THE THIRD GENERATION CURSE- MYTH OR REALITY

BY SATISH JOHN

The Mafatlals, Modis, Muthiahs, Doshis and Shrirams are examples put forth by business writers and historians who subscribe to the "third-generation theory".
Still, that family business groups do not survive in their original form beyond the third generation could either be fact or one of those myths that achieve near-truth status from repetition.

There is no conclusive research to back the argument. Although there is sufficient anecdotal evidence to the effect, there have also been instances of family business groups splitting in the second generation--the Ambanis, for instance--or continuing to remain together into the fourth generation (the Murugappa Group is a case in point).

There is also nothing that shows a correlation between size and splits, although Kavil Ramachandran, Thomas Schmidheiny chair professor of family business and wealth management, Indian School of Business, Hyderabad, says, "Family businesses stagnate by the third generation only because the emotional bonding between siblings is missing.
The business doesn't become too big to accommodate all of them and therefore, the enterprise becomes too overcrowded."

Several family business groups have diversified just to avoid this trap, and some of those that did so have still ended up seeing a division of assets between an assortment of brothers, sisters, cousins, aunts and uncles. As Ramachandran says, for some family groups it's far easier to divide, rather than keep "it all together".

One reason for the popularity of the theory on third-generation splits is the nature of anecdotal evidence on offer--riches-to-rags (well, almost) stories of families, sordid tales of legal battles, and, in some cases, wholly sensational efforts by various warring factions to get what they perceive as their fair share.

Among these is the story of the Chennai-based MA Chidambaram Group, founded by the man after whom it is named. His son A.C.
Muthiah and grandson Ashwin Muthiah presided over the growth and subsequent collapse of the business empire.

Then, there is the sordid drama being enacted in the Mafatlal family, which was once part of Mumbai's ruling plutocratic elite. The Mafatlals still have a palatial home at the city's posh Altamount Road, but its two third-generation scions have taken their fight for a share of assets to a new low. Police complaints have been filed by both sides over missing artefacts. Atulya Mafatlal and his socialite wife Sheetal are on one side of the fight, while the other has mother Madhuri and Atulya's sister-turned-brother Ajay (formerly Aparna; and some people claim that the sex change has been prompted by Hindu succession law that favours sons over daughters).

While it is tempting, then, to subscribe to the third-generation theory--remember, this essay is yet to take sides--there is also a growing belief that the real issues posing a threat to family business groups are those related to competitiveness and governance.

"As family businesses expand from their entrepreneurial beginnings, they face unique performance and governance challenges. The generations that follow the founder, for example, may insist on running the company even though they are not suited for the job," say Christian Caspar, Ana Karina Dias and HeinzPeter Elstrodt of McKinsey and Co.
in the McKinsey Quarterly of January.

What's interesting is that even the McKinsey consultants believe that these issues related to governance and competitiveness make a family business group's survival beyond the third generation difficult.

That doesn't necessarily affect the survival of the businesses the family runs.

Thus, after their split, the Ambani brothers have grown their respective empires (yes, the sum of parts now exceeds the whole, and how).

The TVS Group, which divided management responsibilities and control in the 1990s, too has seen the various sub-groups grow.

Some factions of the Walchandnagar Industries group--people tend to forget that this was the group that started Hindustan Aeronautics Ltd before that firm was nationalized--have rejuvenated after some time in the wilderness.

Ajit Gulabchand's Hindustan Construction Co. Ltd has reinvented itself as an infrastructure firm. Walchandnagar Industries Ltd, controlled by Chakor Doshi and his son Chirag, is eyeing India's latent demand for equipment to generate nuclear energy.

Meanwhile, those family business groups that remain in their original form are trying to ensure that they don't fall prey to the third-generation curse, seeking the help of lawyers, advisers, consultants, and even God.

"Indian business families now are more open to discussion on issues like business continuity, succession planning, corporate governance, how to handle sibling rivalry, how to draft a trust, etc, and seeking advice from experts," said a note put out by Barclays Wealth India, a division of Barclays Plc, announcing the launch of a forum for family businesses.

A few years ago, the GMR Group's Grandhi Mallikarjuna Rao and his family signed a family constitution before their family deity, promising to manage the business in a certain way.

SOURCE;LIVEMINT