The family way

Dynastic governance constrains India Inc

The succession of Roshni Nadar Malhotra as chairperson of HCL Technologies, replacing her father, Shiv Nadar, who turned 75, is another example of an Indian corporate tradition. The move attracted little comment because the practice of founder-owners passing the baton to their children is the old normal. This is the same reason no one found it unusual that Mukesh Ambani introduced his children at a Reliance Industries (RIL) annual general meeting. Family participation in management is taken so much for granted that it creates few ripples in the stock markets, which understand that such accessions do not really entail a substantive change; in both cases the founders were complying with company law. In HCL’s case, Mr Nadar continues as de facto managing director (MD), although the official title changes to chief strategy officer. Besides, HCL already has a chief executive officer in place.

In and of itself, the dominance of family-owned and -managed companies in the Indian corporate-scape should not matter. In any case, some of them have taken their companies to a new level — Mr Nadar himself is an example of that. So have Azim Premji, who handed over the chairman’s baton to his son Rishabh just a year ago, Mukesh Ambani, and many others. There is no uniform pattern either: While one brother has done well, his siblings or relatives have fallen by the wayside. Consider Anil Ambani who has seen a spectacular fall in the fortunes of the companies he inherited. Or, the Birlas. While Kumar Mangalam Birla has kept the show going, others in the Birla family have failed to do so.

But the uber-globalised and competitive world of the 21st century throws up different issues. Among them, maximising organisational talent has become a critical requirement. By their nature, dynastically inclined corporations tend to constrain that dynamic, a factor the storied American corporate families learnt early on in the last century. It is one thing for founder-promoters to dominate management since it is their vision and ability that drive their creations (many of the Silicon Valley giants are at this stage). It is also possible that their sons and, increasingly, daughters, are capable, even brilliant individuals. 

But as long as the possibility of dynastic succession remains, the line between capability and entitlement will always be a thin one, and the predilection to favour a dynast creates an unequal playing field for the rank and file of professional managers. It’s a fact that while a professional manager can be easily removed by the board if he has failed to deliver results, dynastic successors have little concern on that front, either because the board members have been handpicked by them and are generally yes-men, or their dominant shareholding makes their removal a difficult exercise. Such privileging of family in succession stakes has the long-term effect of constraining the market for managerial talent — it is no surprise that a job in a multinational in India remains coveted even when salary differentials at the upper levels are narrow. It may also explain why India may have many multinationals in the strict definition of the term, but it has almost no truly world-class corporation — unlike Japan or South Korea, where family-owned businesses did not preclude the promotion of professional managerial cadres. The perils of dynastic succession are never more starkly evident than in the decline and fall of India’s oldest political party. It is a lesson India’s family-owned giants would do well to heed now.