Family businesses now have the best of both worlds - the latest in technology and the freedom to make quick decisions

A strong votary of family businesses, Hon. member Mr. Adi Godrej is quite candid in admitting that his family does not face any bitterness because it has more businesses than members! He was speaking as guest speaker at the last meeting

"Family businesses, decried for long as .capricious, short-lived, small enterprises ., now appear to be enjoying the best of both worlds. Thanks to their size and the freedom to make quick decisions, they can incorporate the best of the latest technology, hire the best brains in the business and take on multinational corporations on their own terms.

While large international corporations, or MNCs, .have to pass through three or four barriers, going to and fro on decision-making., family businesses enjoyed a major advantage in this area.

Earlier, when MNCs employed good business processes such as technology and so on, it was difficult to compete against them. But today, most large Indian family businesses had adopted these techniques and, with the advantage of quick decisionmaking, would soon become worldbeaters.

These and several other important points were made at the last meeting by the Club.s Honorary member, Mr. Adi Godrej, the eminent industrialist and Chairman of the Godrej Group (which has been privately held for more than a hundred years) while speaking on .Family businesses in India . the past, the present and the future..

(Roda Billimoria, who introduced Mr. Godrej, said the word .Godrej. stood for safety, security, dependability and reliability. From safes and locks to soaps, dyes, refrigerators, furniture, property, fruits and vegetables, to wine and cheese, the family .has covered the world for us., she pointed out.

(She also noted that Mr. Godrej had been associated with several trade and business organisations and was also on the governing councils of various well-known educational institutes.)

Mr. Godrej.s formal talk (reproduced verbatim on Page 7) covered the entire gamut of the trials and tribulations of family-owned businesses in India and the world. But in the subsequent question-answer session more light was shed on issues affecting family-owned businesses and on his family.s dalliance with public equity.

It was Shanta Chatterji.s question about the advantages of quick decision- making that had got Mr. Godrej started. But it was in response to Farokh Balsara.s query about the pitfalls faced by Indian family-owned businesses going multinational, that he elaborated his point in greater detail.

Mr. Godrej said one of the major pitfalls was the cultural issue. The ability to absorb other nationalities into one.s management stream was very important. For many years after it globalised, companies in Japan sent senior Japanese managers all over the world. But now they had started incorporating senior managers of other nationalities and were finding them useful.

.I think we need to do that as soon as possible. I think Indians tend to work very well with various nationalities and that.s an advantage..

Welcome to the Club, Honorary member. Mr. Adi Godrej is received by Programme Chairman Pranay Vakil (from left), IPP Dr. Rumi Jehangir and President Ashish; and (second photograph) answers members. questions with aplomb

However, it was important to learn how to .globalise. management. Global companies would not necessarily continue to be successful if managed only from Bombay or Bangalore. They would .have to be managed from all over the world..

To PDG Manibhai Doshi.s poser about Indian family businesses having short lives, he said that globally, 95% of family businesses disappeared at the end of the first generation. Few survived to the second generation and fewer still to the third.

To PDG Manibhai Doshi.s poser about Indian family businesses having short lives, he said that globally, 95% of family businesses disappeared at the end of the first generation. Few survived to the second generation and fewer still to the third.

However, there was another phenomenon that had to be highlighted . when Indian family businesses split up, they created extra value.

.Whereas I belong to a family business which now has the fourth generation working in it, I know of many family businesses which have split up at the second or third generation . and have added value. Therefore, all models (of family businesses and their cessation) should be welcomed and we shouldn.t sneeze at one or another,. Mr. Godrej emphasised.

But just what was the difference between a family business and a nonfamily business, asked Burjor Poonawala.

Mr. Godrej said that as businesses became bigger and their capital needs larger, one of the ways out was to go public. It could still be called a family business though it was public and controlled by the family.

But sooner or later, the capital needs could become so high that the family.s share-holding would dilute to a very small percentage. And the family role would disappear over a few generations.

On the other hand, there were family businesses that remained private even though the future generations were no longer interested in them. Sometimes, they brought in professional management to run the business, while the family itself remained a mere shareholder. Or, they would sit on the Board but not manage the business.

In such cases, even though the business was owned by a family, it was no longer a family business.

This happened all over the world. For example, the Japanese company Sumitomo, which was more than 400 years old; however, even though it still carried the family name, it was no more a family business. In fact, it was doubtful whether any .original Sumitomo. remained a shareholder today.

And this is our friend Roda Billimoria. Ashish introduces Roda to Mr. Godrej, while Programme Joint Chair Sameer Tapia awaits his turn. In the picture at right, PP Vithal Palekar gestures to Farokh Balsara (extreme left). In the centre is Mr. Godrej having a quiet word with Sunil Vaswani (partly seen)

.I think mainly because of capital needs, you dilute, dilute, dilute. and then it doesn.t remain a family business any more. In Europe and America, most of the companies which started originally as family businesses are no more family businesses. .

When Jagdish Malkani asked about the .reticence. of the group going public, Mr. Godrej said there were many benefits to remaining private if a company did not need much capital. For then it could have strategies that were more long-term than in the case of public listed companies. (Of course, public companies could also have successful long-term strategies.)

But in a private company it was generally easier to implement a long-term strategy which could entail losses over a period of time before the business was built to a critical mass, size and profitability.

.If you don.t need much capital, and fortunately most of our businesses are not capital-intensive, then raising capital from the public makes little sense..

As for Jagdish.s pointed question about the advantages of market capitalisation (or market-cap), Mr. Godrej stated emphatically that he did not see great value in it.

.Market-cap is not a great value because if you want to raise money based on your market-cap, you could do it with private equity, or you could do it with loans. I don.t think it.s a critical issue. The main point is whether you need capital or not. Most of our businesses don.t need capital and therefore we have kept them private..

But hadn.t Godrej gone public in some companies, asked PP Arun Sanghi. .Was it an experiment?.

.You could say that,. replied Mr. Godrej. .But I don.t think there are advantages in going public. For example, you are obliged to get strong independent directors from outside. They are welcome... but that doesn.t mean you can.t get strong independent directors in private companies. .

The only two points on which he was willing to concede ground to going public were the areas of board meetings and capital gains tax.

While in private companies the tendency was to have one-hour or two-hour board meetings, public companies usually had day-long affairs. .In a way, the discipline of being a public company does help..

The second, and biggest, advantage was that there was no capital gains tax on the sale of the shares of a public company.

.It.s a major advantage that will get a lot of people who would otherwise have not gone public, to go public. It.s an unusual situation in India. If you sell the shares of a private company, you pay capital gains tax, even if it is within the group itself, but not in a public company (after one year)..

Mr. Godrej agreed with Arun that the Godrej Group had gone public with one company as it needed capital for expansion (later, that company was split). In a year.s time, he revealed, Godrej Property would go public because it needed capital for growth.

Vijay Mansukhani wondered whether it was necessary to have a set of rules to guide succession and perquisites for all family members.

Saying that it was always better to have a constitution, whether written or unwritten, Mr. Godrej stated that it was not easy to agree on a constitution in the first place.

Many European family companies had constitutions, but usually after the family became less directly involved in the business and it was just a question of how to manage the money, how to divide the income and so on.

There were many experts who guided family businesses and helped them to arrive at a constitution, advised them on how to work with each other and so on.

Finally, Anuj Arenja asked the key question: .What about family conflicts? Don.t family relations usually suffer? Is there not bitterness?.

At which Mr. Godrej sat back and replied: .I always say that we are lucky because we have more businesses than family members!.

The vote of thanks was proposed by Sameer Tapia.