Cipla’s path-breaking succession formula

In 2001, Cipla made news announcing that it would sell a three-drug combination for $350 per patient per year compared to the MNC’s price of nearly $12,000. Cipla’s promoter Yusuf K Hamied was called both a pirate and a messiah. But what was indisputable was that Hamied had changed the face of the Indian pharmaceutical industry by providing access to low-cost drugs, and at the same time, probably saved lives of millions of AIDS victims.

Now, Hamied has applied the same long-term vision to his family structure. In Oct 2014, he wrote to market regulator SEBI seeking an informal guidance specifically on legal implications of the various family members and family-controlled entities seeking to vote together as a single person. (The promoter group held 37.47 per cent in Cipla as on March 31, 2016).

A proposed family agreement stated that every family member and family controlled entity would transfer their voting rights to Hamied, during his lifetime, and to MK Hamied, (his younger brother), in case of YK Hamied’s death or his incapacity to vote. The agreement also stated that in case of the death or incapacitation of both these promoters, the Hamied Family would act jointly, with respect to voting rights in Cipla, under the overall direction and supervision of the Hamied Family member who owned the highest number of shares.

Further, the family agreement also provided for a right of first refusal from the other family shareholders, in case of a proposed share sale by any family shareholder. The family agreement also made it obligatory for subsequent relatives who may inherit shares in the future, to agree to these terms of the family agreement by signing a deed of adherence. On February 2, 2015, SEBI replied that this proposal would be exempt from the Takeover Code.

Ever since there has been press coverage attributing this step as an useful tool to guard against potential takeovers, not an unusual situation in the pharma industry where multi-billion takeovers are common and the over ₹12,000 core-Cipla could be an attractive target.

However, there is another dimension that needs to be considered — this lays the foundation for the long-term survival of Cipla well beyond its founders. The implications can be understood by considering a historical perspective first.

Indian corporate history is replete with examples of siblings or successive generations fighting amongst themselves, which have resulted in companies being split.

Also, there are examples of family conflicts in the media, resulting in companies getting affected, causing uncertainty amongst various stakeholders, like employees, investors, shareholders or even suppliers.

Further, share sales by one part of the promoter group may put the entire company and the management at risk. This may distract the owner-managers and the non-family management from running the company optimally. They would instead focus on retaining control and warding off potential risks.

Again, multiple family owners in management may cause differences especially with multiple generations or different family branches, each seeking to maximise their self-interest. Multiple family factions may also give contradictory instructions to the professional managers in family companies, which could slow down the growth. Competitors could take advantage and the family firms may never recover their past glory. The lack of a single key leader is a malaise haunting any business.

Hoshi Ryokan, a Japanese Inn founded in 718, has survived for over 46 generations because the family has consciously maintained only one head, the Zengoro, who takes over the family firm and then passes it on, to the next-generation single owner.

They practice primogeniture or even adult adoption (where the owner’s daughter may marry the proposed heir), and this has stood the test of time to ensure that there is no ambiguity in the ownership transfer. There can be only one Zengoro from the Hoshi family running the family firm.

Traditional business families often depend on a single business for dividends. This makes it imperative for the family to consider the long-term survival of the business if the family has to survive. Hence, most successful family businesses are those where the family plans towards separating the ownership and management, bringing in competent professionals to run the businesses and hence making the business sustainable. This has been done in the case of the Mulliez family in France, Walton family for Walmart, or in India, in reputed companies like Asian Paints, Camlin, Dabur, GMR and Marico. In fact, this is one of most important reasons for the success of family run companies, beyond the founder.

Coming back to Cipla, voting rights have been vested in a single person, who votes on behalf of the family. This move by YK Hamied has ensured that the family speaks and votes as a one common voice at the Company meetings, thus signalling unity of the family to the other shareholders.

YK Hamied has removed family conflict from the public domain by a single masterstroke. Such family agreements would normally have additional clauses restricting the airing of any differences by any family member with the media, normally a standard condition in most family agreements. While this move does put the entire family’s vote in the hands of the single largest shareholder, and hence potentially risking future generations’ destiny in a single person, it also paves the way for a conflict free, clear direction. The family can stand behind their representative who also would be the largest shareholder, and hence also having more than a fiduciary interest to protect the family’s interests. Cipla’s declared mission is “None shall be denied”. Its roots were in British India, when Mahatma Gandhi said to have asked KA Hamied (YK Hamied’s father) to set up Cipla to reduce the dependence on the British. Today, Cipla has a formidable reputation operating in over 171 countries.

And YK Hamied has has not hesitated to take on Big Pharma on multiple occasions. Cipla’s low priced drugs have made a significant contribution, especially in those less developed countries (including India) where the international drug prices are normally way beyond the reach of most people.

By this move, YK Hamied may have yet again, demonstrated his foresight for which future generations would be grateful. And Cipla may just have taken a dose of YK Hamied’s newest formulation, which would have inoculated it from the disease to which many a company has succumbed, that of family businesses not lasting beyond three generations.

Agarwal is associate professor of family business, strategy and entrepreneurship and Vatsaraj is a visiting professor of tax and finance at SPJIMR, Mumbai