As headhunters scout candidates to take over India’s most valuable private sector bank from Aditya Puri, corporate India is once again plunged into dwelling over succession planning.
Succession is touted as a major tenet of corporate governance but more often than not lacking in depth. This despite various regulations, in India by the exchanges regulator, and a strongly worded recommendation from the Kotak Committee Report. Succession planning is the process of identifying and developing substitutes for key positions in anticipation of the prevailing leaders leaving, retiring or dying. Aside from the obvious benefit of management continuity, succession plans also act as a double checking mechanism for work being done at the top level.
The big question is who? If the shadow is too competent there could be insecurity and if the person isn’t he or she is not suited to take the role. The debate on India’s corporate succession can be broken down to two parts. First, is this a promoter versus professional issue? Second, does the current state truly open business up to fraud and volatility?
Promoter or professional?
The most glaring example of failed succession today has become the departure of Vishal Sikka from his chief executive position at Infosys. It was a scathing, public letter about how his legacy was being erased at the hands of whimsical professionals to whom Narayan Murthy had handed his most prized jewel - Infosys, that led to the resignation of Sikka, half its board and erased about $5 billion of market capitalisation in just two days.
Once a corporate light for governance and bellwether for disclosures, Infosys fell from the pedestal with no apparent outcome from an enquiry on the faulty transaction Murthy had raked up. Corporate gurus cited this as a demonstration of the promoter dominance in Indian business, making it an unsavory and possibly inoperable place for professional CEOs. The environment puts a glass ceiling of sorts and foils professional succession, they said.
But in a closer look, professional chiefs in India also hold promoter status, such as AM Naik of Larsen and Tubro. Foreign investors are complicit to the monarchy-like structures. YC Deveshwar of ITC recently passed away after a prolonged illness. Yet, it was not clear who would fill his shoes. The foreign majority shareholder of ITC supported the company in guarding Deveshwar’s health conditions from the public.
Murthy himself only had a very small portion of shares and had Infosys’s investors wanted, his bid could have been quickly stifled. “In India he has celebrity status, the local sentiment would be disrupted, it would only be worse for the company,” said one of these investors.
So, should all promoters be forced to adopt professional models? Not all promoter driven succession is bad. Glassware maker Borosil fell on hard times a little over a decade ago. The promoters could not tap the investor market. They were faced with power pricing and union issues on their main manufacturing plant in Mumbai. The company seemed close to its end, when its current chief and son of the promoter Shreevar Kheruka took the reigns of the publicly listed company. Clawing the way back from crippling losses took nearly five years. Institutional investors now hold nearly 8 percent in Borosil.
In some sectors a strong promoter or supreme leader is essential to survival. The telecom sector is another prime example. Vodafone Plc tried to make a go of it, and found managing the business and regulatory environment for professional chiefs turned out to be particularly hard. A strong founder, promoter son of soil elicited a better response when it came to managing local challenges. Bharti Airtel and Idea Cellular’s success stories bear testament.
So the jury is out on whether succession should be filial or professional. In India as in many European businesses, sometimes the answer is just to keep the family silver. A second generation entrepreneur has risk appetite and a lack of alternative options which makes business performance make-or-break. Professionals on the other hand are more likely to err on the side of caution. Consider this, without an Ambani at the helm would Reliance Industries venture to launch Jio or without a Tata at the top would the Tata Group have launched Telco (Tata Motors)?
Power center
Then comes the second big question about fraud. In casual forums of private equity investors, it is common to hear loose statements that promoters are frauds. The comment can supposedly be extended to chief executives and chairman. To quote Spiderman’s uncle, with great power comes great responsibility.
In India chief financial controllers routinely take orders from their chief executives over undocumented phone conversations. Last year, a company with a turnover of around Rs 1,000 crore faced a fraud wherein the chief financial officer disbursed a significant sum to a false account after a fraudulent phone call by a fellow employee. If the last five years of corporate prosecution point to one thing, it is that rules are designed to catch the chief executive, but usually a number of people including auditors are complicit.
At a telecom company, which is now being merged with a larger peer, some years ago two of the top five company executives were found siphoning money. While blame fell on the chief executive officer, it later turned out it was those below him benefiting. Cases of big fraud like Satyam Computers and IL&FS also point to this. It happens around the world. Theranos, the startup that promised to bundle blood testing in a small box, but turned out to be a fraud is a case in point. British Telecom had to write off billions because its Italian unit hid its borrowings to show higher profitability.
It is unlikely a good succession plan will foil a cheat scheme. There is no such thing as a fool proof succession plan. Each one has to be unique and will be fraught with last minute changes. The Tata group, one of India’s largest and most respected conglomerates, appointed Cyrus Mistry as a successor, it was a brilliant succession case study. When Cyrus Mistry was removed from chairmanship, it became the story of failed succession. Now, the group is run by a professional, N Chandrasekaran, who does not even hail from the Parsi community, which makes it a successful transition story again. It is the organisation prepared for these sudden changes that is most poised to emerge unscathed.
Deepali Gupta is the author of Tata vs Mistry: The Battle for India's Greatest Business Empire, published by Juggernaut Books. You can buy the book here.