CONSTITUTIONS VITAL FOR FAMILY-RUN FIRMS
A senior board member of a family-held Indian conglomerate which established one of Singapore’s most successful listed companies takes a decisive line when it comes to operating family-run businesses.
Mr. R. Jayachandran, Group Director of Kewalram Chanrai (KC) Group, believes mature family-run businesses should draw up constitutions to govern how they operate, going so far as to define which family members should or should not come on board.
“When businesses are in a developed stage, you have to focus on developing a Family Constitution. If you don’t, you will invariably get into a mess,” he said at a dialogue on growth challenges facing family-run enterprises, held by the Singapore Indian Chamber of Commerce and Industry.
He is the only non-family member of the board of KC Group, held by the Chanrai family, and is also non-executive chairman of local commodities firm Olam International, founded by KC Group in 1989. Olam has gone from strength to strength and is now a leading global supplier of commodities such as cashews and coffee.
Mr. Jayachandran advises that besides defining family members’ roles and pay, the document should explicitly formalize that close friends or relatives such as in-laws are not permitted to join the company, unless they fulfil stipulated criteria.
After more than 32 years with KC Group, and discussions with others in the industry, Mr. Jayachandran believes that hiring friends or family cannot be done without “due diligence.”
The first question to ask – “What kind of person do you need?” And the second – “Does the friend, relative or acquaintance have those qualities?”
He is all for separating management from ownership – leaving the running of the business to non-family professionals. He also believes in looking at options such as listing to boost growth and expansion prospects.
Citing Olam as a case in point, Mr. Jayachandran spoke of the appointment of Mr. Sunny Verghese as chief executive of the company in 1996. That made Mr. Verghese, a non-family professional, completely accountable for its performance.
An equity sharing was also established with Mr. Verghese and his management team. Prior to Olam’s listing in 2005, it also appointed independent directors onto its board and offered equity ownership to employees.
KC Group did not impede Olams’ transition into a global company and was willing to go public despite the dilution in holdings, said Mr. Jayachandran. Today, the family’s stake is about 23 percent. Temasek Holdings holds about 14 percent and the management team, about 11 percent.
Mr. Jayachandran also believes young adults are better placed to join a family business after they have worked elsewhere, preferably at multinational companies, upon completing their education.
The experience will allow them to “acquire the knowledge, discipline and vigour of working out issues” and hold them accountable for their own progress, making it clear entering the family business “is not a birthright.”
There are many families who believe outsiders should not be allowed into their business, but to that he says, “you’re better off changing your policies in today’s context.”
He said the Constitution could also include provisions for hiring independent directors as they are likely to be more objective and have good experience.
When appointing leaders, selection criteria should be based on merit, skills and competence, and need not be limited to family members, said Mr. Jayachandran, who is also Singapore’s High Commissioner to Mauritius.
On the decision to pioneer giving employees stake holdings in Olam, he noted: “One of the things that happened was, it unleashed so much of energy and motivation among the professionals, it’s unbelievable.”
(Excerpted from the Straits Times, Singapore)
