Historically, the issue of succession planning has received scant attention from a policy perspective in the corporate governance debates in India. More recently, however, succession planning has played a key role in corporate governance episodes such as Tata Sons and Infosys, thereby highlighting the importance of the concept. Regulators and policymakers have begun to place emphasis on succession planning given the adverse impact a poorly constructed and shabbily implemented succession can have on investors in listed companies.
From a regulatory perspective, two prominent tools have been deployed to address succession matters. The first is to task the board of directors, including the current CEO, to spearhead the succession planning process in a company. The second is to enable an adequate disclosure of the succession planning policy and processes to make them transparent for the benefits of investors. For example, the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 impose the responsibility of overseeing succession planning on the board of directors of a company, as they are required to satisfy itself that “plans are in place for orderly succession for appointment to the board of directors and senior management” (regulations 4(2)(f)(ii)(3) and 17(4)). The recent Kotak Committee Report also touches upon succession planning, albeit briefly, by recommending that boards of listed companies must discuss the matter at least once a year.
In this context, the report of a survey titled “CEO Succession Planning in India” prepared by the International Finance Corporation (IFC) and Institutional Investor Advisory Services (IiAS) performs the useful role of not only highlighting the relevance and importance of the issue, but also in mapping the current trends and practices among Indian companies. The report first identifies the significance of CEO succession planning in the Indian context. Given the large proportion of family-owned companies in India, the issue of succession tends to be enmeshed in family considerations, thereby making it a sensitive topic. Moreover, the survey finds that a large proportion of CEOs in Indian companies are nearing retirement age, which calls for replacements within the near future.
That the report highlights the Indian context for succession planning is an important consideration. Historically, succession planning has been deliberated in the context of companies with dispersed shareholding where there is a wedge between ownership and management. In family-owned companies, however, the issue of succession might be regarded as an internal matter, with less involvement, if at all, by outside investors or managers. But, in the context of listed companies, such succession issues could impact investors and hence calls for a more transparent approach. As the survey reports, several Indian family-owned companies have also transitioned towards professional managements thereby shattering the stereotypes wherein corporate succession planning is tied in with family succession matters.
The survey then goes on to highlight the different challenges among Indian companies with different types of ownership structures. The first is family-owned companies where family discord tends to be the biggest risk, but business families have established family constitutions to enable smooth transitions. The second is multinational enterprises where succession planning is established in global guidelines where the board of Indian listed company may not have much of a role to play. The third is state-owned enterprises or public-sector enterprises where succession is determined through the process established by the Public Sector Enterprises Board. Finally, in other companies (which the survey refers to as institutionally-owned companies), the board plays the primary role in succession planning.
The report then sets out the results of a survey of top Indian listed companies that displays some interesting trends. While succession planning is generally discussed on a large number of companies, several of them lack a formal CEO succession plan. There is a discerning preference to consider internal candidates as potential CEOs rather than external ones. This is understandable given their close association with the companies and the minimal disruptions during CEO transition. Most companies consider CEO succession planning as an ongoing matter than as something to be dealt with during or after the departure of a CEO. Surprisingly, 81% of the respondents indicated that boards do not consult with investors on succession planning matters. At the same time, neither have investors raised the issue with company managements.
Finally, the report contains a detailed statement of succession planning matters relating to S&P BSE Sensex companies, which are taken from the 2017 annual reports. Interestingly, there is considerable variation with several companies carrying no disclosure whatsoever on the topic, and with some making extensive disclosures regarding their plans.
In all, matters of succession planning continue to be lightly regulated with board responsibility to craft a plan, and with some commitment regarding its disclosure to investors. Given the importance of the issue in the Indian context, a matter that has been demonstrated by the recent episodes at the Tata Group and Infosys, boards of Indian companies would do well to establish and implement detailed succession plans, as some have already done. This is especially so since investors will have to bear the brunt of succession catastrophes.