“Essentially the idea was to withdraw from a place that has four walls. You do not want to live in four walls, because four walls create a false sense of immortality. If you are already in a box, it gives you a coffin-like. When you live in a coffin, you think you are going to be here forever.”
– Sadhguru
The next decade is expected to herald monumental changes in the leadership of some of India’s largest family businesses. A change of guard is drawing close with several next generational leaders “coming of age”. A sudden demise in the family may also be a trigger. The last two years stand testament to this painful reality. This transition of power within Indian family businesses could be positively disruptive for some, while being potentially destructive for others. For a successful outcome, the transition will need to be a structured process, not simply an event. During this process, ignoring the cultural undertones that exist within Indian family businesses would a fatuous proposition, particularly when addressing the age-old dilemma of the outgoing promoter – that is of ‘letting go’.
Transitional phases have confronted humanity for centuries. They are fraught with uncertainty of what the future may hold. As a guiding framework, ancient Hindu texts divide the human lifespan into four stages of transition under the Ashrama system – Brahmachari (student life), Grihasta (household life), Vanaprashta (retired life) and Sannyasa (renounced life). Each stage of life is viewed as a natural part of the journey from cradle to grave, with ethical guidelines, duties and responsibilities, for the individual and for the society. During the period of Vanaprastha, the individual withdraws from his household responsibilities and is expected to seamlessly pass the baton to the next generation. The literal meaning of this transition period is ‘to retire into the forest’. Today, this would be wholly impractical – particularly for a promoter of a large business empire. Nevertheless, if one were to simply view the period of Vanaprastha as a symbolic metaphor, there is much wisdom to be drawn, irrespective of your faith.
Embracing the inevitable
During the period of Vanaprastha, the individual takes on the role of an advisor and focuses on community service and spiritual pursuit. This period can spawn a host of fears, leading to undesirable outcomes. In this article, we explore some common fears, which haunt business owners and suggest effective mitigants, which can help them undertake a modern-age Vanaprastha.
a. Fear of losing your identity
Historically, in the Indian business community, a business owner was accorded the status of a ‘Raja’ (king) of his business empire. Even today, a business owner’s identity and societal status are intrinsically tied to his work. This sphere of influence also extends to family matters. In some cases, the individual may not be the eldest sibling, but still hold the reins of the family due to his role in the family business. To wield such control, after having spent most of their adult life growing the business, the idea of retirement is unpalatable. However, this outlook is detrimental for the future of the business and the family. It only breeds further discord between generations and among siblings (who may want to see their own children take on a larger role in the business).
To address such issues, it is prudent to chart a time bound path towards a ‘value’ driven identity rather than one defined by title. To protect continuity and create a legacy, the promoter would need to see himself as a steward rather than a ‘Raja’ of his business empire. The promoter can serve the community through CSR initiatives or other philanthropic activities undertaken by the family foundation – thereby creating tremendous value and goodwill for the business. If the desire to remain close to the business is strong, the role of a ‘Chairman Emeritus’ can also be considered. However, for such arrangements to work efficiently (from a succession perspective), it is important that the outgoing promoter exercises restraint and trusts his successor’s vision for the business.
b. Identifying a successor
To retain family control, business owners tend to simply appoint their children as their successors, irrespective of their offspring’s shortcomings or their desires. This is the ‘Dhritarashtra Syndrome’, which has plagued several Indian business families for decades. The Kuru King, Dhritarashtra from the Hindu epic ‘Mahabharata’, was not only blind by birth, but he also turned a blind eye to his son’s misdeeds. While King Dhritarashtra recognised his nephew Yudhishthira’s merits (and his claim to the throne), he still favored appointing his ignoble son Duryodhana as his heir, triggering a succession crisis in the kingdom. The rivalry between the cousins ultimately led to unnecessary bloodshed on the battlefield of Kurukshetra. Today the battlefields are leather plush boardrooms, where emotionally charged decisions can erode decades of company growth.
To avoid such acrimonious disputes, the process of identifying a successor should be driven on merit, capability and willingness, instead of gender or kinship. The universe of stakeholders in the business has also expanded. A blanket ‘family first’ approach may produce a domino effect of negativity among this group. It may be the case that your chosen successor is capable and meritorious, but an inclusive selection process will further solidify his position in the market. Several talented next generation family members are becoming selective about the role they take on in the family business (even if it is a senior role). They have a deeper and more nuanced understanding of what running the family firm is going to mean in the coming years. A first-generation leader may have created his company as a means of survival and eventually for profit. The succeeding generation is keen to explore new ideas, new markets, new locations, and even new business models. They are likely to focus increasingly on a broader mission to create value through social responsibility and sustainability of their enterprises. This mindset isn’t right or wrong, it’s just different.
To bridge this gap between generations, it is critical to break down communication barriers. Is the next generation even interested in taking the business ahead or are they keen to start their own ventures? Should the family step back from the day to day affairs of the business and cede operational control to professional management? Broaching such conversations will be the only way to bring about clarity on the way forward. Growing up in the shadows of highly successful parents can often cause the new generation to suffer from an acute sense of inadequacy. Understanding each family member’s strengths and weaknesses can help you plan effectively. It would also be prudent to allow potential successors to get external experience or adopt the ‘try before you buy’ approach. Engaging a professional business mentor has also proved effective for several business families.
c. Protecting the family legacy
When a senior member of the family transitions into the Vanaprashta stage, there is a simultaneous and automatic induction of his offspring as the new head of the ‘Grihasthi’. While such transitions would not necessitate a lay man to chart out a comprehensive plan for his children, a business owner’s responsibility is ten-fold, impacting numerous stakeholders. With increasing oversight by regulatory authorities in India, a single misstep can have a crippling effect on the business and family legacy. To ensure that the next generation is adequately insulated from internal and external risks, family businesses need to develop and adopt a robust governance structure. It’s the family’s shared purpose, values and vision, inspired by the past, which will guide and support the business’ underlying mission. While it is vital to trust your successor’s vision for the business, it is also important to adopt checks and balances to protect a culture whose values extend beyond profits.
Adopting a formal method of family governance would require instituting a family constitution and family council. The family constitution aims to sustain the family legacy by laying down clear guidelines for the family. Preparing this document requires extensive deliberations within the family on a number of issues, including separation of ownership and management of the business and its interplay with the personal wealth of the family, eligibility criteria to join the business, training methodology for successive generations, potential areas of conflict for the family, preferred dispute resolution mechanics, exit mechanics, etc. The constitution serves as a ‘living’ document, evolving with the needs of the family and the business. The family council on the other hand is a platform (usually for family members actively participating in the business) to review the strategy of the business and looks into the broader business strategy and vision.
A private trust structure has also served as an effective succession, governance and wealth preservation tool. They can be particularly effective from a governance perspective, where a family chooses to separate ownership and management in the business. Furthermore, by consolidating ownership under a single entity, the family can mitigate potential shareholder disputes in the future, and in turn guard the family’s legacy from public glare.
Trust the process
Planning early is key to a successful hand-off. If you delay your succession plans for too long, you might end up rushing the process, perhaps causing the plan to fail for lack of careful consideration. As a first step, open communication lines within the family and gather their thoughts about their vision for the future. Some of their responses may not immediately align with you. However, trust the process and exercise composure. External professionals can help guide the family through difficult topics as well. An unbiased voice may bring a fresh perspective to a debate, bridging the generation gap.
A retiring promoter’s journey into a metaphorical forest can either be a sprint, replete with thorny challenges, or a tranquil walk. The latter will require timely action in preparing your family, your employees, vendors and clients for a new dawn.
For further information, please contact:
Tanmay Patnaik, Partner, Cyril Amarchand Mangaldas
tanmay.patnaik@cyrilshroff.com
