Succession Planning

• Replacement planning – the process of finding

replacement employees for key managerial
positions

• In replacement planning the starting point is

the job, whereas in succession management
the starting point is the strategy of the
organization.
 Selling
• If the management decided to sell the
company to a new firm it would most likely
not only bring with it a new management
team, but would also leave existing
management without a say in strategy
matters.
 MBO
• Traditionally, Management Buy Outs (MBOs) involved
the management wanting to purchase a controlling
interest in the company and working along with
financial advisors to fund the change of control.

• Today, MBO activities involve promoters divesting

their stake in a firm by selling out to PE players willing
to finance the asking price. The PE players are flexible
enough to enter into a partnering relationship with
the existing management.
 List of Management buyouts of Indian companies

Company Financial investor Value

• Nitrex Chemicals Actis Capital $13.8 million
• Phoenix Lamps Actis Capital $28.9 million
• Punjab Tractors Actis Capital $60 million
• Nilgiris Dairy Farm Actis Capital $65 million
• VA Tech WABAG India ICICI Venture $25 million

• Nirula’s Navis Capital Partners $20 million

 Management Buy In (MBI)
• A management buy in (MBI) is the purchase of a company by
an outside management team.

• In contrast to a management buy-out, where the purchaser is

already working for the company, the outside management
team wants to replace the existing management.
 The Process
• The management buy-in group usually evaluates several
companies searching for an undervalued business.

• The team leader is usually highly experienced, for example, a

(former) board member of another company.

• By replacing the existing management and applying new

strategies to the business, the management buy-in group
intends to enhance the value of the company.
 Mode of MBI

• The outside management team can either buy shares of the

company (share deal) or assets (asset deal) or both (roll over).

• Most management buy-in transactions are leveraged buy-outs

(LBO).

• The repayment of the loan is made out of the free cash flow
generated from the company, whereas the assets of the
company serve as collateral for the loans.
 MBI & MBO

• The strategy of a management buy-in can also be combined

with a management buy-out.

• If the outside management group considers any existing

managers of the company of great further value, the new
board of directors may also include a former manager of the
company, who can share his/her experience with the new
management group.

• In case of a family business, the question of succession can be

solved by a management buy-in.
 Internal Successor
• Mentoring / Coaching
• Special Assignments
• Formal Training & Development
 Problems associated with succession management

• Elitism – crown princes

• Risk of spotlight – poaching
• Selection Bias
• Unpredictable futures
Succession Planning Fiasco
 Axis Bank
• Mr. PJ Nayak’s term was coming to an end.

• Problems between Nayak and the board was brewing over

succession issue.
– RBI insisted that the post of the chairman and managing
director of Axis Bank should be split.

– The board insisted there must be succession planning and

Nayak must groom his successors.
 Mr. Nayak’s response
• The former bureaucrat had been arguing that he did
not believe in grooming successor.

– Argued that he would quit if the regulator insisted on

splitting his job. This was around the time that Axis Bank's
Chief Operating Officer was also leaving. As a consequence,
Nayak's wishes were granted and he stayed on as Chairman
and CEO.

– He had been pointing out that in public sector banks, there is

no such practice of succession planning
 The Situation
• The board gave Nayak the option to stay on as a
non-executive chairman and asked him to
appoint a CEO. This proposal too was turned
down by Nayak.

• Both the RBI and the board were not happy

about this situation where all powers were
concentrated in one person and there was no
succession planning.
 Internal/ External Candidate?
• Around the same time, the board began looking for
professional help to identify Nayak’s successor.

• It met internal candidates, but realised that none of them had a

rounded experience to be the ideal candidate to head the bank.

• It was then when Ms. Shikha Sharma's name was suggested.

• Nayak decided to record his dissent and the vote taken showed
that he had been isolated, he decided to close his file and left
the room abruptly.
Succession Planning at L&T

“If I was in charge of a bank, a financial

services company, CPG, FMCG, IT...
[such companies], there would have
been no succession problem. But there
are no Indians available [to take on the
leadership role] in the entire industry -
or anywhere in the world. I gave the
last five searches over the last four
years to five different firms - without
any restrictions - to create a team from
any nationality. It is not yet possible”.
~ A.M. Naik
 Succession Planning at L&T
• When Naik became 70, he gave up the post of
MD to K Venkataramanan, retaining the post
of executive chairman for himself.

• But Venkataramanan also had to retire soon.

• SN Subrahmanyan took the helm

• In November 2000, GE announced Jeff Immelt
as the successor to Jack Welch .
• Jeff Immelt
• W James McNerney – CEO, 3M
• Robert L Nardelli – CEO, Home Depot
 HR’s role in succession planning
• CEO succession is a board level decision
– Collaborate with head hunter firms (external sources)
– Competency based decision (address Selection bias)

• Create a culture of replace ability

– Choosing of a successor can be made part of employee
KRA
 HR’s role in succession planning
• Career Growth Plan
– Individualized career growth plan
• Performance Management

9 Block
Model
 HR’s role in succession planning
• Fast Track Promotion
Tata Motors’ Fast Track Selection Scheme (FTSS)
• Started in 1991

• FTSS alumni occupied some of the best

leadership roles in the organization
• Tata Motors had 9 hierarchical levels

• In order to move one level to the other atleast

3 years were required

• To become divisional head employees were

spending almost 30 years
 Eligibility Criteria

• Minimum Educational Qualification : Graduate

• Minimum Work Experience: 2 years

• There is no age limit for the applicants

• An applicant can take a maximum 3 attempts for selection

 Overview of the Selection Test

Group Assessment Final

Written Test
Discussion Centre Interview

• Written Test (2 Hours Duration):

• Logical Reasoning
• Quantitative Technique
• Language Comprehension
• Functional Appreciation
• General Knowledge
• It had 2062 applications this year

• Written tests are now designed externally by

faculty from reputed management institutes

• At the end of each test the candidates get

their sectional score results
• Traditional group discussion was replaced by
manager conversation.
– Nominating each participant as the chairperson
allows everyone to put on the leadership role.

• More assessors – a mix of both internal and

externals
• “Participation Certificate” for employees who
reach certain stage

• Year-long rotation of participants across

different functions, business units and
geographies to give them a sense of how
different parts of the organization function
 HR’s role in succession planning

• Training & Development

– Special assignments
– Overseas assignments
– Job shadowing
– Coaching/Mentoring/ Sponsorship

• Handling Exits in a dignified manner

• Succession Planning is an ongoing process

 Who would be the successor of
Raghuram Rajan?
• SBI Chairperson Arundhati Bhattacharya
• RBI Deputy Governor Urijit Patel
• Kaushik Basu Chief Economics World Bank
• Executive Director, International Monetary
Fund Subir Gokarn (former deputy governor
RBI)
• Economic Affairs Secretary Shaktikanta Das
• Vice-Chairman , NITI Ayog , Arvind Panagariya