Why leadership remains central in crises

Markets were shaken by the recent resignation of Mr. Ajay Kaul, long-standing CEO of Jubilant Foodworks, which operates the Domino’s Pizza and Dunkin Donuts brands in India. Jubilant Foodworks started operations in 1996 and listed in 2010. The company is promoted by Shyam S. Bhartia, Hari S. Bhartia and two group companies. Domino’s expansion and growth in India is well-known and its own website states, “The Company is India’s largest and fastest growing food service company, with a of (sic) 1062 Domino’s Pizza restaurants across 248 cities (as on September 03, 2016)”. 

Companies are larger than their leaders

For companies (excluding Government-owned entities and banks), there are two styles of management: first, where the promoter family run the company actively (examples include the Birla Group, both factions of the Ambani Family, Bajaj Auto) and second where the promoter family allows professionals to run the show while retaining ownership (examples include Asian Paints, Marico) Irrespective of who runs the company, in both cases, the promoter owns majority shares in the company and hence, for all practical purposes, has a major say on guiding the company on strategic matters such as acquisitions, growth strategy, etc. In the second case above, the Chairman of a company is typically the promoter/owner while the Managing Director/CEO is the professional. In case of Jubilant Foodworks, Mr. Shyam Bhartia is the Chairman and Mr. Ajay Kaul is the CEO in the Board of the Directors. This division of roles ensures, at least in theory, a differentiation between ownership and management of the company. Strong leaders help a company survive over the longer-term but for a company to truly survive, it has to live beyond its leaders. Some of India’s largest family owned-businesses, like the Tatas, Birlas, and Ambanis, are pertinent examples of how businesses survive over generations.  

Crises as a driver for change

Leadership gets tested during crisis and during challenging times. India Inc has seen plenty of them. Nestle changed its CEO in 2015, following the controversy over Maggi Noodles and the Food Safety and Standards Authority of India (FSSAI). In 2014, following an exodus of senior leaders and concerns on growth prospects, Infosys’s old guard gave way to the new, appointing Dr. Vishal Sikka as CEO. In case of Jubilant Foodworks, Mr. Kaul’s exit followed slowing sales, falling profits, and stiff competition for the company. Domino’s rapid expansion in the past five years has not paid off as planned. 

All industries go through tough times which can make or break companies within them. PSU Banks had to face the onslaught of competition from private banks, when the banking sector was opened up to private players. On the other hand, Maruti, which was formed in the 1980s, still dominates the Indian car industry despite the presence of nearly every foreign auto major in India. Technology is proving to be another disruptor with Domino’s facing the fallout of food aggregators offering more options, at competitive prices, to customers. 

Succession planning is important

Choosing the next in line for leadership remains critical during management changes at the top. The sudden departure of a leader can debilitate the best of firms, underscoring the need for succession planning at the board level. Mr. Kaul’s replacement has not yet been announced and markets are assuming that the transition to the next leader will be smooth. Jubilant’s stock price fell after the announcement of Mr. Kaul’s departure showing the market’s concerns on the departure of a veteran. A smooth transition to the next leader will hence hold the key for the company’s future as well as its stock price.

Anupam Gupta is a Chartered Accountant and has worked in equity research since 2000, first as an analyst and now as a consultant. He contributes to the Business Standard platform, Punditry, through his blog, Beyond Markets on markets & the economic horizons. 

He tweets as @b50