Look beyond the family

Ratan Tata's decision to have a successor in place is significant in many ways. Unlike most other heads of business families who often eternally postpone their time for "redefining" their role in business ("retirement" is a wrong and unpleasant word for people with an active mind), he has set 2012 as the deadline for a change in leadership. Such a decision is tough, particularly when there is nobody waiting with a similar or better profile from within the family.

In a society where genealogical seniority is still considered the measuring rod of wisdom, handing over the power and responsibility for selecting one's successor to a committee is not easy. There is every chance that the powerful committee may come out with a name that is against the preference of the incumbent. It appears that Tata has been mulling over the options for quite some time, without any clear picture emerging. The current decision is still very good even if it was in some ways forced upon him by destiny.

THE STORY SO FAR... Ratan Tata says he will step down as Chairman of the $70-billion Tata Group in December 2012 Floats the possibility of an expatriate taking over, given the groups expanding global operations The group appoints a five-member committee to appoint the successor The committee will scour for talent within and outside the group before taking a call Ratan Tata's half brother Noel seen as the front runner

This decision is remarkable for many reasons. One, he has publicly committed his responsibility to hand over the reins of this unique institution to someone worth holding the leadership position. Two, he did not want to be biased by his personal preferences. Three, nobody can blame him for selecting or not selecting a particular individual who fulfils some, and not all, the criteria. Four, he is setting new standards for other business families to emulate.

It is high time that promoters realised that the mere fact of being born into a specific family does not automatically make them capable of managing their business successfully. There are instances where family businesses have chosen outsiders to lead and it has proved to be the right decision. The Murugappa Group and Dabur have chosen outsiders to lead.

Internationally, there are examples of Disney and Ford that have gone beyond the family and taken outside intervention in decisions relating to finding a successor. The choice of a leader for the Tatas is not going to be easy. It is an Indian global company that needs someone with strong Tata values nurtured in the Indian context, but with a sharp business mind to maintain competitiveness in the global context. While Noel Tata is a strong contender, it is for the selection committee to assess his capabilities to take the group into the next phase of its life.

Given that both Ratan and JRD, the two immediate leaders, have proven to be legendary, the new leader has to come with proven credentials. Naturally, the search has to be global and objective. Here I'd like to give the example of Dr Reddy's Laboratories as a classic case of successful professionalisation, including at the board level, that enabled not only Anji Reddy to move out of operations completely but also facilitated the building of a non-family team.

The selection committee has to not only choose the ideal successor but also ensure that there is adequate time for the person to settle down before Ratan Tata moves out. The transition will take at least one year during which time the successor should have the time to chart out the next phase. The committee has to start defining the parameters and shortlisting names soon. Unlike the GE experience, the process should not create competitive rivalry within the group. This is only possible if the process is transparent, and the shortlisted candidates have the future prosperity of the group as topmost priority in their minds.

The message for Asian family business is very clear. While looking for business leadership, families have to separate governance and management responsibilities, concentrate their energies on governance responsibilities, and look for best talents from within or outside for management responsibilities. They should not lose sight of the goal of institutionalising their families as well as businesses. This is one sure way of preventing the curse of failure of family businesses.

(See The Reclusive Brand)
The author is Thomas Schmidheiny Chair Professor of Family Business and Wealth Management at the Indian School of Business, Hyderabad