The elegant Godrej split: A blueprint for India Inc?

There is class and elegance written all over the family settlement of the Godrej family, exemplifying the dignity with which its members have conducted themselves over the decades. Four years in the making, it seems thoughtful and—more importantly—respectful in addressing mutual concerns and achieving sustainable outcomes. It also displays proper succession planning at the group level for its substantial assets, whilst balancing it with responsibility to its stakeholders and the larger social responsibility associated with such big businesses.

When these crucial aspects go wrong, we have seen that massive value destruction can follow, as with the Anil Dhirubhai Ambani Group, Thapar Group, etc.

The Godrej agreement could therefore be a blueprint for Indian promoter-driven companies looking to make family rearrangements in the context of succession planning. Like it or not, many such companies will face similar situations with every generational change. And with more than 55% of India’s listed entities classified as promoter-held, it is a matter of significance for India Inc and its minority shareholders.

However, in my view, creating large and globally competitive Indian MNCs should be the driving force behind asset carve-ups for succession planning, rather than effecting shifts in control through a redistribution mechanism. I borrow from global examples to make my point.

In the US, celebrated examples of family created businesses among Fortune 500 companies include Walmart (Dalton family), Ford Motors (Ford family), Hearst (Hearst family), Cargill (Cargill Macmillan family) and Koch Industries (Koch family). These demonstrate that, whilst family control is retained through shareholding interests, the management of such mega corporations can be

delegated to professional managers backed by large institutions. Similar is the story in Germany. Think of BMW (Quandt family), Henkel (Henkel family), Merck (Merck family) and Bosch (Bosch family). In Sweden, the Wallenbergs control significant shareholding in its mega corporations like ABB, Volvo, Erickson, Electrolux and others, with their management left in professional hands. It is similar with other European businesses like H&M (Persson family). They all illustrate how family ownership can work with professional management.

The driving force for this governance mechanism has been the size and complexity of these corporations, as their ambitions were of global scale. Majority shareholder families have become incredibly wealthy in due course, while being relieved of management responsibilities. For these arrangements to work, families in many cases must acknowledge their lack of expertise in management.

In Japan, the approach to family-owned businesses with professional management varies from Western models to some degree. While family-owned businesses are still common, they display unique characteristics in how they operate. Japan is known for its Keiretsu system of interlinked businesses, with companies within the same group holding cross-equity in each other. 

While these groups may have family ownership at their core, they often have professional management teams overseeing day-to-day operations. Hence, succession planning for family-owned Japanese businesses is crucial. It involves meticulous grooming of family members to be ready for the mantle of leadership. Mitsubishi, Matsushita and Sumitomo fall in this category. However, professional managers are sometimes brought in from outside the family to ensure continuity in case an heir apparent does not have the desired skill set. Nissan, Sony and Toyota are good examples of this.

Generally, family-owned businesses in Japan blend traditional family values with modern professional management practices to foster loyalty and stability, and also to prioritize long-term sustainability over short-term profits, which have been cornerstones of Japanese family businesses. Professional managers are tasked with implementing strategies that align with these values. There is tight alignment in Japan and it is fair to say that some families seek to control the professional managers they hire quite tightly at times. However, the last two decades saw a move towards Western practices of favouring skills and merit, rather than lineage—as is common in the East. It is worth noting that no major Japanese family-owned company has been split into smaller configurations.

Most Indian companies are pretty small by global standards. Splitting assets into smaller configurations will compromise prospects of achieving global scale. As these businesses spread their wings internationally, this is a factor they will need to consider whilst demarcating assets for the next gen. Retaining management control within the family for such businesses as they expand in size and complexity may not necessarily be in line with either the expertise or competence of the next generation (or indeed even the latter’s interests).

In due course, India will need to carve out its own path based on well established Eastern and Western models. The Reliance group of Mukesh Ambani’s family will provide an important case study over the next two decades as the reins are passed on for one of our best managed companies. The family patriarch has demonstrated extreme care and caution in handling succession and how assets will be carved out. Of similar interest will be Wipro and HCL, among others.

We have seen enough examples where the next generation’s desire to control management has resulted in significant value destruction of assets created by their forefathers. In the interest of India Inc and its minority shareholders, close attention must be paid to such family arrangements.

Prabal Basu Roy is a Sloan Fellow of the London Business School and advisor to chairpersons of corporate boards.