Institutional EYE

Commentary on Corporate Governance Issues

Succession Planning: Corporate India’s untold story

November 14, 2017

Indian boards now recognize the importance of succession planning and are taking steps to address the vital issue. Since a large section of corporate India is family-owned, succession planning takes place in the background – within the family members. In order to ensure clarity on who will take over in the next generation, several families backing large listed companies have created family constitutions. This will ensure a structured approach to CEO succession. But, for investors, a lot of the effort on succession planning continues to remain in a black box, as disclosures remain weak.

 

Framing a succession planning policy was formally included as one of the key responsibilities of the board of a listed company under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, which was absent under earlier laws. The Kotak Committee on Corporate Governance, in its October 2017 report, recommended that boards must meet at least once a year to address succession planning and other governance issues in a focused manner.

 

In conjunction with IFC’s South Asia Corporate Governance Program, supported by the Ministry of Finance, Japan, IiAS has published a report on CEO Succession Planning in India. The study includes disclosures provided by companies forming part of the BSE SENSEX, and the results of a 57-question survey of board members, aimed at identifying and analyzing the CEO succession planning practices in Indian listed companies.

 

Highlights of the survey results are:

  1. 92% of respondents have discussed succession planning at their board meetings. Even so, succession planning figured fourth on priority for the board on our survey; lower than strategic planning, regulatory compliance and sustainability. 27% of respondents said they discuss succession planning only in the event of the CEO’s departure.

  2. For the companies which do have a formal succession plan, 74% of respondents had identified potential internal candidates by name in the plan with 57% saying they had carried out an assessment of strengths and weaknesses of these candidates.

  3. 64% of the respondents surveyed said their company preferred internal candidates over external to tide over a CEO departure. Internal hires, on account of their close association with the company, are seen as retaining organizational knowledge. However, even while acknowledging the preference for internal candidates, 41% said that they did not consider any candidates from the internal talent pool ready to immediately take up the full-time CEO position.

  4. 65% of respondents surveyed indicated that succession planning for the CEO position was an ongoing process. However, only 33% of respondents said that their company had identified a successor more than three months before the last CEO departed. Therefore, despite an ongoing discussion over succession planning, companies may face a CEO vacancy for a short period.

  5. 81% of respondents reported not engaging with investors on succession planning issues: this is not surprising, because in India, it is rare for non-executive directors in companies to directly engage with the company’s investors. 

  6. A large proportion of respondents said their company did not hire external consultants to assist with succession planning.  30% of respondents turned to consultants only for the search process for a new CEO.  

While corporate India is learning from previous experiences of succession planning, its disclosure levels continue to remain a concern. This must change, for which investors and other stakeholders must be made aware of the board preparedness’ especially in the absence of the current CEO.

 

For the PDF version, click here.
 

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