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In 1997-98, when I was working for a newspaper, we ran a front page story on Keki Dadiseth quitting Hindustan Lever to join Tata Sons as the vice-chairman. The report, in passing, mentioned that Dadiseth being a Parsi was a natural fit for the Tata group. Eventually, it turned out that the news report was incorrect as Dadiseth moved to Unilever. But the day the story appeared, all hell broke loose.

The top brass of Tata Sons reacted very adversely. Not so much about the report being incorrect, but about the “Parsi" angle. The point being made was that the Tatas were neither a “family-run" nor a “community" company. As such, lineage or religious affiliations have no bearing on their choice at the leadership level. Or, for that matter, at any level.

Even otherwise, no effort or opportunity is missed to position the group as a “widely held, professionally managed conglomerate", with no link between ownership and management.

Many a time, Ratan Tata has made it a point to highlight that he doesn’t own a single share of Tata Sons. Not that it would have been in violation of any regulation, or that it would have been ethically wrong to do so. The only reason why this point has been made time and again is to further the position of the group as “professionally run" and distance itself from the tag of being a “family-run" firm. For, in the corporate caste system, family-run companies are seen as one notch lower in governance and ethics than the professionally managed ones.

Now that Cyrus Mistry, son of the single largest shareholder in Tata Sons, has been appointed as the chairman designate, this needless prickliness towards being seen as a “community" or “family-owned/run" firm must change. That the son-in-law of the single largest shareholder was not only a serious candidate for the chairmanship, but will also be on the board, makes the “familial link" even stronger.

Cyrus P. Mistry appointed deputy chairman of Tata Sons

Now, without exception, the biggest private companies in India—Tata, Birla, Bharti, Reliance and Essar—are all family-owned, led or driven. Associated with this is also a strong structure of community relationship.

There has been some criticism of the selection process as being farcical. One can be uncharitable and suggest that it was indeed unnecessary. Rather than going around looking for professionals, the board might as well have selected Mistry in the first place. But the search and selection committee is a clever compromise between a technically above-the-board process and a qualitatively determined outcome.

A charitable, and perhaps more appropriate explanation might be that even though the selection committee was very sincere in looking for people beyond the confines of the Bombay House and the community, the factors of the cultural context and the larger socio-economic milieu, within which the organization functions, weighed on the mind of the members in making this choice.

The decision to select Mistry is a pragmatic one that acknowledges the complex set of relationships in the Bombay House and, more importantly, the larger sociological context of India. In a way, this appointment is a reproduction of the social hierarchies in the corporate space.

This facet becomes critical during periods of transition in large institutions that have a long history and an institutional memory. Initially, what matters more than pure professional competence is the “social" authority. To go back in time, in 1991, Ratan Tata’s battle with the satraps could have easily got coloured as community persecution, had he not been “from within". In the case of Mistry, that comfort will be provided by the lineage and the ownership.

Hence, the appointment must not be assessed on the basis of the Anglo-Saxon-inherited model of corporate organization. That is neither a prerequisite for success nor is it necessarily a better form of organization.

On the contrary, independent research has shown that family-owned companies perform better: over the long term, such firms tend to achieve superior returns and higher profitability than companies with a fragmented shareholder structure.

The track record of the Indian family-led listed companies is in line with the cross-country evidence that listed family firms outperform their listed non-family rivals anywhere by 25-40%.

The real reason for listed companies with a significant family influence doing better is the longer-term strategic focus of the controlling shareholders and management, instead of operational focus on trying to surpass quarterly results.

The time may have come to stop being apologetic about an Indian corporate organization that is a natural extension of the socio-cultural context of our society. It is much more sustainable and relevant to have a business organizational structure that is organically linked with the larger civil society rather than just a transplanted institution.

Haseeb A. Drabu is an economist, and writes on monetary and macroeconomic matters from the perspective of policy and practice. Comments are welcome at haseeb@livemint.com

Also ReadHaseeb A. Drabu’s previous columns

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