Birlas

2007

Family firms: and the liberalisation of 1991

Times of India

How the good old family firm fared

1991 was a turning point for the Indian economy. It was also a wake-up call for family-owned businesses. Not everyone made the Big Leap. Sunday Times finds out why Prabhakar Sinha, Reeba Zachariah & Namrata Singh

Change, they say, is the only constant in life and businesses are no exception. India’s growth story shows that those who embraced change post-1991 have not only survived but excelled. Those who resisted simply fell behind.

Take Bajaj Auto, scooter manufacturer, and Hindustan Motors, who make the Ambassador car. Both are family-owned; both enjoyed near monopoly on the domestic market before globalization. Those were the days of queues and a five-year wait for a Bajaj scooter. But economic liberalization brought in global players like Honda, TVS and Suzuki. The competition forced Bajaj to change tack and venture into the fast-growing motorcycle segment. It finally abandoned scooter-production, once the sum and substance of its identity. Today, Bajaj is India’s second largest two-wheeler maker, after Hero Honda.

Not so Hindustan Motors of the C K Birla Group, which continued to flog its old car model and eventually lost the race to newer, racier entrants.

Girish Vanvari, executive director of global consultancy firm KPMG, says family ownership can give a company the unique opportunity to be quick to adopt change and it is this that counts in a competitive, globalized environment. Vanvari cites the Malvinder-Shivinder Singh Group as an example. The group was Ranbaxy’s original promoter but exited the family business. The Singhs sold their stakes in Ranbaxy to focus on healthcare, a manpower-dependent sector in which India is believed to have a natural advantage. The moral of the story? Decisions must be made on the basis of “available opportunities”, not emotional attachment, says Vanvari.

Azim Premji is another worthy example. He decided to shift focus to software development even as his flagship family firm, Wipro Ltd, busily produced vegetable oil and electric gadgets. His decision transformed Wipro into a world-class software company.

Richard Rekhy, advisory head of KPMG in India says business success requires long-term strategic focus rather than a short-term, operational, result-driven approach. Indian family-owned businesses are doing well in the globalized environment, he says because they generally have the flexibility to adopt alternative strategies relatively quickly. Family management also makes for commitment and continuity.

Interestingly, a 2007 Citigroup report pointed out that investors place a premium on firms in which family insiders wield significant, but not absolute, control. So why have some family firms failed? Consultants, who refuse to be quoted on this, say it’s a mix of short-term strategies and get-rich-quick schemes. Groups such as the Modis and the Usha group of Vinai Rai flourished before the advent of globalization. They formed a number of joint ventures with foreign partners, but hardly any of them survive.

Exceptions apart, globalization has generally helped India’s family-owned companies to flourish — particularly those where control systems are in place and day-to-day activities are allowed to be managed by professionals. One of the best examples of this is the Bharti group. At Bharti Airtel, the management, which is controlled by promoter Sunil Mittal, encourages independent directors to meet separately outside board meetings. The company also appoints a lead independent director who represents and acts as spokesperson for independent directors as a group. These processes ensure transparency and greater involvement of independent directors in the company’s decision-making process. It also ensures that independent directors act in a coordinated manner to challenge management decisions that are not in line with longterm shareholder interests. Today, Bharti Airtel is one of Asia’s largest telecommunication companies.