Let the market judge

DS Brar's exit from Ranbaxy, and the elevation of Malvinder Singh to the company board, raise several questions on the role that professionals play in corporate India.

Do professional CEOs hold their positions merely at the pleasure of promoters? The question becomes all the more relevant when one considers the almost identical case at SRF, whose professional CEO Ravi Sinha had to make way for the promoter's sons.

Nor is the issue confined to Indian boardrooms "" in the United States, the Ford family, in a corporate coup, ousted professional CEO Jacques Nasser, with Henry Ford's great-grandson taking over the reins of the world's second largest car maker.

Carly Fiorina's confrontation with the Hewlett and Packard families is well-known. It's not only India that has large family-run firms "" these are common in the rest of Asia, while a study by the OECD found that the thirty OECD countries contain at least 244 family-run firms with annual revenues of more than $1 billion, and that doesn't include companies such as Berkshire Hathway or Microsoft, which are still managed by their founders.

On the other hand, there is the opposite trend of business families relinquishing control, with Dabur, Thermax and the Murugappa group being cases in point.

The case for the progressive professionalisation of management rests on several grounds. One of them is that, as a company grows, the owners will find it increasingly difficult to subscribe to their share of the increasing capital.

The choice confronting the owners is therefore one of letting the business stay small, or be content to be smaller shareholders in a larger business.

As the Ranbaxy example illustrates, however, promoters may continue to exercise control even when the company crosses the $1 billion mark.

Firms can raise funds in several ways such as private placements and borrowing, and, while there is no doubt that expansion will certainly need more capital, it may not be so much of a binding constraint for companies that are doing well.

Nor can it be said that the stock market puts a higher value on professionally-run businesses rather than well-managed family-run ones. Why then should family-run companies be interested in professional management or in corporate governance? One reason could be succession.

Once the promoter of a firm passes away, rivalry between his heirs has been a potent reason for the break-up of businesses. A promoter may be an excellent manager, but he will also have to suffer his less capable siblings meddling in management. 'Shirtsleeves to shirtsleeves in three generations' is a well-known proverb.

In the final analysis, the market is the best judge of businesses. Indian corporates may not have handed over control to professional managements, but they have been forced to shed some of their more egregious methods of siphoning off wealth, thanks to the markets punishing suspect managements with lower valuations.

There is no particular reason why good managers should be barred from being CEOs merely because they happen to belong to the promoter's family.