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The Cyrus Mistry-Tata imbroglio: A common family business issue?

The successors must have the family support in order to survive and be allowed to remain at the helm of the family firm

By Prof. Rajiv Agarwal
Published: Dec 13, 2016

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Image: Joshua Navalkar

The Tata Board - Cyrus Mistry incident has shaken the Indian Industry. While there are many versions of the facts, and more may be revealed in the days to come, we can view this incident from the perspective of lessons for the family business. While this article is not commenting on this particular case, this issue nevertheless offers rich learnings for family businesses.

Why do I call the Tata’s a family business? By definition, a family business is one which has multi-generational family members working in the business, the family has ownership, influences the strategic direction of the business, and there is an intention to pass on the business within the family. All these conditions could probably apply to the Tatas. (I have taken the liberty of counting Noel Tata and Ratan Tata in the family working in the business).

If we were to summarise the happenings of the last few days in a very simplistic manner, then this could also be understood as a scenario where two families own a business (Tata Sons), where one controlling family (Tatas) owning a 66% share (through various trusts) had stepped down and handed over management control to the second family (Mistrys) holding a 18.5% share. Now, after handing over charge, the predecessor had taken back the reins from the recently appointed Chairman. The fact that these are the keys to a $100 billion empire, one of the largest and amongst the most reputed, is a significant reason why this has made headlines.

Similarly in family businesses, there is often the case of the patriarch returning back to the business, if it is felt that the new recruit is not able to be effective in his job. We have seen the cases of Michael Dell and a few more instances closer home.

This is usually explained as the founder coming back to restore the organization to its former glory, and is usually a much heralded move, by family and external stakeholders alike. But the bigger question is, how good is this move for the family firm? Sonnenfeld has shown that founders (calling them as “Generals”) who hand over charge only to find a pretext to come back to power later on, at the failure of the successor. Based on the facts, it could be said to be applicable to this case too. This is a common incident in family businesses, where the patriarch would not like to let go, and the failure of the successor would further legitimize the thought that there is no one better than himself to run the business. The patriarch would find it difficult to step down, and would not like to lose the trappings of power and prestige that the position of head of the family business enjoys.

Having said that, the successor should be allowed to change the business, which would probably be in line with the environment that the business finds itself in, and allows the business to compete accordingly. This is the only way a family business can survive beyond the current generation, when it is prepared to fight competitive battles of tomorrow, not of yesterday.

In fact, in the late 1990s when Ratan Tata had himself taken over, he had made changes in the Tata group, consolidating power under a common Chairman, instead of the decentralized independent operating units that the Tata companies were. (eg. Tata Hotels, Tata Motors, Tata Steel etc.) He had JRD Tata’s backing, as Ratan Tata took on the herculean task of executing his strategic direction, which definitely was not something for the faint hearted.  Whether a good move or not, is a different story for another time, but the fact remains, that Ratan Tata had the unconditional backing of JRD, as he worked his way around the Tata empire.

After Ratan Tata had achieved a huge success in increasing the size of the group, Cyrus Mistry’s efforts in execution his strategy of accountability and profitability seems to have run into rough weather. His contentions of the group needing some tough decisions to be taken does not seem to have found support, based on media reports.

What is clear is that Cyrus does not seem to have got support of the Board. Whether it is the accountability, or the potential probable closures of the loss making units which could be against the altruistic culture of the Tatas, one does not know the reason that led to his being asked to step down.

Which brings us to the point, that the successors must have the family support in order to survive and be allowed to remain at the helm of the family firm. It would help successors to understand the full scope of activities that one is empowered to deal with, and more importantly, to understand the underlying currents of culture and values. While Cyrus undoubtedly, may be an accomplished and extremely capable individual who may have been chosen more on merit than mere family ownership credentials, the facts as stated in the public domain, however incomplete they may be, do lead us to think that there are certain lessons that can be learnt and that this issue could have been handled better.

It may be quite some time before the dust settles on this matter, before the full facts of this issue come out in the public domain. The learnings from this incident have far reaching lessons for family businesses, which are mentioned below:

FOR THE SUCCESSORS:
Understand the culture and the values of the business family behind the company: The unique feature of business families is the tacit knowledge which is imbibed into each member from a very young age, or around the dining table. Additionally, there are a lot of emotions in various aspects of the business family and the successors would be advised to be sensitive to these. Examples include respectful treatment to key loyal employees, legacy businesses being allowed to continue due to emotional ties, or even offices, residences or some areas being maintained due to family sentiments, or anything which the business family considers sacred or representing the values or identity of the family. I know families where certain rituals and customs are still carried out, or the patriarch’s favourite area still maintained (including one factory which still keeps a couple of chairs at the factory gate, where the patriarch used to sit, before the factory starts and at the shift change time, talking to the workers as they came to work.). These are small indicators of the culture defining the family behind the business.

Research has stated that values define what people and businesses care about and hence they are the basis of human actions. Values are transmitted throughout generations, and define families’ behavior, in terms of what is right, what is wrong, or what is desirable. The successor would be advised to understand these values in the family firm, and understand what are the sensitive areas which could cause reactions, and carefully evaluate his actions based on these.
 
Business families in India are not new to controversial decisions, which have sacrificed the proverbial sacred cash cows, for the survival of the family business. Whether it is Rajiv Bajaj moving into motorcycles from scooters, (surely again not for the faint hearted, but a move which some attribute to saving the company), or Anand Mahindra moving into electric vehicles, and diversifying into non-core areas, or even Kumar Mangalam Birla’s entry into the sunrise industries like retail, telecom, and readymade garments. One can debate the profitability of these moves, but the wisdom of these moves, are something which only time can tell. But the fact still remains that they had the foresight to make bold moves, away from their comfort zone. But it would have to be a very calculative decision based on the successors powers and role within the family and business, to evaluate the situation before making any such moves. Many well-meaning professionally oriented successor family members have faced the wrath of family members, when they have acted ignoring these.

FOR THE INCUMBENT PATRIARCHS:
Letting go: Perhaps the toughest act to perform, this means a complete cut off from the management of the company and maybe just being available as an advisor to the Board and management, if needed. The process and choice of successor should be fair, transparent and merit based. If this is done correctly, then the successor should be allowed to perform, and he should be accountable to the Board who should generally be supportive of his actions. The incumbent should realise that the successor may not be as good as his predecessor, and he should resist the temptation to step in and correct the mistakes of the successor. eg. One does not know how different things would have been, had JRD prevented the consolidation of the Tata group under Ratan Tata. The newer generation successors, since they have been chosen on the basis of competence, should be given a free hand to shape the organization to face the challenges of the future, not just perpetuate the past. In a rapidly changing dynamic world, renewing the business becomes imperative for the long survival of the business, even if it means making a few sacrifices.

Defining the Culture and Values to the successor:
The retiring patriarch should take it on himself to ensure that the successor is aware of the culture and values of the business family and not leave it to chance. This will allow the continuance of the values of the family and lesser conflicts later on.

Accepting the changing environment:
This is perhaps the toughest proposition to accept. Families need to realise that the battles of the future will be different from the battles of the yester years, and will need a different set of skills and mindsets. Traditional practices may not be relevant and these will have to be dealt with accordingly. Trying to hold on to these will just lead to increased misery for all concerned.

Need for profits:
The basic fact is that profits are the essential for the family survival and for charitable causes. As I have often pointed out, one cannot do philanthropy or support families out of losses. Hence, the family firms have to be competitive and profitable and this is paramount. Hence, business families need to ensure that there is a constant pressure to keep businesses performing optimally in increasingly uncertain markets.

Family mindset: Family first, business first, or family enterprise first?
This is perhaps the most important question that any family can ask itself. John Ward had defined this concept, by asking what is the purpose of the family business? Whose interests come first? Is to support the family? (Family first) or is the business to run professionally and its priorities come first? (business first) or does the family strike a balance between the family and business needs so that simultaneously, the business prospers with the satisfaction of the family needs. The answer to this question usually explain the decisions made in most business families.

Regardless of whatever the final outcome in the Tata issue is, what is certain is, that this issue has raised a lot of questions, on the way family firms are managed and governed, and the priorities that the leaders at the helm will have to consider. The issue may get resolved in the near future, once both sides realise that like all family disputes, the fastest way to resolve issues is to usually talk it over across the table, instead of spending valuable time fighting in courts. But the impact on Indian family business will remain for years to come and family businesses could learn from the mistakes of others to ensure that their own businesses survive and thrive.

(Prof. Rajiv Agarwal is Associate Professor of Family Business at SPJIMR, Mumbai. All views expressed above are his own.)

[This article has been reproduced with permission from SP Jain Institute of Management & Research, Mumbai. Views expressed by authors are personal.]

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