However, various corporate governance debacles continue to hit the headlines in India. In 2015, Diageo alleged misappropriation of funds at United Spirits, which they had acquired from Vijay Mallya. Malvinder and Shivender Singh's fraudulent loan transactions at Religare and loan fraud at Gitanjali Gems were the other cases that poorly reflected the governance in Indian family businesses. So was the case of the Dhoot family-owned Videocon's loans obtained from ICICI Bank by questionable means and alleged kickbacks. In all these cases, the role that independent directors played as the custodians of stakeholder interest was wanting.

Our research on these cases of corporate governance failures of independent directors reveals some key insights.

Proximity to Promoters: One of the reasons why independent directors fail to discharge their fiduciary duties is their proximity to the promoters. Due to this, they often do not hold management to account and avoid asking tough questions. Independent directors who continue to serve the companies for a long time develop an affinity with key management personnel, making oversight difficult as the emotional costs of a negative exchange escalate. Hence, independent directors impose self-restraint.

Power equation: In several cases, we observed that the aura and assertiveness of the promoter family's leader kept the independent directors constrained to voice concerns. Board selections were made so that the independent directors could not seriously challenge executive decisions.

Incentives: Another reason for this oversight was the lure of the incentives attached to the board position. Independent directors follow what pleases the management or postpone raising their concerns due to the significant monetary/non-monetary incentives they gain from the company.

Overworked: In some other cases, we observed that the independent directors were so occupied with multiple responsibilities across different companies that they failed to devote sufficient time and attention to their oversight responsibilities.

As a result of the above factors, independent directors are rendered “rubber stamps”, corporate governance falters, and the respective businesses suffer a significant loss of monetary and brand value.

The need of our times is to make independent directors “truly independent.” Several measures can be adopted to empower independent directors with the authority to intervene through more effective checks and control mechanisms.

Selection: First and foremost, it is vital to improve the independent directors' selection process. They must be chosen on merit and have an impeccable value system.

Induction: They must be appropriately inducted and familiarized with the business and its key challenges. They must be eager to learn and update their knowledge and skills. They must be able to assess the internal and external environments in which the business operates and be vigilant of the motives that drive executive decisions.

Promoters' Buy-In: The most crucial factor that may make the role of independent directors more effective is the promoters' realization of the genuine need to raise the corporate governance standards of their company. If promoter families embrace good corporate governance in its true spirit, they will see the value in fostering vocal, expert, empowered, and truly independent directors.

Family firms and promoters must realise that when boards fail to exercise effective oversight, deviations from governance norms go unchecked. Ineffective governance eventually results in bigger violations and the destruction of value. Therefore, the boards must be diligent in objectively assessing executive decisions and providing timely advice when remedial measures are required, and they must be 'allowed' to do it. 

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.

Bridging the generational divide in family businesses through communication

This article was first published in Outlook India on January 05, 2023, Co-author: Simran Senani; https://www.outlookindia.com/business/bridging-generational-divide-in-family-businesses-through-communication-news-251014 

It was a life of struggles for the family when my grandfather died unexpectedly at a young age, my 85-year-old grandmother recalls. “Suddenly, we had nothing. However, we never spoke about it outside. We did not ask anyone for anything. Our lifestyle did not change when we had nothing. And, it has not changed now when we have everything again.”

Those words, spoken casually while I watched The Crown season 5 on Netflix and she went about her daily routine, subconsciously made me feel connected to our lineage and family values. My mind wandered to the challenge many family businesses face in the 21st century. Myriad options, gadgets in the palm, shorter attention spans and intolerance for listening to anything that may not seem of direct interest have caused a divide between the younger and the older generation that seems insurmountable.

Many parents in family businesses pay little attention to interaction with children in their formative years due to their busy schedules and the business demands on their time. Soon, as the children reach their teenage years, in many cases, they feel an emotional void and disconnect from their parents. The older generation also finds it hard to cope with the children’s needs, thoughts and desires. They realise there is little to talk about except coordinating with them for their basic needs. In addition, the widening gap between shared generational experiences also leads to weakening intergenerational bonds.

A second-generation family business leader rued, “The way my brother and I see our business, the emotional connection that we have with it, the desire to uphold the legacy of the business that our father left for us, is simply lacking in our children. They see the business as a money-making machine without wanting to nurture it adequately. We do not know how and from where to start bridging the gap!”

How can the intergenerational gaps be bridged? Here are a few practical solutions that may be considered.

Shared Spaces: This should be the first step towards understanding each other and communicating more. The senior generation can make rules that evolve into traditions over time, such as having dinner together, having a single television at home, eating breakfast together on Sundays with extended family members and celebrating important days together. Sharing space, time and experiences with each other results in better bonding and communication.

Creating opportunities to share: Whether a family lives in the same house or not, communication opportunities need to be created if they do not happen organically. The family must establish formal mechanisms to facilitate dialogue among members on family and business issues in an environment of non-judgement, trust and openness. Starting with a few planned meetings, the family can eventually form a family council (FC). All members of the family become members of the family council, including the children, as they reach their teenage years.

Some families go a step ahead and form the next-generation members’ young council (YC) to facilitate communication among the next-generation members. They have monthly scheduled video calls where they all connect informally and share their challenges and learnings in work and personal life.

Championing communication: When communication between family members is not great, there is often a fear of saying something that might alienate others further. Someone from the family needs to take the lead in understanding how relationships between generations play a crucial role in building legacy, harmony and business growth. A person with empathy, who is willing and able to take everyone along, can champion the engagement and, if needed, engage an advisor (or coach).

Communication is not what is said or intended but what the other person receives. We often underestimate the effort that must be put into learning how to communicate effectively. Families sometimes engage with a coach to learn and practise communicating effectively with the help of communication tools. These sessions also allow the family members to connect deeply.

Conclusion

The unconscious opportunities to interact, bond and build a legacy gradually disappear. Bridging gaps between generations, even intra-generational, is vital to perpetuating family businesses. Family business guru John L. Ward writes in his book Perpetuating the Family Business: 50 Lessons Learned From Long Lasting, Successful Families in Business: When one firm was sold to a large conglomerate amid a great deal of family turmoil, its CEO was asked by a reporter why the family had failed to carry on with its business, “Three reasons,” he answered, “Communication. Communication. Communication.” What he meant, of course, was “Lack of communication. Lack of communication. Lack of communication”.

Therefore, business families, do not take communication for granted, or ignore it at your own peril. And, if you (business families) have to take one resolution for the New Year, let it be to communicate more! On that note, here’s wishing all the readers a very Happy and Prosperous New Year.

Tricks to ensure the next generation becomes capable to take over the family business

This article was first published by the Economic Times, on November 15, 2022, Co-Authors: Sougata Ray, Navneet Bhatnagar

https://economictimes.indiatimes.com/news/company/corporate-trends/the-tricks-to-ensure-the-next-generation-become-capable-to-take-over-the-family-business/articleshow/95529582.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

Leadership succession is a critical transition for family-controlled businesses. Successor selection is a crucial decision that determines the future strategic direction of both the business and promoter family. In practice, family businesses often do not realize the need and importance to plan for succession. Some that do recognize it, continue to postpone that decision. This happens primarily due to three reasons. First, often the incumbent leaders are engrossed in operational aspects of the business and do not feel an urgent need to plan for succession. Another reason, especially with large promoter families, is that the complexity of family dynamics and tangled interface with the business, render succession, a tough decision to make. Third, and most critical, is the lack of preparedness of the next generation leadership, which makes the incumbent leader hesitant to pass on the baton. This is often reflected in our interactions with senior generation participants of our executive education programmes for family business leaders. Senior family business leaders express their reluctance to transfer leadership charge as they lack confidence in the capabilities of their next generation members.

It is important to note that succession is not an event but a process which needs to be planned for years in advance. Promoters of a few large family businesses in India have experimented with non-family successors. However, successor choice for most family firms is often restricted to the family talent pool, which is limited to the family size. While non-family businesses can quickly replace a non-performing leader, for a family business this is not so easy because of kinship ties and lack of alternatives. For a next-generation family business successor, failure costs the survival of both the business and family. Hence, given the high cost of a failure, an incumbent family business leader must not only plan early for succession but also take effective measures to groom the next generation members. This is the biggest succession challenge family businesses face today.

Next generation leadership building takes time and careful planning. It requires diligent cultivation of mentee-mentor relationship between the senior and younger generation leaders. Our research studied 19 successful cases of inter-generational leadership transitions since 2004 in large Indian family businesses. We traced these transformational journeys to identify crucial leadership building measures adopted by these family businesses. The study found that these next generation members followed a systematic development pathway, which equipped them for the leadership role. These leaders were exposed to the family business and its operational challenges at an early age. After their graduation, they joined the family business at middle management level. They gained experience in business operations and developed an understanding of ground-level challenges. They also learnt manpower management and interpersonal skills. In the subsequent phase, they went to world-class institutions to obtain a business management degree, which equipped them with knowledge of strategic frameworks and leadership capabilities.

A critical part of this journey was the work experience they gained in large international organisations after obtaining their business degrees. Working outside the comfort-zone of their family business made these next-gen members independent business decision-makers. It built their leadership strength as they had to prove their capabilities and bear the consequences of their decisions. After 2-3 years of working outside, they joined the family business at senior leadership level. During this phase, they worked closely with family and non-family mentors. They understood the strategic and leadership challenges of the business. They became effective change agents, improved legacy systems and practices, and led their business to the next level of growth. Proving their leadership mantle within and outside the family business, with diverse work experience in India and abroad, these next-gen members earned respect and acceptance from internal and external stakeholders. In a span of 5-8 years, they took complete leadership charge. The senior generation leader stepped out of the executive role and continued to provide strategic guidance.

For succession to be effective the next-gen members must have the ability and willingness to take on leadership responsibility. This can only happen when they are equipped with a wide range of knowledge, experiences and capabilities. Structured training and outside work experience play a very important role in leadership development. Business families that plan early and take timely measures to groom their next-gen members, can implement effective intergenerational leadership succession. 

Why the Rs 4.6 lakh crore pledged promoter shares matter for India Inc.,?

This article was first published in the Financial Express, on November 14, 2022, Co-author: Sougata Ray; https://www.financialexpress.com/industry/pledged-shares-valued-at-rs-4-6-trillion-the-good-and-the-bad/2812080/

Gautam Adani, hailed as the richest Asian and the third richest person in the world in October 2022, acquired 63.15% stake in Ambuja Cements and 56.69% in ACC in September 2022. Part of the acquisition was funded through pledging the entire acquired stake in both the companies, worth $13 billion. It once again highlights the popularity and importance of pledging as a financing tool for the Indian family business owners who usually have the dominant or controlling stakes in the companies.

Pledging at a varied degree is quite widely prevalent around the world. However, in countries where diversified ownership is more common, such as the United States, pledging is generally done by owners, directors, and executives to hedge and diversify their personal wealth or to meet personal needs. However, in India, pledging by family promoters often serves as a mechanism to generate financial capital for the firm or other affiliate firms belonging to the same business group. 

Promoters of almost a quarter of all companies listed on the National Stock Exchange (NSE) of India have pledged their shares to some degree. The average being a staggering 44 percent of the holdings of promoters in these companies. In the last quarter of financial year 2022 (January-March 2022), the value of shares pledged by promoters of NSE listed companies stood at Rs 4.6 Trillion. In a country like India, where more than 90% of the listed firms are family firms and concentrated shareholding is the norm, the exposure of investors and financial institutions to pledging can result in a systemic risk. It may not be so in many other countries where diversified firm is more of a norm when compared to concentrated ownership.

During the last couple of years, there have been many instances where promoters have lost ownership control in well-known large family firms. Of course, this outcome happened due to a combination of over-ambitious or bad decisions. But in many of them, the promoters had pledged their shares to financial institutions and when the share prices started to fall, the institutions sold the pledged shares in the open market. This resulted in the promoters losing ownership in their family firms. The situation was exacerbated due to the pandemic when the share prices of most companies took a hit. 

Just like the mark-to-market concept in the case of financial derivatives, when the share prices fall and the asset cover falls below a predetermined value, the financial institution raises a margin call to the pledging shareholder. Consequently, the shareholder is required to either top-up the loan with more shares or pay off a portion of the loan’s principal to increase the existing asset cover back to the pre-determined value. If the shareholder answers the margin call in the stipulated time, they will continue to own the shares. If the shareholder is unable to answer the margin call, the financial institution has the right to sell the shares in the market. The news of a margin call is generally perceived negatively by investors and the sale of a block of shares of a company in the open market accentuates the negative sentiment associated with the stock. Investors may indulge in panic selling of the stock. The increased supply of shares puts downward pressure on the stock price, thereby warranting further sale of shares by the lending financial institutions. 

In research conducted by the Thomas Schmidheiny Centre for Family Enterprise, Indian School of Business, the authors found increased crash risk, lower return on assets, increase risk aversion, and negative investor reaction to the news of pledging. We observe that the potential loss of ownership control faced by many firms that have pledged their shares is overwhelming and would have significant impact on the promoting families and the other stakeholders of those companies if the promoters were to lose the pledged shares due to an unforeseen circumstance.

However, we also find many instances of family business promoters that have effectively used pledging as a tool to finance strategic initiatives for expansion, new venture creation, acquisition, etc., and to buy back shares in their own firms. Such promoters have not only used pledging for growth, liquidity, market performance, and ownership consolidation, but also reduced pledging thereafter in a systematic way. Examples include firms such as Asian Paints, Apollo Hospitals, and Granules India. Therefore, pledging per se is not bad – it is a legitimate, legal, and effective tool to raise funds by the promoters. When access to capital is limited either due to tight liquidity in the overall economy or stretched bank limits and high debt-equity ratio of the firm, the environment may not be conducive to raise equity or the promoters may not want to dilute their stake, in all these situations, pledging comes in handy.

Pledging has been around for decades in India. However, its impact has become more accentuated now due to the VUCA world that we live in. Awareness about its possible negative consequences has also gone up. It is amply clear that the promoters need to be prudent and strategic in using pledging as a financing tool. A decision to pledge must be associated with a clear plan for usage of funds, returns from them, and a path to de-pledge the shares. The promoters should avoid getting into a trap of excessive pledging, being overconfident about the prospects of the firm and under preparing and underestimating the external risks. The family business leaders taking the decision to pledge the shares must consult the family members and keep them updated. The funds from pledging should be used responsibly, with immense accountability and transparency. The Board and particularly the independent directors have an important role to play in this regard. Timely disclosures and effective communication will help calm the nerves of the other investors. Financial institutions should closely monitor the pledging situation in a firm, as well as that of the companies affiliated with the same business group, when deciding to buy, hold or sell their investments in a firm.