The Godrej split holds valuable lessons for family businesses

Founded in 1897 by two brothers, Ardeshir Godrej and Pirojsha Burjorji Godrej, the group now has fourth-generation leadership. The family pact divides the conglomerate into two groups: Godrej Enterprises and Godrej Industries. One faction of the family gets unlisted companies and a substantial land bank, while the other gains control of five listed firms.

Family businesses go through various ownership stages through their life cycle. Typically, they progress from ‘controlling owner’ stage, where an individual owner controls the business (often with a spouse) to ‘sibling partnership’ stage, where siblings jointly share ownership and control, and eventually to a ‘cousin consortium’ stage, where a group of cousins assumes ownership control, adding diversity and complexity to family and business dynamics.

Complex structures of ownership are exemplified by the Godrej group, which began as a lock-maker, operated at a sibling stage and transitioned to its second generation without a change in ownership structure. It was led by the four sons of Pirojsha Burjorji Godrej, as Ardeshir Godrej died childless, and the business moved into the cousin consortium stage upon the entry of the third and the fourth generations. 

With the third generation having joined the business in the 1960s, Godrej has been in its cousin consortium stage for nearly six decades. This stage is often characterized by issues such as accepting differences among various branches of the family, managing issues related to sharing of wealth and its psychological impact, redefining and realigning family members with the family mission, and in general maintaining unity and organization within the family.

Interestingly, after the split, the ownership structure will likely witness a reversal to the sibling partnership stage in the next round within each newly created entity or sub-entity. The textbook characterization of this stage highlights common issues such as sibling tensions arising from the distribution of power and perceptions of fairness, balancing dividends with reinvestment and hiring professional managers.

Also read: Godrej family settlement agreement: Lessons to learn to save disputes and taxes

An important lesson for family businesses is to understand the evolving dynamics of family ownership, recognize the challenges of each phase and work proactively at mitigating the risks associated with various ownership structures.

The Godrej family had institutionalized an internal structure that accorded equal ownership rights to all family members, in order to avoid conflicts arising out of these issues. Such clear structures and transparency in ownership served the group well throughout much of the cousin consortium stage. 

However, cracks within the Godrej family reportedly began to appear almost a decade ago, primarily over the jointly-owned real estate business. Despite internal differences, the group’s governance mechanisms prevented these from becoming public and did not hamper the competitiveness of various businesses.

A second lesson is the importance of clear governance mechanisms at both the family and corporate levels to support the group’s corporate strategy. Effective governance structures can help manage and mitigate conflicts, ensuring that personal disputes do not interfere with business operations. They provide a framework for decision-making, conflict resolution and strategic planning, aligning family interests with business goals. 

Note that family groups face unique challenges in balancing multiple goals that encompass business, ownership and family objectives. These businesses may adopt different orientations, being family-first, business-first or family business-first entities. Unlike family-first or business-first entities, which prioritize family or business aims respectively, family-business-first entities strive to achieve both business performance and family cohesion.

Also read: The Godrej family saga: Business succession should be led by a common vision

Details of the Godrej deal again illustrate how the family has prioritized the family as well as the business. The pact was concluded in a “respectful and mindful" manner, featuring a unique “no-compete" clause for six years, seeking to ensure family harmony and brand reputation. Under this clause, no entity will compete in the other’s market for six years, except in real estate. Even after this period, new competing ventures cannot use the Godrej brand. This helps maintain brand integrity and prevents brand dilution.

A third lesson from the Godrej split is the need for family enterprises to focus on keeping families in business, rather than just preserving the family business. Trans-generational legacies are important, but must take into account rapid changes in the business landscape, the evolving nature of families and also the differing mindsets and aspirations among family members. Family groups can reconcile these contradictory forces through various strategies, with a split being only one such strategy. 

In this context, the split need not be seen as a vindication of the saying, “Shirtsleeves to shirtsleeves in three generations." Rather, a split may serve as a precursor to a surge in innovation associated with a controlling-owner stage, unlocking the entrepreneurial potential of the next generation and enabling younger leaders to re-imagine the group’s legacy.

These are the author’s personal views.