Ratan Tata will leave behind many legacies when he retires on December 28, 2012 – from the Rs 1.46-lakh Nano to the Rs 65,000-crore acquisitions of Britain's Corus and Jaguar Land Rover (JLR). But none will resonate across Indian boardrooms as strongly as the group's succession plan. The five-member search committee tasked with nominating Tata's successor will deliver its verdict soon. Whoever is chosen, the process has set the standard.
Family-run businesses in India have rudimentary succession plans. Most follow a set formula: the heir receives an MBA from a good American university, joins the family business in mid-management, rises rapidly up the ranks and eventually takes the top job.
There are exceptions. Infosys Technologies, for example, is not run like a family business. Not one of its original seven founders has encouraged his children to join the company. N R Narayana Murthy, 64, currently chairman and chief mentor, will step down from the company's board on August 20 when he turns 65. His son Rohan has declared publicly that he has no intention of joining Infosys, though his family owns stock in the company worth nearly $2 billion (Rs 8,800 crore).
Are Indian business houses thus heading in the direction of American and European companies, where leading public corporations are no longer run by their founding families? The 11-member board of Procter and Gamble, for example, has no descendant from the founding families of William Procter and James Gamble. General Motors, IBM and the Bank of America have been run by professionals for so long that few even remember their founders (William Durant, Thomas Watson and Amadeo Giannini respectively).
Newer founder-driven companies like Apple and Microsoft are also increasingly run by professional managers. There is no Steve Jobs heir who will take over Apple when the founder, suffering from serious illness, steps aside. Instead, Timothy Cook, who joined Apple in 1998, will take charge as chairman. The succession plan at Apple has been put in place professionally and transparently, much like Infosys. Apple is today the world's most valuable technology company. It has a market capitalization of $364 billion (Rs 16 lakh crore) – roughly a quarter of India's GDP and nearly four times the market value of the Tata group's 27 listed companies.
At Apple's longtime technology rival Microsoft, co-founder Bill Gates gave up all executive responsibility in 2008 when he turned 52. His three children, Jennifer, Rory and Phoebe, may inherit whatever Microsoft stock Gates does not gift to charity in his lifetime but they will almost certainly never run Microsoft. It is hard to think of many Fortune 500 companies whose chairman today is from the founding family. In India, it is difficult to think of many large companies whose chairman is not from the founding family.
Separation of ownership from management is the key. As business becomes increasingly global in scale and complex in execution, Indian business leaders are recognizing that their own financial interest will be better served if they separate the two. Virtually every big Indian corporation now has a strong top-tier of professional managers just beneath the chairman. Very few founding families, however, have made the leap of faith to step aside completely. That is why the example set by Narayana Murthy and Ratan Tata, two men of contrasting personalities but similar moral stature, is so important.Tata's succession model is copybook but he owns barely 1% of group company stock so the plan may cut little ice with traditional Indian business families. Narayana Murthy's succession philosophy is equally unconventional: once the seventh co-founder (CEO-designate S D Shibulal) completes his term, a professional with no link to the initial founders will take charge. Within five years, Infosys will be indistinguishable from an IBM or a General Electric as a global enterprise. So could the Tatas. A new group chairperson-designate will be announced by the search team later this year. He or she may or may not be a Tata. The group's largest shareholder, Pallonji Mistry (by virtue of his 18% share in Tata Sons, the group's holding company), is likely to back the principle of separating ownership from management. If the Tata-Murthy model of succession percolates through the bloodstream of corporate India, it will be a victory for a dynamic and progressive new India.
Business is not divorced from politics or society. Indian politics remains regressively dynastic. Indian society is meanwhile changing, albeit slowly. Indian business, on the cusp of economic reforms, must embrace corporate democracy. A fair and transparent succession model is a crucial element of good corporate governance. The market is a ruthless arbiter: it will reward companies that rise above family.
