Sepia Tone

Friday, December 26, 2003

"De – dynasting" the family business - Asia 21

Published in Asia 21, Jan 98 issue.

When Vikram Lal, the second generation inheritor of Eicher Limited, a family owned company in New Delhi decided to expand his business by opening an unit in another town far away from the original plant in Delhi, his aunt asked him, “Well, you are going to expand your business. Alright. But which of the family members will you send there to look after the unit?”

As a member of a traditional Indian family, she had her reasons. One of them was that Vikram Lal was the only son of his father who first started the Eicher Limited decades ago in 1959 as a tractor manufacturing company. And there were not many in the family to take care of different areas.

But it never ever occurred to Vikram Lal that one needed a family member to delegate areas. A competent outsider can do the same job was his line of thinking. So he answered his aunt that he was going to hire an outsider – a professional manager – to take care of the new unit. The aunt couldn’t digest that easily. “But be careful. You will never know about an outsider. He may not be that reliable…..” she cautioned him.

Recalling the incident today after nearly three decades, Vikram says, “ People in those days had different mindset. They believed that an outsider will not be as loyal to the company as the family members. But in reality, family members have turned out to be unreliable in some cases.”

For years, the driving force behind an Indian business venture has been the entrepreneurial spirit of the few visionary individuals. As the businesses grew over the passing years, and the patriarchs who started off them began to disappear, the businesses were handed down to the inheritors and the concept of family businesses took its root. The inheritors took good care of their inheritance and more often than not, contributed their might too, for further growth. Thus the business empires came into being.

But the scenario did not continue for long. As the business expanded into multidimensional force with each of the new area headed by a member of the clan, internal problems like clash of personalities or divergent thinking began to emerge.
What followed was a natural consequence. Splits and disintegration of the assiduously built empire or even a virtual wipe out of the original business. According to one estimate, about 23 major family concerns have fragmented between 1990 to 1997.

But the residual effect was not lost on the business community. The increasing global competition forced them on an introspective mode. In a changing international business scenario, where acquisitions and amalgamations are order of the day to consolidate business and increase market share, was it not foolish to allow an existing empire to disintegrate over family feuds? They began to ponder.

And what emerged was a realisation that more than the family managing the business, managing the company and the family was more important. Particularly in the Indian context, the economic liberalisation and the entry of multinationals was the catalyst in bringing in a change of mindset.

In the past, Indian businesses did not have much of a competition – particularly international competition. The industry was monopolised by a few local players and to large extent by the State. And in a period where a state license was required to produce or trade almost anything, there were limited players in every field which ensured the monopoly. And the supply was always lesser than the demand. It was a sellers market where everything that came out of the assembly line found a ready market.

Says Anil Sachdev, Managing Director, Eicher Consultancy Services, “In those days, there was never a motive to change or improve one’s product quality. Even after the liberalisation many business houses thought that it was a bad dream which would go away eventually. But when that did not happen and when the reality was reinforced by successive governments who went on with the reform process, they began to prepare for the inevitable change.”

It was at this juncture that many business houses discovered that they lacked the professional skills to handle the increasing complexities of business in global context. Earlier they used to do what they liked entering into any area they fancied. The line of thought was that if they succeeded in one they would in everything. Also, the traditional mindset was that the owner is the boss and only his family had the say in every decision making irrespective of the needs of the market place. So, a member of the family usually held the decision making key positions. The idea of professional expertise in a chosen area was not in their scheme of things.

But the pressure of competition was something they were not prepared for. When the going got tough in international market, they realised the importance of professional approach to their business – if the family does not have the professional expertise it was felt necessary to induct outsiders into the management. The realisation came that just by virtue of being a family member, one does not automatically deserve the thrown. And where necessary, the owner should give room for professionals to lead. Thus emerged a paradigm shift from owner manager to professional managers for key positions.

Meanwhile, some business groups who did not want to give away the leverage to outsiders, trained their own kith and kin in a professional way to lead the business. Many of the younger generation family members today are professionally trained in managerial or technical skills.

Either insider or an outsider, the manager must have a professional approach. Says Vikram Lal, “Professional managers per se does not guarantee success, but professionalism does. And the Indian business houses have learnt this through experience.”

Some business houses in India had set on professionalism from their inception. If the Tatas and the Birlas, the pioneers of the Indian industry are earlier examples, Eicher Group, Wipro Group and Infosys are some of the later day examples.

When Vikram Lal the patriarch of Eicher group took over the reins in ’75, on his return from Germany where he acquired his engineering qualification, the family business was in shambles. “I felt that if I have a constant fear that the company will go broke I may have to live with constant tension which I thought was too much to bear. If I wanted the company to survive I had to look at it from the professional point of view and I was a professional myself. To some extent I had also acquired the egalitarian approach of German way of living. The attitude of hierarchy was less. Since I have worked in shop floors and I knew the dignity of labour.”

Thus, hiring professionals for various key positions was a natural process for Vikram Lal So it was for the Tata Group and some other significant business houses which from the earlier days had appointed professional managers to head some of its divisions.

But not everyone bought the idea that professional managers need to be hired for the success. Like mentioned earlier there were several business houses which still remained glued together as a family and instead of hiring outsiders, they trained themselves and got geared up to face the challenges. But some business houses have not been so lucky. In the absence of right approach to family as well as business, they failed to pull the strings together. They simply disintegrated or vanished under the weight of family feuds which subsequently ruined the business itself.

In a recent conclave organized by the Confederation of Indian Industry (CII) to focus on the problems faced by the family businesses, Arun Bharat Ram, Vice Chairman & Senior Managing Director, SRF Limited, a Delhi based conglomerate emphasized the need to address certain vital issues in family businesses. He belonged to the family conglomerate which was a Rs.2000 crore mighty corporate under a single umbrella banner called DCM, before differences among the family members split the group into several insignificant outfits. Emphasizing the need to manage the conflict between past traditions and the challenges brought in by the changing global scenario, he reflected on the importance of keeping together a larger unified corporate entity.

Like DCM, Apollo Tyres, and the Modi Group, are some of the conglomerates which got fragmented due to family feuds. The reasons for discord in the families, as pointed out by Arun Bharat Ram, lies in internal aspirations of each family member, the divergent attitudes and lack of, or perceived lack of competence in a given area.

If one member of the family was given a specific area which is seen as significant by another member who was given another area which, in his/her opinion is insignificant, the ego tussles emerged. For long these issues remained in closet strictly within the walls of the family. But today under pressure to perform, many business houses have begun to introspect and address the problems of managing the family. They have realised that by splitting they have not gained anything nor have they been able to meet the pressure of changed business climate where quality and ability to respond or adapt quickly to consumer needs are essentials of staying in business.

If the DCM story is an example of family businesses which have failed to stay together, there are the likes of Murugappa Group or TVS Group to illustrate success stories. “In a country like India where 93% of the industry is family businesses, it is important to find ways to stay together and ensure that your market share does not go down in splits and disintegration.” Says N. Srinivasan, Deputy Director General, CII.

When Vikram Lal took over the reins and was determined to make a turn around, he consciously took a decision to avoid inducting family members in the business. So much so, the company evolved a policy which holds good to this day that no relationships of any of the employee including the owner himself will join the company. Even if a couple happen to get married after joining the company, one of the spouses always left the job, respecting this rule. “ Somehow I felt that having your close kith and kin at workplace will affect the decision making process. Particularly in India where the bonds are very strong.”

So, he has set an example himself. Today, he has handed over the reins to an outsider Subhodh Bhargava, an engineering professional who joined the company in the seventies and has literally grown along with the company. As Group Chairman and CEO, he heads the Board of Directors – a body of 12 members. And he stepped down before his only son ( 25 years, Masters in automobile industry, and training in Germany ) joined the company’s ranks at the starting level. And as for himself he sits on a Supervisory Board, which has three members – again not family members- which supervises the over all performance of the group. Having handed over the reins, he has chosen to stay away physically at far away place from the corporate centre. “If I continue to have my office there, people would drop in to see me and corporate issues might invariably crop up and that may have my indirect influence. I expect the present management to have completely freehand in the day to day running of the show.”

However, appointing professionals in key positions per se does not guarantee success. “There may be failures where even induction of professionals could not help the business. But this trend of inducting outsider professionals in the management at the board level is a recent phenomenon and enough data has not emerged to establish any failure story.” says Arunav Banerjee of PriceWaterHouse Coopers, the multinational Consultancy firm.

Another issue which needs to be analyzed in the above scenario is the employee attrition level. In these days when human resource is in high demand, what about the problems of loyalty and the high turn over at top management level? “While employing outsiders at key posts that problem does need to be taken into consideration. But when a candidate is chosen for the key post his loyalty factor was one of the main consideration that were taken into account. Often they are employees who have grown along with the company and has the company’s interests at heart.” He explains adding that the professional satisfaction also depends to some extent on the freedom he/she is given. “As long as the professional CEO runs the business on the lines already set by the owner, there may not be any problems. But what happens down the line – if the professional management differs on basic principles laid down by the owner?” he voices his doubt.

Vikram Lal answers, “In Eicher, we have this Supervisory Board which has certain predefined role with a broader focus on the group. Approval of the strategic plan for the group for three years is one of them. And every half-year we meet and review the group’s performance and discuss various issues with the Board of directors. This is not to direct them, but just to keep us informed. If there are differences in policies in future, we will take decisions as long as it falls within our realm. Otherwise, we would not interfere. The overall benefit of the group is the priority and we will review only those matters which will increase the risk of the group.”

Just as the family business tend to view the outsider professional with suspicion, the professionals on their part does not settle for a family managed company that easily. Brought up in a broader outlook, many of them dislike any hierarchical attitude or unprofessional approach of the some of the family concerns. Notwithstanding the assured “professional Approach” some companies continue to exhibit autocratic qualities in the management decisions. Professional managers avoid such companies or do a thorough research about the company before accepting an offer.

The question is not whether companies have to hire professionals to succeed or even to stay above waters. The bottom line is a need for a mixture of professional approach, the basic acumen of entrepreneur and the adaptability for change to meet the market needs.

The family can own the stakes of the company but that does not automatically
grant them right to manage the company. You need professional managers – from within the family or hired - who can take objective decisions to the overall benefit of the group.


The southern India based Murugappa Group which has diversified ventures spanning farm sector to electronics has managed to stay together as a family and has kept the group in one piece. Founded by Diwan Bahadur A.M.Murugappa Chettiar in the 1930’s the family’s roots trace back to money lending business in Burma,(Myanmar), Malaysia, SriLanka and Vietnam. The family returned to India in the 30s and started stock broking operations and rubber plantations. By 40s and 50s, it wound up the foreign operation except SriLanka and took roots in India. TI Cycles India Ltd was the flagship company at that point of time. Gradually diversified into other areas including financial services and today has grown into a Rs. 2900 crore group.

What ensured the success was the shared family values, trust in the leadership and among the family members themselves.

The code of conduct was laid by the patriarch and was closely adhered to for generations. And who would be the leader was always clearly defined and the rest of the family accepted it. The dynamics of the family business was clearly defined as objectives of family and objectives of the business. The interests of the two will not supercede the other nor will interfere with each other. Every basic issue involved in the dimensions of running a family business was pre defined through series of questions. Is discipline held should be held as norms or a process definition; what is the process of sharing resources? Is it seen in monetary terms or in skills?; what is the source of security ? Money in hand or effective managerial control of business? What is the task of the family? The mission. In every area, clear norms were set and roles of each family member clearly identified. Conflicting issues were discussed in open manner but the leader’s verdict was the final word. Again, the leaders’ roles were predefined too. There was one leader for the family matters and other for the business. Neither will interfere in the others’ realm.

Interestingly the Murugappa clan had a unique set of rules for the family members. The perks and the salaries were uniform to all members of the family depending on their family status in their generation. Thus the cousins of the same generations enjoyed the same kind of perks and facilities irrespective of their position in the business. The rule applied to their spouses too. Since each family member respected the family values, and had the courage and conviction to stand by the values, the ego tussles did not emerge.

Similarly, business ethics were strictly adhered to. No unethical business practice was encouraged by any of the family member. And if there was a family crisis, the whole family rallied together irrespective of their respective preoccupation in the business.

Murugappa Group has been a good example of combining both business and family with good synergy. While, they adopted a method best suited to them some other group might have different parameters to combine the two entities. What holds right for need not necessarily be the universal rule. And the corporate world today is still analysing and rediscovering their own strengths and weaknesses. The idea is to find means to co-exist without hurting each other. And one cannot succeed at the cost of another.


What Constitutes Family Business?

- Family business is one where the family or the ownership has Strong influence in the day-to-day running of the management.
- It is that business where there is limited segregation of roles between ownership and business control.
- It is a business where promoter interests invariably come before corporate interests.
- A business where top management being family, is accountable to only to itself.
- Practices in family businesses reflect the social/ business conditions which were prevalent.
- Many family businesses are in a stage of transition. One of the area of change is management structure and practices.

Source: Confederation of Indian Industry.

Five keys for successful Family Business according to John L. Ward; Ralph Marotta Professor of Private enterprise; Loyola University, Chicago.
1. Respect the challenge,
2. Understanding,
3. Communicating,
4. Planning,
5. Commitment.

Classic challenges for a Family Business according to John L. Ward.

1. Balancing Family and Business
2. Succession
3. Family Harmony and commitment,
4. Resistance to Planning
5. Trusting Non-Family
6. Financing Continuity.