Media reports suggest that the Securities and Exchange Board of India (Sebi) is planning to regulate succession planning in listed companies. If the regulator is serious about addressing the problem of shocks to a company's prospects owing to the death of those in control and management, it should tread cautiously.
Typically, policy-makers in India easily believe that it is possible to achieve societal virtue more by legislation than by social reform. Therefore, seeing to enforce succession planning by law runs the risk of translating into a disproportionate intervention of the state into private lives or could lead to check-the-box lip service with form overriding substance.
The proposed measure from Sebi is not a bolt from the blue. Last year, as part of a concept note on corporate governance, Sebi had floated the idea of roping in succession planning as a principle of governance to be factored in by corporate boards. However, this was based on social reality in the OECD countries, US and UK (where, unlike India, a listed company with "promoters" holding substantial shares would be an oddity apart from being a rarity). These jurisdictions adopt a "light touch" approach to such principles-based policies unlike India where society wants to see someone go to jail for any failure of any kind. Besides, legislating that corporate boards "should ensure that plans are in place for orderly succession", implies a belief that the fear of penalty would ensure effective succession.
"The best way to ensure that a company does not suffer due to a sudden unplanned-for gap in leadership is to develop an action plan for a successful succession transition," the Sebi concept note had said, inviting public comments. "Hence, the board of a listed company may be required to ensure that plans are in place for the orderly succession for appointments to the board and senior management. Further, the viability of mandatory disclosure of succession planning to board/ shareholders at periodic intervals may also be examined." Such an approach could be rendered fallacious.
First, Indian social (and legislative) reality is about listed companies being controlled by "promoters". The securities regulatory framework mandates identification of "promoters" with additional obligations and norms to be followed by promoters. Despite companies being limited liability entities, the entire scheme of the financial sector regulatory framework places a strong incentive on perpetrating the role of "promoters" (effectively defined as the shareholder who controls the company). Even the banking sector, where the nudge of regulation is towards diversified shareholding, insists on promoters of their borrowers playing a role far beyond being a shareholder. The promoter community does not protest this, and in fact laps it up exploiting the rent that the statutory entrenchment commands.
Therefore, family-managed businesses thrive in the Indian securities market. In fact, many endorse how such companies have the benefit of one family's vision taking care of the entire firm. Indeed listed companies have been restructured to create multiple companies so that multiple sons of a patriarch could have a company each to manage. In India, the risk of value erosion is often posed by the impact of the promoter family indulging in succession planning. Force-fitting a regime that suits a different market reality would hardly be worthwhile or apt.
Second, sending those in charge of a company to jail for not making a succession plan can never lead to better succession planning. It may indeed lead to formal compliance providing faux fuzzy comfort that our listed companies have succession plans. Corporate boards would routinely adopt policies containing words of high wisdom about how they would constitute committees and identify replacements upon death, resignation or termination of senior management personnel. That would hardly mean that good quality succession planning would get achieved for the board and senior management.
Third, under current law, legislating to ensure succession planning would have jurisdictional challenges. If a potentially adverse impact on market price for securities is adequate to confer jurisdiction on Sebi to deal with every source of adversity, even the entitlement of doctors who may service listed companies' CEOs can get regulated by securities market regulation. When Sebi pushed for a change of management of the depositories for the IPO scam having occurred, the courts ruled that Sebi should only act against depositories while changing the management is a prerogative of the depositories' boards. Some vacancies can never be planned for. For example, the immediate impact on market price for shares of a large Indian automobile company owing to the sudden death in Thailand of its expat CEO could never have been prevented. The perception of the future of a business depends on a variety of circumstances prevalent when a CEO's office falls vacant. The choice of a successor for a listed corporate can be as complex if not more, than the choice of a successor in a political party, government in office or in a regulatory agency.
Simply asking companies to confirm whether they have a succession plan if they consider their business not to be succession-proof could well nudge companies to think about the issue. The markets are the best judges of a company's future. If a company is exposed to risk owing to lack of an effective successor, the price would reflect the perception, forcing the company to think about the issue. Mandating the adoption of a succession plan can never achieve the same result.
Typically, policy-makers in India easily believe that it is possible to achieve societal virtue more by legislation than by social reform. Therefore, seeing to enforce succession planning by law runs the risk of translating into a disproportionate intervention of the state into private lives or could lead to check-the-box lip service with form overriding substance.
The proposed measure from Sebi is not a bolt from the blue. Last year, as part of a concept note on corporate governance, Sebi had floated the idea of roping in succession planning as a principle of governance to be factored in by corporate boards. However, this was based on social reality in the OECD countries, US and UK (where, unlike India, a listed company with "promoters" holding substantial shares would be an oddity apart from being a rarity). These jurisdictions adopt a "light touch" approach to such principles-based policies unlike India where society wants to see someone go to jail for any failure of any kind. Besides, legislating that corporate boards "should ensure that plans are in place for orderly succession", implies a belief that the fear of penalty would ensure effective succession.
"The best way to ensure that a company does not suffer due to a sudden unplanned-for gap in leadership is to develop an action plan for a successful succession transition," the Sebi concept note had said, inviting public comments. "Hence, the board of a listed company may be required to ensure that plans are in place for the orderly succession for appointments to the board and senior management. Further, the viability of mandatory disclosure of succession planning to board/ shareholders at periodic intervals may also be examined." Such an approach could be rendered fallacious.
First, Indian social (and legislative) reality is about listed companies being controlled by "promoters". The securities regulatory framework mandates identification of "promoters" with additional obligations and norms to be followed by promoters. Despite companies being limited liability entities, the entire scheme of the financial sector regulatory framework places a strong incentive on perpetrating the role of "promoters" (effectively defined as the shareholder who controls the company). Even the banking sector, where the nudge of regulation is towards diversified shareholding, insists on promoters of their borrowers playing a role far beyond being a shareholder. The promoter community does not protest this, and in fact laps it up exploiting the rent that the statutory entrenchment commands.
Therefore, family-managed businesses thrive in the Indian securities market. In fact, many endorse how such companies have the benefit of one family's vision taking care of the entire firm. Indeed listed companies have been restructured to create multiple companies so that multiple sons of a patriarch could have a company each to manage. In India, the risk of value erosion is often posed by the impact of the promoter family indulging in succession planning. Force-fitting a regime that suits a different market reality would hardly be worthwhile or apt.
Second, sending those in charge of a company to jail for not making a succession plan can never lead to better succession planning. It may indeed lead to formal compliance providing faux fuzzy comfort that our listed companies have succession plans. Corporate boards would routinely adopt policies containing words of high wisdom about how they would constitute committees and identify replacements upon death, resignation or termination of senior management personnel. That would hardly mean that good quality succession planning would get achieved for the board and senior management.
Third, under current law, legislating to ensure succession planning would have jurisdictional challenges. If a potentially adverse impact on market price for securities is adequate to confer jurisdiction on Sebi to deal with every source of adversity, even the entitlement of doctors who may service listed companies' CEOs can get regulated by securities market regulation. When Sebi pushed for a change of management of the depositories for the IPO scam having occurred, the courts ruled that Sebi should only act against depositories while changing the management is a prerogative of the depositories' boards. Some vacancies can never be planned for. For example, the immediate impact on market price for shares of a large Indian automobile company owing to the sudden death in Thailand of its expat CEO could never have been prevented. The perception of the future of a business depends on a variety of circumstances prevalent when a CEO's office falls vacant. The choice of a successor for a listed corporate can be as complex if not more, than the choice of a successor in a political party, government in office or in a regulatory agency.
Simply asking companies to confirm whether they have a succession plan if they consider their business not to be succession-proof could well nudge companies to think about the issue. The markets are the best judges of a company's future. If a company is exposed to risk owing to lack of an effective successor, the price would reflect the perception, forcing the company to think about the issue. Mandating the adoption of a succession plan can never achieve the same result.
The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own. somasekhar@jsalaw.com