Succession, leadership transition challenges loom for family-run firms

In five to ten years, expect new faces to run India's largest companies

Most of India's largest corporations and conglomerates in the near future will see leaders step out of their roles and transition into retirement, making succession a pivotal turning point. 

A recent study by Korn Ferry and the National Stock Exchange says fewer than 43 per cent of the boards they have surveyed have clearly identified successors for top leadership positions. There's more evidence of being unprepared. Only a third of small-cap firms have identified successors for top positions. 

"The absence of succession planning for leadership transition roles in some of India's largest companies is a serious problem," says Pallavi Kathuria, who just took over as managing partner of Egon Zehnder's India offices. The process needs to take a look at where the company is going and its broader strategy, which then defines what is needed from the future leader. 

On average, chairmen of large companies have no specific age retirement but step down when they find a successor. By the book, leaders are expected to step down when they turn 60 but most carry on till they are 65 or even 70 until they are sure they have found a successor, says Divi Dutta, partner with Shardul Amarchand Mangaldas. "In the next 10 years, India's largest organisations will be run by entirely new faces," she says. 

There are three different buckets that large corporations fall into. The first includes companies run by families and multiple generations, such as the Godrej Group, the Murugappa Group and the Tata Group. The second includes "supreme-leader" conglomerates and are run by one central authority figure, regardless of whether they are operationally involved or not. These include Reliance Industries, Wipro and the Mahindra Group. The third category includes corporations professionally driven by executives who do not and will not have generational or family control on the company and include Larsen & Toubro, Maruti Suzuki and others. 

According to a report by Egon Zehnder on leadership succession, family businesses that control a large share of the global economy are powerful but also very vulnerable. That's because just 30 per cent of family businesses last into a second generation, 12 per cent into a third and only three per cent into a fourth. Part of the reason for that is the complexity that comes with finding leaders for such groups. In the Egon Zehnder study, three archetypes drive such roles and include the 'counterpart' (A true peer to the family owners), the 'governor' (A pragmatic leader who leaves strategy to the family) and the 'steward' (A manager who is subordinate to the family but who adds significant value by executing vision in an effective, professional manner).  

The more challenging replacements are in category two -- companies run by "supreme leaders", who, to a large extent, may have inherited the corporation but have pushed on to the next level. Executive-search professionals grapple with how they can replace "Mount Everest" in such organisations. Indeed, it may be unfathomable to think of replacements for industry leaders such as Mukesh Ambani, Azim Premji and Anand Mahindra but it's a journey that groups overseas have also followed. The trick lies in thinking 10 years before and not three years before an exit or a retirement, says Ritu Kochhar, member of executive search firm Spencer Stuart India's boards and financial services practices. "The bedrock of leadership for such groups is executive development to take on CEO (chief executive officer) roles," she adds.

Not all groups have left succession for too late. Harsh Mariwala, chairman of Marico, handed over charge to CEO Saugata Kumar publicly, commenting that "Saugata is better than me". Then Adi Godrej, in the past few years, also handed over charge to professional managers and heirs at various companies in the Godrej Group.

The outside perception that there are not enough leaders or that not much is being done is incorrect, says R Gopalakrishnan, former Tata Sons executive director. Kathuria also agrees with that perception. "The supply of talent is the easiest thing to find fault with." 

Dutta points to a new succession practice at her law firm, which was formalised in 2016, and says one challenge is that "leaders across companies want to bring in professional management but they are not comfortable with the same professionals taking key decisions. They would prefer to be associated in some manner, visibly or invisibly, either in a guiding role or as a protector".

She says that today their practice is thriving for a number of factors that include the fear of estate duty, growing disputes in wills of large business houses, and the increase in the number of family settlement cases.

One vacuum in the system across the world is not training leaders early enough for the top slot. Gopalakrishnan says while a lot of companies spend time and effort on succession planning, little or no thought is given to exit planning for outgoing leadership. "How and when they will exit, and how they will be separated from the company they used to lead are very important considerations," he adds. "Once that it is done, succession automatically has a higher chance of success. It's important for the outgoing leader to train and groom the incoming leader in advance because you certainly won't see the NRC (Nomination and Remuneration) building cadres of new leaders," he says.