Tata Group may look beyond the family for successor

This month, the Tata Group set another milestone: it became the first Indian family-run business to look beyond the family for a successor to Tata, who is due to retire by the end of 2012.

Tata has no apparent successor, leaving the business founded by his great-grandfather potentially vulnerable.

But his decision to look within the company, as well as abroad, will go some way in dispelling some of the negative notions of family firms in India, highlighted by the bitter five-year feud between the Ambani brothers.

“Change has taken a while; they’re evolving relatively slowly because business is seen as an emotional link between founders and their assets, and they tend to want to pass them on to the next generation,” said Barclays Capital, Managing Director of Advisory Frank Hancock.

The Ambani feud has been held as an example of how blood ties can affect business— lack of succession planning, opacity, and erosion of shareholder value. These are perceptions that India’s top family firms, which have dominated the country’s corporate landscape for over a century, are trying to shake off as they face more competition, tighter regulations, and a new generation of leaders takes the reins.

Business leaders and politicians tend to retire late in India. The Chairman of family-owned conglomerate Mahindra & Mahindra is 86 years old and has been at the helm since 1963. Prime Minister Manmohan Singh is 77, and his finance minister 74.

Analysts say the new crop of leaders, who grew up in post-reform India, are compelling proof of its growing confidence and ability as an emerging economic powerhouse. Others say they are an unhappy reminder that family firms, which make up 13 of the 30 firms on Mumbai’s blue-chip stock exchange index, are still plagued by weak management and a lack of transparency that curtail growth and dissuade investors.

In a Bain & Co survey on corporate governance in Indian firms, more than 75 per cent of respondents said their board did not discuss CEO succession planning at all; fewer than a fifth had any role—formal or informal— in planning CEO succession.

“Succession is an issue. Obviously, you worry if someone is being put in place because of family ties rather than competence,” said Michiel van Voorst, Senior Portfolio Manager at Robeco in Hong Kong, which has 30 million euros ($38.7 million) of a 700-million-euro fund invested in Indian firms.

“There is a risk factor. We’ve looked at some family-run companies in India and decided not to invest in them because of the additional layer of uncertainty,” he said.

No cakewalk

India has a long history of entrepreneurial ambition driving sectors from steel to software, with Reliance Industries(RELI.BO) founder Dhirubhai Ambani and mobile tycoon Sunil Mittal representing hope to millions that even a school teacher’s son or a small business owner can achieve fame and fortune.

Until 1991, family-run businesses were protected by a “license raj” that kept foreign firms out.  Patriarchs ran their companies like private fiefdoms with little regulatory oversight, much like the politically connected tycoons of Southeast Asia. In the old days, sons started at the family firm early, working their way through the ranks and waiting in the wings till the patriarch died, with the oldest son usually taking control.

Now, sons and daughters, armed with degrees from top business schools in the West and stints at multinationals, are striding into the boardroom early, confidently drawing up new strategies.

“The context today is very different, and kids also realise they have to earn the right to a seat on the board, that families can hire professional managers if they’re not interested,” said K Ramachandran, a professor at the Indian School of Business.

Every heir has it different— 30-something Aditya Mittal, a Wharton school business graduate, worked at Credit Suisse before becoming Head of Mergers and Acquisitions at Mittal Steel, where he was key to the 26-billion-euro takeover in 2006 of Arcelor.

He is now Chief Financial Officer at ArcelorMittal(ISPA.AS), headed by his father, billionaire Lakshmi Mittal.

Skin in the game

It is not all a cakewalk— India has a fair share of failed family businesses and heirs who ran firms into the ground. An admission of fraud last year by the Chairman of Satyam Computer Services shook the deep-rooted faith in family-owned businesses.

As did the Ambani feud, which was peppered with lobbying, public outbursts and court fights that prompted a top judge to tell them to go back to their mother to settle their differences.

Others, including the Godrej Group and the Munjals of Hero Group, a joint venture partner of Honda Motor, have drawn up succession plans to avoid such a spectacle. Infrastructure-focused GMR Group even has a forum for spouses to air grievances and spells out a clear role for professionals.

Others, like the Bajaj Group, still do it the old-fashioned way, hashing out differences over dinner at home, as they did recently when the third generation of owners fell out over succession and ownership of the group, one of India’s largest, with interests in autos, financial services and appliances. “We were able to reach an amicable settlement.

It took time, but we did it without involving merchant bankers or middlemen. It was just us,” said patriarch and Chairman Rahul Bajaj. Slowly, Indian firms are following the path of European and American firms of yore such as the Rothschilds, Rockefellers and Vanderbilts, who relinquished management.

There are also a few rare instances of families selling out: apparel exporter Gokaldas sold to the Blackstone Group , and brothers Malvinder and Shivinder Singh, after years of running drugmaker Ranbaxy Laboratories, founded by their grandfather, sold out to Japan’s Daiichi Sankyo.  There will be more such instances, Barclays’ Hancock said.

“Cultural changes will lead to exits. The new generation is much less focused on the family business. They’re not necessarily beholden to daddy. They’re eager to strike out on their own.” Still, there is some merit to having the family involved.

“They have more skin in the game because it’s their capital, their name and their children’s future at stake,” said Anjali Bansal, managing partner at consultancy Spencer Stuart India.

“There is value to having family in the business if they are the right people with the right skills for the right job.”