The Curse of too-many Sons

The Bombay Club is not flatly protectionist. Most of its businessmen-members agree that India must open up, globalise, and get competitive. But they plead, “We need temporary protection for 10 years more. For 50 years, the license-permit Raj prevented us from becoming big enough to take on multinationals, so give us 10 years more.”

There is some truth in this. But equally true is a separate factor that no Indian business house (and no economist for that matter) talks about. This is the constant splitting of industrial empires between the sons of a business house. This has worsened and in some cases finished one industrial empire after another. Had all the great business houses that existed in 1947 stayed intact, many would today be big and strong enough to stand up to world competition. In fact, the original empires have been split into anything from five to 50 separate units as each generation produces a fresh litter of sons.

Note that, historically, a multitude of daughters did not lead to fragmentation, since they got dowries and some inheritance, but not control of a group of companies. Now even that is changing, and daughters are demanding (and getting) a slice of control. With this, the fragmentation of business houses threatens to get worse than before.

Of the major business empires existing in 1947, only the Tatas and Birlas look world-class today. Most of the others (the Dalmia-Jain group, Shrirams, Walchands, Thapars, Singhanias) lie scattered and in many cases shattered. People generally think this is because the Tata and Birla groups have been well managed and the others not. In fact, there is another, very germane reason—the Tatas and Birlas, produced few sons if any, while the others suffered from a curse of excessive fertility.

Sons have traditionally been considered a blessing. And so traditional business wisdom in India has aid sadly, “God gave the Tatas and Birlas everything except sons.” In fact. God’s real blessing lay in a lack of sons. Had these groups procreated as rapidly as say the Modis, they too might have been in a pretty bad shape today.

JRD Tata had no sons. Nor does Ratan Tata. This is why, uniquely, the Tata empire has remained consolidated and strong.

The Birlas were not quite so infertile. GD Biria, for instance, had three sons. But neither MP Biria nor KK Biria had any sons. BK Biria had one son (Aditya Vikram) who, in turn, had only one son (Kumaramangalam). BM Biria had only son (GP Biria) who, in turn, had one son (CK Birla).

Contrast this with the Dalmia-Jain empire, which at independence was virtually as large as the combined Biria group. First the Dalmias split away from the Jains. Then JD Dalmia had as many as seven sons. I am unable to ascertain exactly how many children RK Dalmia had, but I suspect the number was large since he had six wives (quite legally, since this was before Hindu personal law was reformed to ban polygamy).

The DCM empire, started by Lala Shriram, has been split time and again among the Bharat Rams, Charat Rams and Shrirams. It has turned out to be a case of divide and misrule.

The Modis have proliferated in such profusion that they span almost the entire alphabet (not quite from A to Z, but certainly from BK to YK Modi),

The Walchands, great pioneers of industry during the British Raj, are ghosts of their former glory. Premier Automobiles is finally exiting from the car business because it lacks the financial muscle to stay in. Had the family remained consolidated, this could have been avoided.

The decline of the old empires has enabled many new ones to come to the fore. But even these new ones stand in danger of fragmentation. Consider the Munjals, new stars of the Hero Honda group. The four bothers of the clan have no less than 13 children between them, each of whom is apparently going to get a slice of the empire. Unlucky 13, some will say.

This, then, is a major and sadly undiscussed reason why Indian companies are unable to compete. British companies, like Hindustan Lever or ICI, are not subject to constant division between a constant profusion of sons. They sometimes divest businesses to focus on lines of production where their core competence lies. Unfortunately, the core competence of some Indian business houses seems to lie in the production of sons.

The number of sons is only half the problem. The other half lies in their varying quality. Business empires are divided with little or no heed to how competent each son is. The incompetents typically (though not always) get as much as the competent ones. After all, the principle of inheritance has never been related to competence. So even if a talented entrepreneur creates a great empire, there is a danger that some of his sons will fritter away their legacy.

The large professionally managed corporation avoids most such problems. Virtually all the biggest MNCs, which started as family businesses, are professionally managed today. Such companies do not keep splitting with every generation. Their chiefs are selected on the principle of competence, not inheritance. Hence they ha major advantages over family run firms.

However, they have disadvantages too. Global experience shows that entrepreneurship is a quality that professional managers find difficult to replicate. New entrepreneurs have time and again come up from nothing to beat established professionally run giants. Professional managers have less of a stake in a company than the owner, and can sometimes put their private interests before that of the company (through enormous salaries and ‘golden parachutes’ which entitle them to huge compensation if sacked). Still, history suggests that to grow really large, family-run businesses will have to graduate to professionally managed status, not in the first entrepreneur’s generation, but in subsequent ones.

In India’s case, an additional reason for splintering has been the licence-permit Raj. Industrialists grabbed any licence they could get instead of attempting to specialise. Besides, many industrialists deliberately started new businesses so as to arrange a separate inheritance for each son.

If Indian companies wish to grow strong enough to take on MNCs and then become multinationals in their own right, they will have to abandon the historical tradition of splintering every generation. They will have to move to a system where the ownership of shares of an industrial group may be divided between many sons, but the group itself remains intact, and is run increasingly by professional managers.

If this does not happen, there is no point in the Bombay Club saying that in 10 years time, Indian business houses will be ready to take on the world. In 10 years, they will merely have produced a new generation of sons and splintered yet again. Unless, of course, they are saved by infertility.

What do you think?