The Marwaris Page 8

  Khanna and Palepu recognize that the specific identity of the leading individual family business groups changes in each period, particularly when one considers those in information technology. What emerges is the stability of the leading Indian business groups. The Parsee Tatas are the largest group in all three years, that is 1939, 1969 and 1997, and groups like the Birlas, Jugal Kishore, Singhanias (J.K. group) and Hariram Goenka remain influential. Some of the groups cited have been partitioned among family members, but as a whole these business families continue to be important.

  Of course, some business families have declined and a number of new ones have emerged such as the Ambanis. But the fact is that though the founders of the new information technology groups are sometimes from non-business backgrounds, the list is still dominated by family business groups from traditional business communities.

  What the Press Has to Say

  The Forbes billionaire list of the permanent and the evanescent in business includes a number of Indians residing in India and elsewhere. New Marwaris such as Rakesh Jhunjhunwala and at least two Birlas feature.6 Interestingly, no Tatas appears on the list though they run India’s largest business group. The reason may well be that their funds are parked in trusts (the money abroad is presumably already counted) and their personal wealth is moderate. Other ‘rich’ lists too are well populated by the Marwaris.7 It is reported that there are 1,27,000 dollar millionaires in India, constituting 0.1 per cent of the population, as compared to Switzerland where the total number of dollar millionaires constitutes almost 30 per cent of the population, or in the US where they constitute 9.3 per cent of the population.8 Lest this sound high, note that 1 million dollars of net assets, including a family house, would generate $20,000–30,000 of income in today’s America. Retirees are told that the amount is insufficient for maintaining a normal upper-middle-class retirement, even when added to the social security (a maximum of about $39,000) and any supplemental employer-provided pensions they may have. American supplemental pensions vary widely but rarely amount to more than 20–40 per cent of the last-drawn pay.

  Clearly millionaires are no longer rare, but a billion dollars of net worth is something more substantial, one thousand times more. My wife once mentioned that a pile of 1 million dollars is a couple of metres tall; a pile of 1 billion dollars is as tall as the towering Washington Monument in Washington, DC—about 170 metres.

  Of the forty-six Indians on the 2010 Forbes billionaire list, twelve are Marwaris, mostly from old and established families. The non-Marwaris on the list also tend to come from established business families that have been wealthy for two, three or more generations. Some are heirs to large firms who have used their acumen to make them larger. And there are some leading firms that have declined in size over time but still make the cut as far as the list is concerned.

  The India Today issue of March 2012 carried a section titled ‘The Inheritors’, the young heirs to major industrial fortunes. Of the twenty-two business groups which featured in the survey, four are prominent Marwari family groups which include two Piramals (related but separate in business), the steel Mittals and the RPG Group. In one Piramal group, three scions head different branches of the group. Harsh, an MBA from London Business School, now manages the group’s textiles and auto parts subsidiaries, but it is noted that he worked with India’s first shopping mall. Rajiv looks after the group’s real estate interests, and Nandan their football club and entertainment business. In the other Piramal group, Anand, a Harvard MBA, and Nandini Piramal, an MBA from Stanford, have expanded the group’s health-care business and have invested in several social enterprises. As regards the steel Mittals, Aditya Mittal, a Wharton MBA, is the sole heir. Finally, RPG Group’s Shashwat Goenka has completed an undergraduate degree from Wharton. Though it is unclear what he will eventually do, presumably he will head the group in the course of time.

  Besides the older Marwari families such as the Birlas and the Bajajs, there are a number of new Marwari billionaires which include Rakesh Jhunjhunwala, the Ruias of Essar and the Dhoots of Videocon.

  Not all Marwari firms are resident Indian firms any more. Some are headquartered abroad. The textile group of Shri Prakash Lohia is in Thailand, while the steel Mittals and Bagris are in London. Even the India-based groups often have a considerable global presence. And not all contemporary ‘Marwari’ groups are purely Marwari any more. Intermarriage with other communities means that the actual heirs sometimes come from different backgrounds.

  Why Are the Marwaris Still Successful?

  Traditional business firms like the Marwari ones flourished both in the period of the Licence-Permit Raj lasting into the 1980s as well as the period of liberalization which followed thereafter. It is not surprising that success in one period leads to success in the next. As the adage goes, the best way to make a million dollars is to start with a billion.

  During the period 1950–80, it was alleged that the ability of established business groups to influence government decisions in obtaining industrial investment licences, which determined who would be permitted to start industry, was a major advantage.9 Pranab Bardhan writes:

  The corrupt grip of the corporate oligarchy in Indian political life and state allocation of access to land, monopoly rights on natural resources, or telecommunications, is much too evident. As fighting elections becomes more expensive, it is not uncommon to see a large number of wealthy people among new legislators, and the generally rising role of donations, often under the table, by companies (and increasingly real estate businesses) to election funds.

  Ashutosh Varshney and Jayant Sinha in a recent article in the Financial Times distinguish between entrepreneurial and ‘robber baron’ capitalists, in the context of Indian business, who owe their success to corrupt government and anticompetitive market practices.10

  Pranab Bardhan’s hypothesis that the predominance of business groups is primarily a result of their ability to manipulate the bureaucratic and political process may not hold water. Though many of the leading business groups were frozen out of licences during much of this period, they grew in various forms. Political involvement, ‘trust in princes’, is a two-edged sword. This is dramatically illustrated in Gita Piramal’s Business Maharajas where in her survey she observes that among the most vigorous, successful and innovative business entrepreneurs in both periods, many had been frozen out of the licensing process for long periods. She reports that Rahul Bajaj was blocked almost continuously, as was Aditya Birla after 1977. Rama Prasad Goenka and Brij Mohan Khaitan did better, but they primarily acquired existing firms rather than engaging in greenfield activity requiring licences.11 If a limited number of licences were to be awarded among a large group of competitors it was only natural that the decision-makers would take into account the track record of applicants and tend to award the licences to those who were already large-scale operators. Further, given the financial and managerial resources that the concerned business groups possessed, it is no surprise that they were able to, in different ways, evade the licensing restrictions—investing abroad with borrowed money, for example. This is very much what the Tatas and the Aditya Birla Group did. Or else, business groups would combine with those who were able to secure licences and often ultimately ended up taking over the licences completely for themselves.

  In the period following the onset of liberalization, it is alleged that the established business groups exploited their existing oligopoly dominance in different industries to exclude new entrants.

  One account reports:

  Closer examination does not suggest a story of dramatic transformation (in the patterns of industrial ownership) following liberalization, but rather one of an economy still dominated by the incumbents (state-owned firms and business groups). The exception to this pattern is the growing importance of new and large private firms in the services sector. Sectors dominated by state-owned and business group affiliated firms before liberalization . . . remai
n so following liberalization.12

  It is also said that traditional business groups unfairly exploited their positions through ‘tunnelling’ and ‘propping’ and otherwise exploiting certain enterprises under their control to support others. This will be debated at greater length when discussing business groups, but it should be pointed out that while there is indeed reason for concern as regards minority shareholders from many a point of view, the losses for them are greater than for the economy as a whole which is likely to be benefited, at least in the short run.

  The merits of these allegations need to be addressed empirically, but leading firms as a whole, such as the Birlas, tend to focus on their bottom line and thus prove beneficial to their shareholders. It is hardly likely that these firms engage in ‘industrial sabotage’.

  6. What Produces Business Success: Lessons Learned

  Family Firms, Business Groups and Business Communities in India and Abroad

  In the sections that will follow we will define and consider three institutions in the Indian context as well as in the context of several contemporary contentions—family firms, business groups and business communities.

  Indian businesses, especially those owned by traditional business communities like the Marwaris, are typically family firms, they are frequently organized in the form of ‘business groups’, and the families that own them are frequently members of business communities. These institutional forms and their evolution were seen as reasons for Marwari success in the early period, and for relative failure later.

  Family Firms

  Family firms are common everywhere in the world. Even in the United States some of the largest firms are ‘family owned’ and some have remained in the same family for generations. In the US, family firms account for 35 per cent of all firms. In Standard & Poor’s 500 list they account for 95 per cent of firms, 50 per cent of production and 42 per cent of employment. In Germany, they account for 80 per cent of firms as also for 60 per cent of the national product.1

  Some of these family firms have achieved longevity. We are informed that the Birlas are now in their seventh generation as a large business group, and the Rockefellers and Fords have had a significant presence in the American economy over a similar span. An article reveals a list of firms founded before 1800; the oldest is a temple construction firm in Kyoto dating back to 578 ce. The list features a number of familiar names with interests in vineyards, construction and banking, including the Japanese Kikkoman Soy Sauce Company which goes back to 1630.2 This list of firms is obviously incomplete; it misses out several old Indian firms going back to the seventeenth and eighteenth centuries.

  There is even an association of firms going back to before 1800 ce known as the Henokiens (after Henok or Enoch, a name coming from the Bible), which has a number of European and some Japanese members and an active website, www.henokien.org. The comparable British Tercentenarian Club does not have a website but is active. The relative presence and importance of family firms in the Indian private sector is high, and their persistence, as family firms, high as well. The secretary of Lipovitch Henokiens indicated to me that the association would very much like to have Indian members.

  There is a group of originally German Jewish family firms (Greek and Armenian ones as well) which were key factors in international trade and finance for decades. There is an interesting story about how some of these have fared over the last several turbulent decades in financial markets. The British historian Cecil Roth argued in his book on the Sassoons that their commercial continuity was enabled by their adhering to ethnic traditions.3 It is for this reason that the descendants of those branches of the Warburg and Rothschild families that survive as commercial entities have remained Jewish. Many of the other leading Jewish banking families converted to Christianity and no longer have independent commercial presence (for example, the Bleichroeders, Schröders, Mendelssohns, Itzigs, etc.).

  However, the fate of European international banks is a complex topic which calls for a book of its own. Literature exists on these primarily Jewish bankers to German rulers and how they became key funders of international trade in the nineteenth century. Literature also exists on how their descendants assimilated into the general international upper class. The British have a saying that ‘the coach rarely passes the church door for three generations’. Many successful British businessmen were Quakers and other types of dissenters and ‘passed’ the door of the official Anglican Church to go to their own chapels or meeting houses. A remarkable number of their descendants joined the Church of England.

  What it means for a family firm to ‘exist’ is a complex question in pre-corporate economies. The firm and the family are identical. The family may have been in business for generations. And all families, it is asserted, go back equally far—to the beginnings of mankind.

  Whether family firms are a good thing and whether they are successful is a more controversial topic. A flood of literature establishes that founder-run firms are most efficient.4 The situation with family firms otherwise is more murky. In general, the literature in the US and some Asian countries suggests that they are less successful than professionally managed firms.5 Data from Europe and perhaps elsewhere suggests the reverse.6

  Allan R. Cohen wrote a classic but now hard-to-find book in 1974, Tradition, Change and Conflict in Indian Family Business, which was based on eight Harvard Business School case studies on Indian family firms, at least three of which appear to be Marwari.7 He came to the not surprising conclusion that where the business firm and the family structure represented and accepted the same family hierarchy (senior/junior) it worked, and where there were conflicts, it did not. These case studies also documented the extent of the conflicts. Some would say that they occurred more, and probably so, because of contemporary social changes in Indian society as a whole. But these kinds of conflicts between family and business necessities have been endemic in the Indian family and family firms from time immemorial, though undoubtedly the social sanctions for the family hierarchy itself have weakened in present times.

  The Birlas as a Family Business

  The Birlas, together with their numerous offshoots, are collectively the largest Marwari business family group and India’s second richest. Many members of the Birla family have published autobiographies from which I quote extensively in this book. Most have emphasized the importance of accounting skills, cautious and centralized financial control along with parsimony in expenditure, as the secrets to their firms’ success. Operational autonomy for professional managers is important. Conversely, the decline of other family firms is sometimes attributed to loose financial control and the inability to sustain operational autonomy for executives. These are, of course, precisely the features that characterized the Great Firms. These also cover careful succession planning and training of heirs which successful business family firms like the Birlas practise. The relative success of the Birlas in retaining their money has been partially attributed to their successful handling of succession and transition. Finally, the autobiographies deal with the role of family firms as venture capitalists, identifying and investing in the best ventures at any given time. There is obviously an element of convention in all these autobiographies (or sometimes authorized biographies) but the business memoirs are clearly sincere and validated by many outside observers.

  Kudaisya in her biography of G.D. Birla highlights certain values which are even more basic and fundamental than the characteristics emphasized in the memoirs. She begins with what is assumed in the autobiographies with regard to religious orthodoxy and subordination of individualism to the family—the essence of tradition. She continues:

  More significant than learning . . . skills was the inculcation of the family’s code of business in the young initiates . . . it was merely an extension of the code of restraint they had been taught at home . . . the reputation of the family was most important since the community had reposed full faith on us. Even if a si
ngle enterprise failed, the blame would fall on the entire Birla family.8

  In what follows are issues involving family business success and continuity, which often rise to the conscious level as businessmen reminisce on their professional lives.

  Challenges for Marwaris Family Businesses

  Factors in the accounts of the Birla business success indicate how they overcame various challenges.

  The Importance of Proper Accounting Systems

  Says K.K. Birla:

  To run a business successfully, one has to be well versed in accounts. Ever since the days of grandfather, every member of the family understood accounts well. It was felt, and rightly in my opinion, that a man with a comprehensive background of accounts could not be cheated in business.9

  The ‘Parta’ System

  Father [Ghanshyamdas Birla] . . . started the famous parta system of accounting for which our family and our organization have acquired fame. Father developed the system with such finesse that it could provide a daily profit and loss statement on the performance of the unit concerned.

  B.K. (Basant Kumar) Birla, K.K.’s elder brother, gives a similar account in his biography.10 Gita Piramal in her account of Basant Kumar’s son, Aditya Kumar, reports:

  Under BK’s supervision, Aditya acquired a meticulous knowledge of accounts, particularly the parta, the centuries old traditional Marwari system of monitoring and financial control. Though its use was widespread among Marwari firms in the nineteenth century, most gave it up gradually. Today, it is almost unique to the Birlas who use it extensively. In the late ’80s, Aditya convened a conference of his top executives from all over the world to discuss the parta, and compare it with other systems. By the end of the conference, he realized that through it the group was saving Rs 100 crore.11