Why Godrej empire split is a model case study for family partition

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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India has amongst the highest proportion of family-owned businesses together contributing to around 80% of the country’s GDP. Family businesses have always proven to be resilient, yet poor succession planning often proves to be the proverbial straw breaking camel’s back. 

Spats over ownership and control of family businesses is not new and leads to a lot of notoriety. In case of publicly listed family businesses, such events not only tarnish generational goodwill of a family but also seriously hampers investors’ confidence. 

As opposed to the popular belief, values and principles of a family are generally not the foundation on which a successful family business is built, but these elements along with trust and integrity, help such businesses navigate during testing times.

One of the oldest Indian business conglomerates, Godrej Group — founded in 1897 — recently announced splitting the empire into 2 groups amicably. The settlement, for the most part, was discussed, deliberated, and agreed behind closed doors amongst the family members. The Godrej saga, when viewed in juxtaposition with other recent family separations in India, reflects the maturity with which the family have approached the sensitive topic and executed the same.

In fact, Nadir Godrej in a statement said; “Godrej was founded in 1897 to help build economic independence for India. This deep purpose of innovating for a cause — the values of trust and respect and the belief in trusteeship and making communities that the companies operate in stronger and better — continue to form the bedrock of who we are 127 years later. We look forward to building on this legacy with focus and agility.”

The Family Settlement Agreement entered into between the parties and press releases issued not only exudes an efficacious family separation process but also reflects the core tenets of the Godrej family and the importance of preserving the legacy of the group as a whole. This, according to me, is the hallmark of a family-run business. By addressing family settlement with minimum disruptions, the Group has set a precedent for magnanimous yet ‘business first’ outlook for family business owners.

Having a charter and an ironclad succession plan should be on top of the list for families

A well-documented governance structure guiding the family on many important matters, including succession is a cornerstone of a successful generational family business. Multiple surveys indicate that the lack of a clear succession plan for the family business and a well-defined conflict resolution mechanism within the family business are key challenges facing family businesses in India. 

While the realignment within Godrej has been done considering strategic growth aspirations, not all family partitions are carried out in such an amicable manner, and some have caused considerable disruptions and also eroded substantial shareholders’ value in the process. 

A succession plan should be forward-looking and should also take into account the aspirations of all family members. Succession planning is not an exact science, but an art and hence should first begin with a simple question: Is it going to be family first or should the family adopt a business first approach? In case of a publicly listed company where stakes are generally high, strategically splitting businesses through structured settlements helps in safeguarding shareholder interests and also allay regulatory concerns.

There needs to be an open conversation amongst the family regarding the business and hence family leaders play a significant role in setting the tone during the planning discussion. Further, considering the sensitivity of the topic and ramifications of the decision on the family, people with the right skillset must be roped in to bring objectivity and minimise biases during the discussion process. 

Wise family leaders understand the importance of proactively and systematically undertaking a succession planning exercise. By clearly articulating the rationale behind the decision and ensuring a fair distribution, they foster harmony within the family. Ultimately, it’s the enduring bond of the family, the oldest human institution, that remains paramount for an Indian family.

—The authors, Vishwas Panjiar and Shubham Jain, are Partner, and Associate Director, respectively at Nangia Andersen LLP. The views expressed are their personal.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow