Article: CEO Succession Planning: Crafting transfer mechanisms

Leadership

CEO Succession Planning: Crafting transfer mechanisms

In a well-funded, high growth economic environment, it is imperative for India Inc. to craft effective leadership transfer mechanisms. Be it family-run businesses, PSUs or professionally-managed companies, the responsibility for effective succession planning and its implementation rests with shareholders' representatives – the company's Board
CEO Succession Planning: Crafting transfer mechanisms
 

Succession planning in family-run businesses has always been a hush-hush affair, clearly depending upon the life expectancy of the founding chairman or patriarch

 

On average, Boards spend only 2 hours a year on CEO succession planning

 

In a well-funded, high growth economic environment, it is imperative for India Inc. to craft effective leadership transfer mechanisms. Be it family-run businesses, PSUs or professionally-managed companies, the responsibility for effective succession planning and its implementation rests with shareholders’ representatives – the company’s Board

January 2005: Reliance Group, India’s largest private sector enterprise, is split as the two Ambani brothers agree on a legal segregation of assets. While Anil Ambani would take over the telecom, infrastructure, media and power businesses, elder brother Mukesh Ambani would take charge of Reliance Industries, which operates in petrochemicals, oil and gas exploration, refining and textiles. The death of business monarch Dhirubhai Ambani in 2002 without leaving a will triggered a drama that resulted in the division of assets between the two estranged brothers.
                                                                                                      
April 2009: P. J. Nayak, Chairman & Managing Director of Axis Bank resigns after losing 1-8 in the voting for appointment of Shikha Sharma, Head of ICICI Prudential Life Insurance, as the new MD of Axis Bank. While the members of the Bank’s Board submitted that Sharma had experience in banking and insurance industry, Nayak vehemently disagreed with the Board’s decision stating that an insider should take over as his successor. Despite the Board’s several recommendations previously to groom and develop a successor, Nayak paid no heed and was vocal with his views that advance succession planning was not practiced at public sector banks.
                                                                                                            
April 2010: Infosys Technologies reconstitutes its CEO Nominations Committee to include K. V. Kamath, Non-Executive Director of ICICI Bank, along with previous members Jeffrey Lehman, Professor at Cornell University (Chairman) and Deepak M. Satwalekar, CEO of HDFC Standard Life Insurance, to hunt for Narayan Murthy’s successor – a candidate who not only should have deep understanding of the IT Industry and Infosys, but should also possess Murthy’s ‘personal style of leadership’.

One of the most overwhelming challenges faced by organizations in India and across the globe is CEO Succession Planning. The recent turn of economic events has posed a serious threat to the corporate health of organizations as stakeholders in even the most stable and successful organizations questioned the business acumen, ability to sustain confidence and decision-making capabilities of its business leaders. Although the world economy is emerging from the aftermath of this recession, there is still the dagger of ‘establishing a strong leadership bench’ hanging over companies who are struggling towards a post-downturn recovery.

Dr. Shalini Sarin, Country HR Partner & Director – HR, Schneider Electric India emphasizes this point - “‘Do we have an effective succession planning process to assess and develop future leaders?’ – it is precisely at this critical juncture of global economic recovery that such a question is gaining prominence.” After a brief but torrid, financial downturn, India is back on a growth trajectory and is reckoned as the second largest growing economy with a GDP of $1.4 trillion and an 8.8% GDP growth rate. In such a well-funded and high growth economic environment, it has become almost compelling for companies to have a well-defined and articulated succession plan and an able leadership pipeline to sustain future growth.

Succession Planning in India
The Indian business environment is largely driven by family-run businesses, public sector enterprises and professionally managed companies (mostly MNCs). Without doubt, family-run businesses make for a huge percentage of business houses in India. Family-run companies account for roughly 50%* of the market capitalization of publicly traded companies in India and contribute to around 55%* of GDP; hence, the relevance of these companies for the overall economy.

If number are to be believed, only 13% of family-run businesses survive till the 3rd generation and only 4% go on to the 4th generation. Additionally, one third of the business families disintegrate because of generational conflict at the leadership levels. Professionally run succession planning is key for the sustainability of businesses. Family disputes and the lack of succession planning has triggered the decline in fortunes of many business families. Traditionally, succession planning in family-run businesses has always been a hush-hush affair, clearly depending upon the life expectancy of the founding chairman or patriarch. Succession planning in family-run businesses is generally an intuitive process with the family patriarch taking the decision as to who will take charge of the business empire. Dr. Ganesh Shermon, Partner & Country Head - People and Change Practice, KPMG says, “Traditionally, family-run businesses focused on dividing the silver among the next generation rather than grooming the right person to take up the job. However, with changing times, family-run businesses need to ensure that the chosen successor has necessary education and skills and should be made to work his / her way up the management. Alternatively, companies should be bold enough to appoint a professional manager when there is no suitable candidate within the family. Companies such as Ranbaxy, Murugappa Group and Eicher have set a precedent in this regard.” In 1998, when Dabur India realized the might of behemoth MNCs and their scale of operations, it valued the need for a professional to run the operations of the company in order to build a professionally-managed company with strategic business outlook. And that’s when Dabur India roped in an outsider as its CEO, Ninu Khanna, rather than passing the reins to a family-member. Sunil Duggal, Dabur’s CEO since 2000 has taken the business to new heights by strategic acquisitions and has expanded the product portfolio to make Dabur a comprehensive FMCG company from an Ayurvedic products seller. Today, majority of the Board members at Dabur do not belong to the Promoter family. The Tata Group too is on the lookout for a successor to Ratan Tata, who retires in 2012, and for other group companies too, as the Heads of Tata Steel and Tata Motors head toward retirement.

Passing on the reins of the organization to a family member has a lot of legal implications too. Hiralal Walchand, Director, Walchand Associates, which deals in will trust services and family law, says “Family members (sometimes even far-off relatives) join companies as employees but demand legal ownership rights during division of assets. This should be avoided as dividing assets amongst so many claimants completely devalues the company.” In case of listed family-run business houses, the first step towards planning a strategic succession is to increase the holdings in various group companies. Explains Walchand, “Increasing holding by the parent company wards off the risk of future acquisition. B. K. Birla, for instance has been working toward increasing the family’s stake in its group companies of cement, textiles, et al.” Once that is achieved, the patriarch can appoint either family members or internal and external candidates to take on the mantle. This ensures that when the patriarch steps down, there is no change in the way business is done. In the recent succession plan chalked out by RPG Enterprises, Group Chairman R. P. Goenka segregated the ownership and control of various group companies amongst his sons Harsh Goenka and Sanjiv Goenka where the former was named the Chairman and the latter Vice Chairman. The business will, however, continue to run the same way with each brother continuing to control and run the companies they were handling previously.

In the case of PSUs, many of the appointments are guided by political considerations. The fact that quite a few of the top jobs at PSUs are either unfilled or manned by acting CEOs indicate the lack of importance attached to the process of top management succession planning.

In spite of the political stifling, some PSUs have formulated very strong succession planning practices. Dhruv Prakash, Managing Director - India, Leadership and Talent Consulting, Korn/Ferry International, says, “PSUs are unique in that almost invariably grow their own timber. Public sector companies really do not have a succession planning system per se, they have an internal promotion system.” Companies like Indian Oil, Bharat Petroleum, Hindustan Petroleum, BHEL, NTPC, ONGC, State Bank of India have worked on establishing leadership competency frameworks, assessed managers for development and taken follow up actions in terms of internal training and developed courses in collaboration with the IIMs.

Some of these practices can be compared to the best in the private sector. For instance, ONGC conducts succession planning three levels below the Board and NTPC conducts rigorous succession planning two levels below the Board. NTPC has constituted a high level Succession Planning Committee (SPC) comprising of the Chairman and the Functional Directors to own the process of succession planning. NTPC has identified 28 unique leadership positions for succession planning. Most of the positions fall under the two top executive levels - General Managers and Executive Directors. Against each position at least three potential successors are identified for grooming. This is done to ensure that sufficient depth is maintained in the leadership pipeline at all times. Succession planning is a shared responsibility of the HR function and the organization’s leadership. NTPC’s CMD, R. S. Sharma was recently succeeded by Arup Roy Choudhury, former CMD of National Buildings Construction Corporation (NBCC).

The search for a successor for CMD (Chairman & Managing Director) is done pretty much the same way as the search for other Board level appointments where an advertisement is put up for the vacancy by the Enterprise Selection Board and shortlisted candidates sent to the ministry. The final decision for appointment is made by the Cabinet Committee. The concurrent CMD is not involved at all in this process. In July, state-owned telecom units, Bharat Sanchar Nigam Ltd. (BSNL) and Mahanagar Telecom Nigam Ltd. (MTNL) advertised vacancies for the post of CMD. The Enterprise Selection Board, formed under the leadership of K. M. Chandrashekhar, Cabinet Secretary, has received close to 100 applications and will soon announce the successor to Kuldip Singh, CMD of MTNL and Gopal Das, CMD of BSNL.

Professionally-run companies in India, mostly MNCs and a handful of home-grown companies like Infosys, are more forthcoming when it comes to chalking out a strategic succession planning process. Professionally-managed companies have definite processes and employ latest techniques while identifying potential successors. Take for instance Larsen & Toubro (L&T). Well before two years of current Chairman A. M. Naik’s retirement, the organization has systematically and strategically put in place a succession planning process and will announce the name of the new Chairman six months before Naik retires so that s / he is able to get proper handholding. In many of the MNCs operating in India, the decision to find a successor is more in tune with business strategy and growth vision for the future of the organization. Kellogg India recently roped in Sangeeta Pendurkar, former VP-Strategy & Commercial Leverages at Coca Cola India to head its Indian operations as MD, replacing Anupam Dutta. Pendurkar’s experience in revamping Coca Cola India’s tea and coffee business (Georgia) and introducing innovative regional brands such as Minute Maid and Nimbu Fresh made her a suitable choice for Kellogg India’s strategic plan to strengthen the company’s stranglehold on the breakfast segment by introducing more regional flavors.

In certain other professionally-managed organizations, senior leaders have the responsibility to design their own succession planning process, as in Lucent Technologies, where senior managers are expected to develop at least two potential successors using job rotations, challenging work assignments, special projects and executive coaching. Companies like Hindustan Unilever, P&G and ITC have traditionally groomed most of their senior management internally using a combination of talent review sessions, comprehensive training programs, job rotations and a combination of HR and leadership metrics.

Role of the Board & the CEO
For corporate Boards, CEO succession planning should be one of the most important commitments toward the organization. Even though Boards across the spectrum realize the need for an effective succession plan, they seldom devise processes and practices and devote sufficient time to this activity. Dr. Arvind Agrawal, President and Chief Executive Corporate Development & HR - RPG Enterprises, says, “It is imperative for the management / executive Board to participate in the whole succession planning process. I am talking about the involvement of management or executive Board and not the legal Board. The process of succession planning is simple but the real difference lies in its execution and that’s where most companies falter. The process demands full dedication of the top management and not mere compliance as one of the points on a meeting agenda.” Not having a strategic succession planning process and an effective CEO successor is a potential risk to companies and it is the obligation of the Board to timely address this risk. This is also lacking because most companies do not have a Chief Risk Officer (CRO) to identify the potential threats that may arise due to little or no succession planning. In simple words, it is the responsibility of the Board to make sure that the framework and guidelines for succession planning are in place and are practiced to evaluate the developments on a regular basis. While corporate Boards play a critical role in succession planning in professionally managed companies, their role is limited in family run businesses where the family patriarch is generally the one who takes such decisions. In PSUs, the final decision of choosing the successor is taken by an external authority (generally the Cabinet) in consultation with the Board.

“Normally only banks have CROs, as this is a mandatory requirement. It is not a very common role”, says Prakash from Korn/Ferry, “and wherever they are, they tend to restrict their role to systemic risks like technology risk, financial risk, political / regulatory risk, and not really people risks. CEO succession is the Board’s responsibility and the responsibility of the CHRO and from my experience, does not normally come under the risk officer’s purview.” Adds Poonam Barua, Founder Chairman, Forum for Women in Leadership, “In the global scenario, best performing companies worldwide are increasingly looking at voluntary compliance practices and provisions for having a Chief Risk Officer who reports to the Board (and not to the CFO), and identifies the challenges in the succession planning process, including the need to increase diversity on company Boards. Ultimately, Board diversity and succession planning is not just an HR issue, but a corporate governance issue. The Chief Risk Officer will also need to identify lack of diversity as an important risk for the company. Companies such as GE, KPMG, Deloitte, IBM, PepsiCo, Nokia, Microsoft, et all have huge diversity programs to ensure more women move into top management positions.”

The Board is responsible for clearly conveying to the CEO that his / her performance will also be measured by his / her ability to manage succession. Additionally, the Board, in consultation with the CEO, is responsible for detailing out the criteria of selection of the next CEO. The CEO’s role, on the other hand, is to identify high potential leaders and spend disproportionate resources to develop them, besides monitoring the outcome of succession planning activities at all levels in the organization. Sometimes, the CEO’s failure to identify a suitable successor acts as an impediment to the growth of the organization. When Rohinton Aga, MD, Thermax passed away in 1996, Abhay Nalawade was appointed his successor. However, roughly five years later, the entire Board of Governors had to resign en-masse as the company struggled to compete in the changing business environment. While Rohinton Aga nurtured and grew Thermax over a long period of time, he did not pay enough attention to succession planning. Nalawde has, in fact, been quoted to have said, “Mr. Aga never made it explicit that he would have wanted me to become the Managing Director.” Stephen A. Miles, Vice Chairman at leadership advisory firm Heidrick & Struggles and Prof. David Larcker from Stanford Graduate School of Business re-iterate this point - “The CEO’s role is to develop viable internal successors so there are real internal candidates for the Board’s evaluation and to be an advisor to the Board on the strengths and weaknesses of the candidates. The CEO does not own this process. Many want to own it but the Board must own the process and manage the CEO.” In PSUs, the current CEO or CMD plays little or no role whatsoever in selecting his / her successor, which again is very dangerous for business continuity and hence, corporate health.

The Leadership Pipeline
A recent research by Heidrick & Struggles and Stanford University’s Rock Center for Corporate Governance (based on a survey conducted on 140 CEOs and Directors on Boards of North American public and private companies) found that while 69% of respondents think that a CEO successor should be ready to replace the departing CEO, only 54% are actually grooming executives for this position. In the Indian context, the 2010 DDI India Leadership Report findings highlight that while 44% of multinational organizations in India have a process to identify leaders, only 26% have a process to develop them.

It goes without saying that grooming and developing leadership talent is the broader solution to succession planning and readiness - and it is largely the responsibility of HR to undertake this process. According to Prakash of Korn/Ferry International, “This aspect should be addressed from a short-term as well as a long-term perspective. In the short-term, the need is for identifying the right CEO candidate who can carry the organizational strategy forward. The long-term process is an enhanced version of the short-term process, except that it is conducted proactively, across all levels, and throughout the year.”
While identifying future leaders from the existing talent pool, certain key aspects must always be considered. Says Dr. Sarin of Schneider Electric, “Understanding the make-up of the existing talent pool is critical. The goal is to evaluate the target group on a performance-versus-potential matrix to pinpoint key talent. Competencies that leaders must exhibit to move the business forward today and in the foreseeable future can be measured against established standards and improved through training and development. Building a suitable competency model aligned to business strategy is the key. It is also important to assess if the individual’s values are aligned with that of the organization.” In a well-considered succession planning process, the Board of Directors, most often in conjunction with the CEO, determine which competencies are essential to executing the company’s strategy. Most often, the Board focuses on key senior executives who appear suited to lead in the future. Once the set of competencies and criteria for the CEOs role are established, all short-listed executives and a few standout high-potential executives undergo a comprehensive assessment.
One critical aspect where most companies falter while identifying the future CEO is comparing the potential successor with the outgoing CEO – a process wherein they end up roping clones. Instead, companies must develop a skill and experience profile for the job and evaluate candidates against this benchmark. The skill and experience profile is generally a detailed document which lays down the required skills, capabilities, experience in various functions, which allows the Board to evaluate future CEOs. Additionally, the foundational assessments of internal candidates can then be used to assess these prospects against the future needs of the company instead of comparing them to each other or the current CEO. This helps in toning down the typical perception of a rat race and in the process becoming a part of the overall growth strategy and risk management of the organization.

At the end of the day, the crux of the issue lies in the fact that it is the shareholders’ representatives who should own the succession planning process. Corporate India is placed at a critical juncture where the massive inflow of funds will reflect in the gradual change from concentrated ownership (Government, Promoter families) to a more diffused and diverse ownership pattern. Regardless of the ownership structure of a company, the shareholders’ representatives (company Board or the (cabinet of ministers or patriarchs of Promoter families) will need to create mechanisms and processes to constantly groom a leadership pipeline and to identify the best candidate – internal or external – for leading the company into the future and creating shareholder value.

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Topics: Leadership, Strategic HR

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