The business of family and family businesses are in conflict

Family counseling experts, divorce order lawyers and social scientists should serve in Boardrooms and less of accountants, financial engineers and human resource folks

Sanjeev Gupta
Published: 22, Dec 2014

Sanjeev Gupta has lived and worked across the emerging markets of Africa, the Middle East and India over the last 24 years. During his career, he has developed extensive experience in the conceptualisation and execution of innovative and customised solutions for successful business models in emerging economies amidst the challenges of transformation and policy changes and the complexities of managing paradigm shifts. He has been actively involved in the Private Equity & Corporate Advisory sector and has established a strong reputation for strategic business development and implementation of hitherto untried models in new and fast changing markets. He was the CEO of South African financial services giant Sanlam Investment Management`s Emerging Markets Business till December 2010. Sanjeev is currently the Managing Partner of Emerging Opportunities Consulting , a firm he set up to focus on working with fast growing, consumer facing, family owned businesses looking for strategic and financial support . He is a Fellow of the Indian Institute of Chartered Accountants, a Member of the Investment Analysts Society of South Africa and holds an AMP from Saïd Business School, University of Oxford, UK. His hobbies include writing on business and macro-economic trends and playing golf. He enjoys presenting papers and is an active public speaker in various forums.

Photo: Getty Images
Photo: Getty Images

Rick Riordan wrote in The Sea of Monsters: “Families are messy. Immortal families are eternally messy. Sometimes the best we can do is to remind each other that we're related for better or for worse...and try to keep the maiming and killing to a minimum.”

The beleaguered founder and CEO of Continental Energy, a shale oil success story, has been ordered by the court to pay his soon to be his ex-wife a billion dollars (yes that's right).

This made me wake up.

The scribe who covered this story with great aplomb did express amazement that Mrs.CEO had actually the gall to say “it's only a billion and she will sue for more” after the order.

But the more deeper issue he raised so succinctly was around how this would be paid other than either by doing a stock transfer or selling stock to raise cash by her CEO husband whose primary wealth resided in the value of his controlling shareholding in the company he had created.

A billion dollars (or maybe even more if Mrs. CEO gets her way) is a big amount to raise, especially if the liquidity of the stock is not all that great. It could even lead to an overhang and depress the price to the detriment of other minority shareholders.

A bigger and well made point was however around what if it led to an involuntary change in controlling shareholding by having to create a significant other shareholding reposed in the hands of what potentially could be a destructive or at the very least uncooperative shareholder.

I was intrigued reading this article. It told me clearly what the scribe put as the risk of an off balance sheet call option which was never priced in yet existed  all the time.

It was easily one of the most brilliant articles I have read where the scribe in question goes onto therefore arguing that situations like these mean CEOs with large shareholdings must possibly report in the state of their marriages in a regular basis.

This will allow the investing public to objectively decide what risks that posed, including perhaps appointing observers at the family dinner table and receiving regular reports on the quality of their communication and other activities.

A more tongue in cheek suggestion was that all CEOs remain, ala the Vatican, celibates in order to avoid these situations of "significant other" events which are otherwise not properly disclosed or accounted for.

In my work around emerging markets, I see a similar risk playing out.

Typically businesses are family owned and if Mckinsey is to be believed, 35% of billion dollar plus businesses in emerging markets will be family owned by 2025.

The old adage of "blood is thicker than water" has thinned considerably and sons separating or siblings creating uneconomical split structures to  suits their egos and their quest for independence is prevalent.

Add to that the specter of divorces and spouses being awarded settlements within murky family ownership structures with cross holdings and incestuous decision making trees. How will the paying spouse actually settle in such cases when his/her ability to raise those funds from the businesses the family owns is practically zero?

I once had a client. A 60 year old proud, 1st generation tycoon who was unschooled but knew how to develop and run businesses. He had 3 children. The 1st one, the chosen male heir, got to run and manage what he was the jewel in the crown, the flagship business the patriach had himself created and looked at with pride.

The 2nd one, a divorced daughter, got the development side of the business which held large amounts of undeveloped land. A sort of a latent business with no real plans but given to the daughter to think and decide.

The 3rd child was the pet. Much younger to his siblings, a late child to his successful father, he was a spoilt brat.

The old man had moved out of running or getting involved in the first 2 businesses and had started dabbling into new ideas, sports franchises, IT based innovative business models with his youngest child and had started enjoying these new pursuits.

As things rolled on, the 3 businesses started shaping up differently.

The first one started struggling under unpaid debts and desperately needed large amounts of liquidity to ride over it. Banks were reluctant without additional equity coming as the inherent business prospects remained strong.

The 2nd one, with its considerable land bank, had started becoming a development company of some standing and banks were queuing up to provide finance on the back of such solid assets and forecasted cash flows.

The 3rd one was the magical one. Quick paybacks and cash turnarounds were making the father son duo very cash rich and proud.

Ostensibly all of this was owned through various trusts and apart from the father's directives, very little legal basis existed for the siblings to continue with their fiefdoms.

You can see for yourself the complexity of such a situation and the quagmire the old man was in.

One felt some if the land could be sold off to refinance his cash tight business.

Another felt Father has allocated and it was upto to each one to make their bits work.

Another had the view that if one is not smart, one cannot succeed and the proof the pudding was apparently in the eating as to who was the clever one.

So on and so forth.

As an advisor I was simply reminded of an old adage, “United we stand, divide we fall”

But how was I to make that the mantra around which a merged strategy could be found and agreed to.

Personally I was against the idea of selling equity in the flagship company at an almost distressed valuation when so much equity (land) was in the family's hands and some could be cashed in.

I also felt that the newer businesses, some of them flights of fancy, could be sold off.

A lesson on family owned enterprises where holdings are unclear, authority is cultural and hierarchical, emotions run high and outside advise is distrusted.

Add to that the current generational issue where the younger turks have fierce combativeness and the goodness of joint families are large derided away at the altar of independence and freedom.

Suffice to state, sanity finally prevailed but not before a lot of brow beating, the threats and emotional outbursts.

The moral of the story therefore is that the new world of business needs new ways of assessing risk. The traditional control focused risks are the lesser ones.

The big ones going forward are arising from social evolution and cultural changes which nobody anticipated or for that matter could have seen it coming.

I am therefore suggesting to all my clients to start using family counseling experts, divorce order lawyers and social scientists to serve in their Boards and less of accountants, financial engineers and human resource folks.

A couple of fortune tellers could also be useful and so would be historians who have read up on all ancient family dramas.

The risk is from the the beyond and not from the within as we can clearly see.

“All happy families are alike; each unhappy family is unhappy in its own way.”

― Leo Tolstoy wrote in Anna Karenina.

Let's agree to that?

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