The Telegraph
Since 1st March, 1999
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Family and other managers
- Who is the true professional'

Many have said for years that to achieve competitiveness, businesses must invest in research and development, brand building, nurturing its human capital at all levels, paying attention to what employees have to say and focussing on cost improvement programmes. Their most important task is to identify and appoint the most suitable persons to lead the company and to have a line of succession. Some have condensed this requirement into one word, that “professionals” should run the company. But who is a “professional”' It is assumed that they cannot include members of the controlling family. So the Singhanias, Wadias, Goenkas, and others belonging to the families of the founders of the business are not counted as professionals. This is regardless of their qualifications.

In the Nineties, as competition intensified, many companies started recruiting the most competent people they could find in marketing, finance, human resources, and so on. But the best among these outsiders soon were not satisfied with high-sounding designations and compensation packages. They wanted to run the whole company. When they saw that the top slot was reserved for someone from the family they left for better opportunities. A few family-run companies made way at the top for qualified outsiders in whom they had confidence. Even in some of these in recent months the sons with excellent academic qualifications and some experience have started jostling for the top positions and to replace the non-family persons.

All enterprises whether businesses or non-governmental social organizations (even the business of politics!) are started by individuals. Each of them has a dream, a vision, and a passion to build something. With some businesses the individual had no choice but to start an enterprise. The refugee entrepreneurs after Partition left all their property and possessions behind like Raunaq Singh of Apollo, Nanda of Escorts, Munjal of Hero and others. In the South, the Chettiar families similarly left Burma and Malaysia after the war, probably not as poor as the Northern refugees. Others, like Dhirubhai Ambani, were men driven by vision and passion to do something special, something different and build institutions and demonstrate their capability. J.N. Tata at the turn of the century, N.R. Narayana Murthy, Anji Reddi and others are in this group.

Yet others started businesses that were a hotchpotch of enterprises that were put together because their contacts and connections with the all-powerful in government got them in the pre-Nineties the required licences and permits. Some ran them well by appointing competent people, not necessarily from their families, to run each enterprise separately. Others ran them as conglomerates and began to divest and split them as liberalization made large extra demands on financial and human resources.

In today’s competitive world, enterprises are not created by contact and connection. An individual has a dream and mobilizes people and money to make it come true. Businesses that think connections alone are enough are dying.

But individuals build enterprises and fortunes, (equally so with political families) as inheritance for his spouse, children, relatives and even friends and colleagues and as his monument. The best people to sustain and build on his monument he thinks are his family. But today such bequests are not as easy. A shopkeeper, a small artisan, an owner of a small industry who wholly own their business can bequeath it to their progeny to run and enable them to have a living. But when there are other shareholders questions arise as to whether the family person is the most competent to run it for protecting and enhancing the value of the investments in the business for the benefit of all shareholders.

In India for most of the fifty years after independence the prevailing environment enabled families to bequeath businesses, however big, to other members of the family regardless of competence or qualifications. For many of these years the closed economy with central direction of all resources meant not only licensing and permissions for any industrial activity but also penal levels of taxation (income, customs and excise). The only way to enable families of “promoters” to live in comfort was to be employed in the business and they could not be employed anywhere except at the top.

In any case they could not harm the business even if they were incompetent since the entry barriers were strict and the industrial or import licence enabled monopoly profits. The market was guaranteed, prices could be raised if costs rose and there was no competition to force cost reduction, quality or productivity improvement. With rampant tax avoidance or hawala and over-and under-invoicing of imports or exports, building funds illegally abroad had to be handled by family members and some loyal retainers. This is now perhaps a little less and the need for loyal family is not as great.

In other countries also there were families that handed over the business to the next generation even after the business had grown very large. But there were many others that employed qualified and experienced non-family members to run the business. The family kept a close eye on the performance of the company. This happened very rarely in India. Almost all enterprises had a glass ceiling that a non-family manager could never hope to break through.

This tradition was broken in the Nineties. The liberalization and opening of the economy brought intense competition and pressure to go for volume, reduce costs and prices, improve design and quality and look for new markets. Eicher, Sri Ram Fibres, the TI Group from the South were some companies that consciously handed over full managerial control to paid employees, not to paid family members. There were many others that did not do so-Bajaj, Ballarpur, J.K., SPIC and many others. While I do not have the data I doubt if there is any pattern that suggests that employees have performed better than family members in running enterprises. But we need to look at results for a while longer before we can conclude either way.

The question of who is a professional manager has become difficult to resolve in what is not a professional guild like doctors or accountants or lawyers with barriers to entry and self-regulation. A successful entrepreneur may not even have had a college education. A highly rated MBA might fail as CEO. There are many examples of both. The experience of the United States of America has shown that non-family CEOs can be greedy and steal from their company, that they can fudge accounts and cheat shareholders, that they can play favourites, be nepotistic, indulge in insider trading, indeed commit all the offences that popular imagination attributes only to family managers. Given the opportunity, some Indian employee managers might also be doing so.

The larger question is one of governance. When there are other shareholders in a company they are supposed to have approved the appointment of the CEO at the annual general meeting. But the majority rule has always prevailed and even after permitting proxy votes, the chances are that the largest shareholder even without majority share ownership will run the company. How can we ensure that he does it in the best interests of all'

The attempt in recent times has been to do it through legislation and listing rules of Securities and Exchange Board of India. A much stronger regulatory framework in the US with far more alert and watchful media and other organizations has been unable to prevent abuse of the trust placed in the CEOs.

Perhaps we need to define as professional mangers the ones who behave as if they hold the enterprise in trust and not as owners. This must be irrespective of whether they belong to families that own shares enabling control of the company or are mere employees.

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