The world watched in awe as India’s largest airline plunged into a leadership crisis in late August 2019, sending shockwaves through the industry. The sudden replacement of the Vistara board has come without a succession plan, leaving many stakeholders shocked and markets on their guard. The fact that there was no written succession plan when such a significant leadership transition occurred highlighted a common lacuna in the Indian corporate boards: Directors speak about succession, but don’t act on it. Succession planning is the elephant in the room in India’s vibrant corporate scene, which family-owned conglomerates, promoter-driven businesses, and new institutional structures characterise.
There is a paradox in Indian Boardrooms. Paradox of the Succession in Indian Boardrooms.
One of the key fiduciary duties of the board members is succession planning. When the economy is in turmoil, competition is fierce and there is a scarcity of talent, it’s a strategic imperative to keep leadership continuity. Succession, however, is not a Governors’ measurable governance process. In a 2024 Spencer Stuart Board Index, less than 40% of the world’s boards have an effective, communicated CEO succession plan, even in India. Since family promotions are common in India and only the top 50 companies have formal schemes, it is not very common to find such plans.
When succession is not a part of organisations growth and development, the directors quote on cultural resistance, fear of an inner breakage in the organisation as well as balancing promoter’s interest with professional management. Despite the financial and risk management capabilities of Indian boards, they are not considered to be strategic initiatives for long term planning.
Why Leadership Continuity is vital in the Indian context.
Table of Contents
The Reasons why Leadership Continuity is Important in the Indian context
In the last ten years, there have been digital transformations in the corporate sector, changes in the Companies Act 2013, and implementation of SEBI’s regulatory framework. Governance is a priority for new investors, and stability is preferred over uncertainty in the markets. Prospective succession plan is a sign of foresight: HBR (2022) says that the companies with transparent succession plan generate 12% higher shareholder returns over a 5-year period, especially in volatile markets.
Indian family businesses are complex due to cultural and historical factors. Growth has been fueled by promoters like TATA and Godrej but yet, there are problems of generational changes and professional leadership. There is the risk of governance and market confidence being lost if there is no open succession plan.
The Real Cost of Avoidance
Failing to plan for succession can result in problems for the company in terms of performance and reputation. For instance, during the 2020-2023 period, Vodafone Idea went through leadership changes and strategic turmoil as it worked to restore investor confidence and achieve market stability. Leaders’ instability was cited as one of the reasons for its financial difficulties.
Likewise, business sentiment soured in India following the unexpected leadership changes and a lack of cohesion at Mahindra’s Board of Directors in 2020. Firms lacking strong succession planning processes are more likely to make hasty hiring decisions that could result in a mismatch of culture and/or strategy.
However, when compared to the Tata Group’s leadership changes, which are well planned and communicated, such changes were not. These served to strengthen investor confidence and to keep the strategic stability of the conglomerate.
Despite the Regulation, the Long-Term Outlook for the Banking Industry is Still Mixed
The regulators in India have acknowledged that transparency and accountability of the boards in relation to succession are important. The SEBI mandate on business responsibility and sustainability reporting mandated listed companies to report on succession policies in 2022. But, there is a lack of consistency in implementation. According to a Deloitte India survey in 2023, 27% of listed Indian companies have documented emergency succession plans and/or developmental tracks for their internal successors; whereas 61% of companies have succession-related policies in place.
The majority of boards conduct ad hoc meetings with executive sessions between them, rather than formalize talent pipelines or engaging in scenario planning. This can be a governance threat as employees and investors may become disheartened if unexpected exits occur, such as due to illness, regulatory investigation or a market shock.
Creating a Succession Mindset on the Board
Indian boards need to consider a multi-phase approach to succession planning in order to prioritize it strategically. They must connect leadership competencies to longer-term objectives and not simply the needs of the moment, employing scenario planning to meet disruptive changes in the industry, such as digital transformation, sustainability and economic changes.
Additionally, boards should establish policies that spell out timelines, stakeholder communication, and search strategy to increase investor, employee and regulator confidence. A McKinsey (2024) study reveals that businesses that implement a systematic succession program have 70% more effective leaders in a year compared to those that don’t.
Moreover, rotations, mentoring and strategic projects are excellent ways to develop leadership within the organization. It helps facilitate smooth transitions, especially in Indian companies that are family run, with an admixture of professional leadership.
When it comes to Diversity, Boards Must Lead, Before They’re forced to Catch Up
Succession is not only a human resources question, it’s a governance question that is at the heart of a board’s charter. Not doing so will likely create strategic, operational, and market risks that may come up out of nowhere and make a significant impact on the company.
Indian boards are at a juncture. The consequences of not complying are increasing as the economic landscape continues to shift at an unprecedented rate and global expectations of good governance grow higher. A succession program that is viewed as a strategic tool and not a feared burden is not only good for shareholder value, it’s also good for creating legacies that will withstand leadership transitions and market dynamics.
Succession planning is not just the replacement of a leader, it is continuity of purpose, strategy and value creation. This is the perfect time for India’s boardrooms to take a step this way.
