The case for succession planning at Indian family-owned businesses

The importance of structured succession planning became evident in past few years.

Uday Kotak recently highlighted that the next generation of billionaire families in India is increasingly opting to manage investments rather than actively running businesses. This brings the critical issue of succession planning in Indian listed companies into focus.

Warren Buffett, in a recent letter, noted that heirs to substantial wealth often lead lives of leisure, emphasizing that wealth alone does not equate to wisdom or capability. He has been clear that Berkshire Hathaway’s businesses and associated billions will not be inherited by his family but will instead be directed toward charitable foundations. Buffett firmly believes that family members may not necessarily be effective business managers or responsible stewards of capital.

In India, the importance of structured succession planning became evident in past few years, as several family disputes in promoter-led companies significantly impacted businesses and minority shareholders:

* Most board directors are appointed by promoters or major shareholders, limiting the influence of independent directors in resolving family conflicts.

* The lack of formal succession planning and structured wealth distribution often sparks disputes among family members.

* SEBI’s July 2023 regulations mandating disclosure of family settlement agreements have led companies to provide only superficial disclosures.

* Indian business families must adopt transparent succession frameworks backed by legally binding agreements to formalize wealth distribution and transition plans.

* Investors expect boards to safeguard corporate funds during promoter disputes, as many family-controlled businesses continue to operate as personal fiefdoms, causing transparency concerns for minority shareholders.

*  Boards must insulate company operations, employee morale, and business continuity from family conflicts. A professional CEO should be appointed to manage day-to-day affairs independently.

A comprehensive succession planning policy should define the necessary steps to ensure a seamless leadership transition, whether due to retirement, resignation, illness, or unforeseen circumstances. This policy must outline key aspects, including:

# Timeframe for Successor Selection: Boards should initiate the search well before an anticipated retirement, with a clear timeline in place.

# Method of Selection: Defining whether the successor should be internally promoted or externally recruited.

# Search Procedure: Engaging professional search agencies or leveraging board networks.

# Authority of Appointment: Clarifying whether the Chairman or the Board holds the final authority on leadership decisions.

# Backup Plans: Establishing interim leadership roles (e.g., Joint MD or Deputy MD) to ensure business continuity.

# Additional Terms and Conditions: Ensuring alignment with governance best practices.

The nominations or governance committee, in consultation with the Board, should be responsible for drafting and overseeing succession plans. This committee should predominantly comprise independent directors with relevant expertise. Furthermore, the policy must be disclosed to stakeholders and strictly adhered to when implemented.

Despite its significance, many Indian listed companies either lack a formal succession policy or fail to follow existing guidelines. In the Indian corporate landscape, companies generally fall into four categories, with some exceptions: family-owned businesses, subsidiaries of foreign multinational corporations (MNCs), public sector undertakings (PSUs), and banks.

MNCs typically have well-defined succession policies and execute them effectively. Family-owned businesses sometimes groom successors for a smooth transition; however, these successors are usually next-generation family members, reinforcing a lack of separation between ownership and management. This approach reflects a boardroom culture that prioritizes promoter interests over broader corporate governance principles. Furthermore, it underscores the reluctance of these boards to consider non-promoter professional leaders.

As Indian companies strive to achieve global standards, adopting robust board and executive succession planning practices is imperative. A structured approach will enhance corporate governance, strengthen investor confidence, and ensure long-term business sustainability.