Let us begin with a strange question. What role do parents play in a family? Their primary role in the beginning is protection - to ensure the survival of the newborn. And then, as the child becomes older, they slowly give it independence and help it develop a value system and skill-set to survive in the world. And then, in an ideal scenario, once the kids are older, the parents slowly become grandfatherly (or grandmotherly) figures, no longer directly involved, but advising and counselling as necessary. The central idea is this - the major aim for every parent is to ensure that his / her child survives successfully and leads a meaningful life even after the parent is no longer in the world.
Curiously, there are certain entrepreneurs out there who when building an enterprise, attempt to mimic this above commonly observed phenomenon in nature. In their effort to build an enterprise that survives, they truly think long term. And for them, long-term is measured not in years or even decades, but a period beyond their lifetime.
In all organizations that survive for long periods, the common feature observable is culture. Just like a parent, the focus of the enterprise builders in the beginning is to protect the organization and help it survive. And just as a parent takes pain in the development of the right character and value system of a child, so does the entrepreneur take pains to infuse the organization with the right culture. To ensure the development of the right culture, substantial ownership is paramount, as it is from this skin in the game that the entrepreneur normally derives his authority.
There is a special class of business builders, who once they believe the organization is self-sustaining, give up or reduce ownership, in the interest of the organization’s sustainability. They are able to detach themselves from the organization they built exactly because of their attachment to it. They have the courage and the wisdom to plan for the organization beyond their lifetime.
Consider R Thyagarajan (or RT), the co-founder of the Shriram Group, which is worth more than $7 billion today. Thyagarajan’s views about businesses are quite unconventional. He believes that the goal of an enterprise should be to be useful to the community they are part of, and it is thus that he designed Shriram. Shriram’s growth was an outcome of his desire to help small entrepreneurs, a segment that was ignored by the formal financial sector as they were considered risky. This section of the population was systematically exploited by the moneylenders who charged usurious rates.
This choice of the small entrepreneur as the target customer base was driven equally by both logic and altruism. He maintained that while wealth doesn’t necessarily bring happiness, it would help remove a great deal of poverty. And one way to remove poverty is by helping small entrepreneurs generate wealth by helping them scale their business by providing adequate financing. And through his experience in New India Assurance he figured that the small businessman was not a risky category to lend to.
As RT explains, ‘If you simply observe my business you will see that first I started with truck finance and I was clear that I was going to help the poorest in that category, so the focus on used trucks; then came the chit fund, again expanding the product portfolio to the rural poor that we were already serving. The chit fund had thousands of agents and so to maximize their use and provide more products, we started public deposits and then insurance.’
For RT, his mission in Shriram was in some ways greater than himself or his family. This was evident in many of his decisions. Neither of his sons, who are intelligent and running their own ventures in India, were ever part of the flagship businesses of the Shriram Group. This was his way of setting an example against nepotism, which has been the ruin of many an organization. It sets a strong example in the organization when the founder doesn’t favor his own children.
In 2006, RT was supposed to have held 33% stake in the business. And in one move he reduced it to 2.5%. He did not bequeath his ownership to his two sons, as is the norm. He shared his ownership in the organisation he founded with a trust composed of senior employees. He helped set up the Shriram Ownership Trust where around 35 to 40 senior employees were chosen (based on their seniority in the group) and each were given stake ranging from 1% to 2.5%. His reason for this decision was,
‘No one individual can create wealth; it is in partnership with others (that) we do it. It was only fair to share the wealth that was created in partnership with employees. Employees who helped build Shriram are partners in it.’
By the time RT reduced his stake, Shriram had become an established organization making a difference in the life of thousands of small entrepreneurs.
Piramal comes into the picture
Ajay Piramal is the architect behind Piramal Enterprises, a company which has the rare distinction of generating annualized shareholder return of 30% over 29 years till 2017. We have briefly explored a small facet of Mr Piramal’s character in the article - The Power of Detachment. It was through mere chance that Mr Piramal stumbled across Shriram. When Piramal was contemplating entering the financial services space, Shriram was one of the names that cropped up as an organization worth emulating. And when Mr Piramal met RT, they immediately hit it off.
In 2013, in a deal driven by RT and Ajay Piramal, Piramal Enterprises invested in the Shriram Group. Over time, Piramal gradually scaled up its investment and it culminated in Ajay Piramal being appointed as the Chairman of Shriram Capital, the holding company for Shriram’s financial services business. Even this decision to bring in Piramal was driven by RT’s focus on the community, his thoughts on entrepreneurship and his belief in the necessity of change. RT said:
‘Succession was always on my mind and I kept looking at possibilities. In the interest of the community, I feel that entrepreneurs should always run businesses because they are more likely to take risks that help the organisation scale to the next level. Professionals will run the organisation very efficiently. That’s it. To build something even bigger and more beneficial to the community, on what has already been created…I felt we don’t have a set of people to do that. Ajay Piramal’s role will support the larger interest of the organisation and the community.’
Shriram has been in existence since 1976, and RT has been part of it since inception - guiding the business through its various struggles. Despite that, RT is happy for the company to be known today as Ajay Piramal’s enterprise. This is how he puts it, ‘There has to be only one identity for Shriram: an enterprise driven and led by Ajay Piramal’.
This ability to detach from something that he put 42 years of his life into, because it was the right thing to do, is what separates RT from other businessmen in India.
Peter KiewitSean and Ian have covered Peter Kiewit beautifully in the book Intelligent Fanatics: Standing on the Shoulders of Giants. You can read an excerpt from the book here.
Charlie Munger said, "The three best operating companies I’m aware of are Costco, Kiewit, and Glenair. There is nothing remarkable about the product or field for any of these three. But there is something remarkable about the culture of all three.”
Peter Kiewit used the philosophies of simplicity, focus and discipline to develop a strong culture of excellence. The culture developed by Peter was the primary factor responsible for his company’s growth from $400,000 in annual revenues to a $7 billion nationally recognized contracting firm upon his death in 1979. And interestingly, the company continues to dominate in the U.S. even today. How was Peter Kiewit able to ensure sustained excellence in the organization he painstakingly built long after he was gone?
The answer is once again really long-term thinking and detachment arising from a mission to build an organization that lasts.
Peter was fond of quoting a Chinese proverb: “If you are looking ahead one year, you should plant rice. If you are looking ahead twenty years, you should plant trees. But if you are looking ahead longer, indefinite period, you should spend your time growing people.” Given Peter’s time horizon was well beyond his lifetime, he spent most of his time developing his people. The way he did this was to align the incentives of the employees with the company by hiring the right talent, developing them well, decentralizing operations to unleash the employees’ capabilities and also by allowing employees to own majority of the stock. Peter at one point owned 98% of the company, but by the late 1970s, 40% -45% of employees owned the stock. Then by 1978, Peter owned 40% of the stock and employees owned 60%.
He also put in place programs whereby only active employees could own stock in the company. Once the employees became inactive, the company would repurchase their shares at the going rate. This ensured that most of the employees are working for themselves and not for any other stakeholders which would have diluted the long-term culture and focus of the company.
In the interest of the organization, Peter did not bequeath ownership to his wife or son. Here is an excerpt from a Fortune article of how he solved his legacy problem:
“Kiewit arranged his affairs so that when he died in 1979 his 40% stake in the family’s enormously successful construction company was sold to employees. The proceeds from the sale then went to a charitable foundation that he had established to promote education and social services in Nebraska. Kiewit left approximately 3% of his $186-million estate to his widow, his son, Peter Jr., 60, and other relatives.”
Peter Kiewit’s and RT’s decisions were shaped by their desire for their respective organizations to sustain beyond their lifetimes. Both of them were governed by a belief in their mission which they believed to be bigger than them. And it is this belief that allowed them to have uncommon strength of character and detachment to take decisions that an ordinary person cannot.
Sources:Books: I am not an entrepreneur, Intelligent Fanatics: Standing on the Shoulders of Giants
Disclaimer: We may/may not have positions in the companies mentioned in the blog. This case study/article is not a stock recommendation. We are not SEBI registered investment advisors. Our Intelligent Fanatics Case Studies and Articles are meant to retell the stories and strategies used to create exceptional businesses so that we can learn from them.