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'Cousin consortiums' can work
Narendra Jhaveri | June 05, 2003
Historically, families have constituted the most important entrepreneurial resource for free-market economies.
When they started accessing non-family capital, concerns about possible conflicts between 'family succession' and 'family management' and what was good for business started growing. Handing over management to professionals emerged as a popular prescription but proved too simplistic to succeed.
While they boast of professional managers in key positions in the organisation chart, few families genuinely empower them and fewer consider them for succession. On their part, several professionals have connived with families in short-changing shareholders, customers and the government.
The recent unearthing of massive corporate frauds in the Western economies has discredited professional managers thoroughly. The fact that companies like Enron that followed textbook corporate governance models figured in the gallery of crooks has raised doubts about effectiveness of spiritless forms as guardians of public interest.
In contrast, Cargill, a fourth-generation 'cousin consortium,' is the most valuable unlisted company in the world. Campbell Soup, another cousin consortium owned by four branches of the Dorrance family, despite disagreement between different branches, is among the best practitioners of corporate governance. There are a large number of fourth- and fifth-generation successful cousin consortiums in Europe.
Why there are exemplary family businesses and rogue professional managers has several possible explanations. The business environment now offers unprecedented wealth accumulation opportunities, legally, to competent families.
Competitive ability has replaced influence peddling as a key success factor. Young family managers go to the same prestigious educational institutions as professional managers. There are examples of 'excellent' companies built by both categories.
The basic difference -- and a factor that possibly pushed professionals to unethical territory -- is that owner-managers are automatically rewarded (through ownership) whereas professionals have contractual employment and high job insecurity (as boards became more powerful).
Some managers sought to collect obscenely high rewards by fudging accounts, abuse of insider information and playing with huge stock options, often by tempting auditors and boards to collude.
Indian family and non-family businesses are getting 'Americanised' in terms of compensation. With friendly boards and 'compliant' remuneration committees, they appropriate huge rewards, way beyond what is justified by shareholder wealth creation.
Family succession is almost universal. Senior managerial positions for family members are a matter of right rather than merit. Similar practices were followed by Western family businesses initially.
Only when businesses lasted for a longer period and, instead of business opportunity, 'ownership' and 'family' circle issues became a constraint that families began devoting attention to these issues and gradually became more open with regard to true empowerment of professionals.
Wal-Mart, Abbott, Walt Disney are some examples. Indian family businesses must devote attention to these issues when opportunity is beckoning them.
The eventual shrinkage of the public sector would create space for inorganic growth which is what happened in the case of VSNL, CMC, IPCL, BALCO to mention a few.
The fact that companies such as L&T and BSES, the closest examples of board-managed companies, have been acquired by families suggests that truly professionally companies for manufacturing is no more than a theoretical possibility at this stage.
Several 'first-generation' entrepreneurs -- executives and traders-turned- entrepreneurs, who opportunistically set up sub-economic manufacturing plants -- have vanished.
However, second- and third-generation family businesses, led by young managers, have undertaken painful restructuring, transformed business models, redesigned organisations and would rather fight battles in the market place than in corridors of power.
But complex 'ownership' and 'family' circle issues are typically resolved in a slipshod manner -- by fragmenting businesses into as many parts as the number of siblings and creating a web of cross-holdings.
For families that want 'built to last' businesses and potential global leaders, the cannibalisation of assets and enterprise might be the surest recipe for scuttling their ambitions.
Successful European businesses used core 'family values' as an ethical guiding star. Formal family constitution laid down rules and codes of conduct, modified as and when required.
Family councils provided a forum for open discussion, some functioning as formally as boards of directors of listed companies!
Through these institutionalised mechanisms families have tackled typically contentious issues of mismatches between managerial positions and the number and/or capability of aspiring siblings, the sale and restructuring of business, diversification to accommodate aspirations and skills of new entrants and so on.
Effective communication, its content and style, is the bedrock for the smooth functioning of large cousin consortiums.
Should senior family members, having created or built businesses, not strengthen the foundations rather than overshadow the new generation with a Banyan-tree like presence?