When good companies make disastrous moves

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The issues arising out of the recent transitions in the Tatas, Infosys and even some political parties highlight what I suspect will be a recurring incident in the times to come, the battle between the patriarchs who have handed over power and the new successors who have taken over.

Breaking this down to its simplistic elements, this occurs when the incumbent partriarch come back to the company that they had stepped down from, under the rationale that the new generation is not doing a good job, (in their opinion) and that they need to come back to save the company from the efforts of the new successor.

These are the blue chip professionally run organisations, where the people concerned are some of the best known, and most competent people available. Comparatively, family businesses are relatively lesser qualified and hence would probably face greater challenges and the issues become even more serious and alarming for them.

Let us try to understand what is happening here:

Usually the patriarch expresses a desire to hand over the reins to the successor, (family or a non-family member) and may play an important role in his/her selection.

The successor is usually a well-qualified protégé with a stellar track record, who is inducted into the top levels. The successor is handed over the reins, with the blessings of the patriarch, and usually told by the incumbent, that they have a free hand to do the needful. The successor settles down over time, and starts taking steps to reconfigure the organization, which would, in his opinion, help the organization to meet the challenges for the future. This usually has the support of the Board and management, as this successor is not bound by legacy or traditions, unlike the earlier incumbents and views the challenges with a fresh viewpoint.

A few years later, one may find the predecessor, wanting to come to back to save the company as the steps taken by the successor, may be violating some values which may have been considered sacred. This may lead to a tussle at the Board level, which may or may result in the successor being evicted from his position, or even the Board.

This process (or some variations of this) is increasingly becoming common, in corporate and political India. In order to figure out what is happening, it would be interesting to understand what is happening in the predecessor’s mind.

These patriarchs are usually those who have worked hard to set up the company, and very closely identify with the company. In fact, their personalities and identities are interconnected to the company and they usually achieve iconic status within and externally to their companies. The success of the company often gives them a very high degree of visibility and power. Their success and fame as the head of the company is also acknowledged in the industry. Their company may be amongst the leaders in the industry segment, with a significant credit going to the incumbent leader.

What also occurs, is that the organization success is attributed to a very large extent to the culture within the organisations. This culture, (or values, if you will) are shared and protected within the organization. These values are represented in various traditions, practices, or even artifacts which are perpetuated within the organisations. It is this what the patriarch seeks to protect.

This ensures that the organization is kept together and aligned to the vision set by the patriarch. Secondly, research shows, that since the patriarch had been successful earlier by following a particular strategy, he would prefer to follow that. This would also be the most convenient and comfortable path for the entire company to follow, since this would be the tried and tested method which had been successful for the company in the past. Any deviation from this vision would be enough to label the leader as a rebel.

Secondly, the predecessor would have a very close attachment to the business. The business usually is the center of the patriarch’s attention, since he may have spent a major part of his life engaged in the business. So, asking him to step aside or even change something in the business which he has built up, will definitely be an emotionally traumatic experience for him. Some authors have referred the family businesses as the “mistress” with the family members, including the spouse, getting a lower priority, to show the emotional state of the patriarch.

In these circumstances, the patriarch may prefer to let the business maintain status quo, as this is the comfort zone for him and any change in the business would be discouraged. The patriarch’s loyalists too, would like to maintain this state since this is the state of “good times”, where they feel that they are in control. Any deviation from this could be explained as temporary phenomena and they all usually hanker down, focusing internally on increasing efficiencies for the better days to come.

The situation is slightly different, in case of a succession. Post the handover, the patriarch may find that he may miss his prior position in the organization. In India, especially, the old guard may find themselves having a lot of time, and no work. This occurs after the incumbent has taking over, and the patriarch may long for the opportunity to go back to the business.

This usually presents itself, when the new CEO starts making changes to adjust to the new realities, and the patriarch uses this pretext to stage a comeback.

So what are the concerns that this process has, especially for family firms:

Resistance to change: There are ample examples of firms that have just died due to irrelevance, where the successful company did not recognize and readjust to the changing environmental conditions. The success of the company is the biggest factor in its downfall. Examples of Blackberry, Nokia and Kodak are examples of companies not changing fast enough. The Ambassador brand being bought over by Peugeot, and numerous family businesses shutting down or even struggling for survival and relevance are additional examples of companies not being able to cope. The current managements will have to change their mindsets and have to realistically evaluate the options a company has for it’s future.

The Curse of the legacy assets: Most well established firms have legacy assets which are at zero costs and hence not considered at full value when evaluating financial implications. Legacy assets also need to get a return on the investments. I have had constant battles with families, where the land and buildings for factories and showrooms, have been in the family for generations, and these are used at zero value, thus give a deflated picture of the costs. All established businesses usually operate on a marginal cost basis, and do not include realistic costs of such assets while deciding the return on their investments.

We must value all the assets at opportunity costs and replacement costs, that is, the market value to see if the returns are commiserating with the investments. Increasingly, families are unlocking the value of these assets. One family I know, has shut down one line of business and have rented out the property, since the return was higher!

Reality check for the value of factors of production: Very often, companies are successful, and the organizations ride this wave of success for quite some time. During this time, organizations are able to get low costs due to their prominent position in the field. Over time, circumstances change and the company still operates with the same assumptions responsible for its success earlier. There is no reality check for the organization, as they are all internally focused, with internally candidates rising to the top positions, who may not be aware of the environmental changes. This often manifests in assumptions, of the world, the environment, and including other indicators which are benchmarked to the earlier era.

I have often seen extremely reputed organisations, take their human capital for granted, especially in knowledge based and creative industries. The assumption is that the firm’s success is permanent, and the past goodwill and achievements will be adequate to attract the best talent. This proves to be a very costly mistake, as labour is the most mobile in today’s times, and good talent is especially extremely difficult to find and then to hold on to, given today’s extremely competitive environments. There is the famous example of Neal Mohan, a senior executive in Google, who reportedly offered a bonus in 2011, when he was considering leaving for Twitter. These means that we review our compensation to human talent and make this market based, instead of internal policy based. Like a famous industrialist once told me” if you pay peanuts, you will get only monkeys. Or people who will use your office to hunt for better paying jobs”. Good organisations do not fall into this hubris.

What is needed here is a strong dose of reality and realization that “what got us here, will not take us in the future”. A structured mechanism to benchmark the firm against the other competing organizations would help. The sad reality is that the most organizations live in denial and prefer not to accept the fact that the new realities are different. Starting with a zero-based budgeting approach and reviewing the opportunity cost, and the return derived from each asset, would help.

Values:
Often the issue of values is raised in the debates that arise in Board rooms and used as basis for reviewing the actions of the newcomer. But families should realise that there is something more important than values, and that is the question of sustainability of the business.

Businesses have to realise that the sustainability of the business is more important, that is, the business should give a positive return to its investors. And these profits can be used to pursue and preserve values. The profits can only come from efficient businesses making products which are relevant and the customers see value in these products. For this, one needs to prune any deadwood in seeking efficiencies. One cannot compromise on this step. Companies would do well to do this review, seeking an explanation from each resource, project and business, for its existence. The story of 3G Capital doing this for all their companies (Anheuser Busch, Kraft-Heinz) is an interesting case in point for addressing inefficiencies. This may not be easy, but it still needs to be done to keep costs low and businesses relevant, and definitely not to protect the sacred cows in organisations. Unfortunately, this is where some companies may be found lacking.

Recent research has shown that the life of companies has come down from 61 years to 18 years due to their complexity and inefficiencies. The same research study has shown that the businesses are becoming more complex and handling such complexities are a task by itself, along with the forces of Schumacher’s “Creative Destruction” which are also at play. Given this complexity, very few businesses can bear the additional burden of values at the cost of profitability. This is a reality that organisations have to realise, failing which, they will face the same curse that has affected all successful firms, that of, not surviving beyond one generation or even less. The struggle for values should not be at the cost of business profitability and sustainability. New companies need a new leadership to take them through unchartered waters, and for this, the ways things have been done in the past, will definitely not be the same which will take them in the future. It is high time that the incumbent patriarchs realise that the new successor must be given the freedom to develop and navigate this path in a new direction for the future.

In the near future, we will be seeing a large number of firms facing transitions in their management and hence maybe facing these issues. The clock is ticking for all of them.

- Rajiv Agarwal is the Associate Professor of Family Business at SPJIMR.