The Boards of Directors of family-managed businesses (FMBs) must, as a general rule, avoid conflicts between the interest of their businesses and interest of the owning families. "But if and when it comes to a crunch, they must always take bold decisions for upholding the company's interest, even if it means opposing the promoters. Owners' interest must be subjugated to business interest," says Adi Godrej, Chairman of the Godrej Group of companies.
Mr. Godrej was delivering the keynote address at a round-table on "Corporate Governance in FMBs", organized jointly by Indian Merchants’ Chamber – Economic Research & Training Foundation (IMC – ERTF) and S. P. Jain Institute of Management & Research (SPJIMR) on 8th August 2009.
Among other distinguished speakers were Mr Surendra Hiranandani, Founder & MD, Hiranandani Developers' group, Me Ashwin C Shroff, Chairman of Excel Industries, Mr M K Chouhan, Chairman, Mahendra & Young Knowledge Foundation & Vice Chairman - Global Advisory Board, Asian Centre For Corporate Governance & Sustainability. Mr Pravin Chanderia of Chanderia Group, Prof Parimal Merchant, Chairman of Centre for Family Managed Business, S P Jain Institute of Management & Research and Mr Tanil Kilachand, Co – Chairman of IMC's Economic Research & Training Foundation.
Mr Gul Kripalani, IMC President after introducing the speakers said that Corporate Governance (CG) was widely accepted for its relevance and importance to industry and economy. "Progressively, family-managed businesses have also put in place systems of good corporate governance, which provide them not only distinctive competitive advantages but also add considerable value to their operational performance," he said.
Introducing the theme, Prof. Parimal Merchant of SPJIMR said that studies had shown that in general FMBs considered Corporate Governance (CG) as a mere legal formality to comply with and not as an objective by itself. For them, CG was more or less only a tool to enhance their corporate profits.
Prof. Piramal pointed out that 67% respondents to a survey, conducted by SPJIMR, held that family-members should be inducted into managing the FMBs irrespective of their merits and qualifications; 78% held that the family-members' responsibility in the FMGs should be well-defined and only 14% of them said their remunerations should be in proportion of their performance.
"And surprisingly, 80% respondents from among FMGs said that they just did not know whether CG was a tool needed for gaining competitive advantage or how to initiate CG into their business organizations", Mr. Merchant said.
Mr. Pravin Chanderia said that the House of Chanderia had a policy which assured scion of the family the availability of all facilities to acquire the best education and training but no preferential entry into management of the FMB at the cost of non-family professionals. Only if a member of the family was well-qualified and had proven record of competence, should he be inducted into the management the FMB, he asserted.
Mr. Godrej said that 95% of the registered companies in India, Latin America and West Asia were all family-managed. Many Indian FMBs had global scale operations. Gujarat's Palanpur Jain family accounted for polishing 80% of the diamonds of the world and had worldwide branches. He attributed the FMBs' success to the culture, loyalty and personal commitment of the owning families.
He said that unlike the publicly-owned companies, which had a time-consuming bureaucratic process for taking decisions, the FMBs could usually take quick business decisions. "I also believe that good CG practices are critical for the FMBs' survival. As the FMBs pass through critical times when generational change of ownership take place, they should, well in advance, adopt a durable succession planning strategy, after consultations with all stakeholders in the family. Such a strategy would enable smooth transition from one generation to another," hew said.
Mr. Godrej pointed out that the House of Godrej had a reward and remuneration policy, which did not discriminate between the non-family professionals and family professionals, all things being equal. "In fact, we reward outstanding top performers disproportionately high, irrespective of whether they are outside professionals or family professionals. For such, exceptionally talented professionals, we offer variable remuneration, which has only sky as the limit."
Replying to a question by Dr Ram S Tarneja, a management expert, Mr Godrej said, "Managers views are considered by the Board”.
Mr Godrej also said that the House of Godrej does not reserve the top positions such as MD, President, CEO only for the Godrej family members. All competent 'outside' experts can aspire to take those positions. We reserve only the Chairman's position to the family members. Also FMBs did not face the severe problem of attrition, unlike the publicly-held companies."
Mr Godrej admitted that generally the highly skilled and competent management experts preferred to join the professionally managed MNCs and publicly held companies to the FMBs. He rated the 'ability to work as a team' superior to 'individual excellence'.
He also concurred with a questioner that a FMB should practice corporate governance mainly in the interest of the companies’ business -- not necessarily in the interest of shareholders. "I have very clear objectives. Corporate governance must be driven in the interest of the company, not necessarily in the interest of shareholders. Because, the shareholder base of a FMB can be transient and shifting. In view of this, the FMB must give priority to the interest of its long-term loyal employees and consumers. It is wrong to overemphasize the interest of minority shareholders, “he said.
Mr. M K Chouhan said that governance was not the monopoly of only MNCs or other professionally run companies; there were numerous FMBs, which had become famous for good governance. Cargill, Ford, Bata were some well-known FMBs worldwide; Dr Reddy's, Ranbaxi and Godrej are household names, with strong brand loyalty in India. He cited the case of Ford Motors, which at one time, brought in professionals to manage the company, until a highly competent, meritorious scion of the Ford family became ready to take the reins several years later.
Mr Ashwin Shroff said that his company believed in grooming the family's younger generation to imbibe its culture, Gandhian ethics and values, which were a legacy of the promoter, Late Mr. C C Shroff. "We believe that even the choice of the company's products must reflect the corporate governance principles that must reflect the lofty ethical values and meet the society's hard-core needs", he said.
Mr Shroff said "In view of this, my company has begun producing bio-pesticides and bio-fertilizers. It is not easy to practice corporate governance in a FMB".
Mr Surendra Hiranandani said that corporate in India were mostly following the Anglo-Saxon models of publicly owned companies. "On the other hand, in Germany, Austria and such other European countries, FMBs were the predominant model, mostly focusing on niche products, all excelling in the field of engineering," he said.
"The Public Limited Companies have been giving unduly high importance to 'the finance guys' who raise funds for them in the capital market. As such, these finance guys have been claiming a greater credit for the success of their companies, ignoring the reality that credit for the business success owed entirely to the teamwork", he said.
He said the FMBs treated all its loyal employees as part of the family and rewarded them sumptuously. "Payment of disproportionately higher remuneration to any section of employees, such as the 'finance guys' is unjust. If there is any one single section which is responsible for the good corporate performance, it is the engineers and marketing team and not the finance guys," he said.