March 22, 2011

"Values, Ownership and Management" - Article by Sanjay Anandaram

“Five years before we took in venture capital in our family owned company, we’d decided that ownership and management had to be kept separate. The chairman of the company was the well known retired Chairman of a very well known publicly listed company. We had independent Board members and the CEO, a family member, was evaluated by the Board regularly and his compensation decided by an independent sub-committee of the Board. There were no other family members employed in the company which was run by competent professionals. This ensured that sticky situations involving reporting relationships, performance appraisals and the like were avoided.

Other family members ran their own companies which had to bid for and secure business from this company as any other company would. All things being equal, we gave preference to our family company. But the operative term is “all things being equal”

These were the words of the scion of a well known family owned company in India. But then how many companies in India can genuinely claim to separate ownership from management? There’s nothing wrong in family members running a company provided they’re competent and there are institutionalized processes (especially in functions like human resources, purchase, finance) that ensure that all decisions are taken in the best interests of the company only however detrimental they may be to individual family members. Decisions that are taken in the best interest of the company are always good for the family as shareholders. However, decisions that are in the interest of the family-owners need not be good for the company – a cursory look at say, lax governance norms for example as they relate to family led decisions in some companies tells the tale. How does one do an honest performance appraisal of another family member? How does the CEO “manage/direct” a family member who reports to him when the family member happens to be also a board member with a hefty ownership of the company? Who will succeed the CEO – is it automatically going to be a member of the next generation or someone who’s the most qualified (which could well be a member of the next generation!). It is jocularly said that in countries like India, ownership of a company is sexually transmitted! Are tax free dividends paid out to owner-family members rather than having profits being reinvested for the growth of the company? What about soft loans to family members from the company? What about asset purchases especially of real estate? Is the favourite brother-in-law coincidentally the CEO of a company that is a major supplier?

These and several other questions that relate to issues of governance need to be tackled head-on by entrepreneurs as they begin to scale their companies. To be sure, some of these issues are not unique to family owned enterprises but are rather symptomatic of companies with lax governance. However, companies with blurred ownership and management roles and responsibilities tend to be also innocent of good norms of governance.

As the Indian economy grows and increasingly integrates with the rest of the world, companies that wish to take advantage of the opportunities will need infusion of large amounts of capital. These large amounts of capital will be provided by private equity funds which are almost all international funds, India being a capital starved country. The experience worldwide has been that the presence of professional investment in companies tends to force high governance standards. In addition, international best practices of governance will be forced upon Indian companies as Indian companies start doing business globally and foreign companies start doing more business in India. Companies seeking to list on stock markets or be bought will also have to ensure that their governance practices are in internationally acceptable.

In such a scenario, it is imperative that even startup CEOs focus on building their companies with the highest standards. Creating value for an entrepreneur should mean more than just financial results. It should mean creating “values” as well.

What do you think?

Sanjay Anandaram is a passionate advocate of entrepreneurship in India; He brings close to two decades of experience as an entrepreneur, corporate executive, venture investor, faculty member, advisor and mentor. He’s involved with Nasscom, TiE, IIM-Bangalore, and INSEAD business school in driving entrepreneurship. He can be reached at sanjay@jumpstartup.net. The views expressed here are his own.