Understanding the Pitfalls and Crafting Strategies: Navigating the Perils of Self-Destruction for Family Entrepreneurs
Naresh Goel pleaded, “I have lost every hope of life; better to die in jail!” Goel is the family entrepreneur who, not so long ago, successfully built Jet Airways as one of the best airlines in the world. He is facing an alleged `538 crore case while his wife is battling with cancer. The family held 25% shares when Jet stopped operations. Media mogul Subhash Chandra’s fall from stardom reads like a filmy tragedy. His family’s complete loss of control in the ZEE empire that he passionately built up, followed by Walt Disney and Sony terminating their strategic relationships were inconceivable in the normal context. Similar were the fates of once-successful family entrepreneurs like Rana Kapoor of YES Bank. These stars rose up steadily and built entrepreneurially successful and professionally managed family business ventures within a fairly short time, but fell to a morass of disrepute and destruction like a meteor. Why does it happen? What ails family entrepreneurs? Can this slide be arrested?
What ails family entrepreneurs?
Family businesses, traditionally controlled by joint families, are increasingly becoming family enterprises with the advent of nuclear families and the rapid rise in entrepreneurial opportunities. While a joint family derived its strength from collectivism, financial prudence, and patriarchal control, nuclear families most often rely entirely on a single pillar as the source of wisdom and entrepreneurship. Most such family entrepreneurs with a huge hunger to grow start out with a relatively humble financial base. As they prove their entrepreneurial capabilities and managerial acumen from their early growth phase, and with the eco system around them assigning stardom, their hunger to grow multiplies. They project their future trajectory based on past success and tend to circle themselves with admirers and worshippers, their cheerleaders. Entrepreneurs’ need to soothe their ego rises as they push the speed pedal further until they reach a break point.
While this fast-paced journey on the business front continues, they forget to tap into the wisdom or even views of their genuine well-wishers, including family and close friends (if any). Most self-made entrepreneurs do not think that anyone else would know better than them about making their future venture journey successful. They do recognize the genuineness of the concerns of the family members, but often feel it inferior, irrelevant, and irrational to consider their views, let alone advice.
The cumulative effect of these factors is a possible dangerous downward spiral of family entrepreneurs. As the noose tightens with assumptions going haywire, most entrepreneurs desperately attempt many things until they hear their death knell. By this time, their business would have gone to dogs, family wealth eroded, and cheerleaders disappeared into thin air. Family entrepreneurs are left with nothing but legal entanglements they have created.
The need for multi-pronged governance
High-quality family entrepreneurs are important not only for themselves, their families but also for society at large. It is critical to try to prevent them from taking the suicidal path of self-destruction. This is not possible with conventional family or corporate governance alone. What is required is a multi-pronged approach that addresses the slippages on both family and business fronts.
Family and friends
Entrepreneurs create wealth throughout their life, and the fruits of their efforts are enjoyed more by the surviving and succeeding generations. This includes their socio-emotional reputational wealth too, which is globally recognized as an equally important source of family wealth. Family entrepreneurs thus become custodians of the economic and socio-emotional wealth they create for their families and are responsible to preserve, protect and securely pass them over to the subsequent generations. While all such entrepreneurs are aware of their responsibilities, sometimes they get carried away by other temptations. Subhash Chandra of ZEE had done very well to build family harmony and shared his wealth with all his siblings most fairly, but forgot to remember that many of his decisions of diversification, diversion, and pledging of the ZEE shares held by the family could lead to disastrous consequences. The family did not have an effective mechanism to practice family governance. There was none to ask or make Chandra reflect over the possible consequences of many of his assumptions not holding good. Another source of effective support is the close network of personal friends of the entrepreneur who could take the liberty to influence the thoughts and actions of their friend who is on the road to possible disaster. Close friends can provide great emotional support too.
Funders
Financial institutions including VCs/PEs must not only make sure that their investments are financially safe through securitization but have to try to avoid them from reaching a situation of protracted legal recourse to recover their investments. A recent study on share pledging by the Indian School of Business has shown the possible risks involved in indiscriminate pledging and the need to put a cap on the purpose and extent of pledging possible.
Board
The ZEE incident exposed the hollowness of our board functioning with two independent directors resigning when the company was in deep waters. We need policy intervention to mandate promoters to make annual disclosure of their interests and actions outside the normal purview of that business which may put the business at risk.
Multi-pronged governance structure
We need governance beyond compliance to address such incidents with multiplier effect. This would involve development of a holistic approach that includes all key stakeholders. The cost of the disgraceful exit of family entrepreneurs is very high and multi-dimensional, particularly for a rapidly transforming economy and society such as India.
