‘If Not CEO, Be Involved In Running Business:' Family Business Expert Farhad Forbes On India Inc's GenNext Succession

India has the third-highest number of listed family-owned businesses after China and the US. And this decade would be the decade of transition and generational shift in Indian corporates. The next generation would be replacing the patriarchs at several family-owned businesses in India. 

Reliance Industries recently announced the appointment of Mukesh Ambani’s three children to the board. At Kotak Mahindra Bank, Uday Kotak, who founded the company 40 years back, stepped down as MD and CEO and he has said that the elevation of his older son, Jay Kotak who works with the bank, would depend on the board. At Aditya Birla Group, chairman Kumar Mangalam Birla and his two children, Ananya and Aryaman Vikram, who are fifth-generation scions, are involved in the functioning of the fashion-retail-to-financialservices conglomerate. His youngest daughter Advaitesha still has some time to join the family business.

“There needs to be adequate preparation and there has to be adequate acceptance by the current generation in terms of providing the opportunity for development. And that development is not just exposure to good education, but also exposure to the business such that that next generation member is adequately qualified to lead the business if they're going to enter the business,” said Farhad Forbes, co-chairman at Forbes Marshall and global chair of Family Business Network International (FBN). The FBN was founded in 1989 and is headquartered in Lausanne, Switzerland. It brings together 3,600 family businesses, and 16,000 individual members, including 5,000 next-generation members, and operates out of 65 countries.

There has also been a sea-change in attitude to matters relating to women as successors. Earlier, many Indian next-generation women members were not sufficiently welcomed into the family business. “But that's changing, too. And Indian families are at last, in my opinion, being much more willing to accept that their next-generation women also enter the family business. And I think in some are already seeing the women next-generation members taking very active roles,” Forbes said.

In this week’s The Core Report: Special Edition, financial journalist Govindraj Ethiraj talks about succession planning of Indian family-owned companies with Farhad Forbes, co-chairman at Forbes Marshall.

Here are edited excerpts from the interview:

What are your broad observations on where we are and how prepared family businesses are in India as you observe them up close and personal? 

When we talk about the next generation, we have to look at maybe there are three aspects of the next generation entering family businesses. First is exposure and preparation. You referred to that in your earlier comments. 
The second is the opportunities that now exist for next-generation members. And the third is attitudes, generally attitudes of the family and also society.

If we look at these three aspects, talking about exposure and preparation, firstly, the next generation today has so many opportunities. They have much more, by way, in terms of exposure. They have much more exposure than before. And as a consequence of that… because they are being educated overseas at the best universities they have the opportunity to see what's available outside the family business to a much greater extent than previous generations did. 

When they have a good education, which is part of the preparation, what the education does not do is provide exposure to the family business. And so there's therefore a need to provide that exposure to the family business and the family legacy that goes beyond just the business. So the next generation can develop that pride in both—that is the business and the legacy. And it can then be balanced against the external exposures that the next generation gets today. So that's as far as exposure and preparation. Preparation is really, I think it comes through good education and exposure outside the family business. And those are opportunities which many of the family businesses, which are leading family businesses in India, the next generation certainly has had that exposure and an opportunity for preparation. 

The second aspect which I mentioned is about opportunities, which are available to the next generation today. There are professional opportunities for the next generation externally, which are very much in line with their education and their specialisation. And often what the family business may offer may not sufficiently challenge them. And that’s one of the factors that we see all over the world now, not just in India, where as a result, next-generation family members sometimes don’t see the same challenge in entering the family business. It's certainly not true for the names that you've mentioned, but this is one of the issues that does affect many family businesses in terms of attracting the next generation into the family business. 

Second, within the scope of opportunities, the Indian business environment today is very different to what it was earlier. The interest in India for investment in high-quality, good businesses creates high valuations, and it makes it quite tempting for family members to sell out as well, and we see that as what sometimes does happen. And again, it’s not unique to India. It happens elsewhere as well. 

Lastly, attitudes have changed. Firstly, on whether the next generation must or should enter the business, and the senior generation is much more willing to provide the next generation with the space to choose, much more so than it was earlier. 

And related to attitudes, too, is the attitudes to women next generation members. And particularly this is so for India, where earlier, unfortunately, many of our Indian next-generation women members were not sufficiently welcomed into the family business. The concept was that, well, they get married and then they sort of marry into the family business of what they are going to be marrying their husbands for. But that's changing, too. And Indian families are at last, in my opinion, being much more willing to accept that their next-generation women also enter the family business. And I think in some of the names that you've mentioned, we are already seeing the women next-generation members taking very active roles. So those are the three aspects which I thought I would just mention in my response to you. 

Now the kind of companies that we are talking about, and, since most attention would be on these companies because they are more public-facing, what's your sense in terms of the preparedness of the current generation, even as they hand over? 

Two, or three sub-questions to that. One is, I am sure conceptually they recognise, but do they recognise that their next generation may or may not be fit for the kind of role that they have in a way charted out for their organisation and its growth? The second is that if there is such a recognition, what are they doing about it? And the third is that if they recognise or do not recognise, then are they willing to take drastic steps like a sellout? Cipla is a classic case. I am not getting into what triggered it, but it's evident that there is a second-generation or a third-generation that is not likely to or does not want to take over the business. And therefore the best thing to do is to sell the business. 

Well, again, different motivations depending on the circumstances. In terms of preparation, I think we often hear this, if the next-generation family members enter the family business, is the business not being professionalised. And I think we need to make a distinction. You can have a next-generation family member who's as professional as any non-family member executive. Similarly, you can have a non-family executive as unprofessional as anyone. So I think we should make the distinction between the two.

In terms of whether the next-generation members enter the business. There needs to be adequate preparation and there has to be adequate acceptance by the current generation in terms of providing the opportunity for development. And that development is not just exposure to good education, but also exposure to the business such that that next generation member is adequately qualified to lead the business if they're going to enter the business. But there are other opportunities and other ways for a family member to be involved. Usually what happens every next generation in a family business, whether a listed company or unlisted company, most family businesses are not listed, and so as a consequence, the aspects that one deals with in a listed company are less the requirements. So consequently, what happens is that you can be involved with the family business in other ways. You may not be involved in the same way as your senior generation was. 

You may be qualified to do other things, but you can still be on the board of the company. You can be on the family council if it’s a large family and you have every possibility of influencing the family business’s future growth and success, not being directly involved in the day-to-day management. So it’s possible to do that. And there’s a role, there’s a very constructive, positive role which you can play in such a capacity as well. So one needs to think about that too. 

It need not be that you become the CEO of the company. You can be a co-CEO. You could be involved in management, working on business development, business expansion, new businesses, things like that. Or you may not be involved in management at all, and you may just be involved in the governance of the establishment. So those are the possibilities really, which exist. 

Let me put the question a little differently. So, if you were to take ten business leaders of family businesses in India, and you could choose any ten in your mind, how many do you think would want to or would insist on the next generation staying within the company and running it, even though clearly, or at least to outsiders, there is some sacrifice involved in performance, vision, delivery and so on? 

Well, it’s hard to sort of judge that. And I think you have to go by the preparation of the specific family and the specific family business. If you look at overall family business performance, many studies show that actually, family businesses outperform non-family firms. Now, there must be a reason why that happens, right? So that happens, and this is over generations. 

I mean, if you look at, firstly, longevity, we talk about statistics. Statistics are something like 13% of family businesses make it through the second generation. Actually… 13% make it through the third generation. About two-thirds make it through the second generation. Now, if you take one generation as 30 years, you're talking about two-thirds making it through 60 years and 13% making it through 90 years. So there's some value to what family businesses do. In terms of performance, many studies also show that family businesses do perform well, in cases outperforming non-family businesses. So this happens because you have the next generations who are entering the family business too. And whether they’re entering the family business in day-to-day management or as being involved, as I earlier said, in governance, on the boards, etc, but they’re still involved, they're still significant shareholders and they are influencing the direction of the business. So there are those methods of ways that the family can be involved. And I think many of these families you mentioned, I think, have that ability to influence the business successfully going forward. 

So you’re also in some ways saying that there is a self-correcting mechanism which is reflected in the outcome or the data that you talked about

Where I am coming from is the shareholder anxiety that one may see at this point. So if you take all the examples that I mentioned as a shareholder, and if I am a significant shareholder or an institutional shareholder, for example, and we saw it in the case of Reliance Industries, where the institutional investor advisory services said, or rather presented a point of view that they were not comfortable with one of the three children that were being taken on the board. Their point was that there was not enough experience and so on, and that was their recommendation, which of course didn’t matter eventually. But that was a point of view. And we’re, thanks to institutional investor participation and their vocal presence, increasingly seeing those points of view. 

What’s your sense if, let’s say, as a shareholder, I was not sure or I was anxious? One is, of course, I put my foot down and vote whether or not that vote goes through. But the fact is that a concerned or proactive business leader would address this more upfront than perhaps waiting for something like a bomb to land on the boardroom table, literally, and then try and diffuse it. 

No, I agree with you in the sense that I don't think that's right. I think these are things which have to be sort of worked in the background first, and you have to, firstly, the person has to be the right person where there is consensus that the person is adequately prepared, that the person is right for the job if the person is going to be entering the business. And even as a board member, I think you need adequate preparation as a board member, too. I think there has to be a lot of groundwork done ahead of time. And it cannot be just assumed that because the person is a family member, you automatically qualify. 

I think there is that responsibility, particularly when you have outside shareholders that you have to satisfy. But on the other hand, there is also some need for correcting perceptions that family members are not professional. And I think that’s something which we have to do. Unfortunately, most of us go to business schools in the Anglo-Saxon world. And in the Anglo-Saxon world, family business does not necessarily have an entirely positive image, because it actually has examples of family businesses where things have gone wrong and it’s always the sad stories that make the headlines. But actually, what we need to do better in family business is provide a greater sense of advocacy for the good things that happen. And I think that can change perceptions. It can change perceptions of the media and the general public. And I think that’s a job we need to do as well. 

When you talk to business leaders, maybe some of the names I've mentioned as well, and there will be a lot of back-channel deliberations and discussions going on. To the external world, the business leader says, okay, this is my successor. She/he is my daughter/son, and she/he, he will take over and is presented to the world as such. The story behind the scenes may not be as simple. And the business leader, who obviously by definition, has built the business from scratch, has nerves of steel, is battle-hardened, and all of that will want to ensure that the business does not go down the tube. So how have you seen this play out?

I think it has to be, firstly, a very serious conversation in the family, about whether it’s right for that potential successor to step into the role and to step into the role as a successor to the senior generation in the same way. And, and I think that that conversation is essential for that to happen. And it has to be a conversation, which goes on for a long period of time. And there has to be general comfort that the person is adequately qualified, because ultimately, you, as a family leader, a family member who is leading the business, are concerned about the valuation. You do not want to see that valuation of your holding for a business that you have built for years be eroded because the person is the wrong person. So I think it’s very important to make sure that that successor is, in fact, the best person for the job. So that’s a fundamental requirement. 

But what I would like to also qualify and say is that one should not assume that the next generation, the future leader, just because of being a family member, is not the best person qualified to lead. When you have been exposed to a business, which you deeply understand because you are exposed to it from the time you are five years old, where you can begin to comprehend things, you have a deep understanding of the business, and you develop a deep understanding of a business which no non-family member, no matter how bright, how well -qualified, has the privilege of having. And as a result, that deep understanding can sometimes make you a very successful leader for the business. So you have to balance the two. So it has to be that it's the right person. 

But just because you’re a family member doesn’t mean that you are less qualified to lead the business simultaneously. If you’re not adequately qualified, it's best not to push someone into a position that will cause problems later.

To come back to the 2024. I don’t know if conundrum is the right word, but because we are going to see transitions, at least some advanced, some beginning, some maybe they will sort of start getting seeded. Is it your sense that most of these large businesses, which we’ll see transitioned are doing it reasonably well and as close to textbook as possible? 

I think some are doing so because they have had the right, I would say, family business education. I qualify that in the sense that it's not just business education, but it's family business education in terms of whether it's how you prepare the next generation, how you get the next generation to work with non-family professionals, all of that, and also attitudes of senior generation and the next generation in terms of how they will manage the transition. Where it is clear that the next generation is possibly not the right person to lead the business as a CEO, perhaps find the right role for the next generation to still influence the business. 

Be on the board, contribute to the values, and the purpose of the business, but not lead the business as a CEO. And I think in many of these family businesses that you've named, I think to some extent that's happening. So there are some, where you're going to see the family member take leadership position, and in some, you will probably find that it won't be the family member, but the family member will be involved in the governance of the company. And I think both are fine. Both are equally fine. 

So I'm sure people would have reached out to you. Now I'm talking about, let's say the existing generation or the current generation of business leaders in transition. And with both situations or at least if you’re maybe, I'm sure you’re aware of them, where in one case the senior business leader says I want my daughter/son to take over and that person is not interested. And I mean, I've seen some cases too. And the opposite of that is I don't want my daughter/son to take over because this is too big, for whatever reason. I'm emotionally too attached to it. I feel this person is good, but not good enough for this role or this business and so on. So what have your experiences been like? How have you responded?

Well, in that case, what we always talk about is that you have to look at what's right for your family and your family business. And I think that recognition must happen through consensus between the two generations. And that happens if you have the right, as I keep saying, the right exposure to family business education. If you have the right exposure and you have actually over years seen other families deal with similar situations, whether in India or outside India. And we have enough examples of success and failure as well for people to learn from. And that's what we, within FBN, what do we do? We provide that opportunity and we provide that opportunity for families to learn from each other. So you get exposure and you sit down and there's no better teacher than someone who's been through a similar experience. So if it can be a realisation at both generation levels that this is the right thing for us, for our family business going forward and the person is adequately qualified and prepared, then it's the right thing to do. And I think you can convince people, you can convince your institutional investors as well. And if it's not the right thing, then why go through that process? And it’s not appropriate for me to feel that, no, my son or my daughter is the right person for this when it’s not the case. And if the person doesn’t want it in the first place, you can’t force that because then it's a recipe for failure going forward. 

So you're saying that people are, by inference having these tough conversations. And I'm talking about the existing generation of business leaders with their potential successors and are arriving at some kind of understanding on whether there is a future or not with that. One is, of course, this is by inference that these conversations are happening. Second, how tough or easy are these in your experience, particularly in the last few years? 

Very tough. These are very tough conversations because you have to first align expectations and you have to align the expectations across the generations. This is one thing that we do and what we encourage within FBN for people to do is to have these conversations within the family. We talk about family constitutions, that family constitution is a document, but it's not that important a document. It's the process, which you go through to establish that document, which is far more important because you have those conversations in arriving at it. 

So when people say that, no, we’ve been given this family constitution by a consultant, it's the absolute wrong way to go about it because then you try and adapt your family to that document as opposed to adopting, coming up with something which works for your family. When you go through those conversations, you then will determine whether it's right for the next generation woman or male member to enter the family business in a leadership capacity. So those conversations are extremely important. And not all families do this, unfortunately. And that’s when you have a kind of communication breakdown and then put the wrong people in positions as well.

And the other important and interesting point that you mentioned right in the beginning is gender and the rise of second-generation women leaders. Now, some of the examples that we've seen, maybe Godrej is one example, one of the Kirloskas in Pune. Metropolis Labs, I had an opportunity to interview the managing director, Ameera Shah, just a few days ago. So these are cases where everyone is happy because these companies are doing well. They've set standards of excellence, leadership, and all of that. And shareholders are the best judge. So we'll leave it at that. 

My question is, when you look at some of the other cases where, let's say there is a male successor and a female successor, or there's a son and a daughter involved, the historical precedence is that the son gets the mantle, particularly in many communities. Today are you sensing that parents and business leaders are more equal in the way they look at succession and if so or not how are they handling it?

No, I think there is a change that is happening. You're right that this was not the case earlier but I think it is changing for a much more equal consideration today than it used to be. Again, it sort of depends a little bit on the family tradition and history, etc. And where you've had a long history it's often more difficult to change it because one is resistant to make change happen. But I think the change is happening because it needed to happen and because women rightfully are demanding their equal position in this and in many cases, if the woman is more qualified than the male potential successor then it's the right thing for the business as well. It's the right thing for the family and eventually for the investing community as well, isn't it? So I think it is changing. It is changing and it's high time that it had to change. 

And I should have added the Reliance and the Ambanis to that mix because in the case of the second generation, clearly there is a daughter who has equal standing amongst her brothers. 

Which is very good. 

As you look ahead into 2024 and maybe 25, how do you see the family-run businesses will be run in succession? And what other issues or challenges are you seeing? If there are challenges in the way we are going to see ownership and ownership transition in India.

I think it's going to be very much more now that the person has to be qualified adequately. So you’re going to see that as being a fundamental requirement. You’re going to see much more variance as well. Whether a family member takes on that leadership role. You’ll find that there will be somewhere it will happen, and there will be somewhere it won’t happen and it will be equally acceptable for both situations. So I think I am positive at least, that family businesses are being sufficiently smart in terms of how they are considering succession going forward. So I think they will make the right choices. You will always have a few wrong choices, but by and large, they will make the right choices and there will be an equal amount of going one way or the other, and no one particular method is going to be the right one. So that's the first thing. I think you will have qualified, good successors, whether family or non-family. 

Second, you will see family involved in business in different ways. And that provides more opportunity for other family members, not just the one successor, but other family members, to influence a business through a family council, where the family council elects members to the board of the family business, so it becomes more representative and you get inputs from the rest of the family as well, and provides more ownership of the family to the purpose of the business. So that's going to happen. 

And then the third is, I think in the overall context, we are seeing great emphasis now on ESG and the UN SDGs. And we think, well, this is meant for listed large family firms, which are non-family firms. But actually, that's not the case. If we want to make an impact on SDGs, we look at the contribution that family businesses make globally in terms of whether it's employment, whether it's contribution to GDP and the sheer number of firms, if we can get family firms to adopt an attitude which is positive towards ESGs and SDGs you can have far greater impact on the world, whether it's on the environment, whether it's on the social goals, or whether it's on governance. And that's one of the things we're trying very much in FBN to expose our members and get them to adopt and do positive steps, whether it's business transformation, whether it's in their philanthropy, whether it's in how they consider making investments either directly as a family or through their family offices or as the family business, and finally in how they influence others to do the same through advocacy. We are trying to do much more of this, and I think you will see family firms taking a leadership role in addressing many of these global concerns.

We have focused mostly on succession and somewhat deliberately for the chronological reasons that I outlined earlier, being that next year we are likely to see some of this. The other situation that, again, external stakeholders are always worried about is splits within families, and we've seen some big ones in the past. I don't know if that's so much of an issue right now, but your broad thoughts. Is that something that will be on the minds of business leaders as well, particularly where there are such families involved in the next year or so, or will the focus be more likely on succession, at least as I could see from the outside? 

No, I think it's a very valid concern. And the splits happen for essentially the main reason that there's a misalignment of values often, and misalignment in terms of communication about whether it’s who in the family should be involved, how they get involved, and also in terms of ownership and valuations and things like that. And I think you will see quite a bit of that continuing to happen. It happens all over the world, and it happens mainly because one hasn’t invested enough time in family governance education. And unfortunately, what tends to happen is that we spend much more time learning about how to manage our business, whether it’s strategy, finance, marketing, et cetera, and we don't invest enough time in family governance education. And you see these splits happening usually in families where they haven’t invested adequate time in that, unfortunately. So that's something which will happen. 

But I think if you look at going forward, as far as India is concerned, yes, there will be these major succession issues to deal with and there will be the occasional splits which you will hear about, and some are more public than others, and people do it in different ways. And some are very contentious, sadly, because they destroy the relationships which exist in the family. It often destroys value, destroys valuation as well. And you will see some splits which will happen, which will be done very amicably and constructively. So I don't think there’s going to be a universal one-way again on that.