Column : The search for an heir

Aug 19 2011, 21:18 IST
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SummaryIf one leaves out the smooth CEO succession at ICICI a couple of years ago, we notice that family-run businesses are being more proactive in planning CEO successions when compared to the professionally managed ones.

If one leaves out the smooth CEO succession at ICICI a couple of years ago, we notice that family-run businesses are being more proactive in planning CEO successions when compared to the professionally managed ones. Take the biggest professionally managed companies such as L&T and ITC. CEOs in both companies have been quite indifferent to succession planning and have continued to latch on to their positions for a long time. ITC CEO YC Deveshwar has sought another five year term for himself, while AM Naik of L&T has yet to make any substantial noise on the issue. In contrast, Infosys has undergone a successful transition. Also, the Tata group has demonstrated serious intent in this regard by setting up a committee to appoint a successor to Ratan Tata. These observations raise the important question: How important is succession planning? Why are family-owned businesses paying the necessary attention to succession planning while the professionally managed ones aren’t?

Internationally, each one of the top 25 global companies has a clear succession plan in place. In contrast, only 72% of the other companies have a clear succession plan in place. If we dig a little deeper with respect to the processes involved in succession planning, of the global top companies, 94% have been able to uniquely identify and distinguish a leader’s current performance vis-à-vis his or her future potential. In contrast, only 64% of the other companies have completed this task. Second, 88% of the global top 25 companies elicit 360° feedback on the incumbent, which enables them to plan better the kind of skills that they look for in the successor to the incumbent. In contrast, only 56% of other companies complete this task. Finally, with respect to preparing a list of potential occupants for select positions in the company, 96% of the global top companies undertake this task. However, only 68% of the other companies do so.

These correlations imply that succession planning is quite highly correlated with firm performance. To consider an anecdote that illustrates this point well, when the former CEO of Bank of America Ken Lewis announced on October 1, 2009 his intention to leave by the end of 2009, Bank of America did not have a succession plan in place. Between September 30, 2009 and December 15, 2009, the period during which the firm searched for a successor to Lewis, its stock fell 10% while the Dow Jones industrial

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