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Succession Planning – A Strategy For Corporate Stability

Succession planning is the process of identifying and developing employees who can fill key positions in a company, when there is a vacancy, whether planned or unplanned. An efficient process ensures that the business continues to operate efficiently at all times. It starts with identifying key positions. Succession planning is an important part of Business Continuity Planning (BCP), which is integral for each company. It is the people in a company that set it apart from its competitors.  

Given the importance of succession planning, SEBI LODR Regulations, 2015 has made it mandatory for the Boards of listed companies to oversee the process of succession planning, and to satisfy themselves that adequate plans have been made for succession of both Directors and senior management. This has to be disclosed in the Annual report. The Nomination and Remuneration Committee is usually tasked by the Board to oversee this process. 

Some of the points to be considered in succession planning are – 

  • Internal candidate versus hiring from outside: The two approaches to succession planning that are often spoken about are promotion of internal candidates or hiring from outside. While internal promotions are a source of motivation for existing employees, at times it could result in choosing from a limited pool of persons, who may not be the best to be promoted for higher roles. Hiring from outside helps bring in freshness of thought, and helps in casting the net wider, so that the best person is chosen for a job. However, this may result in cultural issues, if the new person is not able to adjust. There is no one best approach. Each company should decide its approach based on how quickly it wants to fill the position, the nature of the role, the expectations from the new person, internal bench strength, and the business model. 

  • How many potential successors to select/ groom: Very few companies proactively plan for succession in regard to key positions. However, for companies that do plan, one of the problems that they sometimes face is that by the time the successor has to take over, the context and business model of the company may have changed, thereby making the successor either unsuitable or irrelevant for the redefined role. 

  • Retention of the second best: Companies that identify and groom at least two successors, to somewhat avoid this problem, very rarely give thought to career progression for the person who does not get promoted. Invariably, this person leaves the company, causing a huge loss. Retention of the second best, if necessary, by reassignment or relocation, should also be a part of this process. 

  • Extension of term of employment: Also, in a number of companies it is observed that some persons manning key positions are either on extension or their term is about to get over due to the retirement policy of the company. Planning for these key positions should be done proactively, rather than considering extension of their term, at the proverbial last minute. 

  • Succession planning of persons other than CEO/ CXOs:  In the past, succession planning was considered important for key positions within the company, such as those of the CEO and other CXOs. Of late, however, there has been an increasing amount of focus being given to succession planning of Board members as also of middle level management, especially with Covid-induced uncertainties. Forward looking family-owned businesses too are increasing their focus on succession for key positions, including that of the Founder, especially in companies with first generation founders. 

  • Succession planning for Board members: Board members usually have a fixed tenure, and it is known well in advance when the tenure will end. Most companies wait for the tenure to be completed before inducting a new Director. However, identifying and onboarding a new Director too is a time-consuming process. Instead of waiting for the term to be completed, it would be ideal if a Board can start the identification, and if possible, onboarding, of the new Director before the tenure of the outgoing Director is completed, since this would give an overlap. 

  • Succession planning for middle level positions: Middle level positions, which were earlier not given as much priority in succession planning, are suddenly getting a lot of importance, especially with Covid-induced burnouts and mortalities. Replacements for such persons may not be available internally, and hiring and onboarding would result in time gaps.  

  • Succession planning in family owned businesses: Increasingly, a number of forward-looking family-owned businesses have also started planning for succession. This could include succession for the roles manned by the family persons, such as those of the Chairperson or top management. Some such businesses have also gradually moved from being ‘family owned and family run’ to ‘family owned and professional managed/run’. In the case of the latter, family members could either serve as Non-Executive Board members, or the Founder/promoter could be the Executive Chair, with top management being manned by professionals. Some businesses have also adopted a structure wherein some managerial positions are with family members, and the others have been given to professional management. 

  • Succession planning in public sector undertakings: In the case of public sector companies and public sector banks, it is noticed that the Government usually decides the appointment of key persons. Over the years, there has been a lot of delay in appointment of Chairpersons, Independent Directors, Nominee Directors, CMDs, Whole-time Directors and the like, with several key positions in a number of organisations vacant even now. This adversely impacts on the functioning of the organisation. 

More often than not, the insecurity of leaving one’s chair/ position, and/or the unreasonable and unstated expectation of immortality, prevents companies from being proactive about succession planning. However for companies that want to succeed, succession planning is planning for success.