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Tuesday, February 20, 2007

How to avoid infighting in a family business

Family run businesses were in the limelight some time ago, and for all the wrong reasons. The most public fracas was definitely what's happening between the Birla family and RS Lodha. The Bajaj brothers - Rahul and Shishir - have also had their tiff. A lot of these business empires are run by third or fourth generation heirs, who may have let the spirit of individualism overtake their desire for discretion over their family matters, where their businesses were concerned.

Business advisor and Management Consultant Ram Charan and Godrej Group's Chairman, Adi Godrej discuss the pros and cons of running a family business, in this age of dynamic startups and maverick entrepreneurs.

Adi Godrej believes the role of a family in a family-owned business is of a shareholder, with more of a personal stake than an outsider. Godrej said, "From a shareholder's point of view, they should provide inputs and obviously, the management, whether it is family managed or is professionally managed by non-family professionals, they must look into shareholder interest."

Ram Charan agreeds. "I really think that Mr Godrej really hits this part. Now over time, as conditions change, you modify, but the key thing I just want to underscore what Mr Godrej has said - put the structures in. Structures will then modify the things as they go forward. Nobody is going to have one thing for eternity. So it's a very important point."

Families have to be responsible shareholders, if it is not managing, but only owning the business. How does it calibrate its inputs? How does it ensure it plays a constructive role? Charan adds, "The lessons are really simple. First, as Mr Godrej mentioned about having a council and having a structure because that has interaction, with management, with the board, and that instruction guides any change in condition."

"Two, the family has to think through, is the business for perpetuity? So the interests are broader than just the shareholding of the family. Those interests are or not just all shareholders' (interests) because if you do things, that are not in the interest of the community, that could come (back) to haunt you, and the shareholder size is very important."

Given that families will have proprietary interest, is over interference or too less interference the way to go about doing things? Charan elaborates, "My major observation is in the US context and what I am finding is that, families believe that because they are part of the (business) family, they have a birth right, that particular assumption needs to change. They are going to say we guided collectively, we interacted collectively, we figured out collectively what needs to be done.

Typically, in family businesses, the creation of a family council is a wise move to head off any future, potential disasters. So what issues are most likely to crop up? Godrej says, "It could be things like, what is the criteria by which you will allow family members to join the family business or not. It could be how the surpluses of the family businesses are to be utilised, how much do you want to re-invest into the business, how much do you want to provide for expenditure of the family etc. In certain cases, we even bring non-family people to make presentations to the family, if they have a greater knowledge of the issue than the family members who are on the boards."

Putting together a team of people to helm the board also needs to be done keeping in mind the business's long-term goals. Charan says, "I think the family has to think through to long-term goals. Having said that, finding the people who are trusted, who give wise counsel, look at the broader perspective, engage the family in a constructive dialogue, and at the same time, when the time comes, select the (right) CEO. Those are (what) the good boards do. So, those are the kind of things, you look at when you compose the board, so that they also help you to professionalise going forward. Implant the right seeds at this point when you have a chance and let the process work over time."

Not having perfected the art of putting together a proficient board, mistakes have been made and companies have paid for their mistakes. Charan explains, "The key mistake of a family business is that, they really don't have the structures. 'I know all the answers' is the kind of attitude. Second, having a board is basically a legal requirement and not making use of it (is how family businesses may get into a soup)."

"Third is interference, that, because I am part of the family, I can go inside. And that creates disturbance, especially if they begin to talk to the press about the CEO and they leak these things. That has happened in a number of situations in the United States."

Godrej adds, "I think, it's even more important for a family CEO to have a strong board that can guide and advice, than it is for a non-family professional CEO. This is because for many reasons, a family CEO has the power structure within the company, where it's difficult for people to criticise. Therefore, a good strong board, with people he respects and people who are willing to go out of the way to make the right suggestions, to point out what the CEO's weaknesses might be and where he needs help from outside etc, can add tremendous value."

So what is the best way to construct a board in order to give the professional CEO reasonable freedom, but with the right coaching and the right input? Godrej explains, "Well, whether I was a non-executive chairman or an executive chairman, it wouldn't make a difference. I think, first we need very strong independent directors. None of them should be personal, close friends of mine, which is very typical to invite on to a board. That is a big mistake to my mind. They should be professionals, whether they are professional CEOs or whether they are professional advisors, whose advice can add tremendously to the board."

He continues, "Second, don't have short board meetings, they never work. To my mind, they must meet, at least once or twice a year and should be two-day board meetings because those are the ones that really add value, whether it is a strategic one or it can be an HRD review or whatever is the topic."

"But you need to have board meetings where people have the time and the inclination to really get into details on things that matter. I agree with Mr Charan, you can't have an agenda with twenty different points. There must be a few important points. Strategy and selection of a good top team including the CEO, whenever necessary, are the two most important parts of the board's responsibilities."

Written for www.moneycontrol.com

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