Family Constitution: Oath of conduct

March 23, 2008
By Syed Akbar
Enoch (or Henok) was a biblical figure, son of Cain and father of Methuselah who ascended to the heaven at the ripe age of 365 years, without having died. In 1981, a group of companies came together to form Les Henokiens — a club of companies over 200 years old and still actively run and managed by the founding family. The club, which has just 38 members doesn’t count a single entry from India though. To an outside observer who has seen the sometimes acrimonious splits in some leading Indian business houses, this wouldn’t come as a surprise.
If the 1980s witnessed family feuds amongst the Shrirams and the Modis, the 90s were marred by the de-merger urge in the L.M. Thapar family. The new millennium was witness to the division of one of the biggest business empires in Asia, the Ambanis. The family feud between the two Ambani brothers; Mukesh and Anil, made headlines the world over. At stake was the division of India’s longest business empires and the transition was, however, not a smooth affair. Even after the division, the feud continues and makes headlines.
The Ambanis saga was not the only one that made national headlines. The family feuds between Rahul and Shishir Bajaj of Bajaj Auto, Ajay, Vijay Chauhan and Prakash Chauhan of Parle and Onkar Singh Kanwar of Apollo Tyres and Narinder Jeet Singh of Ranbaxy are also well-known. A family feud is a global phenomenon whether one agrees or not. Many still remember the family dispute in Gucci, Fiat and Hyatt groups. And why does this happen when the family business enters the second or the third generation? The answer lies in the failure to look at family and business from different angles. Those who take both along have succeeded the world over.
As internationally renowned family-business expert Peter C. Leach explains, "The family system tends to be emotion-based, inward-looking and places high value on the long-term nurturing of family members leading to a conservative structure operating to minimise change. On the other hand, the business system is based on contractual relationships, oriented outwards towards meeting performance targets and results."
The Solution
As business experts and stock exchange strategists wonder how the Dhoots of Videocon, the Godrejs, the Wadias of Bombay Dyeing and the DLF family, will divide the assets among their offspring, Bangalore-based GMR Group has come out with a solution. G.M. Rao, chairman of GMR Group, has created a history of sorts in the country when he went in for what is popularly known in the West as "family constitution". He and his family members signed the constitution in the presence of top executives of the company. G.M. Rao’s family constitution is much-publicised, though other business families like the Kasliwals and the Dalmias too have adopted the family constitution in a hush-hush way. Chennai based TVS Group is also working towards finalising a family constitution, though a formal document is yet to be inked. Says Mr G.M. Rao, "I have seen many business families facing problems and splitting. I had been thinking of some sort of a framework that will keep my family together and ensures in healthy resolution of disputes. It was in 2000 that I got the idea while attending a seminar organised by the Confederation of Indian Industry. There was an interesting presentation, which said that only a quarter of the family businesses make it to the second generation and just 13 per cent make it to the third generation. And when it comes to the fourth generation the chances come down to just two per cent. Then I decided that we should have a family constitution."
Before arriving at the family constitution, Rao contacted Peter Leach and held sessions with him several times. Peter Leach drafted the family constitution and even constituted the family board and family council.
One interesting aspect of the family constitution is the major role it entrusts on female members. As Peter Leach puts it, no family succession can be complete without considering the opinion of the women in the family. And the GMR Group has done just that. Mr Rao’s wife and two daughters-in-law and daughter all have a say in the family constitution and thus in the management of the business house.
The GMR Group’s initiative gains significance in the backdrop of a study conducted by the Association of Chambers of Commerce and Industry. It noted that business houses in India rated themselves at four out of 10 when it comes to grooming successors.
The 50 odd member TVS family, which has interests in two wheelers, auto components, finance and logistics is working towards a formal constitution. "We decided to go for a constitution because it is becoming clear that family businesses are long lived. You need to manage the transition as new generations join thebusiness" says Venu Srinivasan, managing director, TVS Motors. "We have been able to address the simpler issues such as education of future generations, rights of non-working family members and the dividend policy for the family. On some areas such as succession planning and new investments, we still have to finalise something," he adds.
"We see the role of owners as trustees. The operational management should have the freedom to manage the business on a daily basis while the family’s role could be more of strategic and advisory nature," Mr Srinivasan says.
International experts in family-businesses are of the view that unless business firms plan their succession effectively; the empire is bound to collapse as it changes hands to the next generation. Prof John Ward, co-director of the Centre for Family Enterprises at the Kellogg School of Management argues that succession is the root of a lot of problems within the big Indian business families. "It is time that the big family business houses in India put strong family governance systems in place along with family constitutions and family councils. While such agreements, structures and processes may not always ensure smooth succession, they go a long way in helping avoid acrimonious situations," he points out.
Family lore
The idea of a family constitution is to create family ‘lore’, spelling out the family’s values and its policies in relation to the business and those family and non-family members working within it. In most cases a family constitution is not ‘cast in stone’. Not many know that the GMR Group, which created ripples in infrastructure and power sectors in India and abroad, owes part of its success to family constitution.
The family constitution plays a key role in keeping a joint family together. "Everyone in my family including my daughters-in-law know the Constitution thoroughly. Having a constitution is one thing and understanding it thoroughly is quite different. Families, who work together, enjoy a special relationship and when there is family harmony; often the business can derive substantial advantages from the family being there as owners and managers," observes Rao.
To have a successful family and business go hand-in-hand, all the members should ensure transparency in thoughts and deeds, says Prof K. Ramachandran, associate dean, academic programmes, and Thomas Schmidheiny Fellow of Family Business & Wealth Management, Indian School of Business, Hyderabad,
"Most families that successfully survive generations follow certain written or unwritten codes of conduct. The family should objectively analyse why differences crop up, and whether there is any pattern to them. Often, the problem is not individuals, but the pace and nature of growth on family and business fronts. Most family businesses do not survive three generations, partly for want of an approach to prevent, and if necessary, cope with conflicts," he explains.
The Reason
The family constitution represents a powerful tool in establishing the balance between the best interests of the business on one hand, and the well-being of the family on the other. "Many of the problems are inevitable," says Peter Leach adding, "Therefore they can be predicted before they occur. A key part of the process will be to ensure that individuals understand their own and other people’s roles and aspirations in order to improve communication all around," he says. The family constitution also defines the qualifications required to enter the business and other dos and don’ts, "Our constitution bars members from joining politics. One is free to take to politics but he or she has to quit business," says Rao.
Family constitution
A family constitution is tailor-made. It differs from family to family. For instance, the GMR family has decided against joining politics. If a member of the family has to join politics, he or she should quit business. Some family constitutions do not have a provision for family succession i.e the eldest one taking over charge after the death of the head of the family. The selection is through a natural process, the best one will take the charge. However, the following issues are typically addressed by family constitutions:
1. Long-term family vision and value
2. Relationship between the family
shareholders and the business
3. Succession management
4. Board membership
5. Communication
6. Governance e.g. family council, family business forum
7. Rights and responsibility of shareholders
8• Share ownership, dividends, voting control & exit mechanisms
9• Employment and incentivisation of non-family personnel
10• Family meetings
11• Role of in-laws
12• Communication