Organizations, the world over, work on “going concern” principle, which the auditors certify every year to assure shareholders that there is no risk to the continuity of the business. Lack of adequate succession planning in key roles, can cause major disruption in decision making & hence, affects the core principle of “going concern,” which more often is under-estimated by both investors and boards.
While Google & Microsoft, managed the CEO succession smoothly, an abrupt succession planning effort at Uber, caused a loss of reputation & business, from which it is still recovering.
Without realizing the dynamism of environment around them, Indian investors and boards continue to be either passive or reactive, more often aligning their affinity to the management or only majority shareholders. Factors like professional misconduct, sudden illness or death or even conflict of interests are causing more CEO attrition than superannuation. Succession planning incidents at Tata Motors, L&T, Infosys & most recently, ICICI Bank, indicate a reactive and passive role played by their boards. This, despite new Companies Law making it mandatory for companies to have succession planning for “Key Managerial Personnel” and every year, all boards certify the same to the regulator.
In a recent study by Alexander Hughes India, 36% of the top 250 listed companies had no formal succession planning in place for CEOs as they were being led by leaders above the age of 60.
Who Should Lead “Succession Planning”
In all organizations, talent keeps moving up and out, requiring constant replenishment but without causing any significant disruption. It's rudimentary that responsibility for succession planning lies with the supervisor or manager of that particular role.
Regulation 17(4) of the SEBI (Listing & Disclosure Requirements) Regulations, 2015 & Sec 178 of the Companies Act, 2013, has entrusted the responsibility for succession planning with the “Nominations & Remuneration Committee” of the board with direct oversight on all the key positions, which includes board members and those which report directly to either CEO or to the board.
Although pursuant to this legal requirement, most of the listed companies have issued a formal succession planning policy. Unfortunately, none of them disclose any specific aspects of how they review/ plan succession for key roles, including Board Members & “Key Managerial Personnel.” Succession planning is left out from the Board Room agenda, while management or the CEO is left completely in-charge of succession planning. L&T & ITC, are classic examples of how the boards of these companies have played a passive role in succession planning & have not lived up to their legal & fiduciary duties towards shareholders by allowing the leaders of both the companies, to stretch the process of searching their successor, to their own satisfaction.
What Can Go Wrong & How to Prevent It
The first point of failure for succession planning is to not acknowledge that is necessary at the board level & also within the organization. An organization, bereft of a formal succession planning culture, would continue to face challenges in maintaining continuity of decision making with timely replenishment of talent.
To be effective, a part of the performance-linked pay of executives should be linked to the effective succession planning of the roles they manage, applying the policy from CEO to supervisory roles.
The remuneration of the members of the “Nominations & Remuneration Committee” of the board should be linked to their performance in ensuring an effective succession planning policy for key roles, including board positions. In India, the enforcement of this responsibility should be driven more prominently by institutional investors such as LIC, FIIs or Mutual Funds, guarding the interest of even the minority shareholders, who may not have a direct presence on the board.
The “Nominations & Remunerations Committee” should ensure that all key/critical roles are identified and CEO along with CHRO, presents the talent pipeline, comprising a mix of internal & external talent with the committee members, at least every quarter. As a well-established practice, it is not unusual for the “Nominations Committee” of a large Fortune 500 company, to directly engage an independent executive search firm, for building a pipeline of potential board members and successors to CEO. Where CEOs have strong personalities or larger than life public image, such a practice has proven to be more effective & empowering for the boards to give them better control of the succession-related issues.
How to Get It Right
While CEOs & CHROs should be held directly responsible for implementing an organization-wide succession planning model, boards should include their own effectiveness in ensuring a smooth succession for their fellow members and key managerial personnel.
Transparency in selection & appointment of board members is a precursor to such a culture, where boards of large global organizations, disclose how they review the need for succession planning, which executive search firm they engage, to build a pipeline of successors and in case of an event, who from the board will lead the process of succession planning.
A golden rule for an effective succession planning is to never leave the process in the hands of a person, for whom the succession is being planned. A mistake which Indian boards continue to make!