Last Wednesday, India?s largest diversified conglomerate, the Tata Group, broke tradition by appointing non-family member Cyrus Pallonji Mistry to succeed chairman Ratan Tata. This, many feel, can be a wake-up call to Indian family-run business groups, as successions in the past have cut family relations and sliced businesses.
?The best one will succeed me,? Tata had told his shareholders. Tata Sons?s board-appointed panel met 16 times in 18 months to choose the best, in this case, Mistry.
?Mistry?s appointment will reflect a change in the mentality of other businesses as well,? says Monish Thakur, professor, strategy and planning, at business management school XLRI, Jamshedhpur. ?I think, in the future, we would see a lot more young people at the helm of businesses.?
?We wanted a young person and that was Mr Tata?s express wish,? says JJ Irani, former executive director, Tata Sons, adding, ?I personally feel very happy that it is somebody we know, rather than some expat who might be well-known internationally, but who we do not know. In a way, this is like a home-grown product, rather than someone from outside.?
But, many Indian business families pass on the baton from one generation to the other or split it among members, some acrimonious or cordial, unlike in the West where owners take a back seat and let professional managers run the business.
?There is no sharp curve for successions in large business houses,? says Gita Piramal, business historian and author of book Business Maharajas, adding, ?Harvard Business School?s recent research shows that when a business group is in trouble, it is better to bring in an outsider at the helm.?
On Cyrus succeeding Tata, Piramal says, ?In the present economic environment of high uncertainty, someone with a long-term vision will do better, than some other who just looks at the quarterly numbers.?
Global experience is that a split is most often painful both for the business as well as the family.
?Well-governed family businesses stand as testimonials of the benefit of keeping family ownership together for running businesses professionally,? Prof Kavil Ramachandran, who teaches family business and entrepreneurship at the Indian School of Business, Hyderabad, told FE in an earlier interaction. Some industrialists say family members running the business is safer. ?A family-run business is in the long term interest of shareholders,? Ajay Piramal, chairman, Piramal Group, told FE in an earlier interaction. ?When you have somebody with a significant stake, you will not see short-term things being done.?
Indian business families have a unique way of grooming their younger generation by giving on-the-job training rather than focusing on future succession issues. For instance, Piramal is training his daughter Nandini, 31, in Piramal Healthcare after a short stint with consulting firm KPMG, and son Anand, 25, in the real estate business after his studies at Harvard Business School. Some businessmen take risks early in their career. Kumar Mangalam Birla was just 24 years? old when he took over the reins of the Aditya Birla Group, when his father died in 1995. He transformed the group in 16 years from a $2-billion company into a $30-billion global diversified conglomerate spanning 35 countries.
?Family members have a unique sense of that legacy that outsiders may not have,? says Tariq Khan, principal, South West Asia and MENA region, for Cambridge Advisors to Family Enterprise, a US-based consultancy firm solely focused on family businesses. ?As such, it is easier for family members to eventually step into leadership positions within the family business compared to outsiders,? he adds.
RIL chairman Mukesh Ambani?s elder son Akash (19) got a taste of the corporate world when he accompanied his father while signing the landmark deal with British Petroleum to hawk a stake in his gasfields for $7.2 billion. Brothers Shashi and Ravi Ruia, owners of Essar Group, groomed both Prashant and Anshuman early in college and they have now taken up the mantle. Kishore Biyani, owner of Pantaloon, is grooming his daughter Ashni (22).
?We generally advise clients to ensure that next generation family members come into the family business after completing a well rounded educational curriculum and acquiring some management experience outside the family concern to understand alternative systems and to be tested in a non-insulated environment,? says Khan of Cambridge Advisors. Some young Indian businessmen make succession plan early. India?s largest tractor and sports utility maker, Mahindra & Mahindra, has laid out a succession plan even as it sticks to aggressive growth. ?We have our succession plan ready,? 50-year-old Anand Mahindra, M&M?s vice-chairman and managing director, had indicated earlier.
?Selection of a successor causes major problems across the world because of the generational transition,? says Khan. ?The western world has been aware of this risk for slightly longer than the rest of the world, and as such the idea of family constitutions, family councils and trusts and holding companies are more deep-rooted there than elsewhere.?
Closely-knit Indian business families have begun creating family councils to avoid conflicts among members. Dalmia Group has a family council to take decisions on business and strategies for the group; airport developer GMR Group has created a similar council with clear succession plans for every sibling of the group. Khan warns against entrepreneurial businesses trying to cut costs by not setting up the right succession structures. ?The ultimate cost of not doing so could be much higher,? he portends.
With inputs from MG Arun and Debabrata Das