A M Naik’s commitment to Larsen & Toubro, or L&T, is beyond doubt. He even wants to move to an apartment near the company’s Powai factory once he retires so that “when I die, I will be facing L&T”. That statement, made to this newspaper a couple of years ago, can be interpreted in two ways. One, it shows his devotion to an organisation he has served for almost half a century for 14 hours a day, seven days a week, turning it into India’s biggest engineering and construction conglomerate. But the statement can also be seen as reflecting the obsession of a leader who has forgotten how to let go. There is no denying that Mr Naik has been L&T’s biggest value driver — ever since he took over as chairman in 2003, net sales have grown five times and market value 17 times. He has survived several boardroom battles, thwarted takeover attempts from powerful business families, and cut down on inner-firm bureaucracy, making it one of the few widely held companies that are managed professionally without a single owner. It is certainly not easy to run L&T, with its complex web of 64 businesses ranging from nuclear power to switchgear, 60 per cent built by Mr Naik himself from scratch.
But the L&T board’s decision to split the company’s top post is, at best, a short-term measure and exposes its failure to wake up to address the succession challenge early on. As one of the most widely watched companies in India, it has missed an opportunity to set an example in terms of transparent, forward-looking succession planning. Its board had done this earlier too: in 2006, it raised the chairman’s retirement age to 70, giving Mr Naik another five years at the helm. It has had ample time to look for a successor. Mr Naik has himself sought to explain the succession dilemma by saying he would have groomed a younger successor had he got the top job five years earlier (he became CEO at 57) and needs five more years to mentor younger talent in the organisation. But this argument lacks conviction. The fact that the markets have reacted positively to “continuity” at L&T is, in a way, a matter of concern: market players are responding to short-term feel-good sentiment, rather than investing in the idea that well-governed companies are appropriate long-term bets.
The board should have played a more proactive role, by helping choose a younger successor and preparing the ground earlier for a smooth handover. More importantly, the dual power structure itself defies all logic. No organisation can – or should – have two bosses, and in this case the “executive” tag attached to Mr Naik’s designation clearly shows his shadow will continue to loom large over the new managing director (MD). L&T has justified dual authority by saying that while the MD will look after day-to-day operations, the chairman will look at the bigger picture — such as making L&T younger, etc. This argument, too, lacks conviction. If the L&T board needed Mr Naik so badly for mentoring, nothing prevented it from, at least, choosing a younger MD who would have stayed on after the chairman finally retires. By opting for somebody who would retire well before Mr Naik, the L&T board has clearly wasted an opportunity.