Article: Easing out of family boardrooms

C-Suite

Easing out of family boardrooms

History has witnessed the fall of many well-built business empires while trying to serve every family member’s plate equally. How such family-owned enterprises segregate frontline leading positions of the company is a process to learn.
Easing out of family boardrooms

With scams and family feuds galore, many family-owned businesses have started taking corporate governance much more seriously today than ever before, not just because of regulatory mandates. Yes, they are still reluctant to let go of male dominance and power, going by the resistance to the Kotak Panel reforms. 

There are many silver linings though: Crompton Greaves Consumer Electricals has set the pace by relying on both internal referrals and external headhunters for independent directors. Harsh Mariwalla of Marico has revamped the CEO evaluation metrics to include succession planning. Many family-owned companies have started inviting potential board successors to attend board meetings either as observers or invitees to assess their capabilities to work with the family business culture. Indian promoters are finally embracing transparency, perhaps?

How these businesses will implement the requirements of separating chairman and MD roles, and including women board members will be interesting to watch in the coming year, as the extension will soon be ending. Hitherto these companies were inducting female members from the family as directors. Thyrocare promoter had inducted his daughter who was just 27. Godrej and Reliance have done the same with children. Will SEBI disallow this practice when the amendments come to stay? What will such powerful people do? Their children may not qualify for board positions but may be appointed as executive directors.

The dilemmas such as these will cause a lot of headaches for the family boards soon. Perhaps pandemic may delay the reforms but for the sake of minority investors, let us hope SEBI stands firm on no more extensions. 

If the promoter’s child is not suited to become the CEO, will he or she be interested in continuing to create more value? The promoter will retire and fade away like the Mahindras are planning? Making this transition is a tough one but the right thing to do especially when the family is big with many ambitious members.

Family businesses have always offered endless opportunities for drama and disputes, all the way from Shakespeare’s King Lear to the telenovelas. Those who actually own and manage family enterprises, however, know that problems arise less often from such flashy power battles than through long-term, simmering unresolved issues.  

One popular venue for these squabbles is the shape of the family business board. Enough has been written on shaping a good board for the family firm, nurturing family governance skills, seeking outside independents, and so on. Less discussed, but a common sore point, is traffic out of the boardroom – when, why and on what terms do family members rotate off the board?

One problem we see is that it is difficult to impose family business board term limits. It is a challenge to get grandparents to leave the board. The generational rotation is often a concern. The parents’ generation just doesn’t want to get off the board.

The downsides of this can be subtle, but obvious – uncertainty, assumptions of entitlement, and a rising generation frustrated that they don’t get to sit at the “grownup’s table.” What can be done? As an analogy, wait forever like Prince Charles or get lucky like Stalin?

Formal, written board policies and procedures benefit any business and are valuable for family board tenure. As part of upgrading the board’s housekeeping on meetings, agendas, information, etc, add the issue of board election procedures. Board terms and nomination rules are often vague in family enterprises. Promoters may assume they can stay on board until their funerals for the valid reason that proper board election terms don’t exist. Push to spell these out in a structure everyone can accept. 

Once the rules are formalised for getting on the family business board, step two is to discuss sunset rules. A firm limit of a specific number of terms may be a harder sell than just requiring members to rotate off after some years, with the option to re-nominate later. Age limits on the board are even more contentious. A survey by American family business boards found that less than 10% impose a hard retirement age. A better approach might be this: Blend retirement into a solid board succession and talent plan, gently asking members when they plan to retire so the needed skills and generations can prepare to join. Get them to think about the subject.

Other approaches could be “director emeritus” or “ambassador” status. Ask members past a certain age to form an advisory emeritus council for the company, or serve as a representative in dealing with customers or employees. The latter can actually work well – major clients may appreciate having a retired promoter as their liaison with the company.

It is not easy to get promoters to step aside, and forcing anyone to let go of power never worked in Indian politics too. There are a few exceptional organisations that have ushered in some progressive governance changes. Mahindra, Bajaj, Dr Reddy’s, Emami, Murugappa and TVS are some of the family enterprises that have adopted family constitution to segregate issues of governance and family. They have been able to align family valued with business growth issues. Disputes within the various factions of the family are addressed differently from the business.

Not being able to hand over the MD baton to a son or daughter is a painful situation for a promoter, but this has to be accomplished for the larger goal if professional management is more desirable for the business. 

There are a few steps family boards can embrace for long-term success: 

  • Implement democratic principles. Decision-making could be made more participative and appointments to the board can be based on democratic principles to eliminate nepotism and discrimination.
  • Bring clarity on management and leadership. Who will succeed the promoter after his demise/retirement has to be planned well in advance to avoid confusion and turmoil.
  • Draw a line between business and family. Communicate clearly to the board members on the roles and responsibilities as a business director and family member. Any family-related decision will have to be taken by the head of the family while the business-related decisions should be left to the CEO/MD. 

 

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Topics: C-Suite

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