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Challenges in succession planning for business families

by tavaga

Family vs. Business

While travelling, many of us have asked a kirana shop “Bhaiya, Ek Bisleri Dena” when all we wanted was a bottle of water. That’s the impact this legacy brand has had in our lives. With a 60% market share in the water bottle industry, Bisleri has attracted a large number of copycats. Keep your eyes open when you go buy Bisleri next because the bottle in your hand can be Belsri, Bilseri, Brislei or Bislaar instead.

A new home

This ubiquitous bottled water brand now has a new home at the Tata Group. As per news reports, Tata Beverages has purchased the brand Bisleri from Ramesh Chauhan for about ₹7,000 crore. The news was not surprising as rumours of it being up for sale had been floating for a while. But it underscores the failure of the Chauhans to grow the business within the family. Reason – his only daughter Jayanti Chauhan was not interested in the business, Mr. Ramesh said. Despite her father’s continued efforts to groom her for succession, he clearly failed.

Mixing business with DNA

This is not an isolated case. The world is full of family businesses that didn’t last long. From Walmart to Wall Street Journal, Ferrari to Ferrero Rocher, Ambani to Adani, Birla to Bajaj and Piramal to Paragon, family businesses make up over 90% of the world’s companies and India is no exception.

However, these family-run businesses the world over are known to split away by the third generation and just remain shadows of their once-mighty empires. 60-70% of them do not last till the third generation and 90%+ don’t last till the fourth, as per Sunil Munjal, chairman of Hero Enterprise.

Battling for billions

Kellogg brothers John and Will, Chris and Tory of Tory Burch, McCain family, Puma and Adidas, the Gucci family, the Ambanis, Singh brothers of Fortis, Raymond’s Singhanias…the examples of family feuds are far too many…But, why such a poor success rate?

Business families have bickered over every imaginable reason. The most common, of course, is who gets how much of the family jewels like in case of the Ambanis after their father died without leaving a will. Or in the case of Bajaj Auto family who had a disagreement over strategy about whether to continue making scooters or not. Raymond’s Singhania family disagreed over not just their textiles biz but also flats worth crores in Mumbai. In case of the Murugappa family, the restructuring marginalised the daughters and mentored only the sons for leadership roles, as blamed by one of the elder daughters. Assault accusations erupted between Fortis’ brothers. Animosity was far more intense between liquor and property tycoon brothers Ponty Chadha and Hardeep, who killed each other in a 2012 shoot-out.

So, how to avoid this acrimonious drama?

Broadly, there are two models of doing this. The first approach is to harmonize expectations and work together and chalk out a clear succession path. The second approach is about dividing the empire. We have seen several examples of the 2nd one like the Ambani’s and Bajaj’s. Let’s talk about the first one. An undivided group has its advantages of more resources, a bigger balance sheet, and hence a bigger impact in the marketplace but is far more difficult. And GMR has not just succeeded in this model but has really taken this to a new level.

So how has the GMR group avoided bitter succession battles?

GMR has a family constitution that is the “book” which talks clearly about the code and conduct and a clear process for conflict resolution in case a consensus is difficult to attain. Interestingly, GMR took all the family members away on a retreat so that they clearly understand relationships before handling family wealth. Spouses were taken on board and were explained how their husbands and sons could be picked for a role inside the company. Afterall, spouses influence the male members’ thinking tremendously.

They even go into finer details of bringing family members within a commonly accepted band of living standards. Even the sort of schools their children will attend is pre-decided to ensure members have a similar worldview and value systems.

GMR uses the results from an aptitude test and a host of other criteria like education and inclination to decide the right place within the company for the youngsters who wants to join. GMR also follows a transparent performance review against their goal sheets to build a culture of meritocracy and accountability. This is crucial whenever family-run organizations bring in non-family professionals and the best of minds from outside.

Another contrasting but successful culture is at Wipro. While we all know that Rishad Premji, will take his father’s position. But that does not bother the management as there is a difference between ownership and management. Despite being family-led, Premji doesn’t run Wipro like a family firm. He has put in place elaborate processes and checks for taking large decisions and he sticks to them. Interestingly, people often disagree with Premji and he allows that.

Such transparent systems have worked in Europe where families have stayed together for 300 years. In fact, the GMR family meets one such European family every six months.

Lasting Legacies

We cannot say enough about the importance of a good succession plan. Whether to divide or harmonize, what is crucial for sustainability is to provide room for the best talent and dynamism along with transparency and sticking to your core value system. Only then will businesses last beyond the three generations’ natural limit!

Meanwhile, the not so fool proof succession plan

Cheers,

Ruchi Mehta

https://www.linkedin.com/in/ruchimehta-tavaga/

Disclaimer: This write-up is solely for educational purposes. This in no way should be construed as a buy/sell recommendation. Please consult your investment advisor before investing.

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