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Family vs board: who makes the decisions at the Bajaj Group?

Jamnalal Bajaj, founder of The Bajaj Group, was a close confidant and disciple of Mahatma Gandhi. The family is known for the major contributions it made during India's independence movement as well as industrialisation. Unfortunately, the family is also known for infighting over ownership and control of different businesses.

The latest spat arose when fifth-generation managing director Rajiv Bajaj announced that the company would discontinue the production of their famous scooters from 2010.

Founded in 1926, The Bajaj Group is one of India's top 10 businesses. Its footprint stretches over a wide range of industries including automobiles, home appliances, lighting, iron and steel, insurance, travel and finance. The group's flagship company, Bajaj Auto, is ranked as the world's fourth largest two- and three- wheeler manufacturer.

Fourth-generation Rahul Bajaj is a towering figure of Indian industry, and is currently a member of the Indian Parliament. He set out to manufacture scooters under Bajaj Auto soon after completing his MBA at Harvard in 1965. Bajaj Scooters had customers on waiting lists for up to 10 years due to government restrictions in issuing new scooter manufacture licences. The scooter was then the only affordable means of transport for the middle classes and the "Bajaj" scooter was literally an icon of affluence for many. Built with Italian technology, Bajaj used to advertise as the largest scooter manufacturer in the world.

Both Rahul's sons, Rajiv and Sanjiv, came to work in the family business. In 2005, Rahul stepped down as executive chairman to let elder son Rajiv become the managing director. Rajiv, a Warwick graduate, was passionate about motorbikes from day one, and devoted to making Bajaj one of the best motorcycle companies in the world. He invested heavily in new product development and transformed Bajaj into a modern manufacturer. Rahul backed him in the process, but made a quiet separation of responsibilities along business lines between Rajiv and Sanjiv in an attempt to prepare the ground for an amicable division of wealth at a later date and avoid family feuding.

So what prompted Rajiv to make a public announcement that his company would discontinue production of scooters from 2010? In a TV interview in which he appeared alongside his father, he said scooters were no longer very profitable, and focusing on motorbikes was important for commercial reasons. During the 20-minute interview neither of them mentioned that it was the decision of the board of directors. It was clear that Rajiv had made his decision and his father reluctantly accepted it. When Rahul said: "I feel emotionally hurt" Rajiv's response was: "I don't care, I am driven by the magic of logic".

This raises a number of important questions about governance in family business in India. On the corporate governance side this is a decision of critical strategic importance – one an empowered board should have decided. The Bajaj family's controlling shareholding of roughly 60% does not give them the moral authority to decide the destiny of the company based on the likes and dislikes of the family members. This is a curse on most Indian family businesses that still tend to treat their companies as extensions of their families and decide key strategic issues, including new investments, disinvestments, growth priorities, involvement of family members and leadership, based on discussion among key family members.

The company suffers not only when business solutions are provided to resolve family problems but also when family relationships are fractious. Unfortunately, very often boards are used as "approval committees" in spite of the regulatory authorities attempting to bring transparency in governance. Most business families are yet to realise that their independent directors can add value and make their companies more successful. Of course, there are sensible family CEOs who are exceptions to this practice and build institutions out of their organisations.

On the family front, minimum governance procedures would enable the family to discuss and arrive at a decision before going public or to the board. Interestingly, Sanjiv, younger son of Rahul, has not spoken on this issue, ostensibly because the two-wheeler business is not "meant for him". 

The Bajaj incident reflects the lack of governance practices in successful, well-known families who are expected to be role models for the rest of society. It also shows the implications of bitter family fights that can leave a cultural scar on a child, who in turn can assume such behaviour is the normal way to behave when they grow up. Family governance has to be practised by all and not simply preached. 

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