Family Business Consultant Dr. Rajiv Agarwal On Avoiding Conflicts In Family Businesses
My mission is to see what we can do to make family relationships thrive and survive beyond three generations. So, what is a conflict?
A conflict is a disagreement or a different point of view amongst family members. Research in the last 50-60 years shows the top reasons for conflicts in different families around the world:
SIBLING RIVALRY – Sibling rivalry occurs when parents don’t encourage their kids to be friendly. You cause competition between them by saying one kid is better than the other; he got more marks, he ran faster, he is much better or smarter than you… as a result, children grow up amid competition all the time. They don’t work in a collaborative manner, and that is the first root of sibling rivalry. They never learn to live together; we can see that in most Indian families.
THE NEXT GEN DESIRING TO DO SOMETHING DIFFERENT – I see my own daughter saying that I don’t want to do the family business, I want to do something different. I can give you examples of farmers or well-established FMCG companies whose next gen have gone into real estate because they don’t want to be in the main family business.
MARITAL ISSUES – I advise my kids and students to choose their life partners very carefully. We have seen ample cases where internal jealousies or unfair means cause rifts and, if it not handled properly, it goes for a real toss. I can tell you about a 52-year-old gentleman who came to me and said that we need you to come and talk to our dad. I said, what happened? He said our dad is not deciding how much we will get and we need to know. So, I asked what is the hurry? He said I have an 80-year-old dad who is not letting me know. He says I am around, I’ll take care. But my kid is 30-years-old and he has a kid and he wants a will to know what is he getting. So, you have those kinds of issues in the family which cause lots of rifts and disagreements. It is better to address them upfront.
CONFLICT OF IDENTITY – Often, families get split based on who is handling what work and what happens when one person is handling one division and other one handling other division then it becomes us vs them. There are names, good team and bad team and it goes on and on and then you need to know how do you unite as a family and not just as two different individuals working under a common family name.
DISTORTION IN OWNERSHIP AMONG FAMILY MEMBERS – In the case of the Zandu family, we had two families, the Vaidyas and the Parikhs; the Vaidyas had one person in every generation and the Parikhs had multiple. So, let’s assume that you have three kids and each of them has three kids, then, across generations you find that this generation of the family has one shareholder with 50% and over here you will have 27 people each of them having 2-3%. So, now imagine the interaction between both sides of the family and this is what happens when ownership gets fragmented. We see this increasingly in family businesses in India and there has to be some way to resolve this kind of issues.
INVOLVEMENT OF MULTIPLE GENERATIONS – This happens when the next generation comes in and the incumbent generation is still there for guidance and experience. It does help a lot but if it is not managed properly this will lead to certain issues on how to be handled.
ALTRUISTIC INCLINATIONS – There was another family where they had a lot of money to be given for charity, the CSR budgets were huge and the next generation was having a fight because one wanted to set-up a women’s college while the other wanted to invest in a tech fund and they said this is how we will encourage things to go on. So, these kinds of issues do arise.
SUCCESSION ISSUES – My PhD was in succession and I can start about succession for the next two years to come but we don’t have the clarity of who is taking what responsibility and I think that is the biggest challenge that arises in conflict. We have a lot of first generation and second generation family businessmen over here in this room and I will urge you to get this check-box ticked during our lifetimes because these challenges do arise and post our lifetime it becomes way too difficult for the family to handle it and these are the places where these things originate. I can give you a lot of cases where this has happened, most classic case is two brothers where the father did not give clarity of who is taking over what business and eventually it just split the family up until the mother intervened with other people from outside who came and made things right. So, this clarity of succession is extremely important.
LOCK-IN DUE TO INABILITY – Example of those multiple family members, if this person has 3% and he wants an out, the other family members are not going to allow that to happen. So, he is locked in with his 2-3% and the result is that it leads to conflict because I see that the people managing the family business get all the expenses paid from the family business and I get nothing. So, life is unfair and that is where the conflict starts.
DESIRE FOR THE PERQUISITES – People think that those working in a family business gets a lot of perquisites and benefits which they are deprived of. Again, this happens in the case of girls and sisters not working in the family business. They say, okay, how do I get my share of expenditure and dividends that you are experiencing in the business. These are the challenges that arrive.
There are three different types of conflicts.
Task conflict – which goals are we doing, are we doing the women’s college or the tech fund. What do we do with the money?
Process conflict – who will do it? Is it me or the professional or why should it be you?
A little bit of task and process conflict is good in families to help ascertain and get the due diligence done that okay why are we doing this, let’s discuss this, it doesn’t have to be monopolistic decision making.
Relationship conflict – it is a tough one. I don’t like you. So, whatever you say will be no. That is very difficult and not something to be handled easily. It is deep-rooted and it comes because tasks and processes have failed sometime early on and therefore you need to go deep and resolve that, get the family into an agreement. You need to figure out is it me or is it the thing at hand that you are objecting to and then it becomes a lot better and articulate.
Most conflicts arise because of tasks and processes and when it is not being listened to for a long time then it goes to relationship conflict where they can’t stand each other, they communicate through a third person. I saw a family in north India where the two brothers didn’t talk to each other, the father was the intermediary and when they used to sit in the meeting, they used to say tell my brother this order is shipped, and he would say tell him it is not picked up. So, this triangulation that you see either with mother or father is very common in family. So, first thing you have to check is are these talking to each other or not, they are addressing each-others very formally. So, you see those signs in a family where conflicts have reached beyond a particular stage.
So, what do you do about it? It is a dilemma; how do you figure it out? So, like Steve Jobs said, I will leave you with three things: engagement, explanation and expectations. Just a three-point formula.
ENGAGEMENT – engage everybody in the decision-making process, who is involved and who will get affected by it. Normally, patriarchs or matriarchs don’t involve next gen and I can tell you that in case of pharmaceutical giants, when they were getting sold to a Japanese company, the gentleman did call up his family members and he personally told me this and he said this is what I am doing and should I do it? He took their point of view in it and that is a very mature choice to actually involve the people who are affected by it and then he explained his point of view that we will have to grow 33% year on year at compounded annual growth, only then we can expect money that we are getting right now. So, is this something that you really want to do or should we go back and do something else? Then the family decides that this makes sense. So, what happens is when you involve people getting affected, they know what is happening so, the engagement becomes extremely important.
EXPLANATION – is to actually explain why am I doing this? What is going on in my mind? Again, when you talk about asset transfers over here this becomes very important that, I remember one case when Bapuji had given certain amount of money to two sons and the sons were very agitated and I said let him explain the reason. The Bapuji said that this is what I am doing and it took him about half an hour time and it was an emotional moment but after that they accepted it. They said that the father has said that this is what he wanted done, it is okay. I can accept it, difficult but I can accept it. So, explanation becomes extremely important, I think we shy away from that. We don’t want to be accountable or want to give rationale of why we are doing it but this is important.
EXPECTATION – what are the expectations from the people, what is the responsibility? What is the role of people you want them to play? If that is not clear then people will always be living in their own assumptions and in assumptions, we tend to take things that are most favourable for us and that is when things can go hay wire.
Mechanisms to resolve conflicts
Family constitution – it sounds very impressive, it is a simple rule book of who does what, what are the rules of joining the business, what are the rules of getting expenses out of the business, everything is documented for well before hand and everyone signs on it. These are the things that we are going to play by and this is what we are going to do. In fact, I’ll tell you, there was a very impressive family that I was dealing with in south India. They actually had an academic council, a board of elders, where they go to in case of conflict to arbitrate so, the matters remain in the family and doesn’t go to the media. It remains in the family and they actually had a social committee which decided which family will go to which event, there is an education committee that if any kid becomes of age, they will sit down and figure out what they have to do, all expenses paid by the family, lifestyle and education expenses were paid by the family. They defined lifestyle as, all the directors will only get a Honda City, you cannot go and buy a BMW or Mercedes. They said no woman can spend more than Rs 10 lakh on jewellery for a year. In case the kid wants to buy a Ferrari, it is out of question. So, they have set the expectations of the family and have said that we are taking care of the basic needs and we will give you the drawings what you need to have from expense of the family business and these are rules that are set in place that tells what goes wrong before it goes wrong.
Family office – is basically taking care of family investments, this normally happens if you sell off the business and you have a lot of money to invest and the family takes care of tax, other implications are there. So, family office, we have the Dabur family, Harsh Mariwala family and all have set up the family offices.
Family roles – in the offices at the board level, like the Dabur family, they have actually stepped away from the business. They say that they don’t have a role to play in the business, they will monitor at the board level. This is a very evolved view and we need to think and it prevents people getting into family business which at the end of the day is the cash cow from which the family is being sustained. So, your first job as a family business owner is to make sure that family business survives. If it means without the family being in it, so, be it. This is food for thought.
Succession and asset transfers – extremely important to decide who will take over what are the assets we are giving, how will we transfer it keeping the consents in mind before the conflict arise.
I’ll leave with two thoughts, one is a parting thought by Leo Tolstoy, old happy family resemble one another, each happy family is unhappy in its own way and trust me they find ways to become unhappy, each one is unique. And the last one, what legacy am I going to leave behind? Think about it, you want a happy family, for the family name or do you want them to be in disputes and fighting. The ball is in your court.
You said that one of the family you spoke about had a cut-off that they will have Hondas but don’t they have salaries? Can’t they buy something from the salaries?
They can and in fact what happens in families is that there is dilemma that the older generations want to play subdued role and not expose themselves to the wealth and the younger generation want to flaunt it. I think everyone in the family is doing it and the elder ones are the first to do it and they actually had a couple of Mercedes that they sold off and they went and bought an Honda City saying this is the example we are setting here. The kids say if my dad is travelling in the Honda City, I’ll do with an Accent or something. They set an example for themselves and every kid in the family when they turn 18, they sign a document which was a family constitution and they read and agree to it. If you don’t agree then you can go outside the family, do what you want. You are not entitled to the family benefits if you don’t agree to this.
Salaries are fixed to take care of your lifestyle and they say that we will give you a certain percentage depending on how well the company has done. Everything was split across the four brothers and each one got 5% of the profits that the company made. So, it rewarded them with what they were doing but what happened is when they put up new projects, every time a company achieved a turn over of X crores, the person has to step down and give way to a professional and start a new business or mentor someone in the same family. So, they control everything and also 5% of the wealth goes to charity every year. So, it was a religious family which brought this and it also is about the value system that you bring in. Saying I have the wealth, I have the comfort but I can’t go beyond a particular time. They didn’t have a budget for medical expenses, they hired a helicopter to bring somebody in hospital. They said we will splurge money on education, one guy wants to go to Harvard and other on Stanford, we are okay with it but we really don’t want to put a limit on it.
Institutions in India are like family. There are so many limited literatures on family business. So, is the literature expanding? If that does increase is there a vision for India being the centre for family offices worldwide? Which are the Asian countries that are good at it as you have observed?
There is literature coming up in family businesses. In Indian families they don’t want their names to be mentioned at all. I think it is the need for secrecy and confidentiality. We all live our lives on LKK principle which is Log Kya Kahenge. The impact on society and what people will say in coming out with this, I think it is a personal matter and that inhibits any kind of research or literature. All that I have done is all third-party published media only. It is not appropriate to step into any body’s family matters but having said that, there is a lot of literature and good coming out.
The family offices that the Europeans have because they have wealth coming from the titled class over there, in India we always have a joint family system where the head of the family decides, the mightiest shoulders bear the highest burden. We have our own form of family offices and constitutions though not documented, we suffer that because it went to became the whims and fancies of the individual running it, but I think we had those systems in place. In India we have our own tradition at the same time we have the western culture coming and hitting us as a result of which that confluence of a group think looking at the family in Indian society mixed with western requirement to be individualistic is where the conflict rises. I think where the kids are getting more educated with more individual requirements, I think we need to understand that we need individual preferences and recognition in order to them flourish over there. That is what is happening today.
There are family offices in Japan and Singapore. Japan have traditions and offices 1000 years old, the point is the eldest brother takes over the family business and if there are more brothers, they leave the family business because they don’t want conflicts and in case there is a girl, the girl has to marry a man who the family thinks is most appropriate, then the family adopts the son and then he becomes the head of the family business. I think these are the traditions there.
Most of the business families in India are 2nd or 3rd generation and there is a hierarchy but there is also a deep-rooted patriarchal element to it. I know families where you dare not question the elders in the family. Now what happens when the elders take a large risk, how do you hold a balance in such a situation.
I lack the data, to be honest, of the context you have given to me. But couple of things that can happen is, patriarchs become more conservative after they attain certain age; they don’t want to take risks. ‘At least when I am around, I don’t want my business to perish overnight’ is what they would say. It basically then means, bring a colleague same age as the patriarch to talk to, not from family because it will be emotional and you lose track. The idea is to provide a safe place to meet the aspirations without bringing the family name down or without causing damage to family business. I think that is the balance you need to figure out and it takes a lot of time, you need to work on it. It will not be overnight. If you flip the coin, and it is you who have put in your life to a business and someone comes with another idea with a degree of uncertainty, you will have to build the trust, do tests and show what is working.
