In Luxury businesses, Family businesses lead

My article on the SPJIMR Blog talks about how the leading luxury businesses are family businesses . While I have given research which shows this, i would contemplate that the family businesses are best equipped to handle luxury brands, since the interests of both are very closely aligned.

This should be an insight into future plans for family businesses, who seek to continuously differentiate themselves from the competition, and maybe could be a direction for future growth and survival? What do you think? 

When the patriarch just can’t leave…..

I read an article of the Emperor of Japan,  Emperor Akhihito planning to address the nation today. The article states that he may indicate , ” that it’s time for him to step down from the world’s longest-running hereditary monarchy. Taking that step may not be easy, however. No Japanese monarch has abdicated in nearly 200 years, no law governs such cases, and the popular 82-year-old monarch’s retirement could raise delicate questions about a ban on female succession and the imperial family’s place in society.” 

(EDIT: FT reported that he had mentioned that the Emperor did indicate a desire to abdicate, the first Japanese emperor to stand down since 1817)

I am in no position to and hence will not comment on the above article in any manner at all.

But this article triggered some thoughts  on a different context. i was thinking of cases in family businesses, where during my discussions with the patriarch or the operating head of the family business, have admitted in a moment of candour, that they feel helpless, and stuck in the family business and cannot leave. This causes them to remain even though they would leave, given a choice.

I think that this is a phenomena that I have heard from one of the successors, in a top 10 Indian Industrial house make!

This brings us to consider a point, what if the head of the family business wants to exit? do we have rules which allow him to do so, or is the rules in the society, family or business, prevent him from doing so?

Usually, patriarchs design the processes and systems which revolve around them, so as to consolidate their position, and to maintain a control over the different aspects of the business, but this also results that the business cannot run without them! This may be great for the patriarch’s self esteem, but could be disastrous for all the stakeholders, if the patriarch was not able to operate for some reason. In fact, I have met many small scale entrepreneurs who claim that they are so busy that they did not have time for a holiday, or even if they did take one, they were too busy on the phone all the time! and then they want me to advise them on why they are not growing!

While there are usually emotional and personal individual reasons for most patriarchs not retiring, which have been exhaustively covered, it is interesting to note that there are other reasons, which compel a member to remain at the helm. Family traditions of primogeniture, have been the norm in societies, royalty or in family firms.

Which brings me to the fact that every family member needs to examine the social, family and business reasons surrounding the family firm, to be aware of such circumstances.

While a work life balance is definitely suggested for every individual (What’s the use of all the money, if you are not able to enjoy it? How much is enough? What are your goals and what are you exactly hoping to achieve? Is there a finish line or does the bar just keep on getting higher and higher? are questions that may help to determine the answers..)

Given the fact that the youth today are becoming more assertive and independent, seeking opportunities outside that of the family business, it becomes imperative that the the patriarch seek options to professionalise or sell the business. Furthermore, the rules binding him in the family business can be re-examined with all the stakeholders to update these with the current environmental realities. There is no reason, that while we talk about stepping into the next century, we, our families and family businesses  still continue to adhere to norms which may be hindering family relationships and family well-being. It may be a time to do a re-think.

The question is, are we ready to take the first step?

 

 

 

 

Done Deal! Few thoughts…

Todays TOI states that Nimesh Kampani has chosen to step down in favour of his son Vishal Kampani as the head of JM Financial.

This is at a time, the report states, when the firm has demonstrated, that it maintained its ability to make deals successfully.  This is a good move at an opportune moment. I have met many patriarchs who refuse to pass the baton on, under the excuse that the next generation will not be accepted by the customers who would prefer to deal with the patriarch, and the younger generation, feel inadequate at the lack of exposure in being prevented from engaging with customers or other stake holders.

It is very difficult in family businesses, especially those, which are successful, for the head to step down. Because this would mean sacrificing the positions of power, status, and sometimes even meaning to one’s life, as the family business may be everything around which his life may have revolved.

there is also the argument, that a business is a relationship business, and that the firm will lose a lot, if the relationships are not maintained, or if the existing customers reject the next gen.

In both cases, the arguments are superficial. Globally, there have been cases of relationship businesses being successfully transitioned, with the next generation still maintaining the traditions and customer service that was provided earlier, so as giving a seamless transition. Secondly, if the choice of the successor is based on merit, then the transition should not pose any issues, for the customers, who will be eventually looking for solutions, more than relationships.  (Controversial, i know, but think about it, would the customers stay with a supplier, if they were not getting “acceptable” solutions to their problems?  “Acceptable” is to allow for the leeway that they may give, for working with slightly different operational styles of organisations)

The last concern, that I have, and I may be completely wrong on this, is to point out that most transitions are successful based on what the retiring patriarch does post retirement. Does he stay out of the business or does he still carry on, as if nothing has changed? Does he have something to keep him occupied, outside work ?

These questions will, in the long term determine the success of any succession which family businesses have to keep in mind. Coming back to JM Financial, this is a good move and let us wish that this leads to more future success!

Mars Legacy passes on: Lessons for family businesses

The NYTimes reports that the patriarch of Mars, Forrest E. Mars passed away yesterday. It is an interesting article to understand the thinking which had driven their company, one of the largest chocolate makers in the world!

The desire for low profile, away from the media, maintaining his attention to the business, and sticking to what he knew best, with a bad temper. But what stands out is the father-son relationship that ensured that his sons had actually forbidden that their executives to take his name before them.

But the adherence to principles (quality, mutuality, responsibility, efficiency and freedom) and the overall objective which Forrest had, ” to create mutual benefits that make a difference for people and the planet through the company’s performance” will ensure that the family business will stay long after him.

An action, which has ensured that the sweet taste of Mars will be there for generations, well after him, a lesson which can serve well for other family businesses to learn from.

Raymond’s mature step….

In the ET dated 9th June, 2016, the story of Raymond turning around is an insightful article. It talks about how a family business having a well known brand which was declining in profits. The family stepped aside and brought in a professional manager to run the company. What is interesting is, that the family also empowered him to take decisions which included selling off some divisions, and even reducing staff! Not the easiest decisions to agree on. The company has turned around successfully in two years time, the article goes on to state.

This brings out a very important aspect in family businesses, which the inheriting generations can pay attention to. It is important to realize, that just because there is a family business, does not mean that a family member has to run it. Families and businesses are two different systems and each has its own rules. Families are sometimes bound by the notion that the family membership entitles a family member to be a part of the business, and the next generation should and must join, regardless of qualification or capabilities. This is a very dangerous precedent and could lead to disastrous consequences, and could put the business at risk. Additionally, there should be maturity in the family to realize that if the business can be run by some else, then it is best to step down in favor of this person. A business should be run as a business. this is the only way, a business can thrive and subsequently support the family.

 

JSW-JSPL deal is more than just about the family charter.

Todays Hindustan times talks about the JSW-JSPL deal getting stuck because of the terms of the family charter and valuation and the terms of the buyout.

While not specifically commenting on the deal in particular, there is a very interesting issue that this raises, that is, what if the family charter states something which may run into legal road blocks? Or even not permitted by law? Furthermore, how does one comply with an agreement to take care of each other and come to each others help, in case of need?

This becomes particularly acute, when the family or personal wealth is tied up in the companies, usually listed. Any help or funds transfer would be subject to various compliances and legal approvals.

The regulators, investors, or institutional shareholders, who form the largest group of shareholders today, may not agree that such assistance may be in the best interests of the company, even though it may be a moral obligation or a requirement under the family charter, for the promoter to do so.

This also raises the concept of fairness and trust, since these roadblocks could have the potential for blowing up into a much bigger mess, as the weaker side may think of these as excuses to avoid helping out.

The additional risk for governance since this could affect the long term reputation of the helping company, as it may risk its credibility in the financial markets. There is always the doubt, on the extent, duration of the assistance in the future and implications on the health and long term viability of the helping company, if this assistance were to continue in the future.

There is also the probability that the stronger company may have to divert its investment plans to help out and thus jeopardise the operations of the healthier company.

All these will have long term implications on both the family and the business. What can be done to prevent this?

While it is not possible to prevent or forecast all eventualities, families could consider some of the following to safeguard themselves:

Separate out business assets from family assets:

Most family wealth historically, has been in the form of shareholdings in the company and all expenses are borne by the company. There is very little in individual names except what was perhaps required for tax planning purposes. A financial separation of the wealth becomes extremely important as it creates a financial security for the individual family members outside the business.

Build a portfolio of assets in an individual capacity:

This leads to the next issue wherein the individuals have joint shares in various projects, properties, assets without much clarity of the exact shares of each member. It would be a good exercise to clarify amongst family members, as an annual spring cleaning exercise to revisit these so that the family has a fairly good idea of the assets and the individual shares.

Having a pool of liquid assets outside the family business:

I cannot over emphasise the importance of this point. There have been cases where all the assets are highly illiquid and may not be available, should a contingency arise. Any wealth advisor can plan this out for you depending on your lifestyle.

Consider a family pool of liquidity for funds:

Some families have started doing this, each one deploying a small sum which can be collectively used for the family in case needed. This reduces the need for each one to maintain a liquidity for each family division.

Have an informal family meeting with internal family members periodically, once a quarter, if not monthly.

Communication builds up trust and strengthens the relationship between all the members. Regular communication would also reduce any conflict, if the relationships have been strong. You cannot build a relationship in a day, and this would help in times of stress and duress. This has the additional benefit of knowing the people and hence even if there is a delay due to legal compliances, the family is still together.

 Compliance in Spirit or the Letter of the family agreement.

There has been a lot of heartburn on this issue, that is, whether an agreement has to be followed strictly or to understand the intention behind the agreement and to honour that. Most family agreements have a fairly large amount of emotion behind having them, in the first place, and this needs to be considered while executing these. While legal compliances may make one approach difficult, if not impossible, if the family is together, they can work out another alternatives, which may not have been under consideration when the agreement was drawn up, but it meets the spirit of the agreement. Of course, this needs a lot of trust and confidence to be successful and the purposes of the family achieved.

The question is, how many families will have the foresight and patience to do this? The Jindals have shown that they can, but there are very few others…

FFI Certificate in Family Business and Wealth Advising

I am happy to announce that I have just received my FFI Certificate in Family Business and Wealth Advising by the Family Firm Institute, USA. The press release is here( CFBA.CFWA Press Release.). 

The certificates are presented to individuals who have achieved comprehensive professional knowledge and gained significant expertise that can be used as value to family business owners and family wealth clients.

“Through completion of the certificate programs, Rajiv Agarwal has gained a deeper understanding of the needs of family-owned enterprises and the many roles family business and non-family members play, “ said Judy Green, President of the Family Firm Institute. The Family Firm Institute (www.ffi.org), an international professional membership organization of over 1800 individuals and organizations across 88 countries, is dedicated to providing interdisciplinary education and networking opportunities for family business and family wealth advisors, consultants, educators and researchers.

It is particularly a proud moment as I become the first Indian to get this dual certificate. Thank you all, for your support and good wishes which helped me reach this milestone.

FFI-Certificate-Seals-Business-RGB GEN-CFWA-Seal-RGB

Vadilal’s Icecream cold reality

A recent article in the Economic Times on 29th Dec, 2015  mentions about the owner family the Gandhis, filing cases seeking settling of some family and business issues.

Both sides have made claims and counter claims against each other, alleging diversion of funds to some other companies.

The article makes for some interesting reading, but is a prime example of successful families feuding, which oftentimes is first harbinger of troubled times. The business is the first to get adversely affected and the cash flows, which had led to the success of the family gets affected.

Increasingly, there is a need for families to have a structure in place and to work out these issues well before hand, before things are decided in courts.

This is the underlying logic for family structures which are an important topic in family business planning, covered in the SPJIMR course outline.

Readers of this blog may be interested in a one day workshop to be held later this year in SPJIMR which will seek to address this issue and what families can do to avoid such scenarios. contact me if you are interested in being put on the mailing list to be informed for this program.

 

Planning in Families

A recent article in Times of India on Sarabhais, the family behind Arvind Mills makes for interesting reading.  It states that Sanjay Lalbhai’s efforts to structure his family for the long term. He has also stated that the Lalbhai’s are currently in their 17th generation!

What is interesting is the realization in the family, to plan for the next generation, and to put in place a structure for the future. The fact that recent generations are increasingly choosing not to join the family business, it puts a great deal of stress on the existing families to plan accordingly.
An interesting survey by E&Y and University of St. Gallen, (link) have shown that less than 10% of the next-gen are looking to join their family businesses, immediately after their education! And over 60% would want to work outside for about 5 years, before they consider the family businesses! This has huge implications for the succession process and perhaps the Lalbhai’s have shown foresight in providing for this contingency.

In contrast is the experience with the Piramals, where Ajay Piramal’s son Anand, has preferred to join the family business. (link to article).  What is noteworthy, is the mentors that are guiding Anand during his induction. These include Nitin Nohria, the Dean of Harvard Business School, Deepak Parekh, undoubtedly the foremost expert in housing and finance. What are the learnings from this?

Choose the right mentors: having experts in the domain that one is operating in, gives you an insight which would be invaluable. External knowledge helps to overcome the bias that may occur while operating in successful family businesses. And more importantly, to listen to them!

Focus: Despite the fact, that the competition is spread all over India, the Piramals have chosen to focus on the Mumbai market, which brings us to the next learning,

Choose to compete on your own turf, and not where the competitors are: this gives you the advantage of redefining the rules, instead of just blindly following what the competition is doing.

And most important, Humility: to recognize that there is lot to be learnt and one can gain a lot from external help.

The other article of interest is one on the Baba Kalyani family where the niece has sued for a one-ninth share of the family wealth. (link). The article has drawn a similarity with another reputed family where the patriarch was similarly sued by a sibling.

These incidents emphasize the basic need in business families, to ensure that there is clarity of communication and expectations are set right. Very often, elders may choose to avoid asking the tough questions, with the expectation that these issues may not arise, and if they do, they would be solved amongst the siblings. there is always the danger of public perception that if a matter is made public, there may be much more than what meets the eye, like the proverbial iceberg, where over 90% is hidden and is below the surface.

The need for proper family structures usually done under the guidance of a family consultant does help to resolve issues in an impartial manner and ensures the survival of the family which otherwise could become subject to various disagreements. If we consider strictly the family longevity, then we can see that this has probably being put in place, with the Piramals and Sarabhais, and which challenge many business families are facing today, including the Kalyanis, Singhanias. Where there is clarity of thought and purpose, the family gains eventually.