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BW Businessworld

The Search For Successors

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In a wood-panelled conference room in  a city in Gujarat, two brothers sit in silence across a table that takes up a large part of the room. Jackets are casually draped over the backs of chairs, and on a nearby plush leather sofa in what is a lounging area, a third, younger man waits. They are waiting for a group of consultants who are expected to make a presentation on future strategy. The company's growth in a promising business whose revenues were around Rs 3,000 crore has stagnated for some time.

The consultants arrive and, after the customary greetings, begin their presentation. After the initial slides, and as analysis of the company's failures begins, the brothers get animated. Soon, there is argument, with the younger brother blaming the elder's pursuit of foolish business ideas, and on the next slides, the older (he is the CEO) questions the younger's commercial and investment judgement. But during all the emotional outbursts, the brothers do not speak to each other, but at the consultants. Anger follows, some yelling, and finally even tears.

At the end of the two-hour presentation, the brothers retire to their own rooms for lunch. The third member, hitherto silent, and who is the professional brought in to manage business operations, settles down to explain the situation. When the mandate finally becomes clear, it is not about growth strategy, but about putting in a structure for succession planning.

This is a conundrum that leading businesses in India face. "Succession is front and centre on the agenda of most boards," says Anjali Bansal, managing partner at Spencer Stuart, an executive search consultancy. "We held a workshop last year. It was widely attended by chairmen, independent directors and top management."

Recent events surrounding the succession at Infosys Technologies (and the spats associated with it) have drawn public attention. There has also been much speculation about who will succeed the likes of Ratan Tata as head of the Tata Group, or A.M. Naik of Larsen & Toubro (L&T) and even Y.C. Deveshwar at ITC.

True, these men have been storied successes, and as they ride off into the sunset, their departures also mark a generational shift. Finding people to fill their shoes as leaders will be hard. But the problems of succession in corporate India run much deeper, and all the way down even to firms that are usually clubbed into the small- and-medium enterprise category.

SUCCESSOR TO Y.C. DEVESHWAR, The multi-business conglomerate ITC is yet to finalise its next chairman
NESS WADIA, the eldest son of textile patriarch
Nusli Wadia, is likely to inherit a part of the empire, along with brother Jeh (BW pic by Sanjit Kundu)
PREETHA REDDY, the eldest daughter of Apollo Group chairman Prathap Reddy, heads the hospitals. Her three sisters head other parts of the business (Bandeep Singh/Fotune India)

Family-owned firms and professional companies alike face similar challenges: for the former, it is about who will succeed the current incumbent, while for the latter it might be about a choice between a number of internal candidates. Very few in both kinds of firms have any kind of formal succession process, though attempts are being made. But having a process is not a guarantee that there will be no acrimony, or will result in the best choice.

In today's fast-changing business and competitive environment, will a process, which may have been in place for years, be appropriate to find new leadership that will go beyond business continuity to think out-of-the-box?

The history of corporate India is replete with examples of internecine battles, bitter separations and even a public airing of dirty linen (the latest is that of the family that owns The Hindu newspaper). Are there lessons that can be drawn from these? In a country where businesses are mostly family-owned, are there succession models of any kind?

Battle Grounds
Experts say wars of succession go back several centuries. "Take the Aurangzeb syndrome," says Asha Bhandarker, dean of research and consultancy at Management Development Institute in Gurgaon. "It is a pattern that recurs in corporate India over and over." The Mughal emperor imprisoned his father, went to war with his eldest brother Dara Shikoh (who was the father's preferred choice; the law then was vague about the rules of succession), and eventually had all of his brothers put to death (of course, this last does not happen in modern corporate India).

Politics in succession planning is not the same thing as succession planning in politics. Still one can find both, in both situations. Down south, DMK supremo M. Karunanidhi has four names to choose from — sons Stalin and Alagiri, daughter Kanimozhi and grand nephew Dayanidhi Maran. Up north, it is unlikely that Pratibha Advani will fit into the giant shoes of her father L.K. Advani. Elsewhere, it is a similar story. Son follows father (Akhilesh-Mulayam Singh Yadav, Milind-Murli Deora), daughter follows father (Supriya Sule-Sharad Pawar, Praniti Shinde-Sushilkumar Shinde), and so on.

Still sociologists such as Shiv Visvanathan say Indian business is more successful in the succession game than politics, as they have to satisfy a smaller constituency. "Succession in politics is much more open ended. It needs adaptation to a democratic frame and not just a managerial one. Oddly, the answer seems to be dynastic," he says. Visvanathan also warns a political successor must not be in the waiting room for long. It will result in the ‘Prince Charles effect', where a successor spends too long a time in the incubation chamber.

All too often, there is also the Dhritarashtra complex, as Bhandarker terms it: the blind love for a favourite child that the patriarch prefers over the others. Meritocracy seems to have no place in many succession choices, going by examples of the past. And the choice of a favourite son over the others is bound to lead to ill feeling.

Examples of the Aurangzeb syndrome include the ‘coup' in Apollo Tyres, where founder Raunaq Singh was deposed by son Onkar Kanwar as head of the firm, or Ranbaxy Labs, where the father (Bhai Mohan Singh) had a boardroom battle with elder son Parvinder over strategic direction, which resulted in Parvinder winning. Oddly enough, in both cases, the boards of directors in the two companies sided with the sons.
In family-owned businesses, it is often hard to tell the difference between succession management and distribution of ownership: the succession also decides how the assets of the company (or conglomerate) are split up operationally and in shareholding, because founders find it hard to break up their enterprises.

"In some families, there is an anointed successor, and the other siblings accept his leadership," points out Rashesh Shah, chairman and CEO of Edelweiss Capital, a Mumbai-based financial services company. "In others, the businesses are evenly distributed."

The Goenkas of the RPG Group, Harsh and Sanjiv Goenka, or the Piramals illustrate the case of a fair and equal division of businesses, which resolved the succession question. In the Bajaj family, the oldest of the brothers, Rahul, became the anointed successor and cousins Shekhar, Madhur and Niraj accepted him as head of the family. But Shishir, Rahul's younger brother wanted a separation and the seven-year battle ended with his split from the family.

It is possible that when conglomerates get too big, succession becomes a problem that is best resolved through a separation of businesses. Even among the Birlas, though dating back to the earlier generation, these circumstances led to the creation of separate Birla groups: B.K. Birla, A.V. Birla, K.K. Birla and M.P. Birla. Despite this, B.K. Birla, the father of late A.V. Birla, has said that the bulk of his companies will go to his grandson Kumar Mangalam after his death.

Keeping It In The Family
Some families have chosen to use a family council approach. Chennai-based TVS Group and Murugappa Group have had such an arrangement for years. Newer industrial houses like GMR Infrastructure have put in place council-like family constitutions. Mallika Srinivasan, a scion of the Amalgamations Group is married to Venu Srinivasan, chairman of TVS Group. The family council approach in some cases is proving contagious, especially in the south.

One of the earliest attempts, and a successful one at that, is the approach taken by the late O.P. Jindal. His sons — Prithviraj, Sajjan, Ratan and Naveen — run different companies under the umbrella of the OP Jindal Group (see ‘Bonds Of Steel', BW, 4 April 2011). Each owns a fifth of the others' businesses, with control of the remaining fifth (they call it their late father's share) going to the brother in charge of each cluster.

THE FACTOR OF EVENTUALITY: Both Azim Premji Chairman, Wipro, and Kumar Mangalam Birla Chairman, Aditya Birla Group, had to step in upon their respective fathers' untimely death

What of others? Many families recognise that management and ownership should be separated. They are inducting professionals into key management and operational positions while, as owners, they stay on the boards of the companies. This transitioning is in various stages of progress in several companies, mostly those in which the current younger generation sees the value of doing this.

"We are the fourth and fifth generations in the business," says Amit Burman, vice-chairman of Dabur. "This transition began in 2000 when family members decided to go in for professional management. We limit our activities to new strategic inputs at the board level, and funding decisions." The board of Dabur has four family members, down from nine earlier. It does not stop them from going out and setting up new independent businesses, says Burman. The investment in IPL cricket team Punjab Kings XI is a case in point.

Going Professional
The Tatas have the sound of a family-run business and are anything but. For decades, while a Tata is the chairman of this largest conglomerate of over 90 separate companies, there have been a number of satraps that run the many businesses with near-total independence, much like a professionally-run business, managed mostly through the holding company, Tata Sons.

A search committee is examining who will succeed Ratan as chairman, but it is a decision in which two charitable trusts and the Shapoorji Pallonji Group that own the biggest stake (through Tata Sons) will have a big say. Noel, Ratan's half-brother and son-in-law of construction baron Pallonji Mistry, is a strong contender, feel observers. "It is a bit of a charade, really," says a senior partner in a global consulting firm. "It is certain the trusts will want a Tata to be chairman for the foreseeable future. Otherwise, the search committee would have met the March 2011-deadline it had set for itself."

In which sectors are women from indian business families likely to run key firms in future? Almost all. But it was not always that way. In the 1990s, the Walchand Hirachand group split after chairman Bahubali Gulabchand passed away. While his daughter Pallavi Jha became CMD of Walchand Capital, one of the more prominent firms of the empire is run by Pallavi's uncle Ajit Gulabchand.

Today, gender diversity is more than a buzzword and promoter-fathers have increasingly inducted daughters into the business. The Godrej Group, the Chauhans of Parle, Naresh Goyal at Jet Airways, Future Group's Kishore Biyani, Blowplast's Dilip Piramal are some examples. In cases like Thermax, two generations of women leaders, Anu Aga and daughter Meher Pudumjee have been holding fort for over a decade. And there are the likes of Sulajja Firodia Motwani of Kinetic Engineering, the grand-daughter of H.K. Firodia. Women from business families are acquiring their right place in the boardroom, but as a consultant from an international HR consulting firm points out, there is still a long way to go.

The possibility of a foreigner to replace Ratan as head of a group more than half of whose revenues is international has not been ruled out, but most observers are sceptical. "They have been at it (the search) for over a year now," says Pritam Singh, director general of International Management Institute in New Delhi. "Succession planning should be from within and, somehow, we do not seem to be grooming leadership on the inside." But in the past, a non-Tata, too, has headed the group.
Infosys, which has a solid reputation for corporate governance, presents some of the challenges faced by professional-led companies. The board had decided informally that each of the founders would run it in turn, but the departure of Mohandas Pai — a perceived contender, despite not being a founder — and his statements on succession have taken some of the sheen off the company's reputation.

"At a time when the firm is going through the process of re-establishing its preeminence in the information technology business, it is vital that a tech-specialist runs the firm," says the head of a leading securities firm. "Pai is not that person." He acknowledges that Shibulal, the last founder and the likely successor to S. (Kris) Gopalakrishnan, may not be the right person either. "It makes Infosys look more like a quasi-family run firm than one led by professional management," he adds. The ‘winner' will be apparent by the time this magazine hits the stands on 30 April.

The Accidental CEO
There is not much agreement about the efficacy of having a succession plan in place, though most people BW spoke to believed that it helped a great deal. "Organisations that have prepared a ready line-up of able successors to take up critical positions are less vulnerable to a crisis caused by the sudden departure of the CEO," says Vijayendra Bhise, president, Quantronix India, an executive search firm.

Building bench strength should always top the human resources department's agenda in any firm. Preparing for any eventuality is good. Take the case of Kumar Mangalam Birla who had to step in upon his father's sudden demise. when he was still in his 20s. Similarly, Vijay Mallya had to quit his education in England to take over from his father Vittal Mallya on the UB chairman's sudden death. Azim Premj assumed charge as Wipro's CEO on his father's untimely passing. Premji was still in his 20s.

Anjali Bansal, Spencer Stuart "Succession is on the agenda of most of the company boards"
Asha Bhandarker, MDI "The Aurangzeb syndrome recurs in corporate India"
Ganesh Shermon, KPMG "Succession planning starts where career planning ends"

But even these transitions can be orderly. Take McDonald's. In 2003, plummeting sales, poor performance and a bad public image had forced its board to bring back former chairman Jim Cantalupo (he had retired in 2002) to replace Jack Greenberg. Cantalupo started a massive turnaround, but he died rather suddenly in April 2004. McDonald's shares plummeted. Within six hours of his death, McDonald's named Charlie Bell as CEO. A few weeks later, he was diagnosed with cancer, and stepped down. Jim Skinner became the third CEO in less than a year.

"Succession planning starts where career planning ends," says Ganesh Shermon, partner and country head of human capital practice at KPMG India. "Look at transparent companies such as HUL, where investing in the growth of key people creates a pool of talent from which a panel of the best people is then rotated through a series of jobs, usually critical ones,  to assess abilities and succession potential." HUL has a formidable succession process (though parent Unilever went outside to bring in Paul Polman from Nestle), while that of ITC was not as well formalised. But ITC, which chose Deveshwar, had the last laugh and has gone past HUL as the premier FMCG multinational in India.

What Happens To Those Who ‘Lose'?
As the case of GE and the succession of Jack Welch showed, those who lose out in the succession race usually move on to similar jobs in other companies (see ‘Blood, Sweat, and Some Tears' on page 37). ICICI Bank is a good example in India. K.V. Kamath succeeded N. Vaghul as managing director, and was succeeded by present CEO Chanda Kochhar. But she was not the only contender: there was Shikha Sharma (who now heads Axis Bank), V. Vaidyanathan (now with Future Capital) and Nachiket Mor (said to be Vaghul's preferred candidate). Once it became apparent that Chanda would take the top job, the others left.

At the time, many analysts worried about the loss of talent and the impact on ICICI Bank's stock and business prospects. But others were not as worried. A few think that the bench is often far deeper than what is visible. "Great institutions become leadership academies," says Bansal. "Look at what ICICI Bank has produced, and not just from the latest succession." Apart from those named above, ICICI Bank alumni include Shailendra Bhandari, now head of ING Vysya Bank, Ajay Srinivasan of Aditya Birla Financial Services and Sonjoy Chatterjee of Goldman Sachs India.

But like the family-run businesses, succession in the professional-led companies can also be messy. Sharma's appointment as Axis Bank CEO was not without its fair share of drama. P.J. Nayak, the outgoing chairman, wanted his nominee, Hemant Kaul, to replace him. But what upset board members was that Nayak presented them with a virtual fait accompli. They forced a search that included external candidates and, when they settled on Sharma, Nayak resigned immediately in a huff. "Had he only been more inclusive with the board and got their buy-in, he might have had his way," says a senior banker familiar with the events. "As it turns out, the board got it right," he adds.
Explaining The Resistance
Despite the perceptible advantages of succession planning, many families still resist the idea. Lupin's chairman D.B. Gupta has not yet made it clear who will take over his job. His 37-year-old son Nilesh is group president and executive director, and daughter Vinita Gupta runs the company's US-based business. With current managing director K.K. Sharma, they form the core strategic team. While each sibling believes the other could well succeed the father, D.B. Gupta himself is silent on the subject.

L&T's Naik has said that the company is in the process of working out who his successor will be in 2012. In the meanwhile, a restructuring of the company's many businesses into nine ‘verticals', each to be managed by a CEO, is underway. "He is like an emperor who does not want any of his princes to succeed him," says a cynical senior investment banker. "If one man can run GE, which is as complex a business, why not L&T?"

"Splitting the businesses of conglomerates makes the resulting smaller units sub-optimal," says Edelweiss' Shah. "Most families are unwilling to give up the scale and size they have achieved for that reason." In other words, there are those who believe that there is a premium attached to being a conglomerate.

Bansal has another take. "Why should there be a premium to large conglomerates?" she asks. "There could be a discount in many cases, splitting the organisation could create more valuable ones." Some analysts agree with her, suggesting the Ambani brothers' separation created greater market capitalisation, bigger companies and more shareholder value than the combined firm.

Is there a good time for succession planning, and to implement a succession plan? "It should not start too early, nor should it be announced too late," says Sanjay Shastry, regional vice-president, Asia Pacific, of executive search firm Stanton Chase International. It is also vital to distinguish shareholder control from management control. There are many companies in India where the shareholder control does not dictate management control, like in Asian Paints.

Succession And GenNext
Cut to the 33rd floor at the Four Seasons Hotel in Worli. Scions of industrial families that own IPL teams gather to revel and party together. Many of them are in their early to late 20s, and for whom the cricket team is sometimes play, and often a way of cutting their teeth in learning how to run a business at the same time. Cynics dismiss the corporate involvement in IPL as a business interest. "It is like giving children a new set of toys  and entertain the rest of the audience at the same time, not a succession planning platform," says a senior consultant. "The family-run business still needs to formalise the process instead of experimenting with it."

Six years, five months and two days. that is how long it took to find a successor for GE's Jack Welch before he stepped down in 2000. It was a secret project that began in 1994 at a meeting of the GE board's management development and compensation committee. The original ‘panel' comprised 24 candidates: seven of whom headed GE's largest businesses, four just below this top tier, and 13 others who Welch liked and were taken as part of a broad consensus.

Each candidate was tested on his abilities, and board members were encouraged to get to know each of them. Two years into the process, the board felt it needed to know the candidates in their own local environments. By end 1997, the list was down to eight. One or two dropped out by resigning from the company; finally it came down to three: Jeffrey Immelt (who ran GE Healthcare), James McNerney (aircraft engines) and Robert Nardelli (turbines and generators).

Finally Immelt was picked; Nardelli and McNerney left to head GM and 3M, respectively. Welch said the process was a mix of "chemistry, blood, sweat, family, feelings". Perhaps a lot of it.

Other observers believe that the Hindu United Family (HUF) dynamic will continue to rule conditions for some time to come. "It has some classical social and cultural aspects to it that are still in play, including leaving women at the bottom of the pyramid," says a senior lawyer in a corporate law firm. But things are changing: families such as the Godrejs, the Reddys of Apollo Hospitals, the Chauhans of Parle, have all brought women into succession planning (see ‘Eve's Business' on page 36).

Now, pan back to see what happened to the warring brothers in Gujarat. They have begun to speak to each other, and plans are being put in place to address each one's concerns. The extended family members, thus far left out of the business and the planning exercise, are seeking ways to come back in. It is not without its trials, but slowly progress is being made.

Most readers will be awaiting the succession at Infosys in the next day or two. And it will be important to remember that if there is a chasm between the succession planning process and business strategy, the plan is likely to fail.

With inputs from Nevin John, P.B. Jayakumar, Prasad Sangameshwaran, Malabika Sarkar and Shrutika Verma

(This story was published in Businessworld Issue Dated 09-05-2011)