Family first or business first: Leadership succession in Indian businesses

Akash Ambani’s elevation as the chairman of Reliance Jio, which has a turnover of over Rs 80,000 crore, is the latest high-profile succession announcement in Indian family business. Because of the very high holding of the Ambani family in the company, the critical role Jio is playing in the telecom sector, and the young age of the new chairman, the new appointment has become a trigger to understand leadership succession patterns and their implications.

Criticality of succession management

Leadership succession is the most critical phase of a business as it determines the successful continuity of the business. Like a relay race, the choice of the runners and the decision about ‘who will run’, ‘which lap’, and ‘why’ determine the team’s success possibilities. In the context of a family business, the decision is influenced by both business and family factors.

The dilemma most family business leaders face is to decide the criteria for the selection of a successor. Should it be primarily family membership or business management capabilities? In most Asian countries where family members are deeply involved in business operations, the scale is found to tilt heavily towards family membership. The next generation often takes it as a birthright to be the successor. The consequences are often disastrous.

Different models

Historically, both the chairman and managing director/CEO positions are reserved for family members. Interestingly, Sebi’s efforts to split the two roles for governance reasons have met with strong resistance. The underlying message is that promoter families decide who will determine the destiny of the business. Broadly, the principle has remained the same, but we have noticed different leadership succession models under the broad umbrella of family management.

• Groups such as Reliance (Akash, Isha) and TVS Motors (Venu, Lakshmi) have handed over the mantle to their children confidently though they may have limited experience in managing complex organisations.
 

• In companies such as Mahindra and Mahindra and Dr Reddy’s Laboratories, the leadership transition has happened gradually with the much experienced Anand Mahindra and GV Prasad retaining the chairman positions. Operational responsibilities are with senior non-family executives. In either case, no family successor is involved in management in any capacity. The Dabur group had successfully practised this model many years ago in spite of having capable members in the Burman family.
 

• In some other instances, such as in Wipro, the next generation leader went through a systematic grooming process. Our research has shown that most successful succession involves preparing the next generation leader in a planned manner, spread over 10-15 years after their education. There are multiple layers of evaluation they go through. Companies such as Cyient have considered competent non-family executives along with a family candidate while deciding on succession. Of course, in all these models, the intent is noble: Preserve and grow family wealth.

Family first or Business first?

It is common sense that in business matters, decisions must be taken keeping only the business interests in mind. However, in family businesses, this is not automatic. In most instances, one can notice an evolution of the criterion from ‘family first’ for both family and business matters to ‘family first’ for family matters and ‘business first’ for business matters. In a mature model, families are able to distinguish between what is good for the family and what is good for business. There, everyone is clear about the criteria to apply while choosing the successor.

This process of evolution is influenced by a number of factors. For instance, the multi-level consequences of any major decision are much greater in a large organisation such as Reliance Jio,with its innumerable stakeholders, compared to a small organisation. In a highly professionalised environment with mature governance practices, individuals per se are dispensable. Such organisations have a pool of capable professionals ready to step into leadership. On the other hand, in organisations with too much of centralisation, family promoters naturally feel insecure to hand over the mantle to a non-family professional. Promotors’ perception of risks is yet another influencer.

Birthright vs responsibility

The Ambani family history has proven the significance of systematic succession management while the leader is still around and active. Mukesh Ambani has done well on this front. However, such leaders must also recognise the need for grooming the next generation well before pushing them to the forefront, where capabilities alone will determine success or failure. It is a known myth that gene transfer does not work here.

Indeed, in exigencies, young family members have taken up the leadership mantle. Even in such situations, it is important for the board of directors to make sure that their young shoulders are not overburdened overnight. The entire leadership team must be prepared to share the load and fast-track the successor’s grooming process. Also, an empowered board and committed leader will be bold enough to redefine the role of an inadequate family successor, should the business situation warrant that.

The author is professor and senior advisor, Thomas Schmidheiny Centre for Family Enterprise, Indian School of Business