The Crown Prince

The Crown Prince

Public disputes between family members of some of the leading business houses in the country have drawn attention to the need for succession planning in family-managed businesses. Sapna Dogra writes that an effective succession plan is the key to the successful transfer of ownership and leadership from one generation to another.

Family-run businesses in India are on the verge of a revolutionary change. The conventional rights of primogeniture are no longer considered sacrosanct. The rules are now being re-written with business conglomerates weighing merit over birthright, as meritocracy becomes the new name of the game.

Of the top 100 business enterprises in India, 50 percent are family owned, hence, playing a significant role in the country’s economy and making India compete globally. Companies like Dr Reddy’s and Ranbaxy have successfully implemented well formulated succession plans.

A crucial decision

Family feuds on ownership are not a modern day phenomenon. History is witness to several wars over inheritance. In a more contemporary global scenario, it has been observed that only 30 percent of family-run companies succeed into the second generation and mere 15 percent survive into the third. The reason for this is very simple—the lack of an orderly succession plan.

“Succession planning is crucial for family business because its absence becomes the single largest cause of discord within the family, along with putting the business at stake,” says Anil Sachdev, CEO, Grow Talent. Proper implementation of a succession plan helps a company face the challenge to survive in a competitive market, along with keeping the business integrated. Habil Khorakiwala, Chairman, Wockhardt, concedes that it is extremely important to have a well-established succession plan in place, if family ownership is significant. Lately, there has been a spurt in family feuds on the ownership and management of business in some of the leading business houses in the country.

A case in point being the Ambani brothers’ dispute. In such a scenario, succession planning plays a vital role, which helps in the smooth transition from the present generation to the future owners of the business. In the absence of a proper succession plan, many companies split due to family conflicts and in turn reduce their power and stake in industry.

Don’t put off the plan

Soumen Basu
Executive Chairman

Manpower Services India

Most business owners put off succession planning because of relationships and emotions involved. “Though people are not comfortable discussing issues like ageing, death and finances, succession planning should be a priority for any family business,” states Sachdev.

“Most family-run businesses follow the patriarchal system and it is assumed in most cases that the eldest son (daughter) will be the heir and thus, there is no need for a formal succession plan to be put in place,” adds Soumen Basu, Executive Chairman, Manpower Services India. The patriarch continues to work as the business head during his life, passing on the mantle of leadership, when retiring, or in some cases, upon death.

Bharti Gupta Ramola

Executive Director

PricewaterhouseCoopers (PwC)

Incidentally, professionals working with family businesses consider succession planning a key issue along with cash flow, taxes and access to capital for growth. Bharti Gupta Ramola, Executive Director, Price-waterhouseCoopers (PwC), however, believes that succession planning doesn’t figure as a major issue to worry about amongst the business family members.

A recent survey by PwC in Ireland found that 45 percent of family business owners had not thought of a management succession plan. There is no data collected in India, but the situation would be the same if not worse.

Grooming a successor

The plan should be a long drawn process, which enables the owners to test potential successors in different roles and evaluate their maturity, commitment, business acumen and leadership abilities. Even if a successor has been appointed, adequate planning time allows that individual to build up expertise and taken on the responsibility.

“Grooming a successor for running the business should be well-planned, wherein, leadership qualities of the candidate are honed through appropriate exposure in an unbiased professional working environment, along with focus on development of appropriate skills and industry knowledge to run the enterprise proficiently,” says Ramola.

An industry source working with a family-run pharma firm points out that a successor should be professionally trained and possess enough experience both within and outside the organisation. Some experience outside one’s own company always helps along with holistic training, which can happen only by working or having exposure to all departments.

“Merit more than seniority and relationship should be the basis for selecting a successor. A detailed succession plan should be drawn up, which focuses on developing their skills and abilities, and preparing them to take on leadership roles gradually,” asserts Basu.

It helps if the successor is trained on the job on various functions and exposed to the different aspects of running the business before being given independent responsibility for a particular function. Adds Khorakiwala, “The family member should be a professional, and should be well inducted into the business for several years so as to assimilate the organisation’s values and culture, and understand the key drivers of success. In addition, he must have the competence and maturity to grasp organisational and business issues, and leadership qualities to take the organisation forward.”

Talent assessment programme should be done by a neutral body and senior professionals should groom the young and inexperienced. In India, family-run businesses are coming of age by giving importance to merit than lineage. There are other compulsions as well, like stakeholders’ demands, regulatory frameworks and corporate governance imperatives. Sachdev cites the example of Dr Reddy’s Laboratories, where Founder Chairman, Anji Reddy, chose his son-in-law, G V Prasad as the Vice-Chairman and CEO and son Satish Reddy as the Managing Director and Chief Operating Officer. Prasad took charge as Vice-Chairman in 2000, when the company, which he was managing (Cheminor Drugs), merged with Dr Reddy’s Labs. Prasad is more experienced and older and takes care of strategic issues as the CEO, Satish is COO, who takes care of operations.

Globally, leading family-owned businesses are managed by professionals with the boards reviewing their progress regularly.
This trend is yet to emerge in India, though the situation has begun to change

Ranbaxy is another organisation that has executed a commendable succession plan. The untimely death of Chairman Dr Parvinder Singh a few years back, saw D S Brar and Tejinder Khanna taking over the reigns of the group. Brar stepped down as the CEO and Managing Director of Ranbaxy when his term expired on July 4, 2004 and the company board named Dr Brian W Tempest as his successor. Tempest’s elevation from President (Pharmaceuticals) to CEO was thought to be the perfect transitory platform for Malvinder Singh to take charge of the company in a few years time. Though Parvinder Singh’s two sons Malvinder and Shivinder Singh were closer to the top, the management control rests with Tempest. Finally, as part of this effective succession planning, the Board of Directors, on the January 18, 2006, promoted, Tempest to Chief Mentor and Executive Vice-Chairman of the Board. Simultaneously, Malvinder Mohan Singh, President Pharmaceuticals and Executive Director, succeeded Tempest as CEO and Managing Director of the company assuming complete operational responsibility. “Ranbaxy is a professionally managed organisation, which has had a clear succession plan in place,” informs the company spokesperson.

Management succession

It is critical that management and ownership succession should be planned separately. “While ownership succession is an inheritance issue, management succession must be planned for taking into account, the potential and entrepreneurial capabilities of the next generation,” explains Ramola.

Family owned enterprises have to learn that management and ownership are two distinct aspects. “If you want to survive in a hostile M&A global scenario and grow, you need to have a good management and people outside from the family. Nowadays, SEBI has made it mandatory. However, the onus is on the promoter how he wishes to manage his business,” says an industry source.

Khorakiwala points out what he believes should be the driving factor in succession planning, “It is obvious that there is a value in business and one wants someone who has the ability and capability to enhance value.” If for any reason, one does not find anyone in the family, then it would be better to consider an external person who has the ability and capability to enhance value. Succession planning should ensure that people with the right skills are selected and trained for leadership roles. This can be based on the roles, the individual or nature of the business. The first is about identifying key positions, the second focuses on key people, and the last involves replacing a section of people or resources.

Globally, leading family-owned businesses are managed by professionals with the boards reviewing their progress regularly. This trend is yet to emerge in India, though the situation has begun to change. “We still have a long way to go. Twenty years ago, the situation was bad, with owners treating employees like menials. But now that attitude has gone and they have been made to eat humble pie by professionals. In fact, professionalism has crept into all aspects of family businesses,” concludes Sachdev.