Family Feuds: Greed, Ego and Value Destruction for Minority Investors
The inability to share wealth and power amicably among siblings, and within families, is a universal problem. Globally, a quick transition from family-/individual-owned businesses to professional management and fear of shareholder lawsuits, especially by activist shareholders, have usually contained the problem. Not so in India, where debilitating family fights over the distribution of wealth are common. 
 
Perhaps the best example of this is the war between the Ambani brothers, which ended in 2010 when Mukesh and Anil signed a two-page private note and withdrew all cases and charges against one another. At the end of a decade, institutional and individual investors and banks who backed Anil Ambani have ended up paying a huge price. The dirty war between the siblings may have seemed like a battle of equals; but, internally, the management acumen and competencies were vastly different. This was unknown to outsiders, especially retail investors.
 
Our columnist V Ranganathan recently wrote about how a long-overdue regulatory mandate (Read: Unfamiliar Ties: Spat over Ownership & Control of Business Families) exposed the fault lines in family-managed corporate groups, bringing disputes and hidden acrimony to the surface. The Securities and Exchange Board of India (SEBI) has recently widened the scope of disclosure requirements (Regulation 30A) making it necessary for private family arrangements within owner-driven listed entities to be disclosed to stock exchanges. 
 
Mr Ranganathan enumerated the many ways in which listed entities pay the price in promoters’ family disputes. For instance, Kirloskar Brothers Ltd spent Rs274 crore in legal fees over seven years, despite a family settlement signed in 2009. The absence of disclosures by sections of the Finolex group and Bharat Gears exposed poor corporate governance, he says. The Rs75,000-crore Murugappa group, recently, settled an embarrassing public battle over keeping a woman family member, Ms Valli Arunachalam, out of the group holding company. An amicable settlement and withdrawal of all legal proceedings has been announced, but it remains to be seen how it plays out, since the details are confidential. 
 
Family-run companies also tend to hide health issues involving their executive leadership, particularly amid succession battles. Especially worrying is a recent incident where the chairman of a high-profile company attacked his board-director wife, causing her to be hospitalised. While no complaint has been filed, this chairman is already involved in a nasty war with his father and a new area of conflict should concern investors, especially since corporate finances have just perked up and the stock is flying. The Jagran group and TVS are other examples of quiet struggles over corporate control.
 
Apart from washing dirty linen in public and filing expensive lawsuits, families spitefully instigate investigations by tax and enforcement agencies against one another. The cost and consequences of these shenanigans are invariably borne by shareholders. Is there a way to ring-fence investors from the impact of succession wars which have tended to be more vindictive than corporate rivalry?
 
Perplexingly, some family disputes make no business sense whatsoever. One example is the fight over Hikal Limited (market-capitalisation of Rs3,700 crore), where Sugandha Hiremath has gone to court in March this year, against her brother Baba Kalyani. She is seeking specific performance, under a family arrangement ostensibly formalised in June 1994 and witnessed by N Vaghul, former chairman of ICICI, and the late SS Nadkarni, then the SEBI chairman. 
 
Baba Kalyani heads Bharat Forge which has a market-capitalisation of over Rs52,000 crore. The 1994 arrangement, flatly denied by Mr Kalyani, was between him and his parents (Neelkanth and Sulochana Kalyani) and came about after a series of bitter exchanges between the father and son. Meanwhile, the Hiremath family has always had management control over the significantly smaller Hikal, set up in 1988 with financial assistance from the late Neelkanth Kalyani. The Hiremaths hold 34.8% of the equity and have moved court after Baba Kalyani attempted to increase his 34% stake this year. Importantly, the attempt to wrest management control happened after their mother, Sulochana Kalyani, who was part of the family arrangement, passed away in February 2023.
 
As an outsider, who has perused the court papers, one can only say that the bitter exchanges between Baba Kalyani and his father the, late Neelkanth Kalyani, are going to tarnish memories and damage reputations–not to mention the high legal costs and prolonged uncertainty, guaranteed in any high-profile litigation in India. I emailed Mr Kalyani for his perspective but received no response. 
 
This brings us back to the key question: Can the regulator find a way to ring-fence investors in succession wars? Proxy advisors, who study compliance issues, are supposed to guide the decisions of institutional shareholders in such situations. Have they come up with a solution? Apparently not. None of the proxy advisors agreed to go on record on this issue. 
 
In Hikal’s case, InGovern Research Services made a fairly radical suggestion. It said that there was a need for separation of management and ownership and sought the induction of a professional managing director (MD) or chief executive officer (CEO) to run the company because the battle with the Kalyanis would divert the time and attention of the Hiremath family. 
 
Notably, no such suggestion was made about the Kalyanis; although at a recent annual general meeting, over half the shareholders, acting on proxy advice, had raised issues about Baba Kalyani’s remuneration as MD of Bharat Forge. In the coming days, health and age may come up as matters of concern, and Mr Kalyani has a separate battle for assets going on with his brother. Proxy advisors have yet to flag any of these.
 
Further digging suggests that this is the first time, that a proxy advisor has recommended that family management should step aside during inheritance battles. Nobody dared make such a suggestion to the Ambani siblings, or in the case of their one-time arch-rival Nusli Wadia, whose spat with his son Jehangir Wadia had a significant impact on the airline business and control of its brands. The disgraceful coup at the Tata group to oust the late Cyrus Mistry also did not lead to radical suggestions or intervention by institutional investors to appoint independent professional managers. It remains to be seen if the wife-beating episode is brought up by proxy advisors as a matter of concern about management. A source in the advisory business explained the silence on such issues saying, ‘unlike journalists, we don't even get access to such information’. 
 
Interestingly, JN Gupta of Stakeholder Advisory Services (SAS) is known to have openly advocated, at SEBI meetings, that both warring factions should step aside until the promoter-families settle their disputes. He believes that only the prospect of losing management control (not to mention access to company funds for litigation) to a professional outsider, will force all sides to the negotiating table and ensure a practical resolution.
 
Finding a truly ‘independent’ person for such a role is like the fiction of ‘independent’ board directors. A majority of directors, no matter their glittering their profiles, owe their appointment to their closeness to management, or favours rendered in official positions as bankers, regulators and bureaucrats. Those who assert their independence lose their directorship at the earliest opportunity; worse, the corporate grapevine ensures that they are never invited to another board again. The cost of speaking up extends far beyond one company and its mischief. 
 
And yet, each of SEBI’s three corporate governance committees, headed by leading corporate honchos, knowing full well how the conditions are dodged, placed more onerous responsibilities on ‘independent’ directors, compensated with ever-rising fees and perks. Proxy advisors, too, are silent about glaring examples of the apparent quid-pro-quo in appointments of bankers, bureaucrats and heads of regulatory organisations to corporate boards, and ill-qualified political appointees on large, listed public sector undertakings. 
 
Board directors are also supposed to weigh in on corporate disputes with their independent advice and actions. This has never happened. Most family disputes have been settled by litigation or private mediation. In India, institutional investors, with significant shareholdings, have either voted with their feet or stood on the sidelines in family disputes, barring the rare, pre-liberalisation instances when government institutions acted on political orders.
 
So long as family-run businesses dominate the corporate landscape in India, family succession battles will remain a risk factor. Reputational risk does not seem to concern them, primarily because Indian and foreign institutional investors (FIIs) ignore such issues. SEBI orders highlighting large diversions of funds from listed entities and collusion with market manipulators have also left such investors unmoved. On the contrary, some FIIs stepped in to bail out such investors. 
 
The two obvious solutions—that independent directors should develop more spine, or that family management must make way for a professional MD/CEO—are both utopian. They may work in form, but not in spirit. If the protection of minority shareholders is the ultimate objective, then it is clear that their best bet today is to do their homework and divest their holdings in strife-torn entities. But this offers no protection for investors in mutual funds, insurers, provident funds and portfolio managers where fund managers may fail in their fiduciary duties.
 
 
Comments
harmonics2001
5 months ago
There was nothing " disgraceful coup" to oust Mr Cyrus Mistry, the mistake of appointment was realised and rectified there may be clash of vision and interest, the ship is valuable asset if captain needs to be replaced so be it, We all know about Mr Nusli wadia and legal games he plays and backstabbing, ungrateful nature, it surprisingly took a long time for tata group to realise this. Despite what he did to pocket f.e. dinshaw trust
sucheta
Replied to harmonics2001 comment 5 months ago
This unsubstantiated slander from an anonymous ID is not acceptable under Moneylife policies. No such allegation has EVER BEEN made by the TATA group or the board. So we will not permit it.
Sanjeev B
7 months ago
Can an Ethics rating system be set up? Maybe in collaboration with Moneylife and other reputed financial economic and legal experts. Rate on a 1 to 5 scale. Then publish those with a 5 star rating so we know at least who is truly clean.
balakrishnanr
7 months ago
There is no escape. Family needs will decide what is left for the other shareholders. Learn to live with it. The law is there to help the rich.
northguleria
7 months ago
Raymond ..GUY always looked like a chor .....MILKING co. money for his lavish lifestyle !
david.rasquinha
7 months ago
Disgusted to read about the wife-beating chairman - not hard to guess the identity. The company's board has already distinguished itself by its wilful blindness or plain gullibility on funding the promoter's personal expenses, so one would be naive to expect any action from them, let alone a resignation. I long ago stopped buying their reputed menswear products.
SUBRAMANIAN PALLAVOOR
7 months ago
I have been maintaining that most businesses owned by families are run as their fiefdom. No one dare ask questions about the way the Company is run and funds siphoned off. SEBI will remain toothless since there is no willingness to do anything. As for Impendent Directors, less said the better. They surrender themselves to the Management to enjoy the loaves of office and close their eyes. Independent Directors in India are useless.
Kamal Garg
7 months ago
What is the practice abroad where also a significant very large corporates are fundamentally family-owned companies.
Kashmirman
7 months ago
who is this wife beating chairman?
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