Forbes India 15th Anniversary Special

There will be fewer family businesses in the long term: Adi Godrej

As Indian family-owned firms grow in size, their need for external investors and talent will rise in tandem, leading to diverse ownerships and professional managements, says Adi Godrej, patriarch of the Godrej Group

Published: Mar 28, 2017 07:58:05 AM IST
Updated: Apr 20, 2017 04:19:17 PM IST

There will be fewer family businesses in the long term: Adi Godrej
Adi Godrej, patriarch of the Godrej Group
Image: Joshua Navalkar

An increasing number of family businesses in India will transition into institutionally-owned and professionally-managed enterprises, believes industrialist Adi Godrej. The 74-year-old chairman of the Godrej Group is a third-generation member and patriarch of one of India’s most well-known business families.

In an interview with Forbes India, Godrej speaks of the emerging trends visible across Indian family businesses—the influx of professionals from outside co-working with their counterparts from promoter families, an increasing number of women from these families joining the business and the startup culture pervading into business families wherein members of subsequent generations are charting their own course. Edited excerpts:

Q. How do you see family businesses and business families transitioning in recent times?
Globally, entrepreneurship begins with family businesses. But typically, these businesses don’t last through generations. In many cases, they collapse by the second or third generation. However, if they continue to grow well, they end up becoming public companies with diverse ownership since they need to raise capital to fund this growth. This has happened all over the world, including in the US, Europe, and even Japan, where some family businesses date back to the fifth century. This happened in other countries before it happened in India since those economies have grown bigger and their companies had to raise capital earlier. This will happen in India as well. Already, you can see the promoter family’s stake in many businesses coming down to around 20-25 percent.

So I think there will be fewer and fewer family businesses in the long term. Family businesses will go to fewer generations and many will become widely owned and professionally managed as the economy grows. A lot of value will be created in the process and it will be good for the country.

Q. A lot of professionals from outside promoter families are joining their businesses and even leading some of them. At the same time, there are a number of well-qualified professionals from the next generation of business families joining the ranks. Can these two sets co-exist?
One shouldn’t distinguish by compartmentalising people as being either family members or professionals. I like to distinguish by saying that there are family professionals and non-family professionals. It is becoming common in India for many family members to not join the business and pursue other interests. Also, as certain businesses grow in size, a situation may arise where there aren’t enough family members to fill executive positions. So automatically such businesses will have to get professionals from outside to fill these positions.

The best way to divide responsibilities is to select the best person for the job—whether he or she is from the family or not. But in my view, when family businesses become very diverse and certain executives have to be appointed to coordinate between different group companies in a conglomerate or business units in a company, family members tend to do a better job than non-family professionals.

Women are getting more involved in [family] businesses...which can add value.

Q. While many families still jointly administer a business, others have separated their business interests. Does separation of business interests lead to value creation or destruction?

It depends on the way in which these splits are done, as well as the expertise and capabilities of individual family members. Today, it is much easier for members of business families to sell their stake in the enterprise to each other from a taxation point of view. So, there is much more diversity and flexibility.

Q. Do you see a lot of hidden unemployment in business families, where new businesses are started or acquired just to keep some family members gainfully employed?
It used to happen earlier, but it doesn’t work these days. Businesses have to be competitive today. At present, a lot of family members are getting into businesses that are very different from those owned by the family, since they feel their calling is somewhere else. These businesses are self-funded with the help of the value of the equity that these promoters hold in the legacy business, which can also be leveraged to raise debt.

Q. Do you see a lot more participation in business from the female members of business families?
Yes. More and more women from entrepreneurial families are getting involved in the business. Earlier, if a woman got married (and they often got married at a young age), she had nothing to do with her own family. So they were never included in the family business. But that’s changing. Even after marriage, women are playing an active role in business. I have always felt that women managers tend to have a different perspective on things, which can add value to the business.

Q. What are the processes a family enterprise can institutionalise to ensure the business is run professionally across generations?

A lot of families rely on advice from external experts on this subject. One way is to have a family council, which meets regularly to discuss various issues related to business. They also set down rules of engagement between family members and the business, such as who is allowed to join the business based on merit and capability. There are also those that have a family constitution to govern such things.

Q. At what stage should one generation of a business family start thinking about succession planning?
Succession planning is something every organisation—whether it is a family business or not—should focus on. It isn’t something that is required only at the top. It is required at every level. Typically, good companies plan for more than one successor and when the time comes, one of them is selected to lead.

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