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25 November, 2016
Indian society is predominantly a family oriented society, both at the social familial level, and almost equally so at the business level. Indian society lays strong emphasis on family values, loyalty (to the family) and inclusion. There are unsaid dynamics that define and drive family relationships, especially concerning authority and hierarchy. Family ties, age and gender play an important, if not the only role, in decision making. This kind of structure is not unique to any particular religious community as a vast majority of traditional Indian business families, irrespective of their religious backgrounds or beliefs, will display these characteristics.
Traditional Hindu families have adopted the teachings from the two major ancient Indian mythological epics, the Mahabharata and the Ramayana. These epics have been imbibed to such a great extent in the mind and conscience of Indian society, that the values and thoughts therein still evoke reverence.
However, given the evolving nature of society coupled with the tremendous impact of urbanisation and westernisation, the traditional family set up has transformed. The liberalisation and democratisation of the thought process is slowly but surely changing traditional families and their values.
Impact of culture on Indian business families
The impact of culture on the mindset of the Indian patriarch can be understood by reference to the epic Mahabharata. In the Mahabharata, Dhritarashtra is the King of Hastinapur (an ancient Indian city) at the time of the Kurukshetra War. He is portrayed as a hypocrite who says that he wants his nephews to win, but at heart, wants his own children to win. Sounds familiar?
Undoubtedly, different aspects of Dhritarashtra’s personality and temperament still find refuge in the minds of some patriarchs of prominent Indian business families. It may stem from a natural feeling of love and affection but eventually blinds them in matters of business.
The Indian model of family governance
The Indian model of family governance is a direct reflection of Indian society, culture and tradition. Unspoken rules of conduct, passed down generations, are observed in Indian family businesses. Often, tradition and hierarchy take precedence over capability and meritocracy.
In contrast, western societies and companies can broadly be said to be more pragmatic in their approach, with businesses there being driven by entrepreneurial talent and personal drive, and defined by a true meritocracy. While innovation and improvisation are given priority in a western set up, blind adherence to the subsisting practices and tradition dominate Indian families. Change is slow.
Typically, in India, the eldest son inherits the family business, notwithstanding competence or suitability, perhaps at the cost of a more able successor. In contrast, in the western model, family owned businesses are rare above a certain scale and size, especially those in which the founder family retains a significant stake and influence.
Smaller businesses in India usually wind up in the hands of the wealthier offspring, where it is not uncommon for the father to ‘sell’ his business to his heir, often to gain advantageous tax benefits. Further, it is very common for the entire founder family to work in their company; whereas in the West, it is more common to find owners not working in the business, leaving the company in the hands of professional managers.
Peter Leach, a Partner at Deloitte and a leading family business consultant, states that one of the biggest differences between India and the West is to look at what is the ‘glue’ holding the family together. In India it is family and in the West, it is the business. But is this always the case?
East vs. West? One Size does not fit all!
While mechanisms such as family constitutions, family boards and private trusts are efficient methods of governance adopted from the Western world, absolute reliance on professionals or third parties may not be the most desirable approach in the Indian context. A more pragmatic approach to address Indian cultural undertones would involve a hybrid mechanism.
This envisages the appointment of professional managers as well as family members to run the businesses. This ensures that while control is retained by the promoter family, there is also an effective system to run the business. The Godrej Group is a prominent Indian family business that has adopted the hybrid mechanism successfully.
Proponents of the Western approach often reason that control in the hands of professionals or outsiders will raise pertinent and often uncomfortable questions at Board level and bring an alternative (and perhaps better?) perspective to the business.
However, who will these questions be directed at? Whose interests are the professionals ultimately trying to enhance and protect? As per principles of Indian company law, it should be the stakeholders (i.e. not just the shareholders, but the wider
community at large as well).
The Indian system is not yet amenable to pure professional control. The identity of the family and their business are conjoined in India. Hence, Indian promoters will continue to exert a strong legal and moral influence over the company, even if the company is run by professionals. This is simply how business is done in India.
Conclusion
The complexities of Indian society coupled with cultural and traditional undertones makes family governance unique. The removal of the family from the management of the business would destabilize business, making it prone to alternate power centres and governance issues. Thus, to ensure that their businesses stand the test of time, Indian business families must adopt a bespoke hybrid governance structure, tailored to suit this unique environment.
For further information, please contact:
Rishabh Shroff, Partner, Cyril Amarchand Mangaldas
rishabh.shroff@cyrilshroff.com
