Successful CEO Succession: Model of Continuity with Change

Corporate India woke up on August 5, 2010 to the news that the Tata Group, the largest Indian industrial conglomerate, would look for a successor to group chairman Ratan Tata, who is due to retire when he turns 75 in December 2012 as per the group retirement policy, which he himself had put in place. Tata Sons, the holding company of the group, stated that it had set up a panel to begin a global search for a successor, considering external or internal candidates, to replace the veteran leader who took the Tata Group to new international glory. The Group would like to complete the search process for the Chairman by March 2011.

The 142 year-old Tata Group, founded in 1868 by Jamsetji Nusserwanji Tata and developed further by Sir Dorab Tata, has a formidable reputation for its business track record and corporate value system. Tata companies operate in seven business sectors: communications and information technology, engineering, materials, services, energy, consumer products and chemicals. They are, by and large, based in India and have significant international operations. The total revenue of Tata companies, taken together, was reportedly USD 78 billion (around Rs 358,800 crore) in 2009-10, with over 65 per cent of this coming from business outside India. The group probably employs nearly 400,000 people worldwide. The Tata name has consistently been respected over 14 long decades for its adherence to strong values and business ethics.

The legacy of Jamsetji Tata and Dorab Tata was taken to greater heights by JRD Tata who took over the reigns in 1938 (in his five decade tenure, covering the period 1938 to 1988, the Group grew from Rs 620 million to over Rs 100 billion and from 14 companies to 95 enterprises, and as a brand in itself). Ratan Tata who took over in 1991 from JRD steered the group into the international league. Ratan at that time was relatively an untested leader for the conglomerate as a whole, despite playing a role in certain Tata businesses. Ratan confounded analysts who were concerned that the different constituent companies, each with a powerful leader, would pull apart disparately. He represented continuity by preserving and institutionalizing the core Tata values but also led a positive change with a unique alchemy of consolidation, diversification, globalization and performance management.

Given the remarkable contributions of Ratan, it is not surprising that some wonder if the group would be able to find a leader who would match Ratan’s track record. Future proceedings would, no doubt, provide the answer in a positive manner, particularly in the context of the diligent manner the group has applied itself to the challenge of finding a fitting successor to Ratan Tata. The question of leadership succession, however, has connotations that are universally relevant to any firm in any industry and in any country.

Inevitability of succession

Virtuous institutions outlast capable individuals. Virtuous institutions are managerially programmed to grow. Individuals, however capable they are, on the other hand are genetically programmed and administratively ordained to retire. Leadership succession, especially at the Chief Executive Officer (CEO) level, is therefore of considerable importance. Not surprisingly, numerous books and papers have been written about the challenges and opportunities of leadership succession planning.

Some leadership successions, as with GE and now with Tata, are meticulously planned and executed to achieve remarkable continuity and growth. Some successions are accelerated when the leaders die in harness, as was the case with Dhirubhai Ambani’s Reliance group. Some successions are opportunistically handled, as with Apple when Steve Jobs returned in 1997, but are nevertheless dramatically successful. Some successions are seamlessly and consensually managed as with Infosys. A few others are cataclysmically induced, as experienced, for example, by a troubled BP with the major safety incident in Gulf, by certain Wall Street corporations that caused, or were impacted by, the global meltdown or by a highly successful HP facing a sudden CEO discharge. Various experiences teach us that leadership successions could be badly stuck in the middle unless well planned in advance, and as both cause and consequence, unable to balance change with continuity, and growth with stability.

The challenge of succession management lies in the fact that apex level leadership changes often assume larger than life dimensions, more so when charismatic incumbents are involved. A leadership succession is, more often than not, pivoted around the personalities of the incumbent leader and the new leader in terms of not merely their capabilities but also in terms of the new leader managing and exceeding the stakeholder expectations, relative to the incumbent leader. Most corporations, through their boards and shareholder expectations, create a halo around leadership succession leading to an overarching emphasis on results rather than means, and change rather than continuity.

An ancillary reason is that most leaders fail to recognize the transient nature of their own sojourn in their corporations and unwittingly make leadership and management a highly personalized effort. The more charismatic and aggressive a leader is, the more of a cult phenomenon leadership becomes in such organizations. The successor in such cases has not only a legacy that he has to live up to but also a perception that he needs to overwrite. Leaders often make it difficult for their successors to steer their companies in alignment with a changing environment. Comparisons with a larger than life Jack Welch at GE, for example, took long for an equally capable, but differently styled, Jeff Immelt to overcome.

Models of succession management

Ram Charan, in his paper, “Ending the CEO succession Crisis”, Harvard Business Review, February 2005, refers to the track record of perennial performance powerhouses such as GE and Colgate-Palmolive and points out that nothing affects a company’s future more than CEO succession. He proposes internal leadership development and active involvement by the Boards as critical components of a successful succession exercise. He recommends incorporation of certain non-negotiable aspects such as talent, know-how and experience in the process. Kenneth W Freeman in his article “The CEO’s Real Legacy”, Harvard Business Review, November 2004, states that CEOs have a mindset of being unable to imagine anyone adequately replacing them, which thus constitutes a major roadblock to timely succession. A non-egoistic effort by incumbent CEOs to initiate and manage selection and grooming of successors with effective board involvement is suggested by the author.

Manfred F R Kets De Vries in “The Dark Side of CEO Succession” Harvard Business Review, January-February 1988, examines the unconscious emotions that come into play during changes in a company’s top leadership. While any leadership change is unsettling, the incumbent CEO, board of directors and other top managers become particularly vulnerable to unconscious emotions during three specific points in the succession process. These time points relate to when the decision is taken on the need to hire a successor, when the successor is chosen and when the new CEO takes charge. Management of emotions based on knowledge of these time points is seen to promote a positive CEO transition.

General Electric has seen successful CEO successions over time. In 1981, Jack Welch succeeded Reginald Jones as the CEO in a process that was personally driven by Jones as the incumbent CEO. A significant nomination input from several likely candidates followed by in-depth interviews with candidates helped the process. Twenty years later, Jack Welch named Jeffrey Immelt as his successor based on a detailed evaluation of, and discussions with, three potential candidates. Welch focused on the values that he instilled in the GE’s management – speed, simplicity, self-confidence and boundarylessness – as filters to select. A larger discussion of the GE succession process can be had in James Heskett, “Succession at GE: What’s Next?”, Harvard Business School, Working Knowledge, November 2006.

Glaxo SmithKline’s (GSK’s) succession planning process was uniquely different. Dennis Carey et al discuss the GSK process in their paper “Picking the Right Insider for CEO Succession”, Harvard Business Review, January 2009. GSK took the daring decision of making its top three internal candidates very publicly compete with each other to become the CEO. While each was well qualified to run the business, GSK decided to ask them take on year long CEO-level projects under the discerning eyes of the directors and the incumbent CEO. The projects were individually different covering supply chain management, product safety and sales & marketing. The process was also expanded to include outsiders’ evaluation of the three candidates. The way the succession planning process was conducted at GSK resulted in the departure of the two unsuccessful candidates to their own new CEO pastures, despite efforts to retain them.

Leadership succession, not unnaturally, is a favorite topic of executive search firms as well. Max Landsberg, Head of Heidrick & Struggles’ Leadership Consulting Practice, in a 2006 paper (“In Search of Excellence in CEO Succession”) places selection of the new CEO on par with another crucial task of a Board viz., a decision to merge or sell the company. He argues that association of outside agencies helps in a structured and systematic review of all options and selection of the most appropriate choice which could also be potentially followed up with transition support. He advocates prior framing of the ‘‘persona” of the CEO to support the process. According to him, correct CEO succession can create substantial market value for the company while longer term and broader reviewing of the company’s senior executive cadre and succession pipeline can support both the selection of the next CEO, and also the strategic growth of the company.

Infosys, India’s leading information technology company, has been in the forefront of succession planning in India. It has demonstrated how a highly capable and collaborative team of founders could provide a rich pipeline of leadership succession. The principal founder and CEO, N R Narayana Murthy who founded the company with six others in 1981 passed on the baton of CEO when he was at his prime to his deputy and co-founder, Nandan M Nilekani in March 2002, and became the Chief Mentor. Nandan, in turn, passed on the CEO baton to S Gopalakrishnan, another co-founder after just after five years in June 2007. On August 10, 2010 Infosys took one more stride in orderly succession management by initiating a search for its Chief Mentor. Infosys model of collaborative leadership succession, from within the promoter group, meeting all the tests of merit, performance, stability and continuity is indeed unique even in a global context.

Not all leaders happen to be internally developed, however, in the global canvas. Internal development is a strong possibility, and an appropriate option, when companies have been on a consistent growth track. Such companies usually brim with talent and are potentially CEO factories (for example, GE, Unilever, Infosys, Tata, Proctor & Gamble). On the other hand, companies which need turnaround or which operate in highly competitive and volatile industries tend to look at experts from outside the industry to rejuvenate the businesses. Nor has it been found necessary for firms to have CEOs only from the core competency backgrounds of the firms. Allan Mulley from aircraft maker Boeing helped Ford, the automobile maker revitalize itself. Sergio Marchionne who engineered a stunning turnaround of Fiat (which was facing bankruptcy) in mid-2000s was a lawyer and accountant by qualification and practice, with a prior background in chemicals and banking sector. Pfizer, the world’s largest pharmaceuticals company is headed by a legal expert. So has been the world’s leading technology firm Intel, choosing to be led for the first time with a chief executive without a degree in science or engineering. The models of CEO succession thus defy easy classification in any fixed templates.

Ken Favaro et al, based on a study of the World’s 2500 largest public companies identified several trends in CEO succession covering the recent decade. The paper titled “CEO Succession 2000-2009: A Decade of Convergence and Compression” in Strategy + Business, Issue 59, Summer 2010, identifies four key trends that were discernable – the predominance of insiders, the split of the CEO and Chairman roles, the growth of the apprentice model (in which the new CEO’s predecessor assumes the job of board Chairman) and the consistence of CEO turnover rates. Importantly, natural and planned successions are being increasingly seen as the foundations for continued growth in difficult times.

The key aspect of leadership succession whether in successful corporations or unsuccessful corporations, and whether it is through internal development or external induction, is continued corporate growth and profitability. Equally importantly, the focus is on sustainable vitality in the face of increased volatility of economies, enhanced intensity of competition and heightened discontinuities in key technologies. The fact that an incumbent leader has a larger than life image of his or her contributions to the company’s progress puts a significant pressure on the new leader. In addition, the more high profile and the more comprehensive the succession process is, the greater would be the level of public approval or disapproval of the new leader’s performance. These factors bring to the fore issues in management of continuity and change arising out of leadership succession. All these issues would be further amplified in the case of succession to the top position in a conglomerate.

Recent research by Bain & Company, the noted management consulting firm, that was based on a study of 44 top Indian firms suggested that only one in five board members was even involved in talks about a CEO’s succession and little effort was made at board level to groom top leadership. By comparison, more than 60 percent of the boards at the top-ranked S&P 500 companies in the US are said to discuss CEO succession at least once a year and 80 percent of these companies have emergency succession plans in place. Building on the report, Financial Times (August 7/August 8, 2010; “beyond brics:www.ft.com/bb) stated that lack of succession planning was a key failure of boards at many family-owned businesses in India, leaving them highly vulnerable after the retirement or loss of their leaders. According to the paper, such an omission is a drag on investor appeal for many of India’s largest, fast-expanding companies. Indecision on leadership has led to family disputes that have split or disrupted companies.

The announcement by the Tata group to find a successor for Mr Ratan Tata, several months ahead of his planned retirement (to enable the successor work with Ratan and then takeover in full) demonstrates the progress the Indian businesses can make in terms of succession planning. Considering that large industrial houses and firms are grown typically by established business families and self-made entrepreneurs, the challenges of planned succession are all the greater in India. While the Tata Group and Infosys have been ahead of the rest in the systematization and professionalization of the succession issues, others such as the Birla group, Murugappa Group, Godrej group, GMR group, HCL group, Apollo group and Bharti group have started putting in place governance structures and processes to not only plan a successor, whether from the promoter group or from the non-promoter group, but also to ensure an appropriate demarcation between the promoters and the firms that they helped promote.

Tatas’ model of succession management

The review of literature on succession suggests that the more planned and the more contextual the succession is, the greater is the likelihood of its success. There can, therefore, be no singular model of succession that can be adopted by all firms. On the other hand, the right parameters for selection of the successor become paramount for each firm. Depending on the strategic needs of the firm which could range from turnaround to ramp-up on one hand and from efficiency to innovation on the other the screens for selection of the successor could also vary; relevant screens, however, are essential.

Boards and search agencies often attempt to err on the safe side by defining too idealistic a persona for the future CEO. Maxs Landsberg of Heidrick & Struggles, for example, in the earlier quoted paper rhetorically prescribes ten dimensions on which he expects leadership from an ideal CEO. He defines the ten persona of the CEO as Grand Master of Corporate Strategy, Chief Architect of the Corporate Structure, Vocal Exponent of the Corporate Values, Rigorous Shaper of the Talent Portfolio, Inspiring Forger of Exemplary Top Teamwork, Brahma-Creator; Vishnu-Maintainer; Shiva-Destroyer, Scrutineer of Quality Customer Service, Executive Settler of Disputes and Resolver of Dilemmas, Umblical Cord to Chairman and Board, and Fluent Spokesperson to the World. It appears that such a prescription is not only utopian but also off-mark in today’s competitive and unpredictable environment.

A more appropriate hypothesis is that the successful CEO of this generation requires a contextually appropriate mindset rather than a theoretically winning skill-set. The components of the CEO mindset include an ability to tailor corporate strategy to a volatile environment, a flexibility to constantly realign the organization structure to a dynamic strategy, a penchant to institutionalize operational excellence, a passion to leverage science and technology for new products and processes, a flair to connect with all stakeholders, a promise to provide an enriched work environment to employees, an evangelical commitment to quality and most importantly, balancing change with continuity. The CEO’s role is increasingly going to be mind-play rather than skill-deployment.

To validate the above hypothesis, one would need to only look at how Ratan Tata redefined Tata Group ever since he took over the reigns in 1991, confounding the analysts who doubted if he had the required skill-set for steering a highly diversified group of companies. Over and over again, it was Ratan’s mindset that led to appropriate strategies that grew as well as coalesced over hundred companies of the group into the largest Indian conglomerate. Aligning the virtually independent companies and leaders of the group to a common credo (Tata branding, values and retirement age), fusing indigenization with innovation (Indica and Nano cars , Sumo and Safari SUVs, Ace trucks), empowering individual companies to undertake ambitious global acquisitions (Tetley, Corus, Daewoo, Jaguar, Land Rover assets and marques), scaling up companies to top national and international rankings (Tata Motors, Tata Steel, Tata Consultancy Services) and numerous other business initiatives have been primarily a resultant of a winning Indian mindset that spurred bold and innovative strategies.

HBS professors Tarun Khanna and Krishna G. Palepu, authors of the new book “Winning in Emerging Markets: A Road Map for Strategy and Execution”, Harvard Business Press, 2010, speak glowingly of the contribution Ratan Tata made to the Tata Group and how it could become a role model for emerging markets. As they observe, when markets in India opened in 1992, around the time Ratan Tata became the Chairman of the group, the Tata Group had been in existence for more than a hundred years. Yet as a sprawling, diversified business group spanning nearly 100 businesses, each of which was not performing up to its full potential, it was uncompetitive. According to them, the Chairman of the group, Ratan Tata, creatively reorganized the group to make it survive in the new open global economy, and then challenged the individual companies to innovate. At the same time, Ratan Tata motivated his companies to think globally, attempting some of the never-before global acquisitions. Khanna and Palepu are right when they conclude that the Tata Group is a great example of a company that transformed itself from a successful company in a closed, local environment to a fairly aggressive player that has fostered innovation and globalization in almost a trendsetting manner in a completely different, globalized environment of rapid growth and extreme competition.

Change with continuity model

At the core of Ratan Tata’s success has been the plank of change with continuity. Following serves as an effective model of change with continuity, on a foundation of the basic Tata philosophy that the group is a trustee of the wealth that the group creates for the nation.

Investment + divestment. When Ratan took over he inherited a large diversified group of businesses. Rather than abandon the diversification strategy, he defined core businesses and reinforced them (for example, automobiles, steel, beverages, chemicals, information technology, hotels) even as he exited non-core businesses (for example, generic pharmaceuticals, soaps and detergents) and entered into new potential businesses (for example, retail, realty, telecommunications, infrastructure). Divestment of non-core was not seen as a failure to compete; it was seen more as a strategy to make the group more competent and competitive as a whole.

Consolidation + professionalization. The striking feature of the Tata group of companies in the 1980s was that most of these were led by leaders who were stalwarts in their own ways but were also highly independent. This acted to the detriment of group cohesion often. Ratan not only reigned in the individualism of the leaders but also reinforced professionalism in the group through structured retirement and succession policies as well as induction of external talent (for example, Sumatran and Ravi Kant for Tata Motors, Gopalakrishnan for Tata Sons and a few experienced expats from time to time). All through, considerable emphasis was laid in taking forward the legacy of building internal leadership talent left behind by Jamsetji, Dorab and JRD.

Growth + security. When Ratan Tata took over, the holdings of the Tatas in the group companies were in low teen percentages, making the companies vulnerable to takeovers in an economy set to open up. While the public fascination for the indigenous Tata ownership was a powerful counter to takeover attempts, he recognized that more structural defences were needed. He quickly reinforced the capital structure of the holding company, Tata Sons as well as its holdings in the group companies. Limited divestments in non-core businesses were utilized to reinforce equity consolidation. This, coupled with aggressive global acquisitions required the group to be financially bold as well as prudent in terms of global fund raising, which was also accomplished.

Globalization + acquisitions. Ratan’s key change driver has been in the group’s approach towards globalization. From 2002, the group pursued a strategy of aggressive globalization acquiring overseas companies, businesses and brands. These important acquisitions and mergers were aimed at expanding and globalizing the footprints of core companies. Close to USD 5 billion was spent by the group between 2002 and 2010 in nearly 70 mergers and acquisitions across the globe, including such high profile ones as Tetley Tea, Corus Steel, Daewoo, JLR and Hispano. Almost all of these have been successful reflecting positively on the group’s technical and managerial capabilities to integrate new businesses and operations.

Innovation + competitiveness. Scale, scope and technology were used by Ratan to make the group competitive as well as innovative. It has always been in the DNA of the Tata group to be pioneering, whether it was putting up a steel mill in the British-occupied India in early 1900s, introducing new commercial vehicles in the 1970s and 1980s, developing the first indigenous car in the 1990s and ultimately launching the world’s cheapest family car in the 2000s. With Ratan at the helm, the latter day innovations have sought to promote self-reliance, functionality and affordability for making greater numbers of Indians happy, as a true tribute to the expressed philosophy of JRD Tata.

The ten-element strategic framework as above could be effectively practised by Ratan Tata with institutional support in his office, through the Group Executive Office (GEO) and Group Corporate Centre (GCC). The former conducts strategic analysis and develops strategic decisions while the latter provides policy support and conducts portfolio and business reviews. These two entities, chaired by Ratan Tata have the top Tata leaders, R K Krishnakumar, Ishaat Hussain, Kishor Chaukar, J J Irani, R Gopalakrishnan, and Arunkumar Gandhi as their members.

Summary

India’s Tata Group has demonstrated, independent of Western management thought and practice, for several decades that Indian entrepreneurs and professionals of the Group can create a world-class conglomerate as an inspired national endeavor and with an unflinching social purpose. Ratan Tata’s growth model based on change with continuity is an eminently commendable model for effective succession management. Under the overarching umbrella of Tata vision with values, the ten self-balanced components of refining core with divesting non-core, leadership consolidation with professionalization, business growth with ownership security, globalization with acquisitions, and innovation with competitiveness, a uniquely Indian, and a characteristically Tata-stamped succession model has been brought to the fore.

It is a moot point whether the successor to Ratan Tata would follow, or would need to follow, the business strategy established by Ratan Tata in a rapidly changing global environment. Whether the successor would need to discover new core businesses such as clean and alternate energy generation, aerospace and satellite businesses, infrastructure building and management, healthcare and life sciences, and in doing so would need to adopt different strategic planks is a matter for the future. What can be certainly predicted is that the Tata Group would continue to aim at conglomerate leadership with social trust, and the successor to Ratan Tata would achieve success by following the proven succession model of “change with continuity”.

Posted by Dr CB Rao on August 9, 2010.