The situation may become complicated if there are simultaneous or even sequential changes in both the levels of control of ownership and management. An extreme situation is when the founder no longer holds a significant per cent of shares (and, hence, has no significant say in anything), and does not have his “appointees” still calling the shots on the board and management, resulting in little management control. This is akin to a king without a kingdom. Unfortunately, some founders who keep diluting their shareholding do not realise that sooner than later they would lose management control, too. Some day, they start noticing that the organisational policies, practices and priorities are different from what they had carefully crafted and followed for years. This is essentially the “Murthy Phenomenon” that we have witnessed recently. The “Tata Phenomenon” of high ownership control with low management control precipitated a situation when the non-family successor reportedly did not carry the legacy of the predecessor and deviated from the values of the group.
When ownership and management controls change
It is natural for ownership and management controls to change as organisations evolve. As shown in the figure, Quadrant I has both ownership and management controls vested in the same individual. This is the only “stable” situation that will continue so long as the founding family keeps the ownership high and has capable family members or family nominees with the same values as that of the founder leading the board and the management.
Quadrant II can be somewhat paradoxical with the founder, while retaining high ownership and therefore control on the board, practically losing control of operations. Tragedy hits if the founder makes mistakes in selecting the successor who turns out to have different priorities, capabilities, style or values as compared to the founder and starts undoing the legacy of the predecessors. A similar challenge may crop up if there is lack of alignment within the owner family; in a recent case, the founder of a very large group took back the reins of leadership from his elder son when he realised that the son, under the influence of a team of expensive new recruits, had started undoing several things that he thought were core to the organisation. Apparently, the founder did not do the due diligence to confirm that the son had the institutional values, leadership potential and managerial capabilities to succeed him. Founders and family business leaders should realise that not everyone can be an excellent operating leader; some may be better off as strategists or simply as investors. Families with high control, such as Dabur in India and Merck in Germany, have always appointed non-family leaders very carefully.
Firms in Quadrant III have diluted their holding as part of business expansion. Investors allow the founder family to choose the CEOs so long as they deliver results and enjoy their trust. Several industry leaders in India hold sway over their group companies even though their ownership control is quite modest. In the absence of capable successors, the founding family will lose management control as well. Therefore, to avoid sliding into the fourth quadrant it must focus on grooming leadership talents in the family and choose and promote successors with similar values and orientation respectful to legacy.
Select successors who believe in legacy
For a capable successor to retain the proud legacy of a founder or a tall predecessor, it is critical that he is passionate about the organisation, proud of its heritage and is likely to adhere to the core institutional values set by the founder and nurtured by the predecessors. Believing in continuity as the purpose, they should strengthen the basket of values, not summarily discard these. It is a necessary condition that is often forgotten in the process of identifying and inducting a successor. Grooming of leaders with stewardship values, right leadership and managerial capabilities combined with an empowered board to provide an active oversight helps an organisation sustain the legacy of the organisation to the satisfaction of the founder.
and executive director of the Thomas Schmidheiny Centre for Family Enterprise at the Indian School of Business. Roy is professor of strategic management at the Indian Institute of Management Calcutta