Why Governance Continues to be a Challenge-A Family Business Perspective

Building blocks of corporate governance

The essence of governance is to ensure fairness across all stakeholders, and the board of directors is its custodian. Without a facilitative organizational culture, good governance will not flourish. Thus, leadership never compromises between the interests of the organization and its stakeholders. Hence, having an independent board that takes its work seriously is important to oversee the operationalization of regulatory requirements in letter and spirit.

Major governance challenges arise when the leadership compromises on the long-term interest of the organization for short term gains while interpreting and implementing governance policies. One has to go beyond the form and look for the content! This does not happen automatically. Since organizations have to transform themselves during their journey of evolution, it is important to recognize that changes in the capability and knowledge basket of the leadership includes governance. Business does not continue to remain a subset of the promoter any more but grows beyond, with multiple stakeholders impacted by its actions. This is when ownership becomes greater responsibility; values have to be institutionalized in nature, much beyond financial excellence.

Role of promoter families

Promoter families with significant stakes in the business can build or break any of their creations. Corporate India has many well governed businesses. A common feature of leadership of all of them is their family’s commitment to stewardship and personal ethics. Families behind groups such as the multigenerational Murugappa and Godrej or younger corporates like Mahindra and Dr. Reddy’s Laboratories have demonstrated their commitment to building their businesses as institutions. They have played the relay game of leadership succession very strategically, recognizing the need for changes in the resources’ endowments required to sustain the organization’s journey forever. This includes changes in the board composition, its independence in judgement and action. Fundamental to achieving this is the recognition of the leader about one’s own limitations. They believe in humility as a virtue, and practice “detached passion” that enables them to be objective. They separate themselves from the organization and let everything happen that helps the organization grow as an institution.

Building beyond the founder generation by the inheritors is not easy since in most cases the successors would not have gone through the pangs of creation. There is a growing trend among business families (including founder entrepreneurs) to learn the concept and process of creation and practice of family governance which is good. This is particularly among families that have witnessed bitter breakups in the past. Families clarify the range of roles possible for them (e.g., operational vs strategic) in their ever-changing businesses. They prepare clear ownership agreements and keep the family members tuned to the core values continuously

Role of non-family key stakeholders in upholding governance

Two other major stakeholders are the board of directors and the operational leadership. The board represents outside investors too. They have a fiduciary responsibility to play the stewardship role actively. This includes actively sensitizing the promoters about the need to wear the ‘ownership’ and ‘management’ hats judiciously

Given that most business leaders have a history of taking a “discovery driven” exploratory journey, their own understanding of the need to see themselves different from the organization may be limited.

The board can show the mirror of reality to the promoter families. Regulatory institutions such as SEBI can also play a more active role in creating a more informed governance atmosphere in all companies. That will help promoters and businesses evolve as separate institutions, supporting each other.

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Source: The Hunt Report Vol.14

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