BackTata Sons does need a succession process
A swift and well-thought through decision on Cyrus Mistry's successor at Tata Sons will serve the interests of all the stakeholders
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With Cyrus Mistry deciding his battle to stay on as chairman of Tata Sons had gone too far and offering his resignation from all group companies ahead of being forced out at the extraordinary general meetings lined up this week, the focus now shifts to the choice of his successor to head the troubled $100 billion group.
Part of the problem at India’s top business group has been its inexplicable lack of a well-honed succession plan. Indeed, it is a bit perplexing that a new search committee has to be constituted every time a chairman has to be selected for the group. Isn’t a board supposed to plan for succession as a normal part of its ongoing responsibilities? By all accounts in a professionally run group like the Tatas, the board which is the supreme governing body, should have the responsibility for choosing and grooming the next leader.
When the leader of a large institution moves on, key stakeholders are bound to feel jittery and it is the responsibility of the board to move swiftly to assuage those fears. The best way of doing that is anticipating that need and preparing for it.
A recent report in Harvard Business Review notes that each year about 10-15% of corporations must appoint a new CEO, whether because of executives’ retirement, resignation, dismissal, or ill health. Most boards though are unprepared to deal with this. The report goes on to state that a company’s “top executive is one of the few variables over which boards have total control—and their failure to plan for CEO transitions has a high cost".
Also read: The options before Cyrus Mistry
In December 2012, Mistry was picked after a 15-month search by a committee comprising N.A. Soonawala, Shirin Bharucha, Sushantha Kumar Bhattacharyya and R.K. Krishna Kumar, besides Ratan Tata. Now four years later, a new committee tasked with selecting a successor to Mistry has been constituted. Besides Tata again, it comprises TVS group chairman Venu Srinivasan, Bain Capital managing director Amit Chandra, former diplomat Ronen Sen and Bhattacharyya.
The 2010 committee took well over a year to make its decision which as it turned out was the wrong one. Thankfully, this time around the new committee was given a target of doing so within four months. But with every passing day, the uncertainty is growing even if there is the reassuring sight of Ratan Tata at the helm. Unfortunately he is only an interim chairman and long-term group-level decisions will have to be kept in abeyance till the new chairman takes charge and shapes the future of the group in his own vision.
In its 15th annual study of CEOs, Governance, and Success, consulting firm PwC looked at how much difference the lack of effective CEO succession planning can make to a business. The results are quite alarming. According to the report, “Large companies that underwent forced successions in recent years would have generated, on average, an estimated US$112 billion more in market value in the year before and the year after their turnover if their CEO succession had been the result of planning." What’s more, the report goes on to say, “even in cases where successions are planned, financial performance suffers in the year before and the year after the change".
Also read: Cyrus Mistry shifts Tata battleground to all-or-nothing zone
Leadership change in a large, diversified group like Tata is a complex business, one where the price of getting it wrong can be calamitous. Various companies in the group have excellent leaders. Given its unique structure, it was always on the cards that Ratan Tata would relinquish his role as chairman when the time came. It is, therefore, reasonable to the group to be planning for that eventuality.
In normal circumstances, where a company has the usual chairman and chief executive officer structure of management, it is the former in tandem with the board of directors who decides on such an issue. The absence of a CEO position at Tata Sons further complicates the matter and makes the task of the present selection committee more urgent. A swift and well-thought through decision on Mistry’s successor will serve the interests of all the stakeholders.
Sundeep Khanna is a consulting editor at Mint and oversees the newsroom’s corporate coverage. The Corporate Outsider will look at current issues and trends in the corporate sector every week.
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