Rotarians learn about the nitty-gritty of a family-run business
Sunil Shah
Sunil Shah is the Director at Evergreen Family Business Advisors and is an expert in addressing issues related to family business governance and estate planning. He has a Management Degree in Finance from the Indian Institute of Management, Ahmedabad. He has been President of the IIM (Ahmedabad) Alumni Association and teaches Family Business Dynamics.
Shah started by thanking President Shailesh Haribhakti and Programme Committee Chairman Rtn. Nanik Rupani for their kind invitation and kind words. He expressed how honoured he was to be present at the Club and saluted the services Rotary has been performing for the community.He said that the topic of his presentation would be global practices in family business continuity and proceeded to de-jargonise the concept. He said, “Today, my presentation will address four issues: family constitution, root causes for differences in a family, sample content of a typical constitution and the process of making a family constitution. Let me give you some good and bad news. The bad news is that Barclays Bank did a survey about family disputes which revealed that India is a global leader in the area, 70% of the families quoting differences relating to wealth and inheritance. The good news is, since I started work in this area in 2008, people are open to discussing and solving the problem.”
There has been more than 200 years of research conducted in leading global centres on how to deal with family differences. Shah himself has studied at Harvard and Kellogg in the same area and spoke on how in India, the subject is not given academic or practical focus. He said, “I have taught this subject at my Alma Mater, IIM-A, for two years in the area of Family Business Dynamics. The sum total of knowledge in all these universities is that the skill set required to create an empire is entirely different from what is required to create a multi-generational legacy of growth, status and family bonding. You could be India’s biggest businessman and may not be able to handle a family business run by five people.
He then proceeded to talk about continuity planning. He said, “The entire area of continuity planning has four parts. Today, I will focus on ownership and management agreement. I will start this by discussing the root causes of differences in a family.
“Family members are always blaming each other, depending on who you are talking to. Family business, though a single phrase, actually has two parts and these parts work entirely differently with different logic and priorities.
There is a family system, which is trying to say that every member of the family is almost equally important and we have to take care of them. And the fault is that it is not how companies or businesses work.
“Compensation is a hot-button issue in any company. In very few companies will families say, ‘this guy is performing well, let’s give him 10 times more than normal’. We will say that to our executives, managers, general managers. But when it comes to our brothers and uncles, we would like to observe quality. People working in a factory that is not making a lot of money but has valuable property experience a huge windfall gain because the property is worth more than the company. This leads to a dispute to re-invest and start a new business. The moment you think aside from the family’s point of view, big drawings and payouts become important. From the business point of view, re-investment, creation and growth are more important. There is perennial stress between these two systems.”
Shah then discussed business systems in larger families. He said, “The business system has two parts as well – Management and Ownership. When there are generations of family members in a dispute, where do we find the middle ground? Depending on the nature of the family, we will form a customised document. For example, Murugappa group, a traditional conservational group, built a family-focus constitution focusing on unity, culture, traditions and marriage. A group like GMR desires a legacy of growth. They built a business-focus constitution. Then there are the Burmans of Dabur, who have made an ownership-focus constitution. Therefore, depending on your aspirations, different types of documents would take shape.”
Shah then spoke about the family constitution. “It is not written by lawyers and is not a shareholders agreement. It encapsulates the common vision for the family and the business. All the research in the world says the same thing – every family has the same problems. However, every family’s solutions are very bespoke. Every family constitution will be facing the same universal problems and will come up with their own nuanced solutions. The family business board is not a statutory board. It gets more difficult as it gets bigger with the third and fourth generations coming in. It allows us to invite well-meaning people to guide the destiny of the family business. Therefore, there is an internal board which is the real power board of the family,” he explained.
He then came to the last part of the presentation, which was the process of forming a family constitution. He said, “It takes 6 to 12 months. Getting people to talk is a big issue because family members are secretive about these things. The most valuable part of this process is when the participants start trusting the consultants and voice their concerns. One of the biggest problems families face is when the decision-makers increase in number. Decision-making rules are the processes that keep the constitution running. A family council can arbitrate but it is not about arbitration. Soft mediation is an art in itself and families learn how to imbibe that skill. It is a lot of hard work and I do this for a living. I bring people together and conduct dialogue. I have them speak on what they want to see in the constitution and,
we hope, it comes to a happy ending.”
Shah urged Rotarians to think about their families and not to push their issues under the
carpet but act on them. He also added that a family-run business is a great way of wealth creation and family bonding.