India has mainly been in the news for its upwardly mobile economic growth rate over the last decade, which has been driven by a large number of the country's family-controlled multinational companies. However, age-old concerns over corporate governance in these businesses were brought to the fore this January when a family business scandal hit the headlines.
India's fourth-largest outsourcing group, Satyam Computer Services, saw its shares plunge 71% when, in a written statement sent to the Stock Exchange on 8 January, the former chairman, B Ramalinga Raju, confessed that he had overseen a fraud worth $1billion. Raju admitted he had tried to hide from shareholders and the board of the company over many years. The deception, he said, started small when he had tried to cover up a bad quarter's results.
The scandal is even more disappointing because of Raju's image as a modern, Western-educated MBA graduate who previously won the Ernst and Young Entrepreneur of the Year award and oversaw a company of 50,000 employees.
The news reminded investors of the perennial problem in emerging markets where families with controlling stakes treat the business as their own and, in some cases, carefully choose directors who do not stand up to the owners. Sceptics are also questioning whether Indian businesses can successfully make the transition into transparent, dynamic, globalised companies while retaining family control.
These timely concerns highlight the important challenge for family businesses in India – balancing a need to be modern and dynamic in face of globalisation with their long-term vision and traditional values.
One company that has achieved a good balance of the traditional and modern is the Godrej Group. Built over four generations of a close-knit family the Godrej Group is a $1.8 billion conglomerate with 18,000 employees.
It started out selling soaps, locks and safes but has diversified into consumer goods, steel furniture, machinery, agro-chemicals and vegetable oils. Today, the group is one of the largest engineering and consumer products companies in India with varied interests from engineering to personal care products. The group focuses closely on issues of philanthropy, education and training, and maintains a strong reputation for transparent, ethical dealings.
All of India's family-controlled businesses have benefited from the liberalisation of the market. In the 1980s price controls were removed and corporate tax reduced. Many public monopolies were ended after 1991, when industrial and import licensing were removed.
"The government is important in terms of running the country but less the government interferes the better," Adi Godrej, the fourth-generation chairman, exclusively tells Campden FB. "It has a role to play in implementing policy and then leaving the entrepreneurs to develop. In the last 18 years India has made great bounds since we have liberalised our economy."
But it's not just the political and business landscape that has changed. "I was the first business graduate to join our group," says Godrej, who graduated in 1963 from MIT. "At that time there were no business schools outside the US. I brought in new management information systems, human resources policies and marketing systems. Companies did not have the benefit of systematic management practices which meant we were able to change our traditional scientific background."
Godrej aimed to achieve a model mix of "tradition and innovation". For him, tradition embodies the ideals of trust and integrity that are so important to the Godrej brand, and which he is keen for the family to hand down through each generation. Innovation is vital as fresh modern ideas, especially in management, allow the business to remain competitive against evolving global players.
"We are traditional in terms of trust, integrity and employee welfare," confirms Godrej. "But modernity and innovation are extremely important, we like to absorb the latest developments." To keep abreast of these developments Godrej spends 30 days learning each year where he goes to international seminars such as the World Economic Forum in Davos. The group also invites visiting professors to come and talk to employees.
The division of two important committees perhaps best demonstrates how these divergent concepts of tradition and innovation can sit side by side in a modern family-owned business. The group's corporate governance committee is overseen by a think-tank of senior people who analyse geopolitical issues, while an executive committee of "bright young things" aged between 30-40 provide dynamic and innovative ideas to improve the business. One example coming from the latter is the proposal for a new electronic system which will allow the group to share information on orders and transactions with the customers online.
"The challenge is mainly to get everyone aligned to a view that change is constant," Godrej continues. "One must be open to new ideas wherever they might come from. If you do not keep abreast you lose out in a competitive situation."
In order that the next generation can bring fresh ideas to the table, Godrej believes their education must take on board the very latest advances in management practice. "All family members must be professionally qualified to the same standard as the other employees," he says.
"They should be graduates of management schools in the US such as Wharton or Harvard and train as management trainees for two years, just as those who join us do. After about four or five years they get into an accelerated position – like the professional managers who will be the day to day CEOs. They have brought in a lot of fresh ideas, professionalism and innovative thinking."
Another example of the group bringing in fresh thinking is the introduction a system called "Economic Value Add" (known as EVA) which is the latest, most accurate way of measuring the performance of the business. It has allowed the family business to do away with old-fashioned, outdated accounting procedures – simply put it is a system designed to reward individual and team performance with extra remuneration. This prompts employees to behave and get paid like owners, which creates a positive and encouraging working environment. It also rewards managers whose departments perform well.
Shareholders are happier too as the EVA system shows them if they are getting value for money. "We have aligned our group to remain very modern in its management practices," says Godrej, who puts great stock on the group's modernisation of employee remuneration practices.
Seeing the impact made by well-educated managers, Godrej began to restructure the group in order to transform the company from a traditional family business into a globalised, dynamic company. He started the process by introducing non-family CEOs in 2000.
"It might sound as if we recruited CEOs from outside the family but this was quite not the case as we had already been training management graduates in-house," he explains.
In concert with this, he redefined the role of the family. "We decided that family members would then stay away from the day-to-day running of the business and people who had been with us for many years were promoted to CEOs. Family members concentrate on corporate governance strategy and financial planning – we believe they are the best people to implement such procedures because they are the biggest stakeholders."
Mindful of the poor example set by fellow family-owned business Reliance (see page 32), Godrej says there is a prevention strategy in place for such an eventuality. "If there is a matter of conflict of interest between the family members and the business then independent directors need to take over. In any conflict of interest between the family member and the business, the interests of the business should always come first," he says.
Godrej believes merging tradition and innovation can be best put to use by using the family's traditions to instill trust in their products. "The Godrej brand is now very well known in India – 400 million Indians use one or other of our products – and is built on integrity and winning the trust of consumers."
However, he reserves his biggest praise for his employees. "They are our biggest assets, not the land or buildings. They are the ones that built the brand."
The Godrej Group is a strong model for family business in India to emulate. Adi Godrej has successfully kept the traditional family values of trust and integrity but combined them with modern ideas on management. This mix has allowed him to maintain an efficient, consumer-centric business in the face of constant changes in technology and growth in the global economy.
It is this spirit of innovation that the Godrej Group was built on and which has made it one of India's most impressive industrial corporations and a model for successful family businesses across Asia.