The succession-planning imperative

SEBI should make it compulsory for the boards of all listed-entities to perform an annual “sealed envelope” exercise to keep ready a “drop dead successor” to the CEO

No point in blaming the regulators for ‘micro-regulating’ even this basic governance ask!
No point in blaming the regulators for ‘micro-regulating’ even this basic governance ask!

By Srinath Sridharan

In the past 12 months alone, India Inc has lost over 40 CEOs of listed entities to the Covid virus. And many board-members and CEOs of unlisted entities would have passed away too. None of these entities had a readily-named successor.
In January 2020, SEBI had to shift the deadline for separating the roles of chairperson and managing director in large Indian listed-corporates.

A ‘fact of life’—that people can fall sick, become incapacitated or even die—is ignored by corporate India. The bigger the enterprise, the tougher it seems for this fact to get assimilated by their boards! A mere 80 days will show if the Indian company-boards can actually toe SEBI’s deadline of April 1, 2022. Why does corporate India behave so poorly when it comes to succession planning for the key management personnel (KMPs) and board members?

The fundamental objective of corporate governance is to enhance shareholders’ value while protecting the interests of other stakeholders. A company’s board of directors is the primary force influencing corporate governance. The board is expected to approve strategies to develop long-term value and appoint an appropriate candidate as the CEO. It is also tasked with overseeing the performance of the CEO and the value-system within which the CEO operates. Most of the Indian boards don’t even know all the CXOs, except those that they interact with during the board meetings. Indian boards also have not fared well in terms of constantly building a stronger board composition. Does India Inc not know to retire gracefully, when it is due?

In today’s VUCA (volatility, uncertainty, complexity, and ambiguity) world, corporate boards have an important role when it comes to directly overseeing the board composition and the CEO succession planning as a planned process and not an accident. After all, as a good governance norm, it is an expectation from the boards to have succession planning to ensure business continuity & viability. Call it the board’s KRA, if you will.

The financial services sector in India contributes over 10% of the GDP. The sector employs a large number of skilled and semi-skilled workers, across Tier 1/2/3 geographies. For industry outsiders, it is exciting to read about the successful stints of a few CEOs, who have done well for their institutions and also for their stakeholders, and have actually built succession plans. But those are outliers in the larger context that exists for the sector.

The banking, financial services and insurance (BFSI) sector refuses to acknowledge its inability to groom leaders, or what is called the “banyan tree” syndrome where the current leader does not allow other leaders to grow. And their boards have not worried about developing next line leadership. Why? Is it because they could get away when it came to the regulatory dispensation, time and again? Or is it because they did not think it fit to groom younger talent to take charge? Or is it because regulations have not forced them yet? Or is it tough to step away from trappings of power, position and the need-to-feel-wanted?

Thankfully, a few months ago, RBI brought in the rule limiting the total number of years as CEO for banking leaders, and, hopefully, the other BFSI regulators will learn from it. Wherever there is public monies being handled, a fixed term for a CEO & other KMPs is adequate since, if they don’t build value for their stakeholders within that term, those CEOs anyways don’t deserve that seat any further.

As a comparison:  In the Indian bureaucracy, the retirement age is 60 years. In the judiciary, the judges of HC/SC have to compulsorily retire at 62/65 years of age. More importantly, the regulatory-chiefs get only a fixed tenure for their leadership (even adjusting for extensions).

It would be a useful safeguard if SEBI makes it compulsory for the boards of all listed-entities to be tasked with an annual “sealed envelope” exercise to keep ready a “drop-dead successor” to the current CEO.

The same can be enforced by all BFSI regulators, not only for the CEO, but also for all KMPs, even if the entity is not listed. The industry will probably then be inclined to groom talent and let meritocracy play a role. The idea is to build a stable, institutionalised framework that could withstand systemic shocks and to bring process-led orientation, and not a ‘person-dependent’ one, to our financial system.

That’s what good corporate governance is also about. If a board cannot build a succession plan for the company leader during her/his two terms of five years each, then hasn’t it failed ? No point in blaming the regulators for ‘micro-regulating’ even this basic governance ask!

Corporate advisor & independent markets commentator
Twitter : @ssmumbai 

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