Two of India’s biggest corporate entities – the Tata Group and Infosys – are in the midst of succession planning. But over 75 per cent of company boards in India do not even discuss the issue and most CEOs are unable to imagine anyone as an adequate replacement. Even if they have to choose somebody, most are inclined to replace themselves with a clone.
Research by US-based management consultancy Bain & Company found that only one in five board members in Indian companies was ever involved in talks about a CEO’s succession and little effort was made at the board level to groom top leadership. Some family businesses delay the process of succession planning because their decisions could create conflicts and criticism within the family. Others find it difficult to let go of the reins and want to retain their powers as a leader. Also, issues like death could be uncomfortable to discuss.
Bain’s findings notwithstanding, it would be wrong to label this an Indian phenomenon only. Other research studies have found that more than half of companies in the US and Canada cannot immediately name a successor to their CEO should the need arise. According to studies conducted by Heidrick & Struggles and Stanford University’s Rock Center for Corporate Governance, on average, boards spend only two hours a year on CEO succession planning and almost 40 per cent of companies have zero viable internal candidates, pointing to a lack of talent management. This is surprising considering that the lack of a truly operational succession plan can have devastating consequences.
This is all the more important because fewer CEOs today are internal candidates with long experience in the company they head. Companies now have to mostly look for outside candidates because managers are no longer content with taking the staircase to the corner office and prefer the escalator via frequent job changes.
HR experts say there are various theories on how to go about CEO succession planning, but the gold standard often cited was the three-person contest to replace Jack Welch at GE (won by Jeffrey Immelt, with the two losers immediately decamping for CEO roles elsewhere). This is known as a succession “horse race” that pits two or three senior executives against each other in a battle over performance — the winner becoming the next CEO.
Some observers are uncomfortable with the horse race approach because that makes it an overt competition for the CEO role among several recognised candidates within an established time frame — which is not good for the organisational morale. But leading consultancy organisation Spencer Stuart says horse races have been immensely successful in many companies like GE, Procter & Gamble, Abbott and GlaxoSmithKline, all of whom have produced exceptional leaders. GSK, for example, used to ask the top three candidates to take on year-long CEO-level projects. Apart from internal evaluation, eminent outsiders were brought in to make the system fool-proof.
People who back the horse-race approach say an overt competition for the top job can serve as motivation to individuals throughout the organisation who can see a path to more senior roles in the company. But there are many detractors as well. They say that the overt competition for the top job leads to divisiveness in the organisation and immediate departure of the unsuccessful candidates.
There are two more types of CEO-successors, one of them known as the “inside outsider”. Companies choose leaders who are internal candidates but who have the ability to view their role through the lens of someone who just bought the company and is unencumbered by the emotional baggage that comes from a long tenure in the organisation. They also leverage the knowledge they have accumulated about the company’s people, suppliers and customers, and future direction. HR experts say this is the best choice because externally recruited CEOs do bring in fresh perspectives, but lack the required knowledge of the company’s culture and history. But getting such leaders is a tall order indeed.
Then there is the “outside insider”: Someone who knows a lot about the company but has not worked for it, thus free from internal politics. Management consultants who have gone on to head companies are the perfect “outside insider.”
While there is no right answer here since choosing the right path depends on each company’s individual culture and beliefs, what should not be forgotten is the need for an emergency succession, or drop-dead succession. This is a contingency plan to deal with a situation that can force a sudden succession of the CEO.
A few companies like Marico have such a plan in place. But most of India’s family-owned businesses do not, possibly because CEOs in these companies generally love to consider themselves irreplaceable.
