Don’t defer succession planning

The sudden demise of two giants of the business world — Rakesh Jhunjhunwala and Cyrus Mistry — came as a shock to many.

In the medieval times, whenever a king died without a succession plan, claimants fought for the throne and the kingdom would be exposed to political conspiracies and internal turmoil. In large business conglomerates, the lack of succession planning may mean courtroom battles.

The extremely popular HBO series, Succession, poignantly depicts the challenges of passing on the baton to the next generation in a large conglomerate. In the Indian context, succession planning becomes even more complex given the joint family structure, and the societal/cultural complexities.

Many companies may be thriving because of the vision and values of the promoter, but may have failed to groom the next generation. A few years back, an Indian promoter passed away without succession planning which resulted in the overseas joint venture partner terminating the billion-dollar partnership and immediately thereafter joining forces with a direct competitor.

To the onlooker, succession planning may seem an obvious step, but a promoter may have reasons for not putting it in place. Could be a case of being too occupied with ongoing projects, or finding the task very overwhelming and, therefore, preferring to defer it. Also, the promoter may not not have plans to retire or lacks confidence in the successor. Some promoters may also wish to defer succession planning since they may not be comfortable discussing it with an outside advisor.

However, deferment for any of the aforesaid reasons could have grave consequences. Imagine a situation where the young promoter of a listed company dies suddenly, and his children are not ready yet or interested in taking his place and key managerial personnel jump the ship. Not only would this result in massive erosion of investors’ wealth due to panic selling on the stock exchange but could also raise questions on the very survival of the company. If this listed entity has lenders, there is a possibility of eventual loan defaults, leading to wider ramifications.

For family-owned companies, succession is a daunting issue given the nuanced emotional angle involved. Consequently, promoters may avoid communicating their preferred heir. It may so happen that a promoter has two heirs, where the younger daughter is better suited to management and business, while the elder son is far less deserving. However, due to lack of succession planning, the less deserving heir takes control of the family business through a protracted legal battle after the promoter’s demise leading to chaos.

Personality driven

In many cases, the death of a promoter could also mean a complete change in culture, goals, vision, and ethos of the company. Despite the complex management structures and fancy mechanisms in place, at the end of the day, Indian businesses even today reflect the personality of the person leading them. Therefore, the absence of succession planning could severely impact the legacy of a promoter.

Some commonly used components and tools to give effect to succession planning include:

Creating family governance structure: Indian business families are nowadays appointing trusted professionals as advisors for assisting them to take key decisions in line with global trends. Globally, families are also considering creation of family councils to take key decisions on the basis of consensus, just like in shareholders’ meeting — Indian families may also consider adopting this.

Taking strategic and long-term initiatives: In certain business families, there may be just one core business, but multiple scions. Many promoters are exploring the possibility of diversifying their interests so that different lines of businesses can be handled by different heirs once the promoter retires or dies. Alternatively, promoters may consider splitting up their businesses to ensure each scion has a demarcated and separate line of business.

Coach your heir: Education at the poshest boarding school and a foreign degree may not be enough for an heir to fit in. It is common to engage management coaches who may help the heir to be more business ready. Furthermore, early involvement in the business may help in unlocking the heir’s true potential.

Clear implementation and communication: These are the most critical parts of succession planning and, yet, the most delicate. The communication and gradual implementation must be clearly crafted and properly timed. A recent example that caught the attention of the public was the clear demarcation announced by a leading Indian promoter between his children in relation to different businesses. There are many more complex methods and structures adopted to ensure smooth transitions and mitigate the risk of value/wealth erosion. Family businesses are here to stay, not just in India but globally as well. Family businesses are often stereotyped as extremely cost consciousness, having centralised decision-making and not being adaptive to change. However, with the emergence of concepts such as ESG, diversity, inclusion and other good governance initiatives, family businesses are adapting and shattering all stereotypes.

Succession planning is a multi-disciplinary activity which requires assistance from advisors such as lawyers, management consultants and tax experts.

What makes succession planning one of the most complex tasks for a promoter is that often what is good for the family may not be good for business. Furthermore, a promoter may feel that the business is better of being sold off or for an outsider to succeed him in the leadership role. In any event, the lack of succession planning, puts both business and family at risk.

Even the securities market regulator has realised the importance of succession planning and has introduced a legal requirement for the board of directors of listed entities to satisfy itself that plans are in place for succession of board and senior management positions..

Jain is Partner, and Chattopadhyay is Senior Associate, JSA. Views are personal

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