Article in Biz. Standard: Succession Planning in Indian Companies

Bench strength for the corner office

 

(Indian firms need to introduce clear guidelines on succession planning if they aspire to be global in nature)

The untimely death of the Tata Motors managing director (MD) brings into focus the need for a proper and detailed succession planning policy to be adopted by Indian companies. Losing out on a senior executive, either due to his/her resignation, ill health or death, often has severe negative implications on that company’s strategy and operations, which gradually reflect on its financial results.

A detailed succession planning policy articulates procedures to be followed and steps to be taken to ensure a smooth transition of the company, in case a senior executive retires or resigns, or in exigencies such as death or illness. The policy should include all the steps boards should take in case of and even before an exigency. The policy should also include guidelines such as:

  • time frame of selection of a successor – in case of an impending retirement, how many days or months before the retirement should the board start searching for the successor
  • method of selection – whether the successor should be from the company itself or an external recruit
  • search procedure – involvement of professional search agencies or through board member’s contacts
  • authority of appointment – whether the authority will remain with the chairman or the board to appoint successors
  • backup plans – to create backup designations (for example, joint MD or deputy MD) that takes over the responsibility temporarily or permanently at the time of absence of the executive concerned

The succession planning policy, plans and procedures should be prepared by a nominations or governance committee in consultation with the board. The nominations committee must comprise independent directors with ample experience. This policy should be disclosed to all stakeholders, and be followed to the letter of spirit in case of its exercise.

Many blue-chip Indian listed companies either do not have a formal succession policy in place or do not follow the policy in place. One such case was Infosys, which had such a policy and exercised it once the promoter, N R Narayana Murthy, stepped aside as the chairman in 2011. However, when the going got tougher and the company started losing out its share to competitors, the board dumped its policy and went back to re-hire Murthy as its executive chairman in 2013. In that case, it was a double fault of the board and its nominations committee in drafting an ineffective policy and dumping it when it was most needed.

In the Indian context, there are four types of companies, with certain exceptions: family-owned companies, subsidiaries of foreign multinational companies (MNCs), public sector undertakings (PSUs) and banks. MNCs generally have better succession policies and are seen to have exercised the plans effectively whenever the need arises. Family-owned companies are sometimes also seen to groom potential successors for a smooth transition. However, more often than not, the successors of family-owned companies are the next generation members of the family itself, which defeats the requirements of separation of ownership from management. It also indicates that the boards of these family-owned companies are more interested in safeguarding the interests of the dominant shareholder – the promoter family – rather than doing what is right for the company. It also reflects the inability and reluctance of the board to search for a competent non-promoter professional candidate.

There are some companies that cannot be classified into any of the four types, but are widely held, such as Larsen &Toubro (L&T) and ITC. These companies are also seen to have no formal succession policy in place since L&T and ITC have been unable to find the right successors to their respective executive chairmen, even though they are well past the age of 65 years and have served a considerable period in their designations in the company. Companies, which come into this category, need to adopt a higher degree of corporate governance since any financial impact due to an adverse action will be borne solely by the public shareholders.

PSUs are another category that has not fared better in succession planning. Although the chairman-and-managing director in these companies is selected and appointed by the government through the public enterprises selection board (PESB) selection process, there are invariably tardy actions and delayed appointments for crucial executive posts. This means that many a time companies are headless and run without a proper chief executive. The PESB selection process deals only with executive appointments at PSUs.

The concern also extends to succession planning of other directors as well – both independent and non-independent directors. In case of the resignation of any independent director from a PSU, the time taken to find a suitable replacement is usually very high and in cases, exceeds a whole financial year. This is because the government department that nominates the non-executive directors is usually tardy. This affects the smooth functioning of the boards of PSUs since there are times when the number of independent directors is less than the regulatory requirements.

The board of PSUs should set up a nominations committee which, rather than the government, should select and nominate candidates for independent directors. It is telling that out of 13 companies where the board composition was non-compliant with Clause 49 of the Listing Agreement, nine were PSUs and three were public sector banks*.

It is understandable that much of the internal hiring and succession planning process and guidelines may not be shared publicly with all stakeholders. For example, the board may not decide to name an individual who is earmarked to take over temporary responsibility in case of any exigency. However, this shouldn’t be a deterrent to the board to formulate a detailed plan and effect it immediately when the need arises. Had Tata Motors put in place a proper succession policy and plan, it would have tackled the current situation in a more sophisticated manner. As Indian companies aspire to be global in nature, they should adopt best practices of board and executive succession planning.

Read the full article at: Business Standard – 30 January 2014