Good governance in all aspects of business, including remuneration policy, allocation of roles and responsibilities to family members, constituting a strong and independent board and induction of professionals from outside, are factors that lead to family businesses creating shareholder value sustainably
Family businesses, or economic ventures that are promoted and often managed by various members of an entrepreneurial family, have played a crucial role in shaping the economic landscape of the country since the days of India’s struggle for Independence. Yet, a recent study finds that only five percent of family businesses are able to sustain creation of wealth for shareholders beyond the fifth generation.
The single most important differentiating factor that separates this five percent from the remaining 95 percent and ensures the long-term sustainability of family-run enterprises is a sound mechanism of corporate governance, according to Adi Godrej, the 71-year-old patriarch of the Godrej family and chairman of the eponymous business group that has interests ranging from packaged consumer goods to real estate and chemicals.
Delivering the keynote address on Monday at the Family Business Conclave organised in Mumbai by the FaB Network, an initiative of some members from the alumni of the Indian School of Business, Godrej stated that robust corporate governance practices were all the more essential for family-run firms since these entities have to “endure all the complexities of promoter shareholders interacting as family members as well as for the purpose of business”. “The additional level of complexity exerts itself most significantly at the time of a generation change,” Godrej said.
The current Godrej Group chairman is a member of the third generation of the business family and, as Godrej pointed out, as many as nine members of the family belonging to the third and fourth generations were active in the business.
Godrej said a good corporate governance system in a family business should be able to identify business participants – be they employees or professionals from the promoter family – and clearly demarcate the roles and responsibilities “linked to their talent and capabilities”.
At the Rs 30,000 crore-conglomerate, which Godrej leads at present, family members are welcome to take up management roles, provided they have the requisite academic qualification and have passed through the rigour of regular jobs and project execution responsibilities in the middle of the business ladder at the group.