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Corporate governance paramount for family businesses to thrive

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

By Aveek Datta

Published: Nov 2, 2015 08:24:27 PM IST

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.

Godrej also said that historically, family-managed businesses in India, barring a few, have been perceived to be run unprofessionally and have therefore been unable to attract and retain the requisite non-family management talent needed to drive the business. “This reluctance is largely due to the fact that these businesses are seen to operate on the whims of the owners or promoters,” Godrej said.

Sanjay Nayar, CEO of private equity firm KKR India, echoed Godrej’s view at another panel discussion that was part of the same conclave. Nayar said PE investors like KKR have found glaring gaps in management bandwidth beyond the first layer of management, which mostly comprise members of the promoter family, at some family enterprises they have evaluated for investment.

“In a few tough years that we had in the past, we realised that one of the key characteristics of a company that is sustainable in the long-term is good management professionals at the second or third level of management,” Nayar said and made it clear that KKR would prefer to stay away from investing in companies where such management bandwidth didn’t exist and where the PE firm wasn’t allowed to create a path for such professionals to enter the firm.

Godrej, who is also chairman of ISB’s board of directors, emphasised on the importance of maintaining the right balance between personal and professional relationships with family members. “We have tried to achieve this in institutionalising two interactions between family members for business discussions,” Godrej said. “One is a weekly lunch at office where performance updates can be shared, tough questions can be asked and feedback provided. The other is an annual meeting of the family business board. As far as possible, we avoid discussing business at the dinner table.”

“As a family business, we have to maintain the right balance between our personal and professional relationships with family members. We work so closely with family members that the lines blur more frequently than one would like. We have tried to tackle this challenge by institutionalising two interactions with business discussions – first is a weekly lunch together at office and second is an annual meeting of the family business board. These interactions provide invaluable platforms for us to share performance updates, ask tough questions to one another, provide feedback and share experiences. As far as possible, we try to keep business discussions to these settings and avoid them at the dinner table.”

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