Conflicts in a Closely Held Family Business: Durga and Company

Abstract

The purpose of this case is to investigate the nature of conflicts that arise in a closely held family business (CHFB) and to identify variables that ensure successful transition from one generation to the next. This case necessitates that in order to decide on the inheritance, a three-step process, prevention, management and resolution of conflict, is essential. It also highlights the gender bias in succession planning, ignoring the capabilities and competence of women in the family. Unstructured interviews around multiple stakeholders in the family business (FB) were taken identifying the core issues leading to conflicts. Triangulating with multiple sources or incumbents has reduced biases. It is observed that conflicts are inevitable within CHFBs. However, it is widely accepted that conflicts are paramount to forward progression both for the family and for the business, when it is constructive in nature. The case reflects the importance of understanding the critical issues around family and business. The outcome is useful in relaying better understanding on dimensions of conflicts that plague family-controlled business. Family businesses must relay importance of managing conflicts and bringing in earlier resolutions before they become extinct. The aftermath of not resolving such conflicts can be as catastrophic of destroying the FB and its wealth in the longer run.

Keywords

Family Business Conflicts Transition Woman Durga and Company VUCA

Family Business and Its Difficulties

Family business (FB) is the oldest form of a multiparty business enterprise. Typically, a business having majority ownership or control within a single family is termed as an FB. In an FB, members share a bond dealing with each other in both work and family context, and this creates a dual relationship in which two people are managing two relationships, simultaneously. As a result of this complex nature of relationship, it is observed that conflicts are inevitable in FB as it calls for a perfect balance between family, that is, love, and business, that is, money. A slight imbalance between these two pillars of FB with contrast interests leads to its downfall. The impact of conflict in FB is much more complex as compared to non-family-managed business as close family members are involved in business.

Conflicts in an FB generally revolve around issues like ownership, management of business, governance and succession, and can be made worse by several family history issues and personal dynamics among the family members. Though FB accounts for the largest percentage of the businesses in many nations, it is surprising that only a small percentage of FB’s survive transition to the second generation and many intergenerational transitions fail soon after the second generation takes control. It is an irony that the entrepreneurs’ legacy passing down to generations has little connects with competence and acceptance. It usually works like heuristics rather than a strategic decision.

The following case of Durga and Company carefully demonstrates how Kishan Lal’s (the patriarch) myopic vision related to succession led to conflicts among four brothers in an FB. This case also demonstrates how the family baton passes to male descendants within the family, without considering their interests and the level of involvement in business. This case dissects how improper use of organizational resources can lead to downfall in an FB. It also explores the nature of conflicts in a multigenerational family and closely held family business (CHFB).

The Dilemma

The patriarch Kishan Lal expired without laying down any formalized systems, organization structures and operative system in his business. In the absence of documented governance structure, the demise of Kishan Lal created a dilemma and conflict regarding succession of wealth, business and ownership among the four (Hemant, Ronak, Priyank and Meenakshi) so-called competent successors. Above all, being a Marwari business family as per their value systems, the females in the family are not involved in FB for no clear laid down reasons. Will Meenakshi, the most competent female candidate in the family, be given equal and fair opportunity to be the successor? The fate of all is undecided and is dependent on the heuristics of the family involved in the business.

The Case

Durga and Company—Business History

Kishan Lal Bansal (the patriarch) had four sons and four daughters. He along with his eldest son Arvind Kumar initiated a business on molasses (the waste material of sugar) by the name Durga and Company in Lucknow (city capital of a northern state, Uttar Pradesh, India). Molasses is a waste material of sugarcane derived from sugar factory while processing and is used as raw material in distilleries, cattle feed, tobacco, medicines, etc. Kishan Lal, a Rajasthani (native of Rajasthan, a western state in India) Marwari (a community from Rajasthan) shifted to Uttar Pradesh in 1970s. Marwaris are an exemplary mix of hard work, history, tradition, enterprising and with a risk appetite with business ethos. They represent among the top business houses listed in Forbes, and moreover, they believe staying a joint family. Despite being a successful business community, gender bias in their decision-making, especially concerning business matters, does exist.

Women in the Marwari Community

Marwaris are a conservative community with the belief that women are meant for taking care of the family, and men usually do not give exposure to the female members in their family. The daughters are married at an early age, usually, between the ages of 18 and 21 years. Women are generally not highly educated, and even if they are, they do not work post-marriage but are pampered with the best facilities available. It is believed that they live in gold cage throughout their lives. They are, however, not allowed to have or display any independent behaviour. Daughters are not taught business and not told the secrets associated with the FB, with a fear that they might reveal post marriage. As daughters-in-law, their contribution to the FB is limited to basic organizational work. Financial management and decision-making is usually never given to women (Exhibit 1).

Business Growth: Passing of the Baton

Following typical characteristics of CHFB, that is, set of shared traditions and values among all members, less bureaucratic, built-in trust factor with established relationships, Kishan Lal provided hands-on training and an early exposure to the siblings. He had four sons, eldest being Arvind Kumar, followed by Shiv Lal, Hukum Kishore and youngest being Mahendra Kumar. In the business of molasses (waste from sugarcane production), Arvind Kumar (S1), Hukum Kishore (S3) and Mahendra Kumar (S4) were engaged, whereas Shiv Lal (S2) started a new business of apparels ‘Durga Wastra Bhandar’ (cloth business) (Exhibit 2).

However, it is important to understand that the entire financial control of the molasses business remained with founder patriarch Kishan Lal. Shiv Lal’s (S2) cloth business was not performing well, and hence, he decided to shut down and initiate a new one, this time being a plywood factory, which he christened as ‘Rani Sati Plywood’. Meanwhile, the other three brothers (S1, S3 and S4) scaled ‘Durga and Company’. The extra cash as a result elevated the living standards of the family. Their kids started studying in a popular and expensive school in the city. On the other hand, Shiv Lal (S2) could not generate profits from his business, leading to disharmony. In the family, personally and professionally, the other three brothers were living happily as a joint family under one roof (Exhibit 3).

Conflict in Second Generation: Battling for Ownership

Shiv Pal (S2) felt left out at some stage and separated from the family and the FB. Reasons here too were unclear, but majorly, it was the chemistry between other three brothers and his personal nature that eluded his broad acceptance within the family. After his initial business failure, his subsequent business was also not performing well. This led to frustration and feeling of disownment and unsure of his future. So he convinced the other family members for an appropriate division of business among brothers while the frontline business was going well.

When CHFB is divided, it is imperative to construct a plan that provides equitable distribution among siblings, as a fair practice. Thus, after months of discussion and intense debate, the business, ownership and family got finally separated. There was no logic, but as heuristics, both the elder brothers Arvind Kumar (S1) and Shiv Lal (S2) were clubbed together in partnership while the other two younger brothers Hukum Kishore (S3) and Mahendra Kumar (S4) were made partners. The elder brothers S1 and S2 were given 65 per cent of the property, and both the younger brothers S3 and S4 got the rest 35 per cent. The logic expressed behind such separation was that the two elder brothers initiated the business so they were given more of it. Meanwhile, Hukum Kishore (S3) and Mahendra Kumar (S4) got one molasses factory in partition. The patriarch undertook this division of FB and wealth. Both the younger brothers though agreed but were unsatisfied. As claimed by the founder owner, this partition was undertaken with the best of intentions, but it led to impounding troubles for the CHFB. The ownership was in unequal percentages, with unequal voting rights but no reasonable mechanism to deal with a deadlock. The decision by the patriarch was final and had to be respected.

During transfer of the FB to the next generation, Kishan Lal the founder owner did not realize the challenges for the next generation that would emerge as a result of unequal partnerships. Usually, ‘founders don’t have to mess with partners, they just run the business. They don’t know anything about being partners’, said one of the sons during interview. This was a complex situation with forthcoming troubles.

Being dissatisfied with the stock received in the FB, both younger brothers (S3 and S4) tried to get into several other businesses such as import and export of lentils, property dealing, etc., but failed one after the other. When nothing came in handy, they decided to continue and pursue the molasses business as originated by the family.

The VUCA Perspective—When Planning Does not Go as Desired

Within 8–10 years of partition, the condition changed drastically. The Indian government passed a law that in order to save trees all the plywood and related factories registered after 1992 will be shut down. Shiv Lal’s (S2) business was affected as result and had to close down operations. This disturbed him emotionally and financially leading to mental agony. At the same time, Arvind Kumar (S1) was not keeping well and was hospitalized as a result of a kidney failure. The situation in the family was out of control in all respects. The irony was that Arvind Kumar (S1) could not plan his heir, as he had four daughters and one son. As said earlier, the Marwari culture did not permit him to engage daughters into business matters and that the son was too young to handle complex business issues. The management of business was completely at the mercy of non-family members such as managers. At the same time, Hukum Kishore (S3) and Mahendra Kumar (S4) were doing excellent in their business that was flourishing. The family had no inkling on mitigating volatility, uncertainty, complexity and ambiguity (VUCA) in FB that would later on become an emerging issue to FB’s existence.

The Journey Ahead: The Entry of Third Generation

Alok (S1S2) the elder son of Shiv Lal (S2) started a wholesale business of medicines and was among the leading wholesalers of the locality. He distanced himself from the molasses business, which seemed to have no future. Later on, he decided to separate his ways and earn his own living. Meanwhile, Amit (S2S2) the younger son of Shiv Lal (S2) grew up trying his best to restart the closed plywood factory owned by his father. He kept on his persuasion with government officials and related people in restarting the factory. Lack of resources and knowledge failed him in his efforts. Looking at the financial condition of the elder brother’s family (Shiv Lal S2), Mahendra Kumar (S4) counselled Amit (S2S2) and provided him with financial assistance to restart the factory. However, the following conditions were laid down:

The money invested by Mahendra Kumar (S4) for restarting the factory should be returned with interest as soon as possible.

Priyank (S1S3) the eldest son of Hukum Kishore (S3) will be inducted in the business operations and shall continue to oversee operations until the money invested by Mahendra Kumar is returned with interest.

The primary purpose of Mahendra Kumar’s for writing down the second condition was as follows:

Mahendra Kumar (S4) wanted to keep a hawk’s eye on the functioning of the plywood factory but time constraints did not allow him to do so. At the same time, his own son Ronak (S1S4) was too young to be involved in the business, so he chose Priyank (S1S3) to get actively involved in the business.

Hukum Kishore (S3) the father of Priyank (S1S3) willingly accepted this proposal, as he desired his son to get actively engaged in business getting practical exposure before he could take over his father’s baton.

It took 2 years to restart the factory but finally they succeeded. Amit (S2S2) and Priyank (S1S3) started managing the factory.

Meanwhile, Pulkit (S1S1) the only son of Arvind Kumar (S1) had grown and started showing interest in the molasses business of his father. The once flourishing business had now come to nadir after being at the mercy of managers as no one was actively engaged in decision-making. After discussions and guidance from his father, Pulkit (S1S1) finally closed the factory and later on started a new factory on paper converters by the name of ‘Durga Paper Converters’.

Experimentation and learning by the subsequent generations was slow. There was no clarity of consolidating and strengthening the FB. At the same time, elderly generation was getting frail, and some fell with serious illness. After 7–9 years of heavy sufferings in business, Arvind Kumar (S1) died in 2012. This brought Pulkit (S1S1) close to his uncles Hukum Kishore (S3) and Mahendra Kumar (S4) and their children. With no male member to support his immediate family, Pulkit (S1S1) took personnel and professional guidance from them. Post death of eldest brother Arvind Kumar (S1), the three families (S1, S3 and S4) became very close as a family if not on professional grounds.

Multilayered Conflict in a Multigenerational Family

One day in the year 2013, Kishan Lal (patriarch) had a severe body pain, and he expired within 24 hours without any medical aid. It was a sudden loss with no one prepared for the consequences. The most unfortunate part was that he had never prepared a ‘Will’, which is considered a legal document describing wealth distribution, heir, etc., post death. There was a chaos when it was found that Alok (S1S2) the favourite grandson of Kishan Lal was the only one who knew details of Kishan Lal’s assets and finances. As a family culture, Kishan Lal did not share such important information with his wife Shanti Devi. On enquiring with Alok (S1S2), he gave incomplete information and that too on only two bank accounts though it was understood that he had complete information about his grandfather’s assets and finances. This situation led to heightened tension among all sons and grandsons.

Current Scenario and Conflicts

Currently, Priyank (S1S3) is trying hard to understand the plywood business and its intricacies. Amit (S2S2) wants to stay matured and independent, not wanting any interference from siblings or relatives. He does not allow Priyank (S1S3) to be a part of any decision-making in the business, expecting Priyank (S1S3) to be a silent observer. Amit’s (S2S2) unforeseen behaviour is disliked by Priyank (S1S3), Hukum Kishore (S3) and Mahendra Kumar (S4).

The partnership between Hukum Kishore (S3) and Mahendra Kumar (S4) is also in a problem now. There are three sons in the two families in the same FB, Durga and Company which are undergoing succession issues. Priyank (S1S3) and Hemant (S2S3) sons of Hukum Kishore (S3) and Ronak (S1S4) son of Mahendra Kumar (S4) are seeking clarity on succession, while there is no discussion or written documentation laid down by the family on succession issues.

Scenarios

For Priyank (S1S3): Once the plywood factory becomes profitable, it shall be handed over to Amit (S2S2) for independent handling as agreed earlier, thereby Priyank (S13) will be bereft of any assignment in FB.

Options for Priyank (S1S3):

To join the FB of molasses but currently he does not want to join this business.

To start a new venture, which he has been thinking of to establish an independent identity?

For Hemant (S2S3): He is currently appearing for the final examinations of Chartered Accountant (CA). His desire is to be in corporate for at least 2–3 years post-completing CA. But the irony is, in a Marwari business family, an individual is discouraged to work for someone else. There is resentment and confusion as well over his forthcoming engagements with the FB.

Options for Hemant (S2S3):

To be a part of the FB.

To start a partnership business with his elder brother Priyank (S1S3).

To start something of his own, which is unclear.

For Ronak (S1S4): Ronak (son of Mahendra Kumar—S4) is currently appearing in his 12th boards. He desists in studying further knowing that acquiring a professional degree will not allow him to work for a corporate, as tacitly understood in a Marwari family and that finally he will have to return to the FB. Therefore, he intends to acquire a degree from a reasonably renowned college for the sake of higher education. Ronak (S1S4) is expected to graduate by end of the year 2017.

Options for Ronak (S1S4):

To start something of his own.

To join hands with Priyank (S1S3) or Hemant (S2S3) in a business.

To join the FB of molasses and build it forward.

For Meenakshi (D1S4): Meenakshi (daughter of Mahendra Kumar—S4) is currently pursuing an advanced course in communication post completing an MBA in entrepreneurship and marketing. She is expected to graduate by the end of 2017. Meenakshi (D1S4) is too young to get married and has plenty of time to experiment and test her acquired knowledge. As said earlier, the family culture does not permit women to participate in the FB. Though she is intelligent and could be a promising professional candidate for the FB, she is unclear of her future and role except being married once she is eligible.

Options for Meenakshi (D1S4):

To start a business of her own (since she has an MBA, with requisite skills but will have to seek family approval, which is distant).

To help her brothers in their business (here again if permitted).

To help her mother at kitchen and other household activities (the most likely activity to happen).

To explore her passion and that was in designing. She had cleared the national eligibility test on fashion technology in 2009 but was not allowed to pursue. At that time, she was too young to voice her concerns but currently after her post-graduation, she feels like returning to her dreams.

Hukum Kishore (S3) and Mahendra Kumar (S4) are much tensed regarding their molasses business and its succession. The chemistry between Ronak (S1S4) and Priyank (S1S3) is good with individual affinity towards each cousin. Both spend considerable time with each other when Ronak (S1S4) visits home during vacations. Mahendra Kumar (S4) is doubtful on his son Ronak’s (S1S4) competence. Since Ronak (S1S4) is a late learner, his father presumes that a partnership with Priyank (S1S3) might be skewed in the interest of Priyank (S1S3) and that his son Ronak (S1S4) might be fooled in the longer run.

As of now, improper planning and foresightedness has led to the decline in molasses business. After the unjustified division of the assets among brothers the problems have been complicated? Succession planning is nowhere in discussion, though faintly behind the mirrors is a hot discussion among siblings. The fate of Durga and Company is unknown. Can they recover to the glory?

Exhibit 1.

Source: Authors.

Exhibit 2.

Source: Authors.

Exhibit 3.

Source: Authors.

Summary

Durga and Company is an FB initiated by Kishan Lal, an entrepreneur driven by a passion to start his own business. Being born in a Marwari family, he had the gift of many traits expected out of a successful entrepreneur, and he succeeded in establishing a successful venture. As a family ritual, he gradually handed over his business to his sons, while the daughters were married with no engagement in the FB. He along with his three sons (S1, S3 and S4) continued the business of molasses, while his second son (S2) chose to do a separate business. However, the patriarch retained the financial powers to keep ownership control and reduce family conflicts.

On the contrary, he was aware of the family conflicts especially on succession that were about to surface, but there was no ‘successor planning’. Strangely, Kishan Lal did not share any details on financial matters neither with his wife nor children. The case clearly demonstrates the absence of planning in all aspects as a major reason for conflicts in the FB.

The conflicts were seeded in the family when one of the four sons of Kishan Lal desired for the division in the FB. The division of family wealth based on heuristics brought tremendous dissatisfaction and agitation among the brothers. The division was unplanned and unjustified, as claimed by his sons that led to hatred among brothers and family members. Subsequently, the third generation was maturing with each sibling desiring to take the pie in FB or pursue individual interests. Family culture discouraged siblings from expressing individual opinions, even if one was professionally qualified to do so. Some of them who had professional training were not allowed to pursue their choice as they were governed by an unsaid principle within the Marwari family. Even the most talented siblings, Meenakshi (D1S4), daughter of Mahendra Kumar (S4), armed with a professional degree had no rights to express her independent choice towards her career. Her only disadvantage was being a female, who had little or no room for expressions in a closely knitted Marwari family, which desisted females in pursuing a professional career.

With no clear guidelines the siblings are facing a VUCA like situation. Had Kishan Lal planned his successor, ‘Durga and Company’ would have been a much more successful CHFB.