The Marwaris Page 10

  Problems of an Exclusively Financial Focus

  The social sustainability of an enterprise is more than a commercial question. Just as the success of business groups is connected with scanning the horizon to see where to put funds next, failure is connected with staying rooted in declining fields, markets and technology.

  The ‘brand’ of a business group is critical and that is a matter of the group’s management systems, core values, and specific charismatic leaders. Thus, a business group needs accounts and good investment policies, but it also needs the less tangible aspects of a brand even for its own commercial purposes. Beyond that, businessmen like to think that they are accomplishing certain moral purposes in the world, and for that they need their brand even more. Whether capitalism is moral or a matter of morality is a controversial issue, but it is clear that many of its successful practitioners would attest to capitalism being a moral endeavour.

  There is thus a limit to a purely financial approach to entrepreneurship. One problem is the term profitability, which is extremely short-term in nature. Financial return maximization needs to be tempered by a broader concern about the social and corporate culture aspects of new investments, and Indian business groups with a family as well as a financial rationale are ideally placed to consider long-run and contextual factors. No Indian businessman will be unaware of what his peers think of him in the context of a continuing business family with a ‘brand’, an intangible that has value and needs to be cherished.

  Kudaisya’s analysis, referred to earlier, about the importance of prior moral values in the success of the Birla style is just one example of how the brand stems from family and community style and underlies the systems of a successful firm.

  There is a large reservoir of anthropological literature on the cultural and social implications of standard financial management and economics and the need to transcend it for business to survive and flourish.28 Henry Kaufman and Warren Buffett posit that a pure financial management approach ignores two other considerations. The first is the extent of the prevalence of commercially relevant factors that are not fully captured by financial data alone. An excellent example for this are the problems American Express encountered when it acquired Edmond Safra’s bank, which had a different commercial culture from its own. Years ago, an American Express executive said to me sniffily, ‘We lend on what is recorded in the books.’ Compare this to the Bank of Credit and Commerce International (BCCI) which considered many less explicit factors in its lending relationships. The business philosophy of the Safra bank was based on long-term understandings with clients, many of them operating in countries where transparency requirements would have put an end to their activities. The acquisition failed at a considerable cost to the transactors. Later when HSBC bought the bank, and it had to be bought as there were no Safra family heirs though other Safra family members remained in business, HSBC carefully managed the corporate cultural areas. The Middle Eastern cultural ambience of many of Edmond Safra’s clients did not meld easily with the proper ‘white shoe’ approach of American Express. The other aspect is the extent to which individual maximization of financial value may be inconsistent with the system maximization of value for all parties—the kind of issue we face after every major financial system–centred crisis. These problems are faced by the economy as a whole as well as individually by each firm and business group.

  All of this is in addition to the fact that short-term financial success may undermine long-term commercial sustainability. This may not be a prime concern for salaried executives who can move on, but is ever present for family enterprises which intend to continue to trade under their brand.

  Dealing with Non-Family Executives: Delegation as a Strategy

  The problem of employing and working with non-family executives or technicians who are critical to the business is central to the success of the firm. The Birla group has often been rated well because of its ability to inspire loyalty among these executives, though admittedly many are distantly related or at least members of the broader Marwari community. But Kudaisya states:

  [In the] style of management within Birla businesses, kin-based and loyalty have always remained the byword. It has been well recognized that top managerial positions were held by Marwaris and only by those close to the Birla clan. This has delayed the professionalization of management of many of their firms.29

  The Birlas, and many others as well, also prosper when they use non-Marwari, and now sometimes non-Indian, executives. A number of the early key Birla executives were non-Marwari, as indicated by the names observed in the various family memoirs. A traditional way to handle this conflict between professional and family management was to have the executives marry into the family. This is not a strategy unknown to family firms elsewhere. The first non-DuPont head of the DuPont family firm was Greenewalt, a son-in-law. It is also possible to enable the executives to become heirs by founding their own family firms, and this has certainly been the case for the Birlas.30 Several large business groups today were founded by former or sometimes serving Birla executives. Finally, Hindu families like the Marwaris have the custom of adoption, usually from allied families, if there is a lack of male heirs. Karen Leonard in her recent work on the leading business families of Hyderabad—Marwari, Gujarati, Goswami and Muslim—shows how several used this practice.31 Adoption is a time-honoured practice in Hindu law and is widely used. Nominally, it secures an heir to perform the funerary rites, but in practice permits the commercial sustainability of the family. Even though adoption is common among large Marwari firms—Ghanshyamdas Birla’s eldest son, Lakshmi Narain, was adopted by his elder brother, Jugal Kishore; Motilal Jhunjhunwala adopted his brother’s eldest son—there seems to be no data on its effect on business continuity.

  US data is explicit that inheritor-managed firms do poorly when compared to those managed by outside professionals, though incidentally the former do better if the quality of the inheritors’ education is ‘better’. The European experience seems to indicate the reverse, while the Thai experience is more like the US. What the situation is in India is still a subject of considerable debate.

  Resistance to Succession Strategies

  Often, some heirs simply refuse to enter the business and replacements are necessary. The matter is perhaps easier in Europe and in the US, where businesses can easily be sold and the proceeds managed by trusts or other institutions. In the US, trusts created in the nineteenth and early twentieth centuries still handle the large funds which many of the leading wealthy families accumulated.32

  In other cases, the problem is not that the next generation is not willing to enter the business. Defying wealthy parents is not unusual—passive resistance is more common. But the question is how to handle children who are not competent, and are reluctant to recognize their limitations. The challenge for a young heir is not to efface himself (or, progressively, herself) so much that he is discounted, and also not to assert himself when professional executives or even technicians are more competent.33 Gurcharan Das quotes Rahul Bajaj: ‘It is easy to get rid of an outside manager, but how do you get rid of a family member? You must either do what is right for the business or the family. Either way, you will end up with an angry family or a weak company’.34

  Family Conflict

  Even when the next generation is willing and capable, conflicts are common among brothers. To counter this possibility family firms are often very carefully partitioned during the founders’ lifetime.

  Formulas for preserving a family firm unit are a subject of great discussion. Gurcharan Das emphasized equity among members of the family but this is extremely difficult to deliver. The generalization, as cited in Allan R. Cohen’s case studies for Harvard Business School for the 1970s, is probably accurate: where the family hierarchy is congruent with the business hierarchy things work; where it is in conflict they do not.

  In some cases, no formal separation was required because the f
amily was already legally divided as with the members of some business groups referred to below. On the other hand, the wrangle between the two Ambani brothers, where a harmonious partition was not arranged, has been in the public domain and harmful to both their groups.35 More dramatic is the story of the Birlas in the case of G.D. Birla’s nephew, Gajanan, who refused to comply with family strictures and was made to distance himself from the family in 1935. The issue was deserting his wife. She and her sons, Ashok and Yashovardhan, continued to be very much a part of the family and their heirs own one of the significant Birla successor firms. The children from Gajanan’s second marriage have generally been out of the limelight, but reappeared in the court litigation over the M.P. (Madhav Prasad) Birla estate.36 However, the bigger story has to do with the partition before and after G.D. Birla’s death.

  Kudaisya raises questions about the success of the Birla partition.37 But what she actually reports is that the complex nature of interlocking stockholdings meant that issues continued to come up and were successfully negotiated between the various branches of the family after G.D.’s death in 1983.

  Gita Piramal describes the tensions and bitterness between the different Birla groups, especially during the 1983–96 process of separation. Sudarshan Birla of the C.K. (Chandra Kant) Group felt he had received too small a share, and some adjustments were eventually made in his favour, but the adjustment was not sufficient according to Piramal to satisfy Sudarshan Kumar and his uncle K.K. (Krishna Kumar), who had only daughters. Further, a number of K.K.’s units had been nationalized. Piramal gives the following quote from Aditya’s father, B.K.:

  After 1983, it was clear that unless some kind of division was agreed upon, there would not only be problems in the course of time but also misunderstandings and even unpleasantness. At the same time there was, I think, some hesitation in all four of us about how to start discussing the division.

  Piramal reports that initially it was only G.D. Birla’s heirs who were concerned, but eventually their cousins too became involved. To be precise, besides G.D.’s grandsons, Aditya and Sudarshan, their two first cousins too were involved, although Ashok, who died in a crash in 1990 leaving everything to his young son Yashovardhan, refused to contest the matter.

  The Birla division was finalized at some financial cost to all concerned but particularly to the Aditya Birla Group (who the others thought had emerged with a disproportionately large share).38 Gita Piramal estimates the cost to Aditya and his father as about two billion rupees. In 1987, there were differences about Upper Ganges Sugar, a company predominantly owned by G.P. (Ganga Prasad) but managed by his nephew Aditya. The Calcutta Stock Exchange had to step in, as it did with respect to Sutlej Cotton (primarily an investment firm, despite the name). Though the Sutlej Cotton conflict did not involve Aditya, it did G.D.’s other heirs. But the moot point is that by 1996, the process was finished.

  To quote Piramal:

  By May 1996, a power sharing formula for Century Textiles, the last festering sore, had been worked out. Nobody was completely satisfied but at least workable compromises of sorts had been achieved and the clan would stop breathing down each other’s necks.39

  It is hoped that the Ambanis too have ended their feud and arrived at a compromise.

  A less commercially significant but untidy trail of events surrounded the death of M.P. Birla’s widow in 2004, when it was found that she had left his large estate (estimated to be around Rs 500 crore) to a trusted personal adviser. Though the case was contested in court, the adviser remains in possession of the assets concerned.

  The problem of partition goes with having a family firm. An intriguing study of the Filipino Ayalas, one of the leading business groups there, describes some of the negotiations that were involved in their evolution which read much like those of the Birlas.40 Even Friedrich Engels, the co-founder of Marxism, was involved in complicated negotiations cutting him out of the family firm which provided much of his and Karl Marx’s economic support during their lifetime.41 I was recently involved with publishing a set of business cases about intergenerational continuity in Nigerian family firms, some of them of Indian ethnic origin; such a study reveals the same difficulties faced by some Indian family firms and the same mechanisms employed to overcome them.

  Anand Saxena in an article titled ‘Succession in Indian Business Houses’ argues that the succession issue is the one on which Indian firms have most typically foundered and argues for careful succession planning. However, much as such planning might be desirable, circumstances often frustrate it.42 Hence, exceptions aside, most family businesses hold together for at most a couple of generations after which divisions often presage their decline.

  Random Factors

  Gita Piramal has published a series of books (Business Maharajas, Business Legends) in which she analyses the styles and reasons for the success and failure of several large industrialists she has studied, many of them Marwari. She emphasizes individual and specific family characteristics, financial management, planning and organization. As it happens, the selection of new enterprises often turns out to be influenced not only by rational analysis but also by specific family circumstances. Khaitan’s controversial (both from a commercial and policy viewpoint) acquisition of Union Carbide India was motivated partially by a desire to find a vent for their son Deepak, who they were worried was much too interested in his racing-horse stable.43 The decision by Rama Prasad Goenka to acquire CESC, the Calcutta utility company, was motivated by a need to have an enterprise for his son, Sanjiv, after the family lost the firm, for which he was formerly responsible, to an outside partner.

  Other decisions of this kind were motivated by personal ties and conflicts among India’s elite business families which emerge as the various players get into continuous contact with one another. The conflict between the Bajajs and Firodias for Bajaj Auto is well documented, as well as the complex interactions between the Italian Piaggio firm and the Agnellis of Fiat.44 Significant are the interventions by other more ‘senior’ industrialists to deter hostile takeover efforts launched by B.M. Khaitan and Rama Prasad Goenka. When Rama Prasad Goenka launched a takeover effort for Bombay Dyeing, it was J.R.D. Tata who convinced him to desist, and similarly Goenka abandoned an effort to take over Premier Autos because of ‘peer pressure’.45

  The Web gives us a rambling article titled ‘The Rise, Fall and Rise of Indian Business Families’, covering thirteen Indian families of which four are Marwari.46 The Birlas and the RPG Group are reported to have maintained themselves, the steel Mittals have, of course, increased their span of business, while the Singhanias have declined. However, it is perhaps too facile to assume that the conclusion drawn by the said article is definitive because the Satyam family group, one of the rising groups, ran into trouble later. It is also to be noted that the Thapar group (non-Marwari) about which the author of the article is quite critical seems to have produced an heir who has been getting excellent reviews. The article ascribes the decline to family feuds, poor management and lack of industrial focus. It does not mention, as it probably should have, the luck factor of a group being in either a sunset or sunrise industrial sector. To quote King Lear, ‘who’s in, who’s out’ keeps changing. Some heirs go into decline while there are others who revive their groups.

  While each of these factors may be critical there could be exceptions. Generally speaking, after US business firms were ripped apart by the antitrust authorities some entities post separation performed better—for example, Standard Oil Trust and the phone monopoly AT&T. In contrast, some entities have experienced a worsening of performance after merging with others. It is not clear why the same cannot apply to Indian firms, except that often different firms within a business group are so closely interlinked that separating them proves difficult. Nonetheless, one of the key strategies to sustain a business group is often dividing the operations between family members. In fact, one study reveals that Indian family firms which unde
rwent succession fights did better than those that did not, even though splits per se were negative, but the methodology is so complex that many people will not be convinced that having a succession fight could prove to be a good thing for a family firm.47 Undoubtedly, unfocused groups can have problems, but the logic of a conglomerate or private-equity operator, etc., which specializes in overall management, has continuing attraction. Of course, poor management will always spell decline.

  Business Groups

  Indian firms are typically parts of family business groups and loosely affiliated with one another, sometimes through interlocking stockholdings or boards of directors but frequently with more informal ties.48 These business groups are also typically family controlled, in a few cases by more than one family.

  Several Indian business groups have tried to achieve this kind of ‘post-family’ cohesion. The Sarabhais attempted it, in an effort documented in management literature.49 The Sarabhai experiment did not work. The entire history of the Sarabhai group is a classic Indian business story which is still to be fully documented. The Birlas seem to have done better by retaining executives and handling family-property divisions successfully. The cohesiveness of the Tata group, which is at least three generations old, is presumably a success and at the moment Ratan Tata has passed the reins on to the next generation. The Tata family has continued to play a predominant role. Finer cases involve the transition from British management to professional Indian management (Larsen & Toubro, ITC and Bird-Heilgers) but even in these cases it is not clear how permanent the settlements will be.