A crisis of leadership

Gita Piramal

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* 1999 opened with a front page report in The Economic Times that the market capitalization of family-run companies had plummeted sharply.

* A few days later, Crossfire, a programme on DD II, announced that family-run companies now account for a mere 15% of the BSE’s total market cap.

* In Bangalore, CII hastily organised a two day conclave in February 1999 on family business with the theme: ‘Strategising the Future’.

 

Given the importance of family-run businesses in the Indian economy, such news is, to say the least, worrying. Sixty-six of Business India’s Super 100 companies are family-run. According to Business Today, family-run businesses account for 25% of India Ink's sales, 32% of profits after tax (pat), almost 18% of assets and over 37% of reserves.1

There is no disputing the crisis in business leadership today. It is acute and will probably become worse before taking a turn for the better. Competition and change are battening down family businesses, chipping away at profits and market shares. Competitive shock has badly shaken the confidence of ‘wise’ patriarchs.

So what are the issues facing family business? Before answering that question, one needs to step back and understand the changes in the environment which have caused these problems to surface.

Though few of these buzzwords need explaining – they have become so much a part of common parlance – the ideas behind the words have yet to be accepted. For example, take the shift to shareholder value which is almost a mantra today. Yet, in their heart of hearts, few business families are comfortable with the idea that their wealth and power now no longer derives from management control of the companies their ancestors promoted but from equity holdings in rich and powerful companies. What do I mean? In the 1970s and 1980s, when taxes were crushing, promoters paid themselves very little and generally the company paid for all kinds of perks – even electricity bills of residences in extreme cases. The law was so draconian that J.R.D. Tata once complained that if he went abroad and offered a possible customer a cup of tea, he could be hauled up under fera. However, in the 1990s, punitive taxes have come down to more pragmatic levels and there is a clear shift away from such practices.

At the same time, there is now a fundamental shift in how status is defined. Today status, wealth and power derive from association with a well-managed company, not from being an industrialist. As late as the 1970s, simply being born a ‘mill-owner’ conferred status. In the 1990s, this is not so. Only if ‘your’ company’s stock price outperforms the Sensex do you get respect from your peers and society. This implies that the MD or CEO has to be the best in the business. Is that your child? Maybe yes, and maybe no. If no, then rather than grooming him or her to be the next MD, training him as an alert and informed board member might be more useful. Certainly, as a large shareholder of a well-run company, he or she would be richer than as a large shareholder of a poorly performing one. Yet, there is a basic and deep resistance to the shift from ‘family wealth’ to ‘shareholder value’ among the majority of business families.

Table 1 lists just a few of the most critical changes in the environment, a taste or a glimpse, if you will, of the myriad changes which are taking place. Table 2 records the patchy performance of business houses over the past few years. This performance inevitably raises the question: why?

Nani Palkhivala once quipped that an Indian can buy from a Jew and sell to a Scot and still make a profit. I believe he was thinking of G.D. Birla when he said that. For in order to get where he did – and in 1977 the Birlas toppled the Tatas to become India’s number one business group (but only for a year) – G.D. babu had to smash the Scottish stranglehold on the Indian jute business. The task was so tough that after he achieved it, making money came easy.

But as we look towards the millennium, why are today’s business leaders not able to make money? Business World, in its 22 August 1998 issue, pointed out that between 1990-98, 45 companies had been forced out of India’s top 100 list. In the list were some big names: Century Enka (a bk Birla-Enka run concern), Bombay Dyeing (Wadia), several Tata companies (Voltas, Tata ssl, Titan) besides several Thapar ones.

Obviously the state of Indian business houses and Indian entrepreneurship today leaves much to be desired. But more serious is the quality of entrepreneurship. During the pre-independence era, men like G.D. Birla and Walchand Hirachand displayed a rare sense of economic nationalism. They fought for and established companies which created wealth for the country as well as for themselves in what could be called the era of patriotic entrepreneurship.

And they fostered a community spirit. G.D. Birla encouraged other Indian businessmen to enter the jute business along with him. Walchand Hirachand bailed out small Indian shippers wherever and whenever he could. Kasturbhai Lalbhai helped other millowners in Ahmedabad to improve the quality of their cotton mills. J.R.D. Tata developed satellite empires around Tisco. This kind of nurturing is a far cry from today’s cut-throat scenario. So what went wrong? Where did we take a wrong turn?

To answer that question we have to look at the past 50 years which rather neatly divides itself into three epochs. The first I call the Golden Age of Indian entrepreneurship and it stretches from 1947 to 1967. The second set of years is the Dark Ages extending from 1967-1987 and the last decade, instead of being a renaissance, is the age of timidity.

Let me explain what I mean. Our industrial wealth was created during Jawaharlal Nehru’s prime ministership. Nehru might have said ‘profit is a dirty word’ but at the same time he criss-crossed India inaugurating one industrial complex after another. G.D. Birla built Grasim and Hindalco during the years 1947 to 1967. J.R.D. Tata doubled Tisco’s capacity in 1958. Lalbhai turned a barren piece of land into a huge chemical complex called Atul. Walchand Hirachand founded Hindustan Shipyard and Premier Automobiles. In the South, the tvs group built a large engineering complex at Padi. And these are a few stray examples picked at random. The Golden Age is what India survives on today. And unless we replenish the store when its shelves are empty, we will be in trouble. Or rather deeper trouble than what we are in already.

During the last years of the Raj, most British businessmen withdrew money out of their Indian operations leaving some of India’s largest companies seriously under-capitalised. Indian entrepreneurs acquired the giant orphans in the ’50s and early ’60s and they became the foundations of today’s big business. The Goenkas started out by acquiring Duncans and Octavious Steel from the Armenians and the British. B.M. Khaitan, the tea king, bought a slew of estates and engineering companies. J.R.D. Tata acquired Finlay and a stable of smaller firms. The Indian takeover knights pumped in money and revitalised the colonial leftovers.

At the same time Indian entrepreneurs created new assets by collaborating with the government. During Nehru’s administration there was no eyeball-to-eyeball confrontation between politicians and business as there is today. On the contrary, businessmen helped service Nehru’s ‘temples’. J.R.D. Tata, for example, trained men for the three new public sector steel complexes that came up in the ’60s. M.S. Oberoi’s training school provided chefs and staff for the Ashoka Hotel. Kasturbhai Lalbhai’s prodding kicked the Indian Institute of Management at Ahmedabad off the ground.

This healthy nexus between busi-ness and politics came to an abrupt end in the Dark Ages. Indira Gandhi laid foundation stones not factories. Haldia Petrochemicals, for example, has been blessed with half a dozen foundation stones but even after decades of planning hasn’t produced a single kilo of plastic raw material. Indira Gandhi’s mania for control led to the birth of the licence raj, her appetite for donations to the permit raj. Entrepreneurs were no longer permitted to base their business plans on market conditions but on those laid down by the mandarins of New Delhi.

Inevitably this led to a crippling of entrepreneurship which ensured that the world overtook India. Other Asian countries produced better goods, provided their citizens with better standards of living. When Richard Attenborough shot the movie Gandhi he didn’t have to go far to find a film set. India remained where she was. During this period India was probably the only country in the world that threatened to penalise management for over production. Exasperated beyond endurance by a government which refused to allow him to satisfy the demand for scooters, Rahul Bajaj once defiantly declared that he was ‘ready to go to jail for excess production just as both my parents had for the freedom struggle.’

Unable to cope with red tape, many entrepreneurs simply left India for the U.S. and Europe leading to a serious brain drain. Some, like Aditya Birla, built new empires outside India. Our loss was their gain. Birla built the world’s largest palm oil factory, textile mills, carbon black plants in Egypt and Thailand, Malaysia and Indonesia. Thailand’s king processed Birla’s applications in record time. In India, bureaucrats took eleven long years to clear Birla’s Mangalore Refinery project, nine for Vikram Ispat, six for a polyester filament yarn plant, three for argon gas and hydrogen peroxide and two for Indo-Gulf fertilisers. Under the British, Walchand Hirachand got permits to start Scindia Shipping in one month and ten days – the average for those times.

The breakdown of confidence between business and politics during the Dark Ages had an even more serious repercussion in that it led to the perversion of entrepreneurship. Stifled and suffocated by Byzantine laws, entrepreneurs tried to quench their thirst for expansion through whichever avenue was open to them. Some grew by buying companies from others. The growth kings for the years 1967 to 1987 were takeover artists, with Manu Chhabria, R.P. Goenka and Vittal Mallya as the role models. Entrepreneurs like Dhirubhai Ambani, Karsanbhai Patel of Nirma and Venugopal Dhoot of Videocon provided another kind of role model. These men understood the system, knew the loopholes in the law and exploited them.

But perhaps the worst aspect of the Dark Ages is that those who dragged India into it are the ones now busily writing the prescription for India’s future revival. The ministers and bureaucrats trumpeting the liberalisation mantra are the same ones who enforced Indira Gandhi’s licence permit raj. Can a leopard change its spots? Judging by the events of the last decade, it seems not.

The 1990s have, on the one hand, seen an amazing flowering of industrial entrepreneurship and, on the other, the creation of an abyss on which we are teetering. P.V. Narasimha Rao’s reform programme created not only large new groups in fresh sectors such as the steel barons (Jindals, Mittals, Ruias and the Guptas) and pharma shoguns (Torrent and Ranbaxy), but also a vast and throbbing substra- tum of innovative smaller empires in diverse fields such as pens and packaging, electric switches and computer services, biscuits, buckets and spec-tacle frames. Many may turn out to be fly-by-night operators but hopefully the majority will become the face of tomorrow’s big business.

With so much hectic activity all around the reader may well ask why I have labelled the past decade the era of timidity. It’s because I sense, and I hope I am wrong, that Indian business houses have lost their zest for a good fight. Instead of being proactive, they seem content to be reactive in their response to opportunities and challenges. The reasons are not hard to find. Large capital investments require a bellyful of guts, money is costly, competition is on the rise and demand is elusive. But the presence of Lever Brothers didn’t stop Ardeshir Godrej from introducing his Soap No. 2 in 1918. British India Steamship’s muscle didn’t frighten off Walchand Hirachand from starting Scindia in 1919.

The abyss I mentioned earlier is competition – local and global – and more of the former than the latter. Will Indian business houses clear the abyss or stumble into it? Admittedly from a punter’s standpoint, it doesn’t look too good. Few of the old guard have money, technology or world class pro-ducts. Their manufacturing processes are outmoded, their factories too small. The new business groups are brash with an engaging can-do devilry, but often appear shortsighted with a taste for quick profits. Neither seems to display the patriotic nation-building attitude India needs so badly.

Is it all gloom and doom? While the market cap data in Table 2 tells a sad tale, a different cut at the statistics reveals a slightly rosier picture (see Table 3). Take the Bajaj Group for example. According to Anil Mehta’s calculations, Bajaj Auto’s market cap in end 1997 was Rs 7,223.09 crore and Rs 6,169.48 crore in end 1998, reflecting a change of 14.59%, which is more or less in line with the nat Sensex and a somewhat better performance than the BSE Sensex. However, according to the KPMG-BS study, Bajaj Auto is India’s third most profitable company (after ONGC and Hindustan Lever) with an EP of Rs 184.10 crore.

What of the future?

* Replenishing entrepreneurship. I do not believe that we are witnessing the end of family business. On the contrary, the number of family businesses is increasing day by day. Almost all companies, all over the world, start off as a family concern. In India, in 1991, the number of new companies registered in the private sector was 20,745 and collectively they had an authorised capital of almost Rs 300,000 crore. Five years later, when some of India’s oldest and biggest companies were being forced into some serious belt-tightening, hundreds of inconspicuous and uncelebrated businessmen came forward with fresh ideas and raw ebullience. In 1996, there were 47,598 new companies – more than double the 1991 figure. The total authorised capital of these new enterprises crossed Rs 800,000 crore. As old family businesses fade out, new ones will take their place.

* Good management. In the U.S. over 65% of business – and the more profitable sector of USA Inc – is family business. This little fact isn’t much in the news because most of these family-run businesses are privately held. As the stocks are not traded on Wall Street, these companies do not attract media attention. But consider this: Bill Gates’ Microsoft is as much a family firm as Dhirubhai Ambani’s Reliance, Galvin’s Motorola or Ratan Tata’s Telco.

* Ability to change. The issue is not family business but Indian business. Be it a family firm or a psu or an l&t or a bses, the issue rather is: can Indian management improve? And how can it speed up the pace of improvement. It may be that when push comes to shove, family firms are more nimble than their more bureaucratic ‘professional’ brethren.

In the end, success in business is a mix of courage and common sense with a dash of luck. As G.D. Birla remarked as early as 1947, ‘Any fool can establish business when there is a boom. But it is during a period of depression that one’s ability to establish and run a business is really tested.... I therefore appeal to businessmen not to be disheartened but to learn to take risks.’

 

 

© The author.

1. Business India, 16 November 1998; Business Today, 22 August 1997.

 

 

Table 1

The Changing Environment

Sellers’ Market

®

Buyers’ Market

Family Wealth

®

Shareholder Value

Growth

®

eva (Economic Value Added)

Diversification

®

Core Competency

Family Succession Planning

®

Attracting Managers

 

 

 

TABLE 2

Market Cap of Select Business Houses

No of Cos

End 1997*

End 1998*

% Change

INDIAN GROUPS

       

Ambani

4

20,718.48

15,479.49

- 25.29

Bajaj

6

7,564.89

6,488.37

- 14.23

Kumar M Birla

8

11,177.16

7,259.03

- 35.05

BK Birla

7

1,155.31

763.66

- 33.90

Ruia (Essar)

4

1,813.25

1,332.71

- 26.50

RP Goenka

15

797.75

860.31

7.84

Mahindra

8

4,100.82

2,397.47

- 41.54

Tata

39

28,598.05

23,574.02

- 17.57

Total

 

75,925.71

58,155.06

- 23.40

 

MNC Groups

ITC

5

16,062.38

20,095.85

25.11

Unilever

4

31,069.38

37,876.58

21.91

Total

 

47,131.76

57,972.43

23.00

INDICES**

       

BSE Sensex

 

3658.98

3,055.41

- 16.50

NAT Sensex

 

1586.60

1359.03

- 14.36

Source: Anil Mehta, The Economic Times, 1 January 1999.

* Rs Cr., ** Points

 

TABLE 3

The Top Ten and Economic Profit

Rank

Group

Group Sales

Flagships

Sales

EP

MVA

1

Tata

32,615.20

Telco

9,897.59

108.73

6,388.67

     

Indian Hotels

576.82

69.12

2,453.94

     

Rallis India

1,162.59

22.03

173.70

     

Tata Tea

6,89.44

3.39

953.90

     

Tata Chemicals

1,598.52

(14.32)

1,697.98

     

Tata Power

1,174.39

(40.90)

995.24

     

ACC

2,469.22

(126.64)

112.45

     

Tisco

6,351.46

(478.39)

2,631.88

2

BK-KM Birla

12,452.40

Hindalco

1,308.27

25.51

5,027.32

     

Indian Rayon

1,641.14

24.00

106.86

     

Grasim

3,599.77

(65.33)

1,079.14

3

Ambani

9,066.30

Reliance Industries

8,730.33

98.83

12,024.88

4

RP Goenka

4,366.20

Kec International

662.14

7.39

95.41

     

CESC

1,328.58

(123.70)

556.10

5

LM Thapar

4,304.80

Greaves

800.99

15.77

88.13

     

Crompton Greaves

1,508.81

(18.97)

30.76

6

Mahindra

4.149.20

M&M

3,458.86

90.94

3,141.64

7

Bajaj

4.011.90

Bajaj Auto

3157.21

184.10

3453.12

8

Chidambaram

3,475.00

Spic

1,810.66

(79.81)

(283.55)

9

Hinduja

3,310.10

Ashok Leyland

2,482.45

(79.69)

(71.26)

10

Ruia (Essar)

3,242.60

Essar Steel

1,802.80

(250.88)

(25.56)

Source: Compiled from Business Today’s ranking of top 50 business houses, special issue 1998; and the KPMG-BS study published in The Strategist Quarterly, January 1998.

EP stands for economic profit and MVA is market value added.

 

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