How Professional Is Narayana Murthy’s Latest Recipe For Succession In Large Firms?

In his latest media interaction, he said he now regrets his initial decision to keep his family out of the company’s management when it was formed.

Murthy, who co-founded Infosys in 1981 with six others, had borrowed Rs 10,000 from his wife Sudha Murty to start the company but did not board her onto the firm. Additionally, the company had an unwritten rule that family members of the founders will not be in its management even though they had a shareholding in the company.

Murthy, who championed this idea, said he believed that this was in the larger interest of the company from a better corporate governance stand-point. Perhaps, he was ahead of his time then or he is behind now.

“I had this feeling that good corporate governance means not bringing family into it. Because those days, it was only family rule, all kinds of children used to come and run the company, there used to be a violation of all laws,” Murthy told CNBC-TV18. “I openly said I was wrong. Now, I don't believe this.”

Family Vs Professionally-Run Firms

Business groups like the Tatas, Birlas and the Mahindras are those that were founded by families and they often had the controlling equity stake. Family businesses in India and overseas contribute most to their domestic economies. In India, they have a history of more than 200 years.

Initially, the leadership of the businesses were with the founding families helmed by patriarchal entrepreneurs, irrespective of their education or competence. In later years, after the 1991 liberalisation and globalisation, the young inheritors went for higher studies and professionalised themselves and joined the companies.

Over the last decade, non-family professionals are increasingly being trusted at the helm of these companies. Natarajan Chandrasekaran (Chandra) of Tata Sons and Anish Shah of Mahindra and Mahindra are good examples.

On the other hand, professionally-managed firms largely work in the realm of accounting, management consulting, IT and software services and banking and finance and do not have any family shareholding. In India, some of these include the Big Four MNC firms such as EY, KPMG, Deloitte and PwC, and Accenture, Infosys and Cognizant; ICICI Bank and the odd Larsen & Toubro in manufacturing. These firms are categorised as professionally-owned and managed partly because their shareholding pattern is distributed widely.

For example, the Big Four firms are owned and managed by ‘partners’. Infosys was founded by seven professionals and ICICI and L&T’s shareholding is a mix of public and financial institutions. Essentially, they are board and professionally managed firms.

Future Of Professional Services Firms

One of the few instances of succession within a family in Indian professional services firms is when Kashi Nath (KN) Memani, the former chairman of EY India handed down the baton to his son, Rajiv Memani, in 2013.

While there was private criticism to this move, through which a clutch of partners moved out to form a competitive firm named BMR Associates, the younger Memani has proved his worth by growing EY India leaps and bounds in the last 10 years. One measure of growth is that the partners have grown from 250 to 675 today.

In 2013, senior Memani had told this writer while co-authoring his biographyDhulian to Dilli: The Roller-Coaster Journey of Kashi Nath Memani, “If Rajivproves himself, what is wrong in him succeeding me?”

It is in this context that the current point of view of Narayana Murthy shouldbe seen. Should various family members be allowed in professional services firms?

“Differentiation should between smaller professional-services firms in the legal, accounting and consulting areas, where many family members are present, and the larger ones like the Big Four where it is only merit that works,” says Deepak Kapoor, former chairman of PwC India.

Consider the case of the traditional New Delhi-based chartered accountancy firm SC Vasudeva and Company where the founder had inducted his two sons into the firm which helped him to grow the firm.

Another middle-level New Delhi-based CA firm KC Khanna and Company was also able to scale with specific leadership of his son into the firm.

Another interesting professional services area is legal. The legal services industry is transitioning substantially with the coming of technology where hundreds of first-generation lawyers with limited real estate and law book libraries are competing with the large traditional firms like Khaitan and Company and Amarchand Mangaldas and Shroff (now divided itself between two brothers) which are now in their fourth generation and have many family members in the firms.

Rishi Bhatnagar, partner at New Delhi-based legal firm Naveen Law, said, “India is a big draw for traditional large family law firms which offer legacy and stability. But in the new economic environment in India with thousands of start-ups whose management do not mind working with start-up law firms, these first generation legal entrepreneurs also flourish. In that sense, both co-exist.”

That, then, could be the way of the future. Perhaps, Narayana Murthy maybe right this time around!