Why CEO succession planning should be top priority for company boards

A company's board of directors is the primary force influencing corporate governance. In most instances of well-governed companies, the board takes upon itself obligations that extend beyond the financial goals of the company. They also take up concerns about how the company would work towards larger social, human, and environmental concerns.      

The board is expected to approve the strategies to develop long-term value and appoint an appropriate candidate as the CEO. It is also tasked with overseeing the performance of the CEO and the value system in which the CEO operates. In today's volatile corporate world, the board has an important role of overseeing the CEO succession planning as a planned process, and not an accident.After all, as a good governance norm, boards are expected to have succession planning to ensure business continuity and viability.   

Bad corporate governance negatively impacts a company's integrity and transparency, and directly hurts customer trust and subsequently the company's financial health.

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CEO performance appraisal

Boards in India largely assume that the sitting CEO is the best choice until some large failure happens. It is very rare for Indian boards to have a sitting CEO go through an annual formal appraisal by members of the NRC/Board.  

The boards of some reputed firms in fact bring in global external experts (to avoid compromising any local firm or team) to have a professional assessment of the CEO's performance. No large listed Indian entity board has fired a CEO for factual and documented non-performance.

Otherwise, largely Indian boards have not done any "what-if" analysis of the CEO and other critical roles in the organisation. Once the CEO/promoter has the aura and "network" amongst regulators, bureaucracy, media, and investors, does an independent director have the will and clout to stand up and say "let's do succession planning"?

Idea for SEBI

In the past three months alone, corporate India has lost over 20 CEOs of listed entities to COVID-19. None of these entities had readily named a successor. With most of the Indian listed entities being promoter-led/family businesses, it adds more issues of governance complications.   

The boards of most listed entities, including large promoter-led companies, have been lazy with the concept of succession planning. Almost sordidly until the CEO "dropped dead". After all, as a good governance norm, boards are expected to have succession planning to ensure business continuity and viability.    

It would be a useful safeguard for investors in the capital markets, if the securities regulator SEBI, makes it compulsory for the boards of listed entities to be tasked with an annual "sealed envelope" exercise to keep ready a "drop-dead successor" to the current CEO.

After all, given the importance of succession planning for all stakeholders, grooming and selection of potential successors for critical leadership roles should be a continuous process while ensuring that the selected candidate is the right cultural fit.

Also Read: The twists and turns of CEO succession at HDFC Bank - Sashidhar Jagdishan wasn't the only choice

Succession planning process  

Boards should be far more involved and do better in this area of understanding the leadership style and in ensuring their visibility to second-tier leadership. Hardly any board in India monitors the succession planning for each KMPs/CXOs. It is a good governance expectation that boards will be a key driver in building a cohesive leadership team.

The board of directors can take some proactive steps to ensure CEO succession planning arrangements. Some of them include:

• Conducting a formal annual performance review of the CEO, and then discussing whether (s)he is still the right person to be the CEO.
• Having regular interactions with the direct reports of the CEO would ensure that the board has an appropriate talent development process in place to identify, develop and retain high potential individuals who are capable of acting as CEO.
• Developing a detailed job description for the role.  
• Having active engagement in interviewing and evaluating possible successors by benchmarking against outside talent and peers; including working with outside experts in leadership talent assessment and in the succession planning process.

Indian boards have a lot to pick pace in this regard and start asking questions and being accountable for organisational culture.  

And if the board composition itself is not refreshed regularly ("Board refreshment"), the issue of familiarity challenges and the boards missing the obvious signals about CEO performance/behaviour is possible. That might be the next governance challenge.

(Srinath Sridharan is an Independent markets commentator.)