Gaps in succession planning at firms, says study

Mumbai: Even as India Inc. continues to put more controls and processes in place to ensure better corporate governance, a large number of domestic firms are still wanting in succession planning, potentially throwing up serious leadership challenges for the future, says a study by global consulting firm Korn Ferry and the National Stock Exchange (NSE) titled, Boards That Lead, released on Monday. The report, based on a survey of NSE-listed companies, assessed respondents on key areas such as succession planning and process for induction, and evaluation of board members.

The report, which surveyed 106 firms across five sectors—consumer, technology, life sciences, financial services and industrials—found that less than 43% of the boards have identified successors for top leadership positions, while only 53% of the respondents said they have adopted performance metrics to assess the performance of their respective boards.

Consumer sector leads

When it comes to succession planning, the survey found that 88% of firms in consumer companies said their boards contribute actively towards the development of CEOs and top leadership, higher than the overall aggregate of 71%. Financial services sector came a close second with 82% of the boards having a process in place to identify successors for key positions. In terms of market capitalization, large-cap companies appeared to be overall better prepared in terms of succession planning and small-cap firms were prepared the least. While 91% of the large-cap firms surveyed said that their boards supported and contributed towards the development of CEO and top rung leaders, only 60% of small-cap firms said that their board is supportive of succession planning.

Only 32% of the small-cap companies said they have clearly identified successors for all top positions. The boards of large-cap companies, the report says, still need to beef up their processes to identify and select the next generation of leaders with only 46% firms stating their boards ensured comprehensive and rigorous succession process for selection. The number was much lower for small-cap firms at 38%.

“Mid- and large-cap companies may simply attract stronger board members who have more exposure to other organizations around the globe and who therefore know the best practices. Another explanation could be that large cap companies, because of their size, face a greater risk, and therefore see a stronger need for robust governance processes,” the report observed, citing the probable reasons for small-caps lagging behind in corporate governance.

The study found that the board members of the companies surveyed have an average age of 57, while the average number of independent directors was 5, which is 55% of the average size of the board and higher than the minimum statutory requirement of one-third of the total size. Financial services firms have bigger boards than companies in other sectors, the study found.

The CEO factor

The report says that while companies give due importance to selection and development of CEOs, fewer boards acknowledge selection and development of leadership below the CEO level as their key focus area, given only 57% of the firms surveyed said their board members receive information and have deep knowledge of the firm’s talent bench, and the specific capabilities of internal candidates for key positions, which could help them identify the next rung of leadership. According to Stuart Crandell, senior vice-president, board and CEO services, Korn Ferry, almost 50% of the boards opted for an external candidate when selecting a CEO because they have missed the opportunity to plan for succession at the right time. “Ideally, the process for CEO succession should start the moment the current CEO is appointed,” Crandell maintains.

He further suggests both internal and external networks should be broadened while identifying candidates for leadership roles, involvement of the board should be deepened and multiple approaches should be taken to eliminate biases. “Without the board leading this process, it is possible that the next leader will either be a generalist or will simply look the same as the current CEO,” said Crandell. Across sectors on an average, only 45% of firms said their boards follow a rigorous succession process to select CEOs and other leadership positions. The number was as low as 31-33% for industrials and life sciences.

Finding the right mix

When it comes to appointing independent directors, in 61% of the companies surveyed, the Nominations and Remunerations Committee (NRC) decides on the selection of independent directors. The report found that in many companies, the board members conduct the selection process for independent directors and make the final recommendation to the NRC. The NRC gives the final nod or vetoes the suggestion, but is not necessarily involved all through the selection process although, according to the Securities and Exchange Board of India (Sebi) regulations, the NRC is responsible for ensuring that the composition of the board in terms of capabilities, diversity and independence is appropriate. “If the ultimate responsibility for the capability of the board lies with the NRC, they must play an active role in defining the selection process for independent directors, identifying the capability requirements and ensuring that the process is followed appropriately,” the report stated.

On an average, 81% of the companies said they select independent directors based on specific skill and qualifications required for their role on the board. All firms in the life sciences sector said they select independent directors on the basis of skills and qualifications needed to be on the board, the number stood at 91% for financial services sector. “The best boards source expertise from different areas that are important to the strategy,” Crandell said.

Significantly, the survey found that most firms seek an unbiased and independent judgement on various matters with 73% saying that they assessed and selected independent directors based on their ability to give independent judgements. Among the various attributes sought by the firms while assessing and selecting independent directors, two-thirds of firms interviewed said that the ability to contribute towards business strategy was a key skill set. As much as 63% of the firms look for contribution and oversight of company performance. “Financial expertise, knowledge of the core business and the ability to guide the CEO on strategic matters are at the top of the list of desirable qualities. There is an increasing trend of looking for digital transformation experience, M&A experience and risk management,” the survey found.

Some of the other attributes in demand for independent directors include a track record of developing “winning strategies” relevant for the firms from strategic and operational standpoint, successful decision making, controlled ego, team spirit, integrity, mentoring and crisis prevention, among others. When it comes to specific sectors, industrials lags far behind others. While in less than half of industrial companies, the nominations committee decides on the selection of independent directors, only 39% have a formal induction programme for their board members. “This represents that the industrial sector still needs to fortify board independence which will ultimately lead to less conflict of interest between shareholders and management,” the report stated.

Of the total number of companies surveyed, 96% of the respondents said that their boards were highly involved in monitoring legal, regulatory, financial and ethical compliance. Most firms did not have dedicated committee for each of the tasks. Nearly 98% firms, however, have dedicated audit committees. In terms of outlining and clarifying the roles and responsibilities of the board, only 66% of the firms said that they have a charter in place for the purpose with only 53% of the respondents having an induction programme in place for the board members. While 82% of boards guided and approved major capital expenditures, acquisitions, divestitures, and changes to the company’s capital structure, 73% said boards had a clear understanding of core businesses and strategic direction. “It is also evident that most boards spend relatively less time on discussing strategy, reviewing operating plans or ensuring that there is a strategic planning process in place. The board should always take the view of future which should be reflected in its involvement of forming strategies and safeguarding the interests of the company against possible external threats,” the study said.

On gender diversity, the study said while firms have ensured induction of women on boards, their representation is low from socio-economic perspective. The average number of women board members remains suboptimal. “While the degree of gender diversity achieved is satisfactory from compliance point of view, it appears to be low from a socio-economic perspective. India has 49 females for every 51 males; yet women hold only 20% of senior management and 16% board level positions,” the study said.