Godrej restructuring a masterclass for succession planning in family businesses

Internal conflicts, especially over wealth and control, are not uncommon in Indian family businesses. Recent resolutions like the Godrej family's restructuring offer a blueprint for peaceful and strategic dispute management.

Family businesses’ contribution to GDP, employment

Family businesses contribute significantly to India's GDP and employment. According to one survey, family businesses in India account for a whopping 79 per cent of the national GDP. With 111 publicly traded family-run companies valued at $839 billion, India is home to the third-largest number of family businesses globally, according to a report in Gulf Insider.

Reliance Industries is the largest family enterprise in the country and the 10th-largest globally. Founded in 1973, it is run by the Ambani family and has a $204 billion market capitalisation as of December 2023. Following India are Spain and Mexico, with family businesses making up 70 per cent of GDP and contributing over $1 trillion to these economies yearly.

In the US, an estimated 32.4 million family-owned businesses collectively generate $14.5 trillion in GDP or 54 per cent of the GDP, Gulf Insider said. The largest of these enterprises are Walmart, Berkshire Hathaway, and Cargill.

Never an easy ride

While their contribution to the GDP is huge, it has never been an easy ride for the family-owned businesses. More often than not, family members end up fighting among themselves trying to grab a share of the wealth and control of business entities. This is largely because of the most obvious mistake that the patriarchs fail to consider: a lack of a clear succession plan. Add the complex family dynamics; the cocktail can turn out toxic and spill over to the streets, as seen in disputes among the Ambanis and the ones within Bharat Forge and the Kirloskar group. Such conflicts not only threaten the stability of the companies but can also tarnish their public image and affect market performance.

Perhaps the biggest impact of the failed resolutions, according to a report by the Confederation of Indian Industry (CII), is that just 13 per cent of the family businesses survive till the third generation. Only 4 per cent go beyond the generation, and one-third of business families disintegrate.

The Godrej Family's Resolution Approach

The Godrej family's recent "ownership realignment" provides a notable example of handling such disputes with grace and strategic foresight. Here are the key elements of their resolution:

1. Equitable Asset Distribution: The division of assets between Adi Godrej, Nadir Godrej, Jamshyd, and Smita ensures each branch controls certain sectors of the business, reducing potential conflicts over day-to-day operations.

2. Respectful Negotiation: The family described the split as achieved in a "respectful and mindful way," emphasising harmony and mutual respect among family members, which is crucial in maintaining personal relationships post-realignment.

3. Strategic Business Alignment: The division aligns with the differing visions and strengths of the family branches, allowing each to focus on areas where they can best contribute to growth and innovation.

4. Use of Mediation and Legal Frameworks: While specific details of mediation are not disclosed, legal frameworks and possibly mediatory measures helped formalise the agreement, ensuring a clear, transparent, and enforceable arrangement.

Let us examine the other high-profile family business disputes that went south but were later resolved after much mud-slinging among the family members.

The Ambani Brothers

Background: The Ambani dispute is perhaps one of India's most famous family business conflicts. Following the death of Dhirubhai Ambani, founder of Reliance Industries, his sons Mukesh and Anil Ambani found themselves at odds over the control and division of the conglomerate.

Nature of the Dispute: The core of the conflict was the control of major assets in sectors like telecommunications, energy, and petrochemicals. The lack of a clear succession plan led to a public and acrimonious battle.

Resolution: The dispute was eventually resolved through a demerger facilitated by their mother, Kokilaben Ambani, which split the business assets between the two brothers.

Sugandha Hiremath-Baba Kalyani Dispute

Background: Another noteworthy conflict involved Sugandha Hiremath and her uncle Baba Kalyani of Bharat Forge, one of the leading companies in the forging industry globally.

Nature of the Dispute: The dispute primarily revolved around issues of inheritance and the perceived inequities in distributing company shares and other assets. As per a 1994 family arrangement, Baba Kalyani was expected to sell his entire stake in Hikal to the Hiremaths. Kalyani has disputed the transfer clause in the 1994 family arrangement as “a false claim” by Sugandha Hiremath. She, however, claimed that the 1994 arrangement was arrived upon between her parents and Kalyani in the presence of former ICICI Bank Chairman N Vaghul and former Sebi Chairman SS Nadkarni. The Hiremaths own 35 per cent in Hikal and Baba Kalyani owns 34 per cent.

Ongoing dispute: This dispute was also taken to the courts, and the family sought to resolve their differences through legal means, which is ongoing.

The Murugappa Family dispute

Background: The Murugappa Group, one of India's oldest and largest conglomerates, was founded in 1900. The Chennai-based group has diversified interests across sectors such as finance, engineering, agriculture, and bio-products, making it a significant player in India's industrial landscape. Despite its success, the Murugappa Group has not been immune to family disputes, particularly concerning the involvement and representation of family members in the business.

Nature of the Dispute: The Murugappa family dispute came into the public eye in 2019 when Valli Arunachalam, the daughter of former executive chairman MV Murugappan, claimed she was being denied a place on the company’s board after her father's death. Valli, along with her mother and sister, inherited a significant stake in the holding company of the Murugappa Group but felt sidelined due to traditional gender roles within the conservative family business structure.

The Dispute's Resolution: Valli Arunachalam publicly sought a seat on the board or an amicable buyout of her family's stake, proposing these as potential resolutions. After several negotiations, the Murugappa family decided to end the dispute though the contours of the agreement were not made public. It is learnt that the family branch of the late MV Murugappan (including Valli Arunachalam and Vellachi Murugappan), received a substantial amount in lieu of the board seat.

The Sanjay Kirloskar Dispute

Background: The Kirloskar Group, one of India's oldest conglomerates, has been pivotal in the industrialisation of the country with diversified interests in engineering, manufacturing, and environmental management systems. The family has seen its share of disputes, most notably involving Sanjay Kirloskar, the chairman and managing director of Kirloskar Brothers Limited (KBL).

Overview of the Dispute: The dispute involves Sanjay Kirloskar and other members of the Kirloskar family, including his brothers Atul and Rahul and their respective families. The core of the conflict revolves around the management and control of the family-owned businesses.

Key Aspects of the Conflict

1. Business Control and Management: Sanjay Kirloskar has been at the helm of Kirloskar Brothers Limited, one of the flagship companies of the group. The disputes arose over allegations of mismanagement and disagreements on the strategic direction of KBL.

2. Shareholding and Governance: The conflict also extended to issues of shareholding patterns, control of various subsidiaries, and the broader governance framework within the conglomerate. Disagreements were particularly pronounced over the appointment of family members to key positions and the distribution of dividends.

3. Legal Battles: The dispute has seen multiple legal battles, where different family factions have contested control and management rights in court. These legal proceedings have been aimed at redefining shareholding rights and management control among the family members.

Other Notable Disputes

· Mafatlal Family: The Mafatlal family dispute involved complex battles over property and assets among family members after the patriarch's death.

· Singhania Family: The well-known Singhania family dispute, involving the Raymond Group, revolved around estate and succession planning issues.

Patriarchs of family businesses often at fault

Analysts who track family business disputes say that the patriarchs of family businesses, while being visionaries when it comes to their enterprises, try to put off plans for the division of their wealth and businesses until it is too late. This is perhaps the biggest reason for disputes among the children. Dhirubhai Ambani, the founder of Reliance Industries, failed to put together a will before his passing away in 2002, which led to a major dispute between his sons.

Lessons from Godrej family’s restructuring

Some of the lessons that can be learned from the Godrej family's resolution is that there should be proactive communication by engaging all stakeholders early and maintaining open lines of communication which can prevent misunderstandings and resentments from festering. Perhaps the most obvious one is to have a clear succession planning and establish clear rules for succession and asset division in advance which can mitigate disputes before they arise.

Family businesses can also try to separate business and personal relations; by professionally managing business operations and minimising emotional conflicts, businesses can ensure more rational decision-making. The key family members can also include legal and mediation processes providing neutral grounds for fair and sustainable resolutions.

The Godrej family's method of resolving internal disputes through thoughtful restructuring and respectful negotiation stands as a commendable model for other family businesses facing similar challenges. By adopting similar strategies, family-run businesses can ensure longevity and success, preserving both their familial and business legacies.