Focus on competence, not dynastic succession

There are family firms that are owned and managed by family members and have survived many generations, like the 120-year-old, $4.1 billion in revenues, Godrej Group. There are family firms that did not survive transition of leadership to the second generation of family members like in the case of United Spirits. Vijay Mallya destroyed the socio, emotional and economic wealth created by his father Vittal Mallya.

There are family firms that professionalised the management and survived, like the Aditya Birla group and the Tata group. These firms are run by capable non-family business heads or CEOs while the strategic direction for the entire group is provided by the group Chairman, Kumar Mangalam Birla (family member) in the case of the Aditya Birla Group and Natarajan Chandrasekaran (non-family professional but a Tata group loyalist) in the case of the Tata group. Lastly, there are family firms that passed on key leadership positions to only family members and yet did well. Examples include the Reliance group, Bajaj Group and HCL group.

It is very difficult to generalise and say that dynastic succession is bad for family firms. In the end, firms that are well-governed and professionally managed, irrespective of being family-managed or not, are the ones that are sustainable.

It is easier for the incumbent family business leader to appoint someone from the family as his successor, as the family member is believed to be entrenched in the same values and hopefully have the same vision for the company that the incumbent leader does. There would be no cultural misfit, which is possible when hiring a professional CEO as happened in the case of Infosys. While Vishal Sikka was considered to be capable, compatibility with the culture and values that were set by the founders of Infosys became an issue.

While values and culture are important, they alone cannot create and maximise shareholders’ wealth. Passion, qualification and capability to handle the business are important.

The scion should be professionally qualified and be able to retain the “founder’s mentality” or entrepreneurial spirit that had helped build the business in the first place. The successor should also be capable and mature enough to handle a leadership position, understand the importance of good governance, and navigate the firm to greater heights. If the family scion lacks these traits, it is better to look outside for better candidates to lead the company.

Shrinking family size, children brought up in an open environment where they are aware, independent and have interests different from their family business, has forced many family businesses to look for a CEO outside the family. There are two options — choosing someone who has grown up in the ranks in the company, shares the vision of the founder and understands the culture of the company, and second, someone from outside the company who has proved his mettle elsewhere.

The problem in the first case is that the chosen successor has always worked under the shadow of the family business leader and may not be able to handle the various ups and downs if the family business leader is not available to guide, or is there as a shadow.

The problem in the second case may be lack of shared vision and disruptions that may not receive the approval of the family, even if they are good for the firm in the long run.

Hence, the job of finding a non-family CEO is not easy. But it must be done. The earlier the search for a successor begins, the better it is for the family and the firm. The chosen successor should be allowed to work alongside the family business leader for a few years and get acquainted with the vision of the founder, get acclimatised to the firm’s culture, understand the governance mechanisms, discuss the changes that are needed for improvements in processes, systems and structure of the firm, and prepare to do it alone when the transition happens. Or, there should be a clear induction and detachment process developed and implemented efficiently.

The family business leader should be prepared to truly retire once the transition happens. Interference and encroaching upon the decisions of the CEO later on would lead to a lot of confusion and creation of “no-man’s land”, that is, areas where no one takes a decision as the roles are not clear.

The debate is really about competence versus entitlement. Entitlement leads to destruction whereas competence enables the successor, family or non-family, to become the steward of the company, working towards the benefits of all stakeholders and embracing the objectives of the firm. Therefore, dynastic succession is not necessarily bad as long as it is accompanied with merit.