Bhupesh Bhandari: Constitutionally yours

The latest fad amongst Indian business families is to sit together and write a constitution for the family. The Raos of GMR were the first to do so some years ago; the Bharatrams of SRF have written one; and, if industry gossip is to be believed, the Godrej family too wants to put together a constitution. Indian School of Business Professor K Ramachandran, the foremost authority on family business in India, says two families have sought his help to write a similar book of rules for them, the do’s and the don’ts. There are about a dozen such experts in the country. Most of them say business isn’t bad at all.

The idea behind a constitution is to hold the family together. Most families have come round to the conclusion that a split erodes wealth, dissipates entrepreneurial energy and creates bad blood. The only people who benefit from a family split are lawyers. The longer the conflict, the heavier their bank balance gets. But business suffers. Ramachandran likens it to an amoeba. It reaches a certain size and then splits into smaller parts; each of the smaller parts grows to a size and then splits again. The process goes on and on. Conventional wisdom goes that no family stays together, without a split, for more than three generations.

There has been no objective study so far to judge whether a split is good or bad. The impact on all stakeholders — shareholders, employees, associates and customers — needs to be assessed in any such effort. The example of how companies, many of them global giants, run by professionals have come to grief has brought the role of founder families into focus one more time. Long-term vision, new-age wisdom says, can come from entrepreneurs alone. Hence the need is now being felt to keep the family together. Ramachandran recounts the example of a Central India group where the younger sons of the patriarch are trying hard to undo the split he has set in motion.

What does a constitution do? All family members wear two hats in business: shareholder and manager. The shareholder bit is simple to manage because shares are easy to split amongst family members — each branch gets its part. The problem arises in the second act. Most of the times, fights erupt amongst family members over responsibilities in the business. Everybody, of course, wants the corner office in double-quick time. This is where a constitution can help.

A constitution lays down to the minutest detail what the family should do under various circumstances. How can younger members of the family, straight out of college or business school, join the company and at what level? Norms for allotment of board positions to family members, succession, salaries and allowances, education, pocket money for overseas trips et al are all laid down in great detail in most constitutions.

The question that arises is, are such constitutions foolproof. Can they prevent all splits? Please remember that this is not a legal document; what is written in the constitution can be contested in a court of law. Some family members are bound to find their way round the prescribed norms. A consultant who works with several families recounts an incident where a lady wanted a lateral entry for her son, mint fresh from a business school, into the family business, though the family constitution mandates work experience outside the company. The summer training he did at the business school, she argued, was good enough! Digging deeper, the consultant found that a senior position in the company was essential to improve his marriage prospects!

The task, therefore, is to write a robust constitution that offers no loopholes. Here, the GMR constitution is often talked of as the right one, a model for others to follow. The Rao family studied for six to seven years what are the issues that can cause discord in a family. It then got British family business consultant Peter Leach to codify the constitution. It lays down the family values, and a framework to resolve differences. Succession norms have been elaborately laid down in the constitution. It even goes to the extent of prescribing media exposure for the family members. This ensures one member does not hog all the media attention. It also provides a forum for the spouses of family members to get together and iron out all knotty matters! It’s an open secret that family differences often start with disgruntled spouses. There are rules for family holidays as well.

Interestingly, the Rao family constitution says that the family will drive any new GMR venture for a while, and once it has stabilised, hand it over to professionals to run. For any project to get off the ground, it assumes, good quantities of entrepreneurial energy and drive are required. And this is exactly what the Raos want to provide in the initial years. This is different from the Dabur model, where the Burmans are not involved in the company’s day-to-day affairs at all, though some of them are on the board of directors. They are free to channelise their energies outside Dabur, and most of the Burmans have their own independent ventures. The jury is still out if Dabur could do with some energy boost that promoters alone can provide.