Interview with Prof. Kavil Ramchandran



                                                                                             

Ahead of the conference on Family Business, Vijay Dalmia, alumnus from PGP Co '03, spoke to Prof Kavil Ramachandran, Executive Director, Thomas Schmidheiny Centre for Family Enterprise about a wide range of issues affecting family businesses in India today, including family governance, inter-generational conflict and professionalisation. 
Implementing family governance ideas and principles

Vijay Dalmia : Could you share your thoughts on family governance and how the family constitution plays an instrumental role in implementing family governance ideas and principles?


Prof. Kavil Ramachandran: Most businesses in India are family controlled and many are also family managed. Many do not survive beyond the second, third or at the maximum fourth generation, and they face a variety of challenges.


In 2001, when ISB was set up, we realised that most of the business schools in India had not looked at family businesses, their management, their uniqueness and the challenges they faced. They had been following the typical MBA curriculum and taken the functional route. Therefore, we thought that since ISB’s mission was to be relevant to society and the community, we should start doing something in this area. Through discussion and exploration, we found that a fundamental challenge was family governance. Most business families do not even know or understand what family governance is. So if you look at it, it is more like a funnel; there was a gap in terms of awareness. Most business houses, business communities or family businesses accepted the default option, that is, they thought that they had had to divide the business in the second generation. They started with the assumption that as there are multiple siblings, they had to start different businesses so that the division is easy and amicable as far as possible. There was a lack of awareness about building a lasting family business, which has a lot of benefits both in terms of financial and economic wealth as well as emotional wealth, family unity and so on. We found that, apart from a few well-known families such as the Murugappa family, Dabur, which had already started working on its own constitution, and Godrej, which was in some respects already united, nobody actually discussed this. We realised that there was a need to educate people about family business.


Family governance is about developing fair policies and processes at the interface of family and business, because essentially the challenges are at the interface. It doesn't so much concern family members who are not involved in the business, rather, most of the issues are at the interface where family members are involved. Then the question is about roles and responsibilities, rewards, career growth, ownership, leadership, succession and also inheritance-related issues: who can come in, who cannot come in, who will be the leader, who will not be the leader, what would be the process, is it only seniority, etc. Typically, the rule would be that leadership is based on seniority, but in many cases, the difference in age among the siblings is very small. There are also issues of differences in terms of aspiration, which is dynamic. When you are young, you want to grow but when you have a certain amount of wealth already created, you want to take it easy. Some people want to continue to ride, so there are possible differences between aspirations, goals, processes, policies and expectations, and there is a lack of a platform for the discussion of what is right, what is acceptable, and what they should do. It is more like a messy ground — a khichidi kind of a scenario. So the big question is how do you address this? A family is closer to an emotionally connected entity and system whereas a business is a rational entity. In a business, decisions are driven by logic, whereas in a family, it is not logic but the emotional aspect that weighs more. So there is a huge difference.


Given that background, the major question is that unless you have clarity on policies with respect to family members who are bound by emotional connections, when they play a different role as business members or even as shareholders, what should the guidelines, the principles and the processes be? When you have a set of these things that have been discussed, developed and accepted by family members, you have what we call the family agreement or family constitution. We call it the constitution because it becomes the guideline. And like any constitution, it is created by the family members for themselves, by themselves in their own context. Very often, people assume that writing a family constitution is an end in itself — that if you have a family constitution, you have achieved everything.

Gender equality in family businesses
Vijay Dalmia : At Kellogg University, Prof. John Ward’s approach to family businesses was based on gender equality, which is taken for granted in the western world. Is that also the reality in India, or do you think it is still a challenge that we need to address?

Prof. Kavil Ramachandran : It is still a challenge. You can’t have a strategy out of context or a policy out of context. What is culturally relevant in a different society cannot be forced here. What is happening is that when you have an educational session, you discuss the pluses, minuses or the need for gender equality. If I take just one part of it, say, the gender equality part of it and its implications, it is a long distance from acceptance to changing the mindset to execution. Some families are open to the concept, where they say “We need to have that”. Others say “We will have it later”, and still others say “No, we are driven by tradition”. When we connect this point with the constitution element, that is, when we have the discussion on constitution, at the interface are the roles of family members in terms of participation. If you look at ownership, every family member, whether male or female, is inheriting wealth.
The Indian scenario

Vijay Dalmia : Does the above situation hold good in the Indian scenario too?

Prof. Kavil Ramachandran : Yes, it is true and it is changing because of the Hindu Succession Act. The first question is: Who will inherit the wealth? There are instances where tradition-bound families are changing because they have to follow the law of the land. Therefore, changes are taking place, but there is another level of participation. One level is ownership participation. The second level of participation is management participation. In some cases, families are willing to have female members participate as employees, maybe at the junior level or senior level. In some cases, they are part of their in-law’s family business, which is also a new trend because in the past, women joining and involving themselves operationally in the business did not happen. So one major change that is happening is their operational involvement in the business. Yet another is in terms of inheriting wealth. A third kind of change that is taking place is that they are starting their own entrepreneurial ventures, either as part of the family business or outside of it.


Another fundamental change that is occurring is that the size of the family is shrinking. Earlier, the joint family structure was prevalent, and now there are nuclear families. Some families have only girl children, or if there are only two children in the family, they may both be girls or perhaps a boy and a girl. The involvement and connection among family members is much stronger today and girls are better educated. Sometimes they are more capable than the boys of the family. Certainly, there is greater acceptance.

Education and its impact in dealing with issue of continuity in family businesses

Vijay Dalmia : I read an interesting article recently that said that one of the reasons for the strife between generations in family businesses is that different generations have been exposed to different levels of education. Some have not been exposed to global education and some have only received basic primary education. How do you address  this when dealing with this issue of continuity in family businesses?

Prof. Kavil Ramachandran : I think this is only one part of the issue. One aspect is the kind of technology management education that one can have. That is independent in the context of family business. But the other is education or exposure to different cultures, which is what is happening around the world across generations.


One of the big challenges that I have faced is that the senior generation doesn’t accept what the junior generation wants to say, especially if there is a significant age gap. There is an inertia to change. As a mediator or a consultant advisor, I often have to spend a lot of time with the senior generation, and my basic question to them is this: You are in your 50s or 60s or even 70s. You are past your prime; the future belongs to the next generation. Do you want them to be happy, do you want to build something for them, do you want them to grow? If that is the case, then the focus has to shift to them. You have to prepare yourself for this kind of a transition/ succession. And then in that context, I ask them if they are ready for this change, are they better prepared for this change?  


I also ask them —in the classrooms where I have programmes for seniors as well — what happens to the business if you are incapacitated for three months? There is usually dead silence. Nobody has thought about that. I tell them it is high time they think about it because anything can happen to anybody. I ask them: Do you want your children to be happy? Do you want them to be happy because of a good relationship and the sharing of prosperity? If that has to happen, there should be clarity about ownership, about inheritance, about roles and responsibilities. And that leads to a discussion on family governance.

Addressing generation gaps in family business through education

Vijay Dalmia : On the one hand, you have the younger generation that is going out, attending top B-schools and learning new concepts of business and family business. But the older generation has not received this formal education, so there seems to be a tug-of-war of sorts between their ideas and thought processes. Would you recommend that programmes be structured to address this gap and that business families attend these courses together. Would that help?

Prof. Kavil Ramachandran : It will help. What I do, for instance, is to address this on two levels. One is awareness creation through the family conference. Our family business conference has participants ranging in age from about 15 to 20 years to about 70 to 80 years. I encourage all of them to come and that creates a lot of positivity among them. They look around and they find that they are not the only senior person or the only junior person around. The second level is part of the M-FAB programme design, which I played a major role in designing. I said that if we are expecting M-FAB graduates to have any impact and be the next generation leaders, they have to work with the senior generation. Hence, as part of the programme structure, we give one senior member of the family the opportunity to attend the programme free of charge. We offer the “Family Business Growth and Transformation” programme, which is a three-and-a-half-day open, paid programme. The same programme, tailor-made for this group, is offered to them free of cost, and it has had a phenomenal impact. The only issue is that we could not get the juniors and seniors together in the same classroom because it is practically difficult for both of groups to travel together and be away from the business at the same time. So for operational reasons, we decided to have the programme back-to-back.


There have been some very interesting experiences from these sessions. One specific instance I remember is that as part of the seniors’ programme, on the last day, I asked them to make one public pledge in the classroom of one of the key decisions that they would take and implement within the next 30 days. One of them said, “I am going to sit with my son and daughter to discuss the future and succession ”.  Later, one of my M-FAB students told me that the course had an effect on his father. Many of them start thinking and this results in integration. This seniors’ programme covers family governance, family constitution, professionalisation and strategy. And the reason for this is that if you look at a mid-sized family business, which is what most family businesses are, the growth path has three major and almost simultaneous challenges: There is no clarity about strategy — how to grow. That is partly because there is no agreement within the family, and that is partly because there is no governance — there is no discussion forum. And they are not able to professionalise either because of a lack of understanding about how to do it.

Theory of separation of ownership and management
Vijay Dalmia : Are you a proponent of the theory of separation of ownership and management? Do you think that that will work in the Indian context?

Prof. Kavil Ramachandran : I don’t think that a complete separation is possible or that there is necessarily a need for it. There, the assumption is that family members are not competent. We don’t have to start with the assumption that family members are not professionals. What I say is that there is a need for professionals — family professionals and non-family professionals. What we have to ask is that at different growth stages of the business, who is the right person to drive it? It could be a family member or it may not be a family member. That is one way of looking at it. The second is that there is a framework that John Ward had developed that talks about the different shades of involvement of an owner. A shareowner family owner can be an operating owner, can be out of operations but involved only at the strategy level, can be minimally involved in strategy but only at the governance level, can be only an investor, or can be a completely passive shareholder. Therefore, there are different ranges and shades of involvement possible. If you apply that to a family business that is growing, at some stage you will realise that the family members are good entrepreneurs, so let them identify opportunities, build the business, hand it over to the next generation or non-family members and move on to the governance level. Once the operations are set, somebody else can run it.
Personality of the family business
Vijay Dalmia : In any case, this is required since the inherent personality — the character — of the business ultimately is the character of the promoter.

Prof. Kavil Ramachandran : Yes, but it is also not only that; there are two parts to that. First, if I take the example of Merck (Germany), which completed 350 years a couple of months back, there is no division within the family business. I have written a case on Merck with Dr. Frank, who is the Chairman. Incidentally he will be at the conference to give the keynote address on the continuous evolution of the family business. The family is 100% out of operations. They have oversight in terms of strategy and governance, because at the end of the day, more than 70% of the company’s shares are held by the family. So this is one part. I have asked the same question to several people within India and outside where they say they have separated family and management, and the family has oversight.
Until you have a strong corporate governance mechanism, you can’t just leave the key with somebody. The second challenge is that many family businesses, including Merck where there is a huge separation, among the next generation members in the family business. What is happening is that in many families, they have the share certificate. After 10 generations, they don’t know where the company is, there is no emotional connection to the business except for its share value. And that is becoming a big challenge because there is no custodian of the business apart from its financial wealth. Another important point in the Indian context is that corporate governance is not mature here. Here there is nothing like board governance. The board is a rubber stamp of the family.