How Succession Planning is an Important Parameter of Corporate Governance for the Companies?

What is Succession Planning?

Succession Planning in the business refers to the process and strategy of the replacement strategy or passing on of the leadership role of the company.

Importance of Succession Planning?

• An individual investing in a business primarily looks at the competitive advantage of the business i.e, the key person leading the business. Hence, an individual also looks cautiously about the same when there is a leadership change in the business that whether the competitive advantage will remain as before if it happens.
• Also, it becomes important to understand whether the new leadership will run the business for a longer period and whether will it be successful in providing longevity to the business.

What Decides Good Succession Planning?

1) Decentralized Decision Making:

• Good succession planning is considered when there is decentralized decision-making wherein the topic/decisions are being divided among the key personnel of the company and is not in the hand of a few individuals.

2) Long Tenures:

• The service tenure of the top executive should be longer to avoid any delay in the decision-making process and loss of integrity and dispute in the authority in the responsibility.

3) Diverse Board of Directors:

• There should be a diverse board of directors comprising of several independent, non-executive directors, and other members.

4) Good History:

• There should be a good history of leadership/succession planning in the past of the company.

Some Examples:

Average Example of Succession Planning- HDFC Bank:

•  Mr. Aditya Puri is the name that is deeply associated with HDFC Bank as soon as we hear of the bank. He was associated with this bank for over 26 years and has taken the bank to several heights.
•  One of the key reasons behind the significant performance of the bank in the past is mainly due to the consistent leadership of the bank led by Mr. Aditya Puri.
•   Now after the retirement of Mr. Aditya Puri, the responsibility is being handed over to Mr. Jagdishan Sashidhar who is the new Managing Director (MD) and Chief Executive Officer (CEO) of the company.
•   Mr. Jagdishan Sashidhar has been associated with the bank since 1996 and hence he perfectly understands the functioning, values, and ethics of the business.
• Since there was no proper planning of succession planning as the planning was done at the last moment and hence it is an average example of succession planning.

Below Average Example of Succession Planning- Reliance Industries:

• Recently, the head of Reliance Industries- Mr. Mukesh Ambani handed over the position of Chairman of Reliance Jio to his elder son Mr. Akash Ambani.
• But the point to look here is that Reliance Jio is a quite small pie of the giant Reliance Industries. Also, Mukesh Ambani has made this succession planning at the edge of his retirement period and this planning should have been done earlier.

Good Example of Succession Planning- Muthoot Finance:

•  Mr. G. George Muthoot was the MD & CEO of Muthoot Finance but recently he died of sudden circumstances at the age of 71 years.
• The death of George Muthoot would have been a very bad impact on the company if it does not have perfect succession planning which the company has already made.
•   Mr. G Muthoot had already made an appropriate division of his stake among the family members. And after his death, Mr. George Jacob Muthoot has been handed over the position of MD & CEO of the company. He is having experience of over 43 years of in the industry.

What Should Investors Do?

Succession Planning becomes an important factor for the individual investor to look upon as the family-driven business has a larger promoter holding and poor succession planning can have a negative impact on the business.

Disclaimer: The information here is provided for reference purposes only and should not be misconstrued as investment advice. Under no circumstances does this information represent are commendation to buy or sell stocks or MF.

Originally Published On:https://blog.investyadnya.in/how-succession-planning-is-an-important-parameter-of-corporate-governance-for-the-companies/