InterviewWith Cyrus Guzder by Naazneen Karmali
What are the major challenges that economic liberalisation has thrown up before family business groups?
I think the big challenge for them is to adapt to the new competitive environment. Because they have been robbed of their protection they find that people can enter the businesses that they were able to operate in with protection earlier. So suddenly you find your customers having a choice, and they could desert you. They face the challenge of managing the transition. But the fact is, this is a challenge not just before family businesses but for all companies.
The term family business tends to imply, in the Indian context, something derogatory. It implies businesses that are run by families for themselves, that is, as if they were the only stakeholders in the business. To that extent they were involved in practices which the external regime encouraged, which was to under-declare income, not to pay taxes and to siphon off money. That is the case for a large number of companies even today. But if your markets are under threat, then to continue to run the business in that way could be suicidal. You could end up having a business from which there is nothing left to be siphoned off anymore.
The second challenge is that because the earlier environment gave them protection, they did all sorts of funny things such as diversify in a chaotic and disconnected manner. Today, they have to start refocusing on a portfolio of businesses that they can viably manage. The third, which follows from this, is that they have to build a core competency to manage their chosen business. Earlier the competence they needed was in fixing, managing the environment or preserving a monopoly. The summation of all of this is simply: can they change their mindsets? That is very difficult because it calls for a deep-rooted, cultural, intellectual transformation.
How have Indian business groups coped with these challenges in the past eight years?
Itís a mixed record but overwhelmingly they havenít coped well. On the other hand there are some stellar examples of people who have. They are the ones who looked at themselves and said: Iíve got four or five years before the foreigners walk over me. How do I manage to get competitive despite the fact that my input costs are higher and labour productivity is lower? One of the reasons why Indian businesses have not done well is that nobody bothered to read the WTO protocols in 1992-93.
Some of them who managed the transformation really took risks. Wipro is a typical example. People didnít really think that they could make it in IT with IBM coming to India and HP walking all over the Indian market. What saved them was that they were in software at the same time and that the market opened up. Be that as it may, the point is that internally they were ready and began to see themselves as an IT company. Reliance also took the decision to go for world-scale, motivated by the fact that they wanted to be global in costs. There are some who decided they would develop their own brands and compete. Take BPL, theyíre still at it despite the entry of MNCs. Others like Piramal followed a different strategy of growing through acquisitions. Ranbaxy too decided to grow through improving R&D and establishing abroad. These are good stories. And theyíre all Ďfamily run businessí.
With the entry of multinationals, hasnít survival become an issue? Isnít that why we have seen a spate of sell-outs by family companies to MNCs?
Survival concentrates some minds but it doesnít concentrate others. Some people decided that, it was just not worth the hassle and I feel very sad about this. The Chauhans gave up too early in the game and so did the Pandoles of Dukes. The fact is Pepsi still canít kill Dukeís Mangola and lemonade. Itís tragic. If theyíd only hung in there a little bit longer, they would have sold out not for Rs 30 crore but for Rs 120 crore today. If you get enough money then the family says, maybe we donít want to kill ourselves and sells out. But the other reason usually is that they believe they just cannot win against the new competitor. So they get defeated and tend to give up before time.
It rather depends on the family as well. Families are usually caught between generations where either an older generation or a younger generation is more or less in charge and they have different ideas. It also depends on what states of mind those generations are in. For example, in terms of attitude to life, my father is eternally modern because he has always been very liberal and open-minded in his values. So he has not had any problem in adjusting to all of this and frankly, he rather likes it. There are others who have not been able to adjust. Sometimes the younger generation brings with it enormously better skills because the earlier generation had invested in their education. Sometimes the younger generation is effete and spoilt and so they will wind down the inheritance. I think you have to look at the families individually.
Does the family owned, family managed business group have a place in a competitive business environment or will it fade away?
I think you canít escape family businesses. In almost a definitional sense, businesses tend to start with an entrepreneur. And as long as heís the promoter and shareholder it would be a family business. There are very few businesses that would be started by a group of professionals. Entrepreneurs start a business and so in the early stage it would be Ďfamily managedí. If you asked me whether there is a role for them, I would say the world of business wouldnít survive without them! Companies go through a three-stage process: family managed, then professionally managed and finally world-class management. The difference between the family and professional is simply this Ė the professional manages for all the stakeholders, i.e., customers and the community at large. The moment you become sensitised to other stakeholders you begin to pay attention to corporate governance and begin to show accountability. If youíre managing for all stakeholders then it is irrelevant who the owners are and how much they own. How many MNCs are family owned but not necessarily family managed? About 40% of the Fortune 500 companies have a dominant family shareholding. I am no longer embarrassed about saying that Airfreight [now AFL] is a family owned company, but it is professionally managed.
As family businesses attempt to break down their feudal management structures and move towards professional management, what are the vital factors to ensure a successful transition?
I think the primary one is business focus. Also a commitment to corporate governance which involves significant levels of disclosure to your board, your employees and your external stakeholders. A need to develop some core competency. And thereís one point that family businesses are belatedly coming round to but which my father intuitively grasped; there are two ways in which you can grow your wealth. You can take it out of the company and enjoy a very high level of personal income. So you have black money and blow it up on imported BMWs or Patek Phillipe watches or spend Rs 5 crore on doing up your house. The other way is to keep it in the company and that starts adding to shareholder value. And if youíre running a business that has a future, then the market will give you a colossal multiple. Therefore, by just running your business soundly and keeping your money in it, the market will grossly multiply your wealth. When you need the money you can sell a per cent or two. That would be totally legal and you can enjoy it without having to do so surreptitiously abroad. I think the realisation is dawning that you should keep it there, ensure good governance and at an appropriate time you can certainly encash, either through a merger or joint venture.
Family businesses tend to find it difficult to attract top drawer managerial talent. What will it take to change this?
As long as the talent feels that there are family members in the organisation with undefined authority then it will be wary of joining. The systems of management must be open and transparent and that reputation spreads rather quickly. Second, the management must be perceived to be an ethical one. There is a belief, I think quite illusory, that family companies are not straight and MNCs with their codes of conduct are. Third, if you can build a strong brand then people will join. For example, people will work for BPL Electronics but not with say a Bakshi Electronics. The fourth is that if you have foreign associates, then you can attract people. Whatís also important is how much you empower managers. Finally, remuneration. Family companies have never matched MNC salaries but must start doing so.
Elsewhere in the developed markets of the world, ownership does not bestow the divine right to manage a company. Are Indian entrepreneurs resisting this trend or accepting it?
I would say that the Bombay Club was a sign of resistance. The way in which people still try to work with family auditors and manage tax is also an effort to resist the trend. If you work in an external environment where governments are very expropriative and corrupt, then itís more difficult to open up. As government cleans up its act, it will happen. Industrial licensing has gone, customs duties are coming down. Today, the focus has shifted to state governments, who are notoriously corrupt; so in a sense you are up against another brick wall.
How vulnerable are family empires to takeovers? Do you see this as a real threat in the future?
Yes, even though our takeover code does not operate as freely as in other countries. If you look at the heavyweight companies a lot of funds are required to take them over. But the existence of the code constitutes a potential threat. As the market lifts, we will see takeovers severely threatening some family businesses. The presence of financial institutionsí stake in family companies is a major block to raiders. That provides them with a big cushion.
Indian family businesses have traditionally been lax on ethical issues and delivering shareholder value. Do you see this changing? If so, why?
I think itís changing wherever families need to raise capital. That leads to a need to raise standards of disclosures. I think this will be a big driving force. Also, thereís shareholder activism and the presence of SEBI. Besides, management is seeing a correlation between good corporate governance and high P:E multiples on the stock markets. But the reality is that it is not just family businesses who are lax on ethical issues. Corrupt practices pervade both the public sector and MNCs. In the future, the pressure of minority shareholders will push reform.