Dead men tell no tales but on July 4, 2004, things were a bit different. Priyamvada Birla, widow of Madhav Prasad Birla, had died. Madhav Prasad Birla was one of the four Birla brothers who built the Birla Empire. Priyamvada’s will had the Birlas stumped. She had given away her wealth to her chartered accountant, R.S. Lodha. That gift also included her share in Pilani Investments. This company has often been described, innocuously it would seem, as an investment company. The reality is that it was how the Birla Empire’s economic interests were aligned between family members. Through a maze of cross-holdings that ran across companies in the MP, BK, and AV Birla Group, wealth was kept within the family. It had never occurred to the family that this way of apportioning wealth would have a downside. And then R.S. Lodha, an outsider to the family, was suddenly pitch forked into Pilani Investments. The Birlas swore to keep him out. It was only later that they realised that this model of managing family wealth had outlived its purpose. It took them five years to unravel the fabric of cross-holdings.
If the Birla episode was a wake-up call for other Indian business families, the Ambani family feud got them to smell the coffee. “After that episode most Indian business families started thinking very seriously about having a roadmap for one, accommodating family members inside business and two, entry of sons and daughters into the business,” says Salil Bhandari, managing partner, BGJC, a Delhi-based consulting firm. Indian business families are different from those in the West. In India, most business families are part of the old joint family system. It takes professionals working with these enterprises years before they figure out key decision makers within the family. That’s how amorphous it can get. “It’s a reflection of society. There is a lot of support mechanism — from the family, relatives; this network of people. Brothers fight here too, but this broader system makes sure that trivial issues do not lead to a break up of relationships,” says Kavil Ramachandran, Thomas Schmidheiny Chair Professor of Family Business and Wealth Management, Indian School of Business.
Global research shows that most business families can’t keep their flock together for more than three generations. Ramachandran says that for India, no clear data exists but there is anecdotal evidence. The Birlas split after three generations, the Ambanis in the second generation, and the Bajajs in the third generation. The Jindals have divided the business empire operationally; though the control of the company is centralised in the hands of Savitri Jindal.
No wonder then that Indian business families are eager to avoid a script-less family drama. They would much rather plan for the involvement of members in advance. “There is value destruction when the news of a split catches the markets by surprise,” says P.M. Kumar, a family advisor of the Bangalore-based infrastructure company GMR, which has been in the news for putting together a family constitution. Kumar is now member of the GMR group holding board.
When Anil Ambani made his impassionate plea about ownership issues at the Reliance AGM on August 3, 2005, Reliance Industries stock fell from Rs. 760 to Rs. 710 before recovering somewhat. Even the Sensex dropped 80 points that day on this development. This is a defensive reason at the best. A more important factor is that most business groups are fighting a war for talent. Family members can be valuable resources for the group to tap. “Indian business houses are competing with MNCs for talent. Family members, if properly groomed, can be a source of advantage in their understanding and also commitment to the business,” says John Ward, Clinical Professor of Family Enterprise & Co-Director of the Center for Family Enterprises, Kellogg School of Management. The second key reason is that the members of the next generation know their place in the enterprise. This prevents nasty surprises — for family members as well as investors.
Counter-intuitive as it may sound, Indian families are involving the younger members of the family right at the start of the discussion. The younger lot is more educated and open to concepts. The older generation is often caught in situations where respect means saying nothing. Even when they see something they don’t agree with, they say nothing. So the next generation must be involved. They are anyway the people who will have to execute the plan and must be convinced, otherwise it won’t work. If the participants are not agreeable to the plan, then even if it’s a legal document, nobody will act on it.
There is this business group — a patriarch and his brother, and their kids and grandkids. They all got into a room to start discussing succession planning. Now between the brothers, all in their forties, there was a lot of argument and it went into a deadlock. So a family advisor came up with a suggestion: Let the younger generation—their children, all in their 20s — go away together to attend a one-week course on succession planning. At the end of that exercise, they would have to draw up a transition plan for the family. So at the end of that course, they all sat down and prepared a plan — a PowerPoint presentation for the rest of the family. At the end of presentation, the elder generation was speechless. The youngest generation had come up with a fantastic solution and so the elders said they would do it. The other major shift that business families are trying to make is to include their daughters as well in the succession and discussion plan. Till now, daughters have been by and large ignored. Take for instance a large NRI family, which had a huge succession planning challenge. There were 10-15 children, two brothers, 11-12 sons and many cousins. “We asked them how many daughters did they have. They promptly told us, we don’t want to talk about our daughters,” says Richa Karpe, director, investments at Altamount Capital, an agency that specialises in wealth transfer planning. The group members were told that there was little point in planning a succession because it was clear that only sons were being considered. “They had a very talented set of daughters. They had all studied in Ivy league colleges but they were not being considered at all. It is very important to bring the daughters into the equation,” says Karpe.
Perhaps the most critical matter before most business families is the way they introduce their sons or daughters into the business. Twenty years ago, this was not such a big issue. India still believed in God-given rights! Today’s employees are different. They have been brought up on a diet of meritocracy. If top professionals feel they will not have room to grow because the scion of the business family and his cousins will grab all the top spots, then there is sure to be a talent flight. Most business groups are very careful about how they do this.
(This story appears in the 22 October, 2010 issue of Forbes India. To visit our Archives, click here.)