Succession planning is perhaps one of the most discussed topics in companies today, but while discussions focus on creating best processes, implementation continues to be a big challenge. This is a real pity because a “company” is merely an entity incorporated in a country in accordance with the local laws, but it comes to life and gets its energy to function effectively from its people. This energy is important for a company’s success and a key factor of differentiation. As a result, unsuccessful implementation of good quality succession plans is a growing concern for both regulators and investors.
It is essential for those stewarding (board) and leading the company (management) to ensure that there is sufficient and suitable human capital available to lead the company successfully to its goals and beyond. This is what succession planning is all about.
Succession planning figured fourth on priority for the board on our survey; lower than strategic planning, regulatory compliance, and sustainability. Twenty-seven percent of respondents reported the lack of a CEO succession plan in their company.1
This is also borne out in our client interactions: most boards treat this as a paper exercise, and only a few follow it in spirit. With a view to learn from these few leaders who have got this right, we interviewed some distinguished practitioners (board directors and CEOs) who have successfully managed leadership transition. We also spoke with key influencers at rating agencies and proxy advisory firms to understand the lens they apply to succession planning.
This paper captures the learnings and the wisdom distilled from these interactions, which often go unnoticed when companies transition leadership smoothly and without incident.
Any business has two capitals - financial capital and human capital. When the two come together, value
creation happens. Human capital is not a collection of individuals but a team that will create an impact.
- Narayan Seshadri
There are two keys drivers to succession planning, one is the inevitability of it, which is a reality, and the other is the continuity of the corporate personality. Therefore, planning for succession should be part of a CEO’s DNA.
- Romesh Sobti
General State of CEO Succession in India
In India, CEO succession is predominantly influenced by the constitution of companies (MNCs or family-owned businesses) and the regulatory environment. Let us reflect on some of the nuances:
Global vs local
Indian companies are more relaxed as compared to their global counterparts on succession planning. This concept is much more institutionalized in the western world than it is in India and goes beyond just the CEO’s succession. Hence, succession in MNCs based in India tends to play out much smoother than in local companies.
An enabling ecosystem with opportunities to test leadership in a matrix environment and a globally mobile talent pool provide a tailwind to the succession practices in MNCs. In contrast, in Indian companies, family dynamics and limited platforms to test leadership, serve as headwinds.
Any large MNC has a global talent pool that they could dip into. They could either appoint an established
CEO from another geography into India or use the well-rounded diaspora talent from the system. Domestic companies do not have that luxury.
- Sunil Duggal
The abundance of family-owned businesses in India, coupled with societal expectations on family members joining the business, are key challenges to institutionalizing CEO succession. Regardless of competencies, the default option is to seek successors from within the family, and only under minor exceptional situations, such as, involvement of multiple families or family members, no natural or willing successor in the family, conflicting opinions of existing promoter groups, etc., such businesses look outside for a successor. Yet, some progressive Indian family businesses have done this more proactively and in a structured manner, instead of the usual reactionary approach to succession planning.
One must look at CEO succession with a different lens in a family managed company as compared to a professionally run organization. Emotions can override rationality in family businesses.
- Harsh Mariwala
In some family-owned companies, often there tends to be no structured thought on CXO succession. The first question asked is, “Is my son ready?
- Deepak Parekh
Succession is taken very seriously by the regulators and there is a process defined by the Securities and Exchange Board of India (SEBI) that demands the nomination and remuneration committee (NRC) and the board to review succession periodically. Moreover, beyond regulations, the ecosystem today, including rating agencies and proxy advisory firms, keep a very keen eye on CEO succession.
Business continuity is not only about data centers, technology, but at a more holistic level it is about the management. Therefore, as a rating agency, management assessment is an important driver of the final rating outcome and succession planning is a part of it.
- Ashu Suyash
In the western world, if you were to wake up the directors of a company and ask them to name two to three internal and external candidates as CEO successors, chances are you would get the same names. That doesn’t happen in India. Succession planning needs to go from passive to active.
- Amit Tandon
Barriers and Challenges in Succession Planning
The succession lifecycle is fraught with barriers and challenges at each stage – and just embarking on the succession planning journey is the biggest barrier. While in many family businesses this is still a very sensitive topic, in some other cases where there is a strong CEO, it instills insecurity, making it a non- starter. When companies do venture down the path of running the process, the fear of attrition, desire to keep everyone happy and not having clarity of what is expected of the successor, leads to the failure of a smooth succession process.
Also, institutionalizing succession planning has its own challenges, some structural (such as size and footprint of organization and depth of talent) and others related to culture or mindset. In the following sections we provide insights to help navigate and overcome such barriers successfully.
The biggest barrier for discussing CXO succession planning is whether there is confidence in the internal candidate or the overconfidence in the belief that external candidates can be hired at short notice. Timing is critical and tricky – if succession planning starts too late, handover gets more difficult. If one starts too early, there tends to be a lot of market speculation and rumour mongering. There can be reluctance to discuss names openly at the board level as things don’t remain secret.
- Deepak Parekh
Succession planning where the transition is from promoters to professionals is the biggest challenge. Once professionalized, the process becomes evolutionary.
- Sunil Duggal
One of the biggest aspects to consider in succession planning is the attitude of the CEO / MD and Chairperson. The ability to link future growth to succession planning and embedding it two to three levels below allows for robust succession planning. The exercise will become holistic and meaningful if done for the entire leadership team.
- Ashu Suyash
Leading Practices on CEO Succession
Here are the Top 10 insights from successful practitioners and influencers:
1. Start early
Succession, as Romesh Sobti puts it, “is inevitable.” We believe the best time to start talking about succession is as soon as a leader takes over. It is also the time the person is most secure, having just taken over a new responsibility and feels idealistic about identifying and grooming successors.
2. Role of the Chairperson
The boardroom needs the right constitution and culture where succession conversation is not an elephant in the room and there is a candid debate on the topic. The primary responsibility for fostering such a culture rests with the chairperson of the board, who must instill the confidence in the CEO for succession from Day 1 and ensure his/her commitment to the succession process, delinked with individual performance.
3. Role of the NRC
NRCs must be staffed with the right members and it cannot be just another committee role. According to Shailesh Haribhakti, “the audit committee looks at the rear view mirror while the NRC deals with potential future performance.” Harsh Mariwala puts it very simply, “you need a person with deeper understanding of human resources to Chair the NR." If the NRC chair brings deep-rooted knowledge of human capital, focus on the succession agenda is automatic and well managed.
4. Seek help when needed
Use of consultants brings about objectivity to the process of succession planning, be it in terms of assessing internal candidates, or selecting and comparing with external ones, in addition to exposure to current thinking on topics such as diversity and inclusion, and sustainable leadership. As Shailesh Haribhakti puts it “The ingredients for great succession planning include a professionally run, formal process; incredible internal effort; and a long-term engagement with an external search firm, all aligned to the long term strategy of the organization.”
5. Internal versus external
Companies that lead in their industry often have wellmanaged businesses and a high-performance culture. These are perhaps best served by a focus on internal succession. For others, looking to shake up their business, bringing in external talent is the preferred option.
6. Testing successors
Create organization structures that provide the opportunity to test potential leaders with P&L responsibility. Geographic or business unit P&L structures provide a much better opportunity to groom or test leaders with responsibilities beyond their functional expertise. MNCs with global operations have a much larger playing field with several businesses and global roles. This aids them to continuously focus on leadership development and succession while moving potential leaders between roles.
7. Play the field
Continuous engagement with senior leaders of your key competitors can be a booster shot for succession planning. When done directly by NRC members it gives them a good feel for not only the competition but also provides viable options when faced with a leadership crisis.
8. Role models
Internal role models serve a great purpose. Employees see the success story, remain motivated and mobile and aspire for leadership roles. For example, companies like Unilever and Citibank, which have effectively institutionalized succession planning, have had great rub-offs from such demonstrated success of predecessors.
9. Make it a “non-event”
Strong succession practices make the actual succession a “nonevent.” As Romesh Sobti puts it, “IndusInd Bank CEO succession was an event for the markets, but not for the Bank.” The ability to manage “continuity with change” makes for a robust, competitive organization.
10. Successor identified, what next?
As Sunil Duggal says, “CEO induction is only one part of the whole process. One also needs to create a complete framework for the CEO to operate and succeed, which includes governance, empowerment, etc.” To this Romesh Sobti adds that “succession planning is incomplete without thinking of the team and how the new team supports the successor.”
Rigor of CEO succession is a reflection of how seriously the Chairperson and the NRC is taking his or her role. It is a good practice to discuss CEO succession from day 1.
- Harsh Mariwala
Proper CEO succession is a reflection of board maturity and their freedom to express themselves.
- Shailesh Haribhakti
While not always possible, I feel that internal talent pools should be the preferred source for CEO and senior management succession planning. Hiring an outsider magnifies the risks inherent in the succession planning process.
- Sunil Duggal
While it may appear difficult and complex, the insights from our practitioners, influencers and our own research shows us that the “cost of not doing it right” is far in excess of the “cost of doing it right”. It essentially boils down to developing the right mindset in the board and the executive team, aligning and securing commitment, and thereafter focusing on execution.
Institutionalizing a Succession Mindset
To truly derive the benefits of succession planning, it needs to move from an event to a process, such that a succession mindset is embedded in the DNA of the organization. One of the best ways to de-risk the human capital of an organization is to institutionalize succession planning. The Board, the Chair and the NRC have a collective responsibility towards making this happen. MNCs and public sector enterprises are both good, yet contrasting examples of institutionalization of succession planning, where one doesn’t come across many issues with either emergency succession or planned succession. Both have advantages of scale, various opportunities to assess and groom talent, and a strong intake of talent which has stickiness. In addition to this hardware, the software that makes this work well is the ingrained culture and commitment towards leadership talent identification and development, through interventions such as training, coaching or mentoring, job rotations, etc.
Companies that have a succession planning mind-set have a system where talent is given exposure to difficult mandates; they are groomed to be future leaders. The smaller the company, the lesser the chance of this happening.
- Deepak Parekh
Some companies have evolved to become CEO factories as they have a certain level of entrepreneurship and empowerment instilled in individuals while being part of a broader structure. One of the biggest barriers to institutionalizing succession planning in an organization is its culture. The more you instruct, the less leaders think. Culture also includes how you deal with mistakes.
- Narayan Seshadri
CRISIL does not look at only CEO succession while rating an organization, but also for other critical roles.
- Ashu Suyash
I have always been a huge believer in the management trainee program. It’s expensive given high attrition, but you must have faith that the future generation of leaders will come from this program.
Another facet of institutionalization of processes is stakeholder engagement in succession conversations, be it with board members, investors, or broader stakeholders. In India, it is rare for non-executive directors in companies to directly engage with the company’s investors. Therefore, it is not surprising that 81 percent of respondents reported not engaging with investors on succession planning issues.2
Functional experts within the Board must mentor people at the CXO level. For mentoring to happen naturally, CXOs and not just the CEO should be encouraged to attend Board meetings and a dialogue should be encouraged which enables the Board to gauge the CXOs but more importantly helps the CXOs to connect with relevant functional experts on the Board. Regularly mentoring of CXOs presents the Board with a deeper understanding of talent.
- Harsh Mariwala
Companies with good disclosures have two things in common - strong committee chairs (Nomination & Remuneration Committee and Audit Committee) and a professional executive leadership team. In crucial times, if the influence of an individual plays out versus the better judgement of leadership, then it could pose challenges.
- Ashu Suyash
Moving from Why to How
Leadership succession is a much debated and watched topic which has been around for ages, be it succession of political leaders, religious sects, or various other non-commercial institutions such as the armed forces, sports teams, or similar. Succession conflicts have not only filled board meeting agendas and newspaper headlines, but in some extreme cases have even led to wars and other severe impacts. It is now inevitable for India Inc. to let go of their ostrich syndrome and take this important topic head-on.
In the corporate context, pre-COVID, CEO succession conversations were usually prefaced with a hypothetical scenario of “what if your CEO was hit by a bus?” The pervasive impact of COVID has well established that the probability of the CEO, and the leadership team being out of action for some time, if not forever, is much higher than earlier acknowledged. Hence, succession planning is not wasted effort spent to plan for an unlikely or remote occurrence, but a necessary risk mitigation to ensure business continuity and shareholder value protection, both of which are amongst the most important responsibilities of the board.
With the “why succession planning?” question being addressed, we hope that this report will provide assistance in “how to go about succession planning?” to progressive companies and their boards.
Case Study: CEO Succession at IndusInd Bank (as recounted by Romesh Sobti)
Romesh Sobti’s leadership in reviving and turning around an underperforming bank is a distinct example of effective succession planning and a case study in itself. However, what is also commendable is how he managed, in the last two years of his term, to focus on developing an internal successor.
Romesh had moved into IndusInd with a select, tight-knit team and as the time approached for Romesh to retire, he was very conscious that given the success of the team and the bank’s winning culture, his successor needed to come from within. Continuity of the “corporate personality” was a must. As Romesh puts it “retirement was inevitable at 70, so you better prepare the organization for it.”
Romesh started the process almost two years before his retirement. The bank’s non-executive chairman and the NRC told Romesh that they concurred with his internal candidate idea, but he would have to ensure that high standards were met, and a professional approach followed. Romesh identified internal contenders based on track record over the last many years. He, however, ensured that these folks were NOT identified as potential successors to avoid internal biases or lobbies. Each of the identified successors were gradually given additional responsibilities, which often included participation in multiple committees. In these meetings, Romesh observed who “people were listening to.”
Over time, one emerged as a lead runner, based on performance, and Romesh then started the “grooming phase,” which involved various parallel tracks:
- Further widening exposure to other functions
- Greater focus on ability to carry the team along
- Develop self-awareness and openness to developing capabilities
- Smoothening of the edges on various counts
- Getting the potential successor to sit in board meetings – this also helped the board develop confidence and buy-in
Once the board developed confidence, the individual was informed formally that he was the chosen successor. Since banking is a regulated industry, the RBI needed to approve the new CEO. Once the application was sent to the RBI, the chosen successor was involved in day-to-day activities of the CEO. In parallel, Romesh sat down with each of his direct reports and explained the decision and asked for their commitment to support the successor.
The final leg of the succession involving hand-over and transition took four months – the successor had access to everything and led the decision making, validated by Romesh. Subsequently, the RBI approved the choice, and the successor took over as the CEO the day Romesh retired.
- Sanjay Kapoor is a senior member of Russell Reynolds Associates’ Industrial and Natural Resources sector and Board and CEO Advisory practice. He is based in New Delhi.
- Pankaj Arora is a senior member of Russell Reynolds Associates’ Consumer sector and Board and CEO Advisory practice. He is based in New Delhi.
Karan Bahl is a member of Russell Reynolds Associates’ Healthcare sector. He is based in Mumbai.
Chairperson - HDFC Ltd. and Siemens Ltd.
Founder and Chairperson - Marico Ltd. and Kaya Ltd.
Chairperson - Blue Star Ltd., L&T Finance Holdings Ltd. and Future Lifestyle Fashions Ltd.
Chairperson – PI Industries Ltd. and AstraZeneca Pharma India Ltd.
Former MD & CEO - IndusInd Bank Ltd.
Former CEO – Dabur India Ltd.
Managing Director and Chief Executive Officer - CRISIL, S&P Global
Founder and Director - Institutional Investor Advisory Services India – a proxy advisory firm
1,2 Source: Institutional Investor Advisory Services – a proxy advisory firm (CEO Succession Planning in India) – 2017