Opinion Changing a change of guard

How is succession usually decided in Indian listed companies? In truth,it does not engage boards as much as it should. The reason is partly because there are very few India-listed companies that have dispersed shareholding,and no management-active shareholder,thus leaving the board wholly and solely in charge of succession.

Most Indian companies are still actively managed by the promoter group — which could be a family or a group of family-like founders,as in the case of Infosys. Infosys describes itself as being professionally managed by promoters,a description that applies to several family-owned businesses as well,who have well-educated,experienced family members in the business — think Godrej,Mahindra,Tata,Wipro,TVS ,Piramals,etc. However,in some of these companies,there are also young,well-educated gen-next family members in the succession “pipeline” — though not the case in Infosys,and not apparently so in the Tatas or the Mahindras.

In companies where gen-next family members are already in the business,the usual practice is that at an appropriate time in the future,they become the sole candidate for the top executive or board job. Some form of board process then happens; how much substance there is to this form,how much of a “done deal” outcome it usually is,is entirely dependent on how the non-promoter board members choose to discharge their responsibility.

Infosys has followed a hybrid model of succession. The frontrunner for the CEO job thus far seems to have always been a founder — vetted and confirmed by the board,of course. After all founder-members have had their turn at CEOship,the baton will pass to professional managers,as none of the founders’ children are in the business. Infosys has explained the board process it used for CEO selection,and Mohandas Pai has provided a footnote to it; but it is not clear from all the media interviews given by Infosys board members whether the board process of determining CEO succession included debating questions like the desirability of a CEO change at this juncture,or the desirability of giving every founder a chance to run the business,resulting in frequent changes at the top,and so on.

In the case of Tata Sons’ chairmanship succession,it appears from media reports that the contenders,generated by a board search process,includes a family member,and the final selection will be made by some board process. There are a few more high-profile chairman and CEO successions slated to happen in the not-too-distant future. After Infosys,given how much attention the issue has garnered,it is unlikely that they will be allowed to get away with no public discussion on the decision and the process that the board used.

Bringing succession decision-making into the public space is a good thing for corporate governance,because in many of the listed companies,promoter shareholding is well below the 51 per cent mark. (For example,16.04 per cent in Infosys,24.9 per cent in Mahindra and Mahindra,and so on.) Therefore the rest of the shareholders,big and small,must know what those appointed to act on their behalf are doing to find the best person to run the company,or to run the board that supervises the management of the company. Are they just going along with the “default option” of a family or founder-member representing a shareholder with non-controlling stake?

However,it is true that the majority of Indian shareholders,as we can sense from AGMs,feel that the best candidate for the job is a family member or founder-member. Perhaps it is our cultural mai-baap comfort gene or,more likely,our consistent experience that promoters identify deeply with the company,do not see themselves as separate from it (a mixed blessing),display a great passion for the business,have institutional memory of it since inception,display greater commitment to see it succeed,and do not quit when times get tough. If they also bring in good professionals at one level below,then shareholders feel it is the best of all worlds.

Boards also have usually gone along with family/ founders as successors,on the assumption that they know the business best,and have a substantial stake in delivering results. However,we have,of late,seen boards play a more active role in some companies with large FII holdings or strong independent directors,though there is a long way to go in getting to even acceptable good practice.

Succession decisions in Indian PSUs are often maligned by the private sector as being totally subjective and at the whim of some minister. Yet the government processes of setting up search and selection committees,looking at a wide swath of candidates,etc are far more rigorous than the processes that most of India Inc’s boards follow. The form-versus-substance scepticism is equally true for both!

Going forward,Indian boards need to play an active role not only at the time of succession,but also in evaluating CEOs more formally and rigorously,beyond the financials,than they do today. Equally,unless enshrined in the rules of the company,the board must question the choice of a promoter/ founder chairman versus an independent one — but that is a subject that,for India Inc,needs a lot of thinking even to frame the debate.

The writer is a management consultant and author of ‘We are like that only: understanding the logic of consumer India’,express@expressindia.com