Rewards of enterprise

There is one thing missing in the list of eight Indian companies that have made it to BusinessWeek's Global 1000: the old family-owned business houses find no place in it.

Of the eight, three are public sector companies (ONGC, Indian Oil, and the State Bank of India), one is a multinational subsidiary (Hindustan Lever), and the rest are companies created by first-generation entrepreneurs""Reliance, Infosys, Wipro, and Bharti Tele-Ventures.

It could be argued that Wipro's Azim Premji inherited his dad's business, but his phenomenal success has almost nothing to do with the vegetable oil company he started out with. His billions came from being an infotech pioneer.

In fact, the only company from a traditional business house that could have made it to the Global 1000 is Tata Consultancy Services. It will perhaps make the grade next year, now that it has broken out of the purdah and is seeking a listing on the stockmarkets through an IPO.

Not all the eight companies are there for reasons of entrepreneurship. ONGC and Indian Oil are there because they have been state-owned monopolies till recently, and high international oil prices have given their shares new buoyancy.

The State Bank of India is there because it is by far the largest Indian bank, thanks to years of government patronage and access to cheap deposits. The markets have re-rated the bank, having noted its intrinsic worth.

Hindustan Lever is there by virtue of past performance. But over the past few years the company has been losing steam, thanks to the emergence of strong competition in various FMCG segments from aggressive local entrepreneurs.

To book a permanent place in the Global 1000, Hindustan Lever will have to call forth the same kind of aggression that it displayed while tackling the Nirma threat in the late 1980s.

While it may not be fair to generalise, the underlying message one gets from the BusinessWeek list is that entrepreneurship is the key to generating shareholder wealth.

Monopoly status can be conferred by government fiat and good fortune can happen to anybody, but long-term shareholder value cannot just come from size or by resting on past laurels. One crucial difference between first-generation entrepreneurs and established family-owned business houses is the inertia of incumbency: when you inherit wealth, the first instinct is to preserve what you have.

By implication, this means older business houses lose some of their risk-taking abilities as their focus shifts from wealth creation to wealth preservation. Bajaj Auto is a case in point. When it was the undisputed king of the two-wheeler market, it was sitting on loads of cash. It didn't have to do anything to generate profits""and it didn't.

Result: it failed to take its competition seriously and lost the appetite for risk. Having been humbled by Hero Honda in motorcycles, and once again by Honda in scooters, it has learned the hard way that it needs to take new risks to regain lost glory.

Ratan Tata has demonstrated the same thing with Tata Motors, which emerged from a near-death situation to deliver terrific stockmarket returns in recent months.

That's the real bottomline: wealth can be inherited, but success has to be earned by each generation. First-generation entrepreneurs know this instinctively because they have no wealth to fall back upon; inheritors have to re-learn this truth.