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CEO Succession

Milind Kothari, Managing Partner |

25 May 2021

For thriving companies, an effective CEO succession plan is the elephant in the room. The sooner it is addressed, the better it takes care of the long-term interests of all stakeholders.

The Supreme Court of India delivered its decision (at the end of March 2021), in the  Tata Sons vs. Cyrus Mistry case, setting aside an earlier NCLAT order. The Apex Court upheld the decision of the Tata Sons board to remove Mr Cyrus Mistry as Chairman. It would allow the Tata group to course-correct one of the biggest failures of CEO succession in India’s corporate history.

This is not the first time that a CEO’s term has ended abruptly. Mr Narayan Murthy, the principal founder of Infosys Ltd was troubled by the compensation enjoyed by Mr Vishal Sikka.  The fall out of this led to the ouster of Mr Sikka within three years of his assuming the CEO’s position. Even Mr Vivek Paul's exit as the Vice-Chairman of Wipro Ltd in early 2000, after a stint of six years, was equally abrupt. Interestingly, both Mr Vishal Sikka and Mr Vivek Paul were 'outsiders' in their respective companies.

World over, it is not unusual to witness mishaps with CEO appointments. One of the most prominent cases was that of Mr Jack Immelt, the erstwhile CEO of General Electric. He had succeeded the celebrated Jack Welch to lead one of the best-known engineering companies. Mr Immelt was held responsible for halving GE's value in his 18-year term, and the company is now a pale shadow of the business icon it was at one time.

Interestingly, while the CEO transition in professionally managed companies, family-owned businesses, promoter-led companies, law and accounting firms, have all developed their processes to find successors; none can guarantee success.

In the case of Asian Paints Ltd and Pidilite Industries Ltd, a transition from a family-led business to a professionally managed company has been exemplary, with a well-thought-out long-term strategy for handing over reins to professionals. Globally, promoter-led companies such as Microsoft Inc, founded by Mr Bill Gates, are now being led by the Indian-born Mr Satya Nadella. Apple Inc, founded and re-invented by the legendary Mr Steve Jobs in his lifetime, is under the effective leadership of Mr Tim Cook. These exceptional professionals have added more than USD 1 trillion to the market cap of these companies. Even companies such as Google and now Amazon seem to have followed a similar strategy.

While the success stories of companies having chosen the right CEO successors are plenty; there is an alarming number of CEOs that seemed to be like square pegs in a round hole. It is another matter that more than 60% of companies do not have a thought-through succession plan at any point in time.

What should be an effective succession strategy for CEOs? I see two factors that stand out prominently; one, insiders who are elevated as CEOs stand a much better chance of success; second, a long and multi-year process of transition could insulate companies from significant risk of error. On the other hand, a short process of appointing a CEO could result in passing over a deserving candidate who could have been a real contender if only he/she were given more time to prove themselves and the company would have invested more in their development.

Companies look for several attributes in a potential CEO: a strategic mind, execution and delivery expertise, resilience, street-smarts, character, and a socially responsible ethos as a purpose. Many companies put their high-performing employees through immersive side programs, personalised coaching and development plans, psychometric testing, and 360-degree reviews, all designed to make them more credible contenders. Business enterprises are also known to engage outside advisory firms to bring in their discipline, methodology, and impartial insight into the process. However, the company board has to take the ultimate responsibility in the appointment of the future CEO.

While the appointment of the right CEO is vital, there are several other critical challenges. For instance, an alignment to the predecessor’s business philosophy proves to be an excellent aid in a smooth transition. The other big challenge is retaining contenders who have been passed over.

Professional services firms in India conventionally follow an election approach to select CEOs. Such a practice is universally followed by law and accounting firms in the developed world. However, in India, this practice is known to divide the organisation as the losing candidate ends up leaving the firm, and on many occasions, joins competition.

For thriving companies, an effective CEO succession plan is the elephant in the room. The sooner it is addressed, the better it takes care of the long-term interests of all stakeholders.