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A family constitution can bridge the gap between family and business values

As more and more Indian business families adopt a constitution, it is becoming clear that for the document to be effective, the manner of drafting it has to be given due importance

Published: Mar 29, 2017 06:11:47 AM IST
Updated: Mar 29, 2017 09:54:12 AM IST

A family constitution can bridge the gap between family and business values
From the Burmans’ family album: (Seated from left) late RC Burman, late AC Burman; (standing from left) Mohit Burman (director), late Sidharth Burman, VC Burman (chairman emeritus), Pradeep Burman, Amit Burman (vice chairman), late GC Burman, Anand Burman (chairman)

It took the Burmans 18 long months, including a couple of family off-sites in Kathmandu, Nepal, to discuss and finalise the family constitution they were drafting. This was sometime in 1997-98. Dabur Ltd, the company the family owned and managed, had already made a name for itself in the fast-moving consumer goods (FMCG) space with their Ayurveda-based products, and the family’s fifth generation was involved in the business. “We realised that for Dabur to grow rapidly there was a need to professionalise the management, and to attract the best managerial talent it was important to keep the top slot vacant,” says Amit Burman, vice chairman, Dabur. What’s more, “the family had also grown in size and the complexities in managing it were rising.”

Consulting major McKinsey & Company was roped in to advise them. Soon after, family members gave up their day-to-day operational roles and professionals were brought in. Also, a family council was set up and all the male members of the family, above the age of 25, numbering over 10, were made part of it. Today, almost two decades since the family members signed on the dotted line (of the constitution document), the business has grown exponentially and the family remains united.

Indian business families have increasingly been embracing the family constitution. The Hyderabad-based GMR family is another early mover in this space, and their family constitution is even considered a gold standard. Others like Emami, Dr Reddy’s and Murugappa Group too have put constitutions in place.

Some call it a family constitution, others a family charter or just a shareholders’ agreement. “Whatever the nomenclature, the document serves as a mechanism to enforce family governance,” says Kavil Ramachandran, executive director, Thomas Schmidheiny Centre for Family Enterprise.

There has been a long-standing need for such a document. “There is a huge difference between how the family and the business are managed. Business is a reflection of capitalism where success depends on competitiveness and meritocracy. Family, on the other hand, is socialist in approach as everyone is equal irrespective of their qualification or gender,” points out Ramachandran. “This creates a challenge for a family business. There is a need for the family members to understand the relationship between the business and the family and among themselves.”  

When it comes to Indian business families, where culture and tradition play a large role, there are further complexities. The father’s (or patriarch’s) decision is rarely questioned; in many families women members do not get a shot at running the business, and the oldest son typically inherits the mantle. The other peculiarity is that in India most family members are owner-managers. This adds to the complications when it comes to offering the right roles and remunerations for everyone. “There is a clear need for a bespoke model of family constitution that factors in Indian dynamics,” says Radhika Gaggar, partner at law firm Cyril Amarchand Mangaldas.

While the rationale for the need of a constitution is clear, not many families put it in writing

While the rationale for the need of a constitution is clear, not many families put it in writing. There is a reason for this. “Hinduism is not a structured religion. It does not have one scripture like the Bible [Christianity] or the Koran [Islam]. India is a country known for practices based on culture and values and that gets reflected here too,” says Ramachandran. Some even see this as a Western concept being imposed on Indian families. “In the Western world people sign an agreement before marriage. We don’t, but Indian marriages don’t fail as much,” says Parimal Merchant, director, Global Family Managed Business Programme, SP Jain School of Management. “We trust our family values where the family is more important than ‘me’. Instead of acknowledging our great culture we judge ourselves through a Western perspective.”  However, Burman disagrees. “As the families grow in size it is better to put everything on paper,” he says.

So what does a typical family constitution contain? “The detailing varies from family to family. Some prefer just a broad guiding principle listing out the core values and beliefs while others go into the specifics. In some cases it is recommendatory while others prefer it to be very prescriptive,” says Gaggar.

Whatever the level of specificity, a shareholders’ agreement always finds a place in the document. This clearly states who holds what percentage of the family’s stake, whether it is held directly or through a trust as is the case with, say, the GMR family or the Tatas. For Dabur, it even specifies the voting rights of each member. It can also stipulate what will happen to the voting right if a member dies and his spouse remarries.

Exit clauses are another important element. They clearly specify the details relating to the first right of refusal—if a member wants to sell his stake he must first offer it to existing family members (this became a standard feature after Priyamvada Birla, MP Birla’s widow, bequeathed her estate to an outsider, RS Lodha, in 2004 and the Birla family had to take legal recourse), the pricing formula, and the conditions relating to not starting a competing business.

The constitution also specifies the role of the members and their remuneration. Dabur’s constitution rules out any role or remuneration for a family member (a next-generation member can at best do a year-long internship), while in other instances, the constitution could make it mandatory for every member to be a part of the family business.

It can also lay down rules regarding the quantum and mode of communication. For instance, Emami family members (see story on page 58) meet every fortnight. Besides, the entire family has to go on a holiday together every year. Succession processes are also specified in the document as is the retirement age.

The process helps create a binding shared purpose & vision for the family. It strengthens communication skills & trust.

It can even go into minute details governing the behaviour of the members. The GMR family constitution prohibits members from being featured on the Page 3 (of society gatherings and soirees) of any newspaper. In the case of Emami, members are told to avoid being seen as ostentatious. They are also given a broad dress code.

“You cannot have a policy for every eventuality; to deal with an unexpected situation, a process is put in place,” says Ramachandran. As business, family and society change with time, some parts of the document may become dated. Families then tend to periodically review the document and make changes.

“While a review is good, the sanctity of the document has to be maintained. It should not be amended every now and then,” says Gaggar. “It should be like the Constitution of India: Amend when the need arises, but after a lot of debate.”

If there is one thing all experts agree on, it is that the process involved in drafting the constitution is more important than the document itself. It is not without reason that the Burman family took 18 months to arrive at their constitution.

“Without a complete buy-in from all the family members, a constitution will cease to be effective,” says Ramachandran. Gaggar adds that her firm always recommends a very consultative process. “Having an open discussion helps. It often brings out issues that are simmering under the surface. Thorny issues that could have surprised the family later are identified and discussed to arrive at a solution,” she says.

Merchant concurs. “The journey is important,” he says. For instance, the elders in the Bajaj family had a clear understanding but when the next generation came up, the buy-in was missing and that led to the bitter, infamous break-up.
John Ward, a global expert on family business and former director of Kellogg Center of Family Enterprises, who has advised large Indian families, says research proves that the process is more important than the product. “The process helps create a binding shared purpose and vision for the family. It strengthens communication skills and trust. It also offers practice at settling different points of view and conflict,” he says.

Indian business families, it appears, are yet to realise the importance of this aspect. “Families continue to hire a consultant who will prepare a fancy bound document and then get all the family members to sign. This is a recipe for disaster,” says Merchant. Ward adds that few Indian families focus on the process and this makes the document more standard and formulaic. “It’s important to take the time and to make them [family constitutions] very customised to each family’s circumstances,” he says.

Another reason a buy-in is critical is related to the legal sanctity of the document. “A family constitution is not a commercial contract but a family charter. It has a high moral binding value but only the shareholders’ agreement part of it is legally binding,” says Gaggar.

According to Ramachandran, the goal of a constitution is to keep the family together and help it govern itself better. But even with the best document there are other factors at play. There have been instances of families, who had such a document, ending up in a messy split. On the other hand, families without a well-documented constitution, such as the Chennai-based TVS Group, have stayed together and are growing.

A constitution will help members in passing on strong values and well-defined processes to the future generation, but traditional familial traits—tolerance, compromise and reconciliation, it would seem, remain the foundation on which business families survive and thrive.

(This story appears in the 31 March, 2017 issue of Forbes India. To visit our Archives, click here.)

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