How can smaller companies do succession planning right?

Promoters must remember that companies are built by people and that they need to carry their team along to make any major decision a success. (Photo by fauxels from Pexels)

Family businesses are the backbone of the Indian economy, but they can be hard to run. Promoter families have been accused of interference, feuding among themselves and putting the company through uncertainty, and of poor succession-planning that again puts stakeholders through uncertainty. While the culprit companies can be found across sizes, small-and mid-cap family-founded companies are looked at with a greater degree of suspicion.

Auto-ancillaries manufacturer Suprajit Engineering’s chairman and managing director Ajith Rai, in a session hosted by Marcellus Investment Managers, spoke about the challenges faced by a family-owned company when transforming into a decentralised management-run company.

Marcellus holds Suprajit Engineering in many of its portfolios. 

Below are lessons gleaned from the session. 

The biggest fear

The biggest one is about letting go. There is the ego that says, ‘no one can do a better job than me’, then there is the fear of the unknown and then there is insecurity that asks, ‘If I get go and a new CEO comes in, what will I do’.

Also read: Building business the Mariwala way

Let go and have a review process in place

In businesses, there is what is called a key-person risk. Insurance companies have coverage for that. "I challenge myself and say that I will not be that key-person risk," said Rai. For that, a promoter has to let go. Most of the beliefs around letting go are myths. "Most businesses, unless they are highly technical, aren’t rocket science," he said. Its functions can be delegated. Also, senior management hires come with many years of experience, having worked in various scenarios that a promoter may haven’t seen. 

To make a successful handover, you need to have a system in place, set key performance indicators and have a review process. Give the new CEO independence and clarity. Don’t do backseat driving. People who used to report to you may be unhappy with the new boss, and may come with complaints. Don’t get involved in that. Tell them that there is a new boss in town.

Many times, it is said that small businesses cannot hire good talent. But, as long as you give clarity and independence to the new managers, they are happy. 

Think long-term and track the capital

The promoter should be involved in formulating the vision for the company. A CEO may look at a two or three-year timeframe, trying to maximise returns during his tenure. Therefore, a promoter should be focussed on the long-term vision. There is also capital allocation, where promoters can be involved. Rai takes capital allocation very seriously and holds regular review meetings for that.

Let the next gen learn the ropes

Don’t parachute your son or daughter, who is just out of a university in the US, into the CEO’s office. 

If the next gen is joining your business, don’t let him/her report to you. He/she should be reporting to the person who reports to you. If you place them above the person right below you, there is bound to be unhappiness. Companies are built by people. You must be able to carry your team along. Instead, if you make the son/daughter report to the person, the next gen will get a good grounding in the fundamentals of the business, and you can tell the senior exec to mentor and train them. Review with your children about their progress once in a while. It is okay to fast rack the next gen, but first they should be made in charge of a project in a department that is critical to the company. 

Also read: Sundram Fasteners, where daughters have taken the wheel

Keep family issues within the family.

"We have a responsibility to our family, as well as the shareholders. So we should ensure that we do not leave a big void when we are not around," he said. Rai and his family have a family constitution (which lays out the vision for the business and the processes for deciding on management and ownership-related matters) in place. 

He said that senior execs don’t really mind who the owner is as long as they are given clarity on who the next decision maker will be and how the business will be run. They will create their own rapport with the next gen. Promoters have to ensure that senior execs are ringfenced from any internal conflict. "Matters of the family should be managed within the family," he said.

"Most importantly, as a shareholder I want to maximise the value of the business. If the internal fight is allowed to continue, it will eventually destroy value," he said. 

The role of a family trust

"As a family, we chose to transfer promoter shares to the family trust because we wanted the next gen to own Suprajit Engineering collectively, and not individually... Any decision will now have to be taken collectively," he said. With their trust structure, the children are entitled to an income but aren’t entitled to the ownership. This will encourage them to run the business professionally because then it will earn better, which means the trust earns more as a shareholder and the children will get a good income from the trust.

To attract good independent directors, be good

"Unfortunately, small-cap companies have found it difficult to attract good independent directors," he said.

That said, it all depends on how your company is perceived in the market, he added. If it has a good market reputation, has good accounting practices and is known to do a fair and good job, independent directors will be willing to join.

Recent actions of our regulators have unfortunately made people wary of accepting independent-director positions, he said. "What we have to understand is that the directors only give their point of view. They are not responsible for the success or failure of the business," he said. But now (following certain regulatory actions) people are wondering if they should take independent director roles and be made accountable for the mischief of others.