The Birlas are it again, closing ranks to spar with an outsider over control of an heirloom they consider should have stayed with the family.
The heirloom in question: a Rs 4,000 crore corporate fiefdom that an heirless widow has bequeathed to a family retainer. Twenty years after they separated, should the Birlas crib over the so-called loss of face?
To better understand the current controversy surrounding Priyamvada Birla’s will that has the Birla clan red faced, one needs to first understand why family businesses split. And why do family members go their separate ways in choosing a successor of their individual preference rather than think of the common good of the larger family.
Family business researchers often claim that the first generation builds a successful business, the second generation lives off it and the third generation have to start all over again after destroying what has been inherited.
Frankly, this is true of most families in general, whether a particular family is in business or not. Sociologists see in this a natural evolution of the family tree where successions can be traced, in most cases, till the fourth generation, or the fifth generation at a stretch, with the older roots giving way to new-look tree. But why do families split? Most often they split when what has been bequeathed to individuals do not add up in equal measure among the several inheritors. It also depends on how much of the perceived shine from the family silver rubs on to each individual member of the clan. You could find the earliest traces of this in the Mahabharata, where the third generation contested what was to come to them by way of inheritance leading to a complete decimation of an illustrious dynasty.
Researchers are now probing how family businesses survive generation divides and live beyond the first 100 years. Statistically, there aren’t too many examples of this. Independent research suggests that about 13 per cent of once successful private businesses can sustain themselves for 50 years. Of these, a third, or only four per cent of the original 100 per cent can survive and grow. Of the four per cent that last 50 years, only half grow as business and families. And a quarter of them, or only one per cent of the original 100 per cent, grow in 100 years. You have examples of this in the West — in the Henkel family of Germany where 62 family members from the fourth and fifth generation manage a $11.5 billion empire. Wal Mart, the world’s largest family business is the other successful example. The Godrej Group is perhaps the only Indian family business that has survived intact and grown for 100 years, although the TVS and the Murugappa groups from Chennai have survived as entities for nearly 90 years now.
According to Prof John L Ward of the Kellogg School, one thing common to businesses that have sustained and grown is that their business vision is very vague and ill-defined. They are very qualitative and not at all quantitative. The ones that are much more compatible and are likely to grow as family business don’t think of their enterprise just as a business, but as an institution. They develop, nurture and refine the philosophy of management. They have a coherent and distinct philosophy of management.
Prof Ward also illustrates how successful families manage their business: They focus on the institution by continually refining how they manage, building an institution into an heirloom by protecting and nourishing the institution. They allow the institution to build on endurance and the flexibility of not being rigid. They do not just concentrate on maximising profits. For them, profitability is a means to an end and not an end itself. To realise this, they need a lot of competence. And that competence comes from flexibility. They have this lovely mixture of focus and flexibility, he says.
If you probe deeper into Indian family businesses, these factors are clearly missing. Why? In most cases, it has to do with a lack of corporate sensibility. Quite often, promoter-led businesses cannot overcome the greed of aggrandisement. Their ego orientation is more external, not internal, whereas for successful families, ownership is a stewardship concept rather than a proprietary concept. They see that some businesses can be divested to satisfy longer lasting ownership, bringing in flexibility in the way businesses are run.
On the other hand, promoters of typical Indian family businesses control the business without majority ownership, and financial institutions that are supposed to have an independent say in the management of business, usually do not have a very strong voice in decision making, resulting in less stringent shareholder pressure. You could call this a legacy of the licence-permit raj where businesses have prospered despite high asset and raw material costs and not because of competencies within the families and help from external advisors.
According to Dr Valentin von Massow of the Boston Consultancy Group, “When families create a smoke screen, they don’t know how to grow.”
This has been largely true of the Birlas. It has been true of the Modis, the Singhanias and the Thapars, where promoters have run their fiefdoms all by themselves and with the help of a few trusted retainers.
Sadly, for the Birlas, once India’s most successful business family, the time has come for the retainer to strike back. Back to Essays