Perspectives from ISB

The 120 years old Godrej Group has emerged as an icon among family businesses in India, not only for its economic achievements but also for its relentless focus on achieving excellence in corporate governance. In an interview with Sougata Ray, Professor of Strategy, Indian Institute of Management Calcutta, and Visiting Scholar, Thomas Schmidheiny Centre for Family Enterprise, ISB, Mr. Adi Godrej, the chairman of the conglomerate shares his thoughts on corporate governance in family businesses.

What does governance mean for a family enterprise?

In my opinion, corporate governance should be defined as efficient supervision which encourages ‘doing everything better’, and protects the interest of the Company while conforming to all established laws and ethics.

You said “Corporate governance should promote the long-term good of the company and not necessarily particular stakeholders”. Could you please explain this further?

A good management should be looking into the interests of all stakeholders. But the ultimate interest that should be protected is the company’s. All these other things come as part of the company’s interests and not as primary interest.

This makes perfect sense. Yet, why do you think there is so much emphasis on protection of minority shareholders’ interest in the context of family enterprises?

I think we get confused because we automatically assume that people will sacrifice minority shareholder’s interest for promoter interest and, therefore, we should go out of our way to protect it. I think we should go out of our way to promote corporate governance, to protect the company’s interests and ensure that the company’s interests include the interests of various stakeholders.

Does the short term focus in terms of quarterly performance or annual performance affect corporate governance in some ways or the other?

A good board will not over-emphasise the quarterly results at the cost of the company’s long term interests. The company’s long term interest is what is important. One advantage family businesses have is that they don’t need to chase quarterly numbers.

What is your general advice to leaders of family enterprises to improve corporate governance?

I believe it is important that corporate governance be principle-based rather than rule-based. This is essential since principles are harder to ‘get around’ compared to rules. In trying times the temptation to seek loopholes in the rules remains large. However, with principle-based corporate governance the quality of governance is as robust as the principles.

Are there special issues related to corporate governance in family enterprises as compared to firms promoted by other forms of ownership?

There are certain unique characteristics of family managed businesses that necessitate good corporate governance principles as an essential element, to ensure their successful survival. Sound corporate governance addresses risks inherent in the characteristics of family managed businesses systematically and sustainably.

How does one ensure sound corporate governance in a family owned enterprise?

Good corporate governance must include the framework of a strong performance orientation. Conformation to good governance is a hygiene factor – performance is important. Good governance needs to incorporate leadership and management imperatives that can lead to strong financial and strategic performance. Corporate governance and performance are not mutually exclusive – on the contrary, companies with sustained sterling performance are usually the paragons of governance too.

Source: ISBInsight, Volume 4, Issue 4, pp50-57