Getting the Succession Process Right

Professor K Kumar
Apeejay Surrendra Chair Professor of Family Business and Entrepreneurship & Chairperson (Academic Programmes)
N.S. Raghavan Centre for Entrepreneurial Learning
Indian Institute of Management Bangalore

In all the excitement generated by the recent events in the Tata group, where the chairman was replaced by his predecessor- albeit as an interim measure – the real issue has gone into hiding. A substantial focus of the discussions and comments from the press, observers and experts has been on procedures and personalities. Whether the incumbent chairman was given adequate notice about his removal and whether he was given a chance to argue his case are no doubt relevant questions to assess the fairness of the decision. But these questions speak to the procedural issues surrounding corporate governance. The other widely discussed question is about the differing perspectives and the pos/itions taken by the personalities involved in the event – the incumbent and the predecessor. Whatever information that has come into the public domain so far has only informed the public that the issues involved are even more complicated than the rarity of the event itself. If one were to seriously search for the root cause of this issue, it is possible to recognize the elephant in the room – ineffective succession planning and implementation.

Moving away from the specific incidents within any one business group or organization, succession planning is one issue which not many business organizations have handled well. While the succession planning can be quite challenging and tricky in family owned and managed companies, we also have examples of other companies promoted by professionals struggling with this very important aspect of corporate management. It is time we took a hard look at this issue to understand what comes in the way of highly reputed and sensible business leaders delivering on this inevitable but crucial mandate given to them in their role as business leaders and owners.

Let us take the case when ownership is concentrated at some level, the incumbent leader represents ownership interests and also functions as the executive head. When this leader has to put in place a successor, and plans for it, organizational succession always takes the lime light, and ownership succession recedes into the background. This kind of incomplete succession planning has serious implications on the effectiveness of the succession process as a whole. The status of a principal owner gives the predecessor not only freedom to choose the timing of the succession event, but also a say in who the successor would be. Once a successor is in place, the predecessor relinquishes the management role, but still gets to play the ownership role – either from close quarters as a member of the board or from a distance as the principal shareholders acting through other informal forums or through nominees. In effect, they continue to be in a position to pass judgments on the actions of the successor in one form or other.

Such an arrangement often makes life difficult for both the predecessor and the successor. Being continuously exposed to the ongoing affairs of the organization/ which he or she no longer has the mandate to lead, the predecessor is emotionally challenged to distinguish between decisions that are a response to changing business environment and those that could be a dilution of the legacy – of the group or family or the individual- or simply a neglect of the legitimate interests of the principal shareholders. The successor also finds himself or herself in a predicament having to put his or her decisions through multiple screens, some of which might amount to just blind guesses about whether the decision will be acceptable. Given that innumerable decisions get taken in multi-business conglomerates almost on a daily business, this field of discomfort only expands forever and without anyone being able to predict when it will explode.

What can be done then? There are very simple solutions but they have to be implemented with maturity and iron will. Firstly, it is well accepted amongst family business scholars that succession means the predecessor gives up control and the successor assumes responsibility. This spirit behind succession needs to be understood by all the family business leaders who make way for a successor. When the predecessors give up control, they should not only give up control over the management, but also give up control over the ownership interest. They should find a successor to delegate the responsibility to play the owners’ role, irrespective of whether a legal transfer of ownership happens or not.

Once a successor is put in place, the predecessor should also steadfastly severe all connections with the business. This is possible only under one condition- that the predecessor takes up other pursuits in life. Most predecessors refuse to cut the umbilical cord with business under the guise of ensuring continuity. It is not without reason that succession is also metaphorically compared to passing the baton. In a relay race, the continuity is provided by running along with the successor before passing the baton, but not after. Sure, the predecessor can provide advice or opinion when specifically asked by the successor. But he or she should refrain from any involvement that goes beyond providing that advice. Such advice should also be provided with no expectations that the advice would be listened to or implemented either partly or fully.

Usually, a predecessor is fully involved in the process of selecting a successor. That being the case, the predecessor should own up his or her choice of successor and fully accept the consequences – even if those include erosion of business value and personal or family wealth. Keeping the back door open to second guess successor’s actions and to pull the rug from under the successor’s feet only means that the succession has not happened in spirit. On the other hand, if organizational succession is implemented along with ownership succession, the new representatives of ownership interests will play their role, without carrying the emotional burdens of the predecessor, to prevent the successor from getting a carte blanche and holding the successor accountable to good performance. They can do so through other governance mechanisms like the board, family council etc. which can be structured to function without the involvement of the predecessor.

Some family business leaders in India consciously follow these principles, but it would be great if many follow suit. Only then effective succession – or the lack of it – will cease to be the Achilles’ heel of Indian family business.
Visit @ IIM Bangalore

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