Shyamal Majumdar: Time to step down

THE HUMAN FACTOR

Ratan Tata's recent statement should spur Indian corporates to devise succession plans.

Two-and-a-half years after the Tata Sons board increased the retirement age to enable him to stay on as chairman till 2012, Ratan Tata says he doesn't want to go out on a wheelchair and it would be a terrific time to step away if he had a firm successor in place after the small car is in production.

Despite the ifs and buts, Tata's comments (published in the latest issue of Business World) came as a surprise as India Inc has been known to be a laggard as far as succession planning is concerned. Consider the problems faced by the Ambanis, the Bajajs, the Nandas of Escorts, or the Modis of Modi Rubber.

In the past, even the Tatas have gone back and forth on the retirement age for the top management, inviting criticism about the lack of a succession plan and the group's over-dependence on one man. In June 2005, the nine-member board of Tata Sons had revised the retirement age for all non-executive directors, including the chairman, from 70 to 75, as the company wanted to "continue to benefit from the rich experience of these directors."

The retirement rules were first framed in 1991 and were used to force satraps like Russi Mody and Darbari Seth out of the Tata group in what was then a celebrated battle between JRD Tata's anointed successor and the stalwarts who ran their companies like their fiefs. At that time, the retirement age for executive positions had been set at 65 and that for non-executive positions at 75.

But in 2000, the group slashed the retirement age for non-executive positions to 70 while retaining the 65-year limit for executive positions. Five years later, it decided to go back to 75 as the retirement age for non-executive directors.

But Tata has now capped all speculation about the lack of a succession planning in his group by saying that realistically his successor would need up to 18 months as handover time. The moot point is that by announcing his intention four years before his scheduled retirement, Tata is finally following global benchmarks in succession planning.

Take GE, for example. The company announced in November 2000 that Jeff Immelt would be the successor to Jack Welch as the chairman and CEO of the company. But Welch had started the succession planning process way back in 1994, when he created a list of essential qualities, skill and characteristics an ideal CEO should possess. The result: a year before Welch was due to retire, GE had three candidates for the top spot and all of them exceeded every expectation. Finally, Immelt was chosen as he was the youngest.

The fact that the other two aspirants, W James McNerney and Robert L Nardelli, were taken on as the CEOs of 3M and Home Depot, respectively, within weeks of their losing out to Immelt, was in itself taken by observers as testimony of corporate America's confidence in leaders groomed by GE.

The late Roberto Goizueta of Coca-Cola was also known for his excellent succession planning. He had at least four people who could run the company after he decided not to run it any more. This prompted The Economist to say, after his death, "Goizueta will clearly be mourned at Coca-Cola, but he might not be missed." That was one of the greatest compliments a departed CEO could receive.

In fact, a global Great Leadership survey done by HR consultancy Hewitt showed that top companies hold people accountable for leadership development and have linked leadership competencies to determine base pay, annual incentives and long-term incentives. And 95 per cent of these firms use leadership compensation with succession planning at all levels.

There are examples galore of this happening in top global companies. In what could be called a textbook case on solid succession planning, McDonald's was able to name a battle-tested successor within just an hour of the sudden death of its 60-year-old chairman, Jim Cantalupo. The decision was possible only due to years of succession planning.

Despite some exceptions like Infosys (Narayana Murthy who didn't bother to extend his company's retirement age and retired as soon he turned 60), or the Murugappa Group (where M V Subbiah resigned from directorship almost immediately after attaining the age of retirement), India Inc still has miles to go in succession planning. An Assocham survey, for example, rated Indian companies four on a scale of 10 on long-term succession planning.

The CEOs of India's private sector companies would do well to ask themselves the following question: "Can I walk away from the company and have it still function and survive?" If the answer is yes, the company is indeed in safe hands.

shyamal.majumdar@bsmail.in