Concept of Governance in Lesson

Professional Managed Company & 7

Promoters Driven Company

KEY CONCEPTS
n Family Managed Business n Professionally Managed Business n Independent Directors and Women Directors
n Corporate Social Responsibility n Audit Committee

Learning Objectives
To understand:
 Concept of family and professionally managed businesses.
 Governance structure of family and professionally managed businesses.

Lesson Outline
 Introduction
 Learnings from studies and surveys
 Family Businesses in Germany and Japan which are known for its longevity
 Governance of Promoter Driven vs Professionally Managed Companies
 Case Studies- Metamorphosis of Promoters to Professionally Driven Companies
 Lesson Round-Up
 Glossary
 Test Yourself
 List of Further Readings
 Other References

265
PP-ESG-P&P Concept of Governance in Professional Managed Company & Promoters Driven Company

INTRODUCTION
India enjoys a rich and glorious history of family-owned business. A family business may be company,
partnership firm, HUF or any other form of business owned, controlled and operated by members of a family. In
India the majority of businesses are controlled by families.
Family businesses are the major form of enterprise in India and across the world, viz. Corporation houses
like Aditya Birla Group, Bajaj Auto, Eicher Motors, Emami, GMR Infrastructure, Godrej Group, GVK Power &
Infrastrcture, HCL Technologies, Hero Moto Corp., Marico, Reliance Industries, Tata Group, are some of the
family owned companies in India. Arcelor Mittal, Berskire Hathway, BMW, Cargill, Comcast, Continental, Ford
Motor, Hyundai, Koch Industries, LG, Maersk, News Corporations, Peugeot, Roche, Samsung, Volkswagen,
Walmart, are companies owned / controlled by family. Several studies indicate that family business carry the
weight of economic wealth creation in all economies.
Most family businesses do not survive beyond two or three generations. One of the main reasons for the
short life span of family businesses is due to the lack of governance mechanisms in the family. With better
family governance, business development reaches next level and ensures continuity of the business across
generations. Strong governance measures in a family owned business can effectively act as a prevention
mechanism against a lot of tensions that may arise between family members at a later stage. It is also imperative
for family businesses to adopt effective corporate governance measures in order to give tough competition to
other players in the global market.
The most glaring characteristic of a family owned business is that all the key managerial positions in such
businesses are held by family members. Non-family members may of course be employees of the company, but
the decision-making power usually vests with the members of the family. Professionalisation of a family business
is of supreme importance for its long-term sustainability. In absence of professionalism, a family business may
get frequently weighed down with conflicts due to lack of clarity and systematic work processes, role confusion
and informal organisation structure. Poor accountability and improper operations control severely interrupts
efficiency of business. The business also fails to attract and retain good external talent.
Family businesses are generally operated with the ethos of “Family First”. Business decisions are taken while
keeping the family’s wellbeing in focus. With changing preferences of the next-generation successors, it is
possible to balance the family’s philosophy, culture and personal needs with business performance, profit and
transparency. However, a visible change can be observed in the family businesses in India. Old family business
houses are changing to “professionally managed” companies. The younger successors have a broad vision
and global aspirations. They prefer working with modern management techniques, build competent teams,
and create transparent systems and processes. Instead of getting stalled in family conflicts, disputes, and non-
productive practices, the younger generation prefers to create a professional work culture.
Further, family values also get ingrained in organisation values. In an organisation, the values are decided
by a group of people running a firm over a period of time but in a family business, the family value also gets
transferred to the organisation. Further the way a family business is managed is very relevant from a country
perspective and is based on that respective country’s culture and values.
Certain provisions of Corporate Governance in a Family Owned Companies have been incorporated in the
Companies Act, 2013 such as:
i) Independent Directors and Women Directors : To build up the transparency and accountability of the
Board of Directors, the Act now requires at least 1/3rd of the total directors of a listed company to be
Independent Directors and have no material or pecuniary relationship with the company or related
persons. Unlisted Public companies with paid up share capital of Rs. 10 Crores or more; turnover of Rs.
100 crore or more; aggregate outstanding loans, debentures, and deposits, of Rs. 50 crore or more are
statutorily required to have at least 2 directors as Independent Directors.

266
Concept of Governance in Professional Managed Company & Promoters Driven Company LESSON 7

To ensure diversity on the board, all listed companies and non-listed public companies having paid
up share capital more than Rs.100 Crores or more and turn over exceeding Rs.300 Crores or more are
required to have atleast one woman director on the board.
ii) Corporate Social Responsibility : Every company having net worth of Rs. 500 Crores or more, turnover
exceeding Rs. 1000 Crores or net profit of more than Rs. 5 Crore is required to constitute a Corporate
Social Responsibility Committee under Section 135 of the Companies Act, 2013 constituting 3 or more
directors with at least 1 Independent Director to formulate policies and recommend activities that the
company may undertake for promotion of education, gender equality, health, poverty eradication,
environment, employment etc. Again, this measure puts responsibility on the company for the social
wellbeing not just of its workforce, but also makes it publicly accountable.
iii) Audit Committee : The Act provides for the setting up of an Audit Committee comprising of at least 3
directors by all listed companies, majority of which have to be independent directors. The members
of such a committee have to be persons who can read and understand financial statements and the
task entrusted to such a committee is recommending remuneration and appointments of auditors and
reviewing their independence.
iv) Nomination and Remuneration Committee : The Nomination and Remuneration committee shall
comprise of 3 or more non-executive directors out of which at least half shall be Independent Directors.
Such committee shall identify persons qualified to become directors of the company and make
recommendations to the board of directors regarding their appointment and approval.
v) Serious Fraud Investigation Office : Section 211 of the Act provides for the establishment of a Serious
Fraud Investigation Office to look into the affairs of the company and investigate incidences of fraud
upon receipt of report of the Registrar or inspector or generally in the public interest or request from any
Department of Central or State Government.
Some Unique challenges/ Governance issues of family businesses:
i) Managing the diverse opinions of family members in the business, solving internal issues and disputes,
etc., is a challenge.
ii) Investors – both shareholders and creditors – may look with distrust on family-controlled companies,
because of the risk that the controlling family may abuse the rights of other shareholders. So investors
shall scrutinize such companies with care before taking the plunge and investing.
iii) There are also challenges of multiple stakeholders for the leadership position. Very often, there is lack
of communication between the incumbent and incoming generations. The incumbents do not know how
to handle the succession challenge, while the incoming generation does not know how to raise it. The
families should choose their most competent member(s) to manage the business, disregarding age,
gender or bloodline. However, post-succession role of the incumbent is not often planned leading to
complications.
iv) Hiring external staff which may perceive that career advancement, freedom and decision-making are
solely the purview of family.
v) Although ownership and management succession are the key concerns of a large number of business
families, they do not devote enough attention to the process involved. Succession dilemma is also closely
related to the family policy on entry of new generation, retirement of incumbents and mechanisms for
resolving conflicts. Entry of new members from the family depends also on the ‘space’ available in the
organization, which in turn depends on the success of the business. The younger generation may face
difficulties in proving themselves to the former generation.

267
PP-ESG-P&P Concept of Governance in Professional Managed Company & Promoters Driven Company

l Change in mind-set: Differing views between the older generation and the newer generation.
l Lack of Competitiveness: Another source of challenge is in the nature of competitiveness. For instance,
when the Indian economy was opened up in 1991, most Indian companies, of which a huge majority
were family owned, were put under competitive pressures for the first time. Many firms, particularly
those that grew under government protection did not have a strategy to respond and took it as a
threat rather than opportunity for a variety of reasons. This created huge tensions in business families,
sometimes leading to division of assets.

LEARNINGS FROM STUDIES AND SURVEYS

To comprehend the corporate governance scenario prevailing in family businesses across the globe, research
surveys conducted by various renowned organisations have been studied. The coverage and outcome of the
surveys are as under:
i) 2022 Family Business Benchmark by KPMG
KPMG conducted a survey titled- “2022 Family Business Benchmark” comprising of 253,552 Family
business entities from eleven metropolitan regions in Germany to comprehend their governance
scenario. The study revealed that the family businesses with regard to their financial position, cash
flow and financial performance as well as their management and governance structures. On other
parameters, the following facts were revealed:
a) Family-owned business strategy aims for longevity, independence and security: They hold higher
proportions of cash than non-family businesses, have comparatively high equity ratios, and own
a large portion of their fixed assets themselves. They are also keener to invest than non-family
businesses.
b) Family-owned businesses generate higher turnover and are more profitable than non-family-
owned businesses on average, as measured by their capital.
c) In 74 percent of the family businesses studied, the shares are concentrated in one shareholder or a
family of shareholders. 78 percent of family businesses are run by at least one family shareholder.
d) Family businesses are more often run by women (8.7 percent) than non-family businesses (7.7
percent). Non-family businesses, on the other hand, have a higher share of mixed management
(approx. 28 percent versus 20 percent in family businesses).
e) All metropolitan areas have a very high proportion of family-owned businesses (approximately 90
percent) that provide up to 80 percent of jobs.
ii) The 2021 EY and University of St. Gallen Family Business Index
The 2021 EY and University of St. Gallen Family Business Index which is based on a global ranking of
500 family-owned businesses according to their revenues reveals the largest family-owned firms are
vital to the health of the global economy.
The largest 500 family businesses generate US$7.28 trillion in revenue and employ 24.1 million people.
Together they constitute the third largest economic contribution in the world by revenue. In some cases,
generations and generations of family members have played a part in guiding the business over the
course of decades and even centuries.
The oldest family business on the Index, Japan’s Takenaka Corporation, has been in business for more
than 400 years. Meanwhile, more than half of the German businesses on the Index are over 100 years
old.

268
Concept of Governance in Professional Managed Company & Promoters Driven Company LESSON 7

The 500 largest family businesses have 4,418 board seats in total with 1,041 held by family members. Of
those, 17% are female and 83% male. The share of companies with female family members on boards
is 31% and is on par with global industry benchmarks. The average family business board member is
61 years old, but the next generation is on its way. One in five businesses on the Index have a next
generation member (aged 40 or younger) on the board or in the management team. This represents a
major opportunity for boards to diversify and extend their talent pool.
The next generation can bring professional expertise, valuable technology and digital capability, and
insights into the current generation of consumers and employees. Generational attitudes differ on
sustainability, for example. Gen Z and Millennials are more likely than older generations to favour
sustainable lifestyles and share information about sustainable products with peers. A good proportion
of the family businesses on the Index are reporting formal ESG metrics. 53% (264) reported at least once
on the GRI Sustainability Disclosure Database.
Fifty-one percent of those companies come from EMEIA (Europe, Middle East, India and Africa), followed
by 30% from the Americas and 19% from Asia-Pacific. The US is the country with the highest number (42)
of family companies that contributed to the GRI database.
Privately owned family enterprises using ESG metrics to manage but not report on their businesses are
missing an opportunity to attract talent, win customers and grow future revenues.
iii) PwC’s Family Business Survey 2023
PwC’s Family Business Survey 2023. Trust has been—and remains—a vital competitive advantage that
sets family businesses apart from other companies. This year’s survey of 2,043 family business owners
in 82 territories uses a model developed by Sandra J. Sucher, a Harvard Business School professor
of management and the author, with Shalene Gupta, of The Power of Trust, to assess whether family
businesses are doing the right things in today’s world to build trust.
The model identifies four pillars of trust: competence (is the company good at what it does?), motive
(whose interests is the company serving?), means (is the company using fair means to achieve its
goals?) and impact (what is the tangible impact the company has, as opposed to the impact it claims
to have?). The way the respondents answered questions based on these pillars reveal a disconnect
between traditional views about trust and their impact on how family businesses operate today. They
also highlight where and how family businesses will need to transform to ensure their legacy.
The survey revealed that the notion of how to build trust in business is changing—fundamentally and
rapidly. For everyone—including customers and employees—issues like environmental, social and
governance (ESG) and diversity, equity and inclusion (DEI) have become litmus tests for trustworthiness.
Due to powerful demographic shifts, most of today’s customers and employees hail from generations—
millennials and gen Z—whose values differ from those of baby boomers. Family businesses, which for
years have relied on a trust premium, built up over generations, have been slow to get the message.
The survey revealed many businesses are not taking actions that is required to build trust.
59% do not communicate their purpose externally
84% do not take public stance on important issues
85% do not have clear and communicated ESG strategy
79% do not have purpose statement/commitment that advances DEI
Further PWC’s ‘Global NextGen Survey 2022’ of family business leaders-in-waiting showed that they
are following their parents’ lead and prioritising growth over ESG as a means to safeguard their legacy.

269
PP-ESG-P&P Concept of Governance in Professional Managed Company & Promoters Driven Company

iv) India-State of family Business Report: Centre for Family Business and entrepreneurship, S.P.Jain
Institute of Management and Research.
In the mentioned study, 350 family businesses were surveyed across 50 cities pan-India, out of which
35 were large enterprises; 70 medium enterprises; 140 small enterprises and 105 micro enterprises.
The study reveals that the top family challenges faced include: Lack of a clear successor/succession
plan; lack of clearly defined and/or written roles and responsibilities for all family managers, including
women; lack of a conflict resolution mechanism within the family business; lack of a retirement age for
the senior generation and a roadmap for the next generation’s induction into a leadership role; and lack
of a family constitution.
The study further reveals that reasons for not “letting go” to the next-gen include lack of interest of the
next gen; lack of capability of next-gen; family conflicts and no unanimously accepted leader. The most
important reason cited for not letting go and handing over the business to next-gen is Lack of interest
of the next-gen.
While these family businesses are governed by clear values and a code of conduct, there seems to
be lesser attention paid to critical aspects such as family governance and succession planning. This is
manifested in succession timing being not clearly defined despite there being an intent to hand over the
business to the next-gen member, and a reluctance to let go due to the perceived inability of the next
generation or their lack of interest in the business.
v) India Business Survey Report 2022 by Deloitte-Survey specific to family-owned businesses-
Highlights
a) To strive for effective governance structure
Family-owned businesses are required to strive for effective governance structures within the
family and ensure greater harmony amongst family members about the values, vision, and
purpose of the business. As different generations get involved in it, a well designed governance
structure helps settle conflicts and create a healthy equilibrium between tradition and innovation.
b) To establish effective conflict Resolution Mechanism
More than half of the survey respondents enumerated that a formal family constitution including
will, entry and exit provisions, and conflict resolution mechanisms were of utmost importance.
Such a constitution helped promote open and transparent communication and settle conflicts.
The second priority was to hold regular family meetings to align with the culture, values, vision,
and direction of the family business. The regular cadence helped build communication skills,
increased transparency, and ensured greater harmony amongst family members.
c) Succession plan in terms of ownership and management
It is an essential part of family governance, as its absence can lead to power struggles and
conflicts, which are detrimental to the performance of the business. Succession planning involves
engaging the next generation of leaders in business decision making and setting performance
expectations. This must be combined with leadership development programmes that can improve
the chosen leader’s success chances and ensure business continuity.
d) Many Businesses are being managed by Non-Family Leaders
More than half of the respondents revealed that their business is being managed by a non-family
leader, even though the ownership was with the family (including the next generation in the family).

270
Concept of Governance in Professional Managed Company & Promoters Driven Company LESSON 7

This displayed the confidence of appointing an outsider as a leader and the realisation that it is
the need of the hour, as the business expanded. For a few of these, a non-family leader acted
as a ‘bridge leader’ who helped develop the business and prepare young family members for
leadership roles. On the other hand, one-fifth respondents preferred handing over both ownership
and management to the next generation. A very small proportion of the respondents from family-
run businesses agreed to transferring ownership to a non-family member.
e) Over two-third respondents have a formal leadership development programme for the next
generation
Over two-third respondents revealed that their organisation has a formal leadership development
programme for the next generation (Chart 13). These programmes helped families pass on their
rich knowledge and heritage to the next generation and motivated them to learn about business.
The older generation shared their experiences with the next generation to develop the skills for
managing a family business. Some respondents revealed that no formal programme existed, but
the next generation was continuously exposed to different business leadership aspects, or they
were considering developing one at the earliest
f) Independent Directors on the Board
Along with family governance, we wanted to understand if the governance of the Board was
unbiased. Most family businesses tend to rely on internal experiences and judgments, but the
presence of an external professional helps explore the benefits of having an outside influence
with clearly defined roles on the Board. Most respondents revealed that they have external
professionals as part of the Board.
One-fifth respondents indicated that they did not have external professionals but hired advisors
who supported the Board members consisting of family members. These advisors helped promote
effective business governance, succession planning, mentor the next generation, resolve conflicts
and unexpected family issues, and make strategic decisions. For more details, please refer the
following link:
https://www2.deloitte.com/content/dam/Deloitte/in/Documents/about-deloitte/in-India-Business-Survey-noexp.pdf

FAMILY BUSINESSES IN GERMANY AND JAPAN WHICH ARE KNOWN FOR ITS LONGEVITY
A) Family businesses in Germany
The oldest family businesses – that is, those owned for the longest period of time by one or more
affiliated families and continually in operation – are The Coatinc Company Holding GmbH in Siegen
that was founded in 1502, William Prym Holding GmbH in Stolberg (1530) and Freiherr von Poschinger
Glasmanufaktur e. K. in Frauenau (1568). Nine of the oldest German family businesses have been in
family hands for more than 400 years, according to extensive research conducted by the Foundation
for Family Businesses.
B) Japanese Secret of Family business longevity
The world’s oldest family business, the Nishiyama Onsen Keiunkan, is a hot springs hotel founded in
705 AD and has been passed down through the family for 52 generations (including adopted heirs) for
1,300 years. Another of the oldest companies in the world is Sudo Honke, the oldest sake brewery in
Japan. It was founded in 1141 and run by the 55th generation of the Sudo family.

271
PP-ESG-P&P Concept of Governance in Professional Managed Company & Promoters Driven Company

THE CONCEPT OF ‘IE’ IN JAPANESE FAMILY BUSINESSES

Translating to family or home, ‘ie’ represents a group of people who share a home and an economic and social
life. A continuing unit of people, a group, a clan. In the case of the Japanese culture the ‘ie’ is more corporation
than family, in that the business comes first, and the primary objective above all, is to survive and prosper. The
‘ie’ needs to last forever, because if it doesn’t, the family doesn’t either.
The head of the ‘ie’ chooses their successor, at times overlooking their own children if they deem them less
capable – it’s about the survival of the tribe at all costs, no questions asked. The adoptee takes on the family
name and once succession occurs will become the head of the ‘ie’ with full control. All other family members
have been conditioned to support the head for the greater good whether they are bloodline, or not.
This strategy is being used by huge companies such as Suzuki. The current CEO Osamu Suzuki, is the fourth
adopted son to take this role. Suzuki overlooked his own biological child and named his successor as Hirotaka
Ono. Other famous companies using this approach include Canon, Kikkoman and Toyota.

GOVERNANCE OF PROMOTER DRIVEN VS PROFESSIONALLY MANAGED COMPANIES

It is well understood from surveys and examples that the sustenance of family businesses is not possible unless
it follows good governance practices. In this context to comprehend the scenario of governance structure in
professionally and promoters driven companies, a sample of six companies affiliated to Telecommunication,
Automobile, FMCG, Hotels, Paperboards, Packaging, Agri-Business, Information Technology and Construction
sectors have been considered to comprehend their governance structure on the following parameters:
1. Chairman’s Independence
2. Separation of Ownership and management
3. Promoters Holding
4. Succession planning
5. Business Continuity Plans
6. Sustainability Focused Approach
7. Conflict Management
The companies randomly selected for the study are- Bharti Airtel, Bajaj Auto, Tata Motors, ITC , HDFC and L&T.
From the companies selected, Bharti Airtel, Bajaj Auto and Tata Motors are Family Business organisations and
ITC, HDFC and L&T are Professionally Management organisations.

GOVERNANCE STRUCTURE

Parameters for Family Business Professionally Managed Business

comparison
Bharti Airtel Bajaj Auto Tata Motors ITC HDFC L&T

Chairman’s Chairman is Chairman is Chairman is Chairman Part Time Chairman is

Independence Executive Director non-executive non-executive is Executive Chairman and non-executive
(Non-promoter) (Promoter) (Non- Director Independent
promoter) Director

Separation of Yes, the role is Yes, the role is - No, the role is Yes, the role is Yes, the role is
role of Chairman separate. separate not separate. separate separate
and Managing
Director/ CEO

272
Concept of Governance in Professional Managed Company & Promoters Driven Company LESSON 7

Promoter 55.02% 54.98% 45.81% NIL 25.63% NIL

holdings (%)

Public Holdings 44.93% 45.02% 54.19% 100% 74.37% 100%

(%)

Age of the 07/07/1995 30/04/2007 01/09/1945 24/08/1910 30/08/1994 07/02/1946

Enterprise (Date
of Incorporation)

Succession l The Company l Pursuant l The l l The l The

planning has a robust to regulation Nomination Company’s Nomination organisation
succession 17(4) of the and Succession and has a robust
planning SEBI Listing Remuneration Planning Remuneration process of
framework in Regulations, Committee processes Committee building its
place for the the framework works with have ('NRC') and talent pipeline
Board and top of succession the Board contributed the Board of which helps
critical positions planning for on the to helping Directors (“the to feed in
including its Senior the Board leadership employees Board”), review succession
Management. and senior succession realise their succession planning.
management is plan to potential, planning and
l The Board of l The process
placed before ensure craft their transitions
Directors, HR starts with the
the Board orderly careers while at the Board
& Nomination Development
for its review. succession in recognising and Senior
Committee and Centre (DC)
During the year appointments their strengths Management
Apex Talent where high
under review, to the Board and areas of levels.
Council are performing
the Board of and in development
entrusted with l The Board employees
the Company the senior and ensuring
overseeing and composition get assessed
satisfied itself management. a sound
monitoring talent and the on defined
that plans workforce
management l The desired skill competencies
are in place planning
and succession Company sets/ areas of at four
for orderly system.
planning initiatives strives to expertise at the different
succession
at the Company. maintain an Board level are levels in the
of such
appropriate continuously organisation.
91% Succession appointments.
balance of reviewed and
rate for middle l The process
skills and vacancies,
and top level identifies
experience, if any, are
management. competency
within the reviewed
gaps
organization in advance
which are
and the through a
developed
Board, in an systematic
with specific
endeavor due diligence
to introduce process.
new
perspectives,
whilst
maintaining
experience
and
continuity.

273
PP-ESG-P&P Concept of Governance in Professional Managed Company & Promoters Driven Company

l Succession Individual
planning Development
at Senior Plans
Management (IDP’s) and
levels, competency
including programs
business and organised for
assurance these levels.
functions, is This helps the
continuously organisation
reviewed to have a pool
to ensure of leaders at
continuity every level
and depth of who are
leadership “Competency
at two levels Ready”
below the
Managing
Director.

l Successors
are identified
prior to
the Senior
Management
positions
falling vacant,
to ensure a
smooth and
seamless
transition.

Business l Yes, Airtel does l During the - l Yes, ITC has l The In- l The
Continuity Plans have business year under a Business ternal Audit Company has
continuity review, a Continuity Department established
and disaster revised risk and Disaster independently emergency
management plan management Management reviews as well preparedness
in place. policy/ Plan designed as evaluates plans at each
framework to address the quality and project site to
l Airtel has
was adopted the threat of comprehen- deal with the
proactively
by the Board. disruptions siveness of emergency
implemented
This framework, to business Bank’s disaster situations.
business
inter alia, activities or recovery and
continuity plan l It also
includes processes. business conti-
and effectively provides
Business nuity plans and
enabled work from response
Continuity Plan. also carries out
home facility for procedures
management
all the employees for preventing
self-assess-
by providing and mitigating
ment of ade-
necessary IT the hazard
quacy of the
infrastructure and & risk and
Bank’s internal
network security. environmental
financial
impacts

274
Concept of Governance in Professional Managed Company & Promoters Driven Company LESSON 7

l Regulatory controls and arising from

team along operating emergency
with legal and effectiveness situations
networks keeps of such including the
a close watch on controls in provision for
first aid.
compliances with terms of
regulations and Sarbanes l In the
laws and ensures Oxley (SOX) event of any
the operations Act and occurrence
of the Company Companies of an
are within the Act, 2013. emergency,
the same
prescribed
shall be
framework,
investigated
and have also and
implemented appropriate
business preventive
continuity plan measures
wherever required. would be
initiated
to avoid
recurrence in
future.
l Relevant
information
and training
related to
emergency
preparedness
and response
shall be
provided to
the interested
parties.
l The duties
and respon-
sibilities of all
the workers
are being
communicated
periodically.

Board Level ESG/ l In order to - l The Safety, l The l The CSR l CSR and
Sustainability drive its long-term Health and company and ESG Sustainability
Committee sustainability Sustainability has CSR and Committee Committee is
vision, Airtel (SHS) Sustainability of the Board responsible
has Board ESG Committee Committee. oversees for
Committee which reviews the the Bank’s sustainability
l The
provides strategic Company’s sustainability related issues
CSR and
guidance and performance and climate
Sustainability
decision making on SHS change
Committee
on ESG and aspects, initiatives.
of the Board,
reviews

275
PP-ESG-P&P Concept of Governance in Professional Managed Company & Promoters Driven Company

is responsible including ESG and oversees l The

for review and and oversees implemen- Board level
approval of ESG the imple- tation of the committee
strategy, goals mentation Sustainability is guided by
and targets. of relevant Policies of the ESG apex
policies and the Company committee.
strategies on an annual The ESG apex
basis. committee
that comprises
l The role of
of key
the CSR
representatives
Committee
from the senior
of the Board,
management,
under the
oversees
nomenclature
sustainability
‘CSR and
reporting
Sustainability
initiatives,
Committee’,
climate change
is inter alia,
disclosures,
to review,
internal
monitor and
projects
provide
to ensure
strategic
reduction of
direction to
our overall
the
emissions
Company’s
and tracks
CSR and
its progress
sustainability
on ESG,
practices
to achieve
towards
industry
fulfilling its
leadership.
triple bottom
line objectives. l This Commit-
tee is further
supported by
ESG action
sub-commit-
tees which in-
cludes Product
Responsibility
Sub-commit-
tee, which
looks at ESG
risks (including
climate risks)
in the existing
portfolio and
ESG linked
opportunities;
the
Environment
Sub-committee
which oversees
the environ-
mental impact
from our
operations

276
Concept of Governance in Professional Managed Company & Promoters Driven Company LESSON 7

and Social and

Governance
Sub-committee
which works
on workplace
policies and
governance
initiatives.

The Group
Head for
Corporate
Social
Responsibility
(CSR) & ESG
updates the
CSR & ESG
committee
of the Board,
every quarter
on the Bank’s
sustainability
(ESG) initiatives
and progress
on ESG
actionables
and chairs
the ESG apex
committee.
The ESG apex
committee
governs and
reviews the
progress of the
three action
committees
that drive the
ESG agenda
(including
climate
change) at the
Bank.

The Product
Responsibility
sub-committee,
examines
Environmental
& Social (E&S)
risks in our
operations,
including
climate risks,

277
PP-ESG-P&P Concept of Governance in Professional Managed Company & Promoters Driven Company

while finding
new business
opportunities
in the E&S
arena. The
Environment
subcommittee
comprises of
representatives
from the
Administration,
Infrastructure
and IT teams
at the Bank,
sets targets
and identifies
opportunities
for
improvement
in areas of
emissions,
energy, water,
and waste.
This committee
will continue
to drive the
Bank’s path
towards
achieving
carbon
neutrality.
The Bank has
a dedicated
ESG vertical
that works in
conjunction
with several
internal and
external
stakeholders,
to drive the
ESG agenda.

% of Independent l % of l 50% of l 50% of l 50% of l 72% of l 44% of

Directors to Independent Independent Independent Independent Independent Independent
total number of Directors to Directors to Directors to Directors to Directors to Directors to
Directors total number of total number of total number total number total number of total number
Directors. Directors. of Directors. of Directors. Directors. of Directors.

l As on March 31, l As on 31 l During FY l The present l As on 12th

2022, the Board March 2022, 2021-22 the strength of the May, 2022,
comprised the Board Board Board is the Board

278
Concept of Governance in Professional Managed Company & Promoters Driven Company LESSON 7

11 members, consisted of comprised of 16, comprising comprised

including a 14 directors, 8 Directors, the Chairman the Group
Chairman, a of whom three out of which & 3 other Chairman,
Managing Director were executive 7 Directors Executive the Chief
& CEO, 3 Non- (including the (87.50%) Directors, 8 Executive
Executive Non- managing are Non- Non-Executive Officer &
Independent director), Executive Independent Managing
Directors and seven were Directors. The Directors, Director, 7
6 Independent non-executive Company of which 2 Executive
Directors out as well as has a Non- are Women Directors, 1
of which two independent Executive Directors, Non-Executive
are woman (including Chairman and 4 other Director
Independent two women and 4 Non-Executive (representing
Directors. independent Independent Directors. a financial
directors) and Directors institution)
four were (’IDs’), and 8
non-executive including Independent
and non- 2 Women Directors,
independent. IDs, which including one
comprises Independent
half of the Woman
total strength Director
of the Board.

Vision/mission, l The company’s - l Given l To achieve l The Bank l The

strategies linked Vision is to be a the global its has been Company is
to ESG globally renowned challenge Sustainability reporting to committed
Environmentally of ‘Climate 2.0 vision, the Carbon to Energy
conscious, change’, as the Company Disclosure Transition &
Socially responsible continues to Project (CDP) Sustainability
responsible and corporates, strengthen its on its climate goals by
Governance led Tata management change setting targets
Company by Motors has approach strategy, risks, to become
implementing outlined its which is opportunities, Water neutral
leading ESG Sustainability guided by a and emissions. by 2035
practices and strategy and comprehen- and Carbon
l From the
transparent a definitive sive set of neutral by
perspective
reporting. action plan Sustainability 2040.
of climate risk
towards Net Policies that
assessment, l Its ESG
Zero. are being
the Bank will roadmap is
implemented
l E-mobility assess the aligned with
across the
and usage priority of the 5-year
organisation.
of 100% physical and strategic plan
renewable transition risks - 'Lakshya
energy will in the near to 2026' with a
be the initial medium term. commitment
key steps to climate
l Some of
towards leadership,
the critical
carbon water
parameters to
footprint stewardship,
consider would
reduction. circular
be GHG

279
PP-ESG-P&P Concept of Governance in Professional Managed Company & Promoters Driven Company

emissions, economy,
air pollutants green supply
and climate chain,
transition risk biodiversity,
pathways both and green
at the sector offerings. The
and borrower Company
level. views the
transition
to Green
Energy as an
opportunity.

l Opportunities
like Green
Hydrogen,
Clean Energy
Technology,
and Offshore
Wind have
been
identified as
new growth
avenues.

Stakeholders l Company’s - l The l The l The Bank l The

engagement stakeholder Company Company is engage with its Company
level Engagement continuously strengthening stakeholders is working
framework engage the to understand on several
outlines an with its mechanisms and respond initiatives with
to their its partners
approach to stakeholders of
expectations across the
engage and to understand engagement
and concerns. value chain
work with its and resolve with key This provides for inclusive
stakeholders and their concerns stakeholders, valuable development
is applicable to through identification insights that
all its operating effective of material l The
help the Bank
company
entities and stakeholder sustainability shape its
is able to
functions across management issues and priorities and
manage
the corporate and framework. progressively strategy.
risks and
regional levels. monitoring l The Bank opportunities
and mitigating has a well- proactively
the impacts defined and set clear
along the process to goals to
value chain identify and deliver long
of each prioritise term shared
Business. our major value by
stakeholders, engaging
based on their with key
involvement stakeholders
with and through
value to the regular
organisation. dialogues.

280
Concept of Governance in Professional Managed Company & Promoters Driven Company LESSON 7

l In line with
the Board ap-
proved policy
on stakehold-
er engage-
ment, ITC
has evolved
structured
framework for
engaging with
its stakehold-
ers and foster-
ing enduring
relationships
with each one
of them. ITC’s
engagement
approach is
anchored on
the principles
of materiality,
completeness
and respon-
siveness.

Conflict l Yes, Airtel l Pursuant l Pursuant l Yes, the l The Bank l The
Resolution has put in to regulation to Regulation ITC Code has separated Company has
place stringent 26(5) of the 26(5) of the of Conduct the Risk, processes on
procedures SEBI Listing SEBI Listing requires the Control and management
and safeguards Regulations, Regulations, Directors, Compliance of conflict
to avoid any senior all members senior functions from of interests
conflicts of interest management of senior management the Business involving
involving members has made management and functions members of
of the Board and periodical have employees in order to the Board
other employees. disclosures confirmed to avoid create a strong which may
to the Board that there are situations in culture of arise due
l Bharti Airtel
relating to no material, which their checks and to Directors
Code of Conduct
all material financial and personal balances and joining the
covers guidelines
financial and commercial interests could to eliminate Boards
related to Conflict
commercial transactions conflict with any possible of other
of Interest. It is
transactions, wherein the interests of conflict of companies
applicable to all
where they they have the Company. interest and even
Board of Directors
had (or were a personal between conflicts
and employees. l Further, the
deemed to interest that revenue which would
It provides Directors of
have had) may have generation take place
guidelines for the Company
personal a potential and risk during the
avoiding any are required
interest conflict with management course of
conflict of interest, to disclose
that might the interest of and control. normal
both actual or to the Board,
have been the Company business
apparent, and on an annual
in potential at large. activities.
the mechanism to basis, whether
conflict with the
report any such they, directly
interest of

281
PP-ESG-P&P Concept of Governance in Professional Managed Company & Promoters Driven Company

situations that the Company. or indirectly or l The process

may give rise to a There was on behalf of allows the
potential conflict. only one case third parties, Directors
involving a have material to recuse
l Airtel’s Policy themselves
member of interest in any
on Related Party from the
the senior transaction or
Transactions discussions
management. matter directly
intends to pertaining to
In this instance, affecting the the conflict of
ensure that
the disclosure Company. interest. The
proper reporting,
was discussed, Directors have
approval and
reviewed and to exercise
disclosure
found in order their respon-
processes are
by the Board. sibilities in
in place for all a bonafide
transactions manner in the
between the interest of the
Company and Company,
related parties. should not
allow any
l The Policy extraneous
disallows the consider-
concerned or ations that
interested Director may vitiate
to participate in their exercise
any discussion or of objective
approve contracts independent
or arrangements judgment in
with related the para-
mount interest
parties, to avoid
of the Com-
potential conflicts
pany and not
of interest. abuse their
position to the
detriment of
the Compa-
ny for the
purpose of
gaining direct
or indirect
personal
advantage.
l Any conflict
of interest
arising with
the Board
Members
needs to be
reported to
the Chairman
of the Audit
Committee/
Chairman of
the Board.

282
Concept of Governance in Professional Managed Company & Promoters Driven Company LESSON 7

Analysis and Findings*

On conducting an exploratory study of the governance structure of the companies considered for the study, the
following observations are made:
1) Chairman’s Independence: As it is a widely accepted fact that shareholders attach higher value to the
quality of corporate governance structures, and this is true especially in case of pubic listed companies
which is marked by broad base of shareholders and some of them hold relatively diversified investment
portfolios. In view of this, it is imperative to have independence of Chairman.
On observing the facts of the given companies, it may be inferred that in majority of the companies
the Chairman have fairly high magnitude of independence, except ITC where Chairman is Executive
Director. Thus, it may be opined that family based companies are relatively better placed when it
comes to in this regard, since in case of Bharti Airtel the Chairman though Executive Director is a
Non-Promoter and in case of Tata Motors, the Chairman is Non-Executive as well as a Non-Promoter.
However, in case of Bajaj Auto, the Chairman though Non-Executive is Promoter of the company.
With reference to the professionally managed company and on analysing the overall scenario of
Chairman’s independence, it may be stated that HDFC’s scenario of Chairman’s independence is
optimum.
2) Separation of Ownership and management: On perusing the scenario of separation of ownership and
management of the six companies, it is observed that leaving Tata Motors, as no information in this
regard could be retrieved, four companies out of the balance five companies are having separation
in the role of chairman and management. In case of ITC, there is absence of separation of the role
of chairman and management, which may be a matter of concern in view of the size and scale of
operations of the company and being a mammoth conglomerate.
3) Promoters Holding: On observing the data of promoters holding of the companies considered for the
study, it can be stated that ITC and L&T are completely democratic organisations, as their 100% holding
likes with the public. So ITC despite being laggard in two parameters i.e., Chairman’s independence
and separation of ownership and management, it has prodigious performance in promoters
holding.
In case of HDFC, the promoters holding is quite less, i.e., 25.63%, whereas in case of Bharti Airtel
it is highest, i.e., 55.02%. Bajaj Auto registers the second highest promoters holding at 54.98% and
Tata Motors at 45.81%. Thus, family managed businesses have higher percentage of promoters
holding. Now at this juncture it is of paramount academic and research interests to explore the impact
of promoters holding on the three key financial variables of the companies, i.e., PBDIT Margin, PBIT
Margin and Net Profit Margin. In this regard, Net Profit Margin of the companies have been taken into
consideration.
To conduct the analysis the data of the above mentioned variables have been considered for the period
of 2018 – 22. Regression analysis have been applied to decipher the impact of promoters holding on
PBDIT Margin, PBIT Margin and Net Profit Margin
The data pertaining to promoters holding, PBDIT Margin, PBIT Margin and Net Profit Margin of the
companies is provided in table 1 below:

*For information only.

283
PP-ESG-P&P Concept of Governance in Professional Managed Company & Promoters Driven Company

Table 1
Promoters Holding and Key Financial Variables*

Bharti Airtel

Years Promoters Holding (%) PBDIT Margin (%) PBIT Margin (%) Net Profit Margin (%)

2018 67.14 33.61 9.3 0.14

2019 67.14 30.07 -0.4 -3.76
2020 58.98 41.19 3.65 -66.43
2021 56.23 47.21 13.01 -39.17
2022 55.93 51.68 16.87 -5.13
Bajaj Auto

Years Promoters Holding (%) PBDIT Margin (%) PBIT Margin (%) Net Profit Margin (%)

2018 49.3 24.36 23.11 16.16

2019 49.3 21.92 21.04 15.45
2020 53.52 22.82 22 17.04
2021 53.7 22.36 21.43 16.41
2022 53.73 19.51 18.7 15.14
Tata Motors

Years Promoters Holding (%) PBDIT Margin (%) PBIT Margin (%) Net Profit Margin (%)

2018 36.37 8.27 2.99 -1.75

2019 37.27 10.82 6.35 2.91
2020 42.39 1.66 -6.01 -16.59
2021 46.41 6.21 0.47 -7.93
2022 46.4 4.56 0.84 -2.94
HDFC

Years Promoters Holding (%) Net Interest Operating Profit Net Profit Margin (%)
Margin (%) Margin (%)

2018 25.66 3.76 2.82 21.79

2019 26.54 3.87 3.48 21.29

2020 26.18 3.67 2.6 22.86

*For information only.

284
Concept of Governance in Professional Managed Company & Promoters Driven Company LESSON 7

2021 26 3.71 4.89 25.74

2022 25.8 3.48 5.83 28.93

The outcome and inferences of the regression analysis of the aforesaid data is provided in table 2:
Table 2
Outcome and Inferences*

Bharti Airtel

S. Basis of Analysis Multiple R R Square Inferences

No. (Correlation (Coefficient of
Coefficient) Determination

1 Promoters 0.97 0.94 From the correlation coefficient value and

Shareholding and coefficient of determination values, it may be
PBDIT Margin inferred that promoters shareholding has exerted
a positive impact on Profits before Depreciation,
Interest and Tax (PBDIT) of the company.
Since the R-Square value or Coefficient of
Determination is very high, i.e., 0.94, thereby
indicating that 94% of the dependent variable
PBDIT has been explained by the independent
variable promoters holding.
In light of the aforesaid statement, it may be
stated that promoters of Bharti Airtel have been
proficient in discharging of their obligations in the
capacity of board members.

2 Promoters 0.97 0.94 Same scenario is prevailing for PBIT margin

Shareholding and too, i.e., promoters shareholding and PBIT
PBIT Margin margin exhibit a strong correlation (0.97) and
high coefficient of determination (0.94), thereby
indicating that 94% of the dependent variable that
is PBIT margin is explained by the independent
variable that is promoters holding.
It may be opined that Bharti Airtel’s Board though
family based, as promoters have high stakes, it
has displayed a prodigious growth in PBIT.

3 Promoters 0.34 0.12 On observing the impact of promoters holding

Shareholding and on the net profit margin it may be stated that
Net Profit Margin promoters holding has not proved to be as
effective as PBDIT and PBIT Margins, since
both correlation coefficient and coefficient
of determination values, i.e., 0.34 and 0.12
respectively are extremely low.

*For information only.

285
PP-ESG-P&P Concept of Governance in Professional Managed Company & Promoters Driven Company

In other words, it may be concluded that

promoters have failed to carry on the momentum
created at PBDIT and PBIT levels to the Net Profit
of the company.
Since net profit is the remainder left after taking
into consideration all the operating and non-
operating expenses, operating and non-operating
incomes, interest and taxes, in view of this, it may
be stated that the business knowledge/ acumen,
expertise and experience of the promoters might
have fall short when it comes to steering the
business to its crucial and last leg of the yearly
business journey, that is net profits.
May be the level of business knowledge
and expertise required to make the business
sustainable in terms of net profits is lacking in the
promoters.

Bajaj Auto

S. Basis of Analysis Multiple R R Square Inferences

No. (Correlation (Coefficient of
Coefficient) Determination

1 Promoters 0.15 0.023 From the values of correlation coefficient (0.15)

Shareholding and and coefficient of determination (0.023) it may
PBDIT Margin be presumed that promoters holding or family
business structure have not delivered the desired
business results.
Moreover, the meagre value of coefficient of
determination at 0.023 is a metaphor of poor
strategic business decisions by the board.

2 Promoters 0.14 0.021 On perusing the impact of promoters holding

Shareholding and on PBIT margin, it may be construed that family
PBIT Margin business concept have not succeeded to a great
extent for Bajaj Auto. Both correlation coefficient
(0.14) and coefficient of determination (0.021) are
abysmal, implying that the promoters might have
lacked on the vital attributes of pragmatism,
planning, intelligence, strategy etc.

3 Promoters 0.39 0.16 Similar scenario is being observed in case of net

Shareholding and profit margin, i.e., significant promoters holding
Net Profit Margin have not exerted a positive impact on the net
profit of the company. In view of this, it may be
opined that promoters may be lacking requisite
business acumen and expertise.

286
Concept of Governance in Professional Managed Company & Promoters Driven Company LESSON 7

Tata Motors

S. Basis of Analysis Multiple R R Square Inferences

No. (Correlation (Coefficient of
Coefficient) Determination

1 Promoters 0.58 0.34 High promoters holding to some extent have

Shareholding and created an impact on PBDIT to some extent only,
PBDIT Margin as evident from the correlation coefficient which
is 0.58 and coefficient of determination is 0.34.
Hence, it may be stated that by reducing the
promoters holding, if the company would have
inducted board members from outside who are
having in-depth knowledge of the automobile
sector and its dynamics, probably the results
might have been different.

2 Promoters 0.43 0.19 The story remains same in case of PBIT too, as
Shareholding and both correlation coefficient and coefficient of
PBIT Margin determination are quite low.

3 Promoters 0.38 0.14 From the coefficient of correlation and coefficient

Shareholding and of determination values it may be mentioned
Net Profit Margin that lack of requisite practical insights about
the automobile sector at macro level and key
business processes at micro level.

HDFC

S. Basis of Analysis Multiple R R Square Inferences

No. (Correlation (Coefficient of
Coefficient) Determination

1 Promoters holding 0.92 0.85 The magical effect of professionally managed

and Net Interest company can be observed from regression
Margin analysis results of promoters holding and net
interest margin.
HDFC Bank has relatively less promoters holding
in comparison to the other companies and
probably this holding structure has enabled the
bank to achieve high net interest margin.

2 Promoters holding 0.74 0.55 Looking at operating profit margin it may be stated
and Operating that HDFC’s professionally managed structure
Profit Margin has delivered fruits of financial prosperity.

3 Promoters holding 0.95 0.91 From the coefficient of correlation value 0.95 and
and Net Profit coefficient of determination value at 0.91, it can
Margin be said without an iota of doubt that the bank
is deriving the benefits of the blend of business
knowledge, expertise and experience of the non-
promoter board members.

287
PP-ESG-P&P Concept of Governance in Professional Managed Company & Promoters Driven Company

4) Succession Planning: On observing the succession planning scenario of all the six companies considered
for the study, it is heartening to note that all the companies have robust succession planning in place.
For instance, in case of Bharti Airtel though a family managed business has instituted strong succession
planning that is its board of directors, HR & Nomination committee are entrusted with overseeing and
monitoring talent management and succession planning initiatives of the company.
On the other hand, HDFC a professional managed company too has espoused robust succession
planning as manifested from the fact that its Nomination and Remuneration Committee and the Board
of Directors review succession planning and transitions at the board and senior management levels.
5) Business Continuity Plan: From the study it is evident that the companies are aware of the significance
of having business continuity plan. Companies have taken several measures indicating that they are
geared up for business continuity plan. Measures like disaster management, work from home facility for
employees, adoption of risk management framework, efficient internal audit department, preparedness
level at each project site etc. all creates an optimism among the stakeholders that the corporate world
has the requisite preparation to surmount varied degree of challenges and ensure survival of the
business.
6) Sustainability Focused Approach: On observing the performance of the company in terms of
sustainability oriented approach, it is interesting to note that the companies have embraced various
measures like constitution of ESG committee; Safety, Health and Sustainability Committee and CSR and
Sustainability for strengthening sustainability of the organisation. The mentioned committees provide
strategic guidance and decision making, reviewing and overseeing of implementation of sustainability
policies on annual basis etc. thereby, ensuring sustainability of the companies.
7) Conflict Management: Conflict management is manifested in the approaches of the companies
considered for the study. Code of conduct, periodical disclosure by senior management to the board
relating to all material financial and commercial transactions pursuant to Regulation 17(4) of the SEBI
Listing Regulations, continuous review of the succession planning and transitions at the board and
senior management levels, focusing on board composition with reference to skill sets required / areas
of expertise etc. indicates robust conflict management in the companies considered for the study.

Marico Limited - A case study in professionalizing of the board

Marico Limited is one of India’s leading companies in the fast-moving consumer goods (FMCG) and skin care
businesses, founded by Harsh Mariwala. Harsh Mariwala joined his family-owned commodities trading business
before eventually founding Marico in 1990 – completing a transformation of a traditional trading business into
a leading consumer products and services company.
Mariwala turned the family-owned company into one that is now perceived by the market to be a well-managed,
professionally run company. In 2014, Mariwala, who was till then, the Chairperson and Managing Director of the
company, inducted a professional MD on the board – Saugata Gupta. He proceeded to then make his role non-
executive – he would no longer look after the day-to-day operations, instead allowing a team of professionals
to run the company. He would remain the chairperson of the company.
Mariwala’s son Rishabh spent three years at Kaya, the beauty-salon business of the company, and then left
to start a venture of his own in 2011. His daughter, Rajvi, left the company after two years and is now a canine
behaviorist. His children are no longer part of the management or the board.
Mariwala has stated that he intends to make himself redundant in the company over time. By making an
investment in professional leadership and staying away from day-to-day management, he has sought to
demonstrate to the market that the interests of the promoter group are aligned with those of other stakeholders.

288
Concept of Governance in Professional Managed Company & Promoters Driven Company LESSON 7

Marico’s case is an excellent example of the promoter handing over the leadership to a professional and
distancing themselves from day-to-day operations.

Godrej Group - Clear responsibilities for next generation promoters

The Godrej group is a large Indian conglomerate operating in the consumer products, real estate, consumer
durables and animal feed businesses among others. Adi Godrej is a third-generation promoter and the current
chairperson of Godrej Industries Limited, while his brother Nadir is the Managing Director for the same company.
His cousin, Jamshyd Godrej is the chairperson of Godrej and Boyce, the consumer durables arm of the group.
Adi Godrej has ensured that the companies are run by a combination of family members and industry
professionals. The group had appointed a facilitator in the past to oversee succession planning in the group.
Family members seeking to enter the businesses in management roles are required to be well qualified.
Adi Godrej has three children, of which his eldest daughter, Tanya Dubash, his daughter, is an Executive Director
of Godrej Industries Limited and the Chief Brand Officer for the group. She oversees the group’s branding efforts
and is also Chairperson of Godrej Nature’s Basket, the gourmet retail arm of the company.
Nisaba Godrej, his second daughter is the Executive Chairperson of Godrej Consumer Products Limited, the
home and personal care products division. Previously, she led the innovation strategy at the group company
– Godrej Industries Limited. She was also involved with Godrej Agrovet Limited, the agribusiness arm of the
company. Vivek Gambhir, a professional, serves as MD at Godrej Consumer Products Limited.
Pirojsha Godrej, Adi Godrej’s son, looks after the real estate business. He has served as Managing Director and
Chairperson at Godrej Properties since 2012. Effective April 2017, he serves as Executive Chairperson at the
same company, while handing over the MD role to Mohit Malhotra, a professional who joined the company in
2010.
The succession plan has ensured that there are specific and clearly defined roles for the next generation based
on individual strengths.

WAY FORWARD
No doubt there may be many limitations of a family driven businesses but it is to be noted that family businesses
make up for an astonishing 79 percent of India’s GDP. Even under times of volatility and uncertainty, family
businesses have displayed conviction and resilience. However, it is essential for them to adopt new-age
techniques and competencies to grow in today’s fast-paced world. Family businesses play a pivotal role in the
Indian economy through their contributions to the country’s business growth and stability.
With 111 publicly-traded family-run companies valued at USD 839 billion, India is home to the third-largest
number of family businesses globally. One might struggle to fully comprehend why family businesses need to
be treated in a way different from any other corporate company, but it is essential to understand that family
businesses are more often than not built on unwavering values and principles. It can be argued that these
values and principles are what enable family-run businesses to sail through troubled waters through meaningful
internal and external collaborations.
Family businesses are rooted in trust, integrity, kinship, and brotherhood, which extends to their employees as
well. Data shows that 78 percent of family businesses have gone out of their way to retain their existing staff in
the face of adversity. Family-run companies tend to be resilient under volatile conditions considering that they
do not rely solely on external entities for their capital.
Thus, it may be opined that despite professionally driven companies are making rapid growth, family run
companies are also doing quite well. However, in the era of globalisation marked by cut throat competition
both at global and national levels, companies may espouse the trajectory of professionalism for enhancing
business growth.

289
PP-ESG-P&P Concept of Governance in Professional Managed Company & Promoters Driven Company

LESSON ROUND UP

l India enjoys a rich and glorious history of family-owned business. A family business may be company,
partnership firm, HUF or any other form of business owned, controlled and operated by members of a
family. In India the majority of businesses are controlled by families.
l Most family businesses do not survive beyond two or three generations. One of the main reasons for
the short life span of family businesses is due to the lack of governance mechanisms in the family.
With better family governance, business development reaches next level and ensures continuity of the
business across generations.
l To build up the transparency and accountability of the Board of Directors, the Act now requires at least
1/3rd of the total directors of a listed company to be Independent Directors and have no material or
pecuniary relationship with the company or related persons.

GLOSSARY

Family assembly: A formal gathering of family members to discuss business and family issues. This meeting,
usually held once or twice a year, is generally open to all members of the extended family.

Family constitution: A set of documents that record the family’s values, hopes and goals as well as a
framework for how to achieve them. The constitution provides guidance on the activities of the family, the
business, the enterprise, the family office and more.

Family council: A formal governing body that represents the family. It makes decisions on issues that overlap
the family and the business and makes recommendations on behalf of the family to the board.

Family enterprise: The various businesses and shared investments, including real estate, owned jointly
by family members. A family usually begins with a single legacy business and then, over generations,
diversifies into other investments, often selling their family business.

Family governance: Agreements and shared activities that organize the family to remain aligned in support
of their ventures and investments through multiple generations.

Family office: A private wealth management advisory firm that serves ultra-high-net-worth families. A single-
family office serves one family. Multifamily offices serve multiple families. Family offices can also manage
non-financial issues, such as travel and household arrangements.

Family values: In a family business context, these are statements of what the family and their company
stand for and believe. Families typically uncover and enshrine family values over time. Documenting and
distributing the values to all stakeholders creates behavioral guides for decisions, brand development
and family development. Some families create separate statements of family values and business
values.

Independent directors/board members: Members of the board of directors or board of advisers who are not
family members, company employees, advisers or consultants paid by the company, or close associates of
the CEO or other key stakeholders.

Stewardship: The careful and responsible management of something entrusted to one’s care; an attitude
that one’s inheritance should be preserved and passed on to others, rather than used up.

290
Concept of Governance in Professional Managed Company & Promoters Driven Company LESSON 7

TEST YOURSELF

(These are meant for recapitulation only. Answer to these questions are not to be submitted for evaluation.)
1. How corporate governance differs in family and professionally driven businesses?
2. Does India is witnessing a metamorphosis from family run to professionally run businesses? Elucidate
with suitable examples.
3. How the phenomena of globalisation has impacted the growth of family run businesses in India?

LIST OF FURTHER READINGS

l Harvard Business Review Family Business Handbook: How to Build and Sustain a Successful, Enduring
Enterprise (HBR Handbooks) by Josh Baron
l The Family Business: A Parable about Stepping Into the Life You Were Made For by Geoff Peters

l The Ultimate Family Business Survival Guide by Priyanka Gupta Zielinski

l Family Business for Next Generation Leaders : To Build Business Beyond Generations by Abirami
Duraisamy

OTHER REFERENCES

l https://trendlyne.com/equity/share-holding/187/BHARTIARTL/31-03-2022/bharti-airtel-ltd/

l https://www.moneycontrol.com/financials/bajajauto/ratiosVI/BA10/1#BA10

l https://trendlyne.com/equity/share-holding/144/BAJAJ-AUTO/31-03-2022/bajaj-auto-ltd/

l https://trendlyne.com/equity/share-holding/1362/TATAMOTORS/31-03-2022/tata-motors-ltd/

l https://trendlyne.com/equity/share-holding/533/HDFCBANK/latest/hdfc-bank-ltd/

l https://economictimes.indiatimes.com/industry/services/education/ushering-indias-family-businesses-
into-a-new-era-of-endless-possibilities/articleshow/89500732.cms?from=mdr

291
PP-ESG-P&P Concept of Governance in Professional Managed Company & Promoters Driven Company

292