LK Advani is not alone, in that he is not willing to give up his position as the top man of a political party. This is not even a syndrome typical only of India’s politicians. The concept of “retiring gracefully” is something that seems to be absent from the corporate world too.
The past few weeks have thrown up a few interesting cases. The comeback of Infosys founder-CEO NR Narayana Murthy as executive chairman, purportedly to lift the company from its lows, has been well documented. In a somewhat similar case, AM Naik, the 71-year-old chairman of infrastructure giant Larsen & Toubro (L&T), has said he is struggling to find someone appropriate to replace him.
This begs an interesting question and an equally important quandary. Do corporate leaders in India love their stature so much that even after decades at the top, they are unable to move on? Or is there not enough talent to replace them?
Both L&T and Infosys are publicly-listed companies with independent board of directors and millions of shareholders. By playing the sole saviour’s role, are these industry honchos not putting their reputation at stake and, in the process, the reputation of their companies?
“I find this ridiculous,” says Ajay Shah, professor at the National Institute of Public Finance and Policy. “There is a global talent pool. We can get people from anywhere today.”
The issue of succession — and obsession of the hot seat — is not new, but it’s been particularly sticky in India’s context. “If you rank countries in such terms, India should certainly be ranked very high,” says former SEBI chief M Damodaran.
The past five years have seen several issues of corporate governance crop up, yet most boards of Indian companies seem too occupied with formal processes to worry about protecting companies’ interests. In most cases, the board is too enamoured by the CEO to take a stand to the contrary. In L&T’s case, Shah points out, what is going on is a problem of power structures. “The board, and not the chief executive, appoints the CEO,” says Shah.
Stanford Business School Professor David Larcker says boards “need to ask themselves: could they really name someone today, or is everyone in the succession plan always 1-3 years out from being viable?”
Damodaran points out that a poor succession plan leading to perceived indispensability reflects just as badly on the Chairman/CEO. “It leads to the obvious conclusion that you didn’t create an organisation that doesn’t need you,” he says, “and cannot manage without you. That is the ultimate failure of leadership.”
Narayana Murthy’s comeback to Infosys — with his son in tow — has shocked corporate India, even though many of his contemporaries do not want to say it to his face. Not only has he broken the rules he set — of not allowing family members to join the company — he has also signalled to the world that he may be the only one to save the company.
“What does this indicate to the young employees?” asks the head of a multi-business conglomerate. “Weren’t there enough bright young people like Rohan (Murthy’s son) in the company already?”
For a globally listed firm, this is a dangerous stand to take. Murthy had kicked off a process at Infosys, whereby a rotation would give all its founders a chance at being CEO. In a sense, it was this policy that led Infosys to a position today where the old guard has been forced to come back. Shah explains a board of directors is often biased towards the founders even though “their powers are most needed in getting a good CEO on board”.
From a governance standpoint, why should owners with a collective holding of just about 16 percent in the company reward themselves with the CEO position and not engage in a democratic election? Damodaran shares a few observations on the management decisions of the Bengaluru-based tech giant. “If S Gopalakrishnan (predecessor to current CEO SD Shibulal) was a good leader, then why change him? If he was not good, then why make him co-chairman?” Damodaran is puzzled as to why Infosys would want to replace a non-executive chairman in KV Kamath with an executive chairman. “Are we going to see the first case of a non-executive CEO?” he quips.
As is often the case with all publicly-held family-driven businesses, people forget the constituency they really work for: the shareholder. Given the nature of new public companies, the minority, but significant investors (such as private equity), will start making a point. “In publicly-listed firms, they may become activists if the leadership does not plan its succession,” says business historian Gita Piramal.
In most family businesses, it is almost a given that the top job will always pass to the next of kin. Gita Piramal points out how of late, family businesses have set good examples of clear succession planning. There have been instances, such as the Rahul Bajaj and the RP Goenka Groups, where succession was affected while the patriarch was very much active.
“If promoters can do that, surely professionals should also be able to do it,” she says. But, that is easier said than done.
Finding the right person to fill the predecessor’s shoes has been found to be a major hurdle to a smooth succession. Even the committee hunting for Ratan Tata’s successor sought an extension because it couldn’t find someone to replace his position. ITC’s YC Deveshwar got an extension of five years till 2017 with an aim to find and groom an heir while L&T’s Naik has admitted he can’t find someone appropriate to pass the baton.
In case of professional firms, the search for a chief executive gets complex when existing bosses “just don’t groom enough leaders,” says Sanjay Nayar, country head of private equity firm KKR India.
“It is a genuine problem,” says Piramal, “but in the end, not having a solution is a bigger problem.”
According to a survey done two years ago by US-based management consultancy Bain & Company, “more than 75 percent of company boards in India do not discuss chief executive succession planning at all”.
An insider at L&T shares that the problem with the firm’s succession is that the hunt for a successor began too late. “Had Naik started the search 10 years ago, this wouldn’t have been a problem.”
Often companies are okay with having the CEO move into the chairman’s role but not continuing with operational responsibilities. But questions must also be raised on just how long should a chairman stick around? To this, one analyst asks, “Who defines the length of the chairman’s tenure? Is there even a tenure?”
Not willing to give up a position of power is somewhat of an Indian trait. As a society, having a ceremonial chief is an ideal that is ingrained in our belief. This is true for corporate India too. Damodaran calls it a cultural issue. “We respect grey hair,” he says. “We tend to not let people go before they are too old.”
A few pointers to solving the succession issue came from — not surprisingly — a private equity manager, who sits on many boards. “This obsession with the kursi is actually a personal issue,” he says, on condition of anonymity. “One, Indian CEOs feel miserable when all the trappings, the magic potion of power suddenly vanish. Two, personal lifestyles are hugely subsidised by the companies and it’s hard for many CEOs to adjust to a life without them. Part of it is also to do with lack of options after retirement.”
Succession can only be planned if one is willing to move away to make way for another. Respect should not become reverence. “It is sad that today ‘creators’ of wealth have begun to behave like ‘inheritors’ of wealth,” rues Damodaran. “That’s a cause for concern.”