10th May 2019 BUSINESS STANDARD
(*The writer is a corporate advisor and Distinguished Professor of IIT Kharagpur. During his career, he was a Director of Tata Sons and a Vice Chairman of Hindustan Unilever)
If a CEO insists that executives walk away from the company upon retirement, then that CEO should also practice what he or she insists others should do
A superb CEO retires from executive position and becomes the non-executive chairman (NEC) of the same company. Is it a good idea or a bad one? Opinions are probably loaded on both sides of the argument, and there is no yes or no answer. It depends on the circumstances and the precautionary processes; there are examples of success, though the examples of failure are vastly more. When a superb CEO is appointed as the NEC of the same company, behaviors change.
Why should the superb CEO at all be associated with the company after completing executive tenure? There may be two reasons: first, providing mentoring to the incoming CEO, and, second, to exercise ownership control. These are different contexts and are examined here separately.
The wonderful film, About Schmidt, brings out poignantly the universal human desire to hang around, ostensibly to mentor. It is highly undesirable for the superb CEO of a professional company to continue as NEC. Why?
The successor can always seek advice, but it should be his or her call; why does mentoring require a statutory position? Why should mentoring care be made available through a position only on the CEO’s successor, why not to the successor of the retiring National Sales Manager or Factory Manager? In that case, the company will abound with retirees as mentors to their successor, clearly undesirable. If a CEO insists that executives walk away from the company upon retirement, then that CEO should practice what he or she insists others should do as practiced in HUL, Glaxo, Castrol and other MNCs.
If the new person has not been groomed by the superb CEO till his retirement, then it is the CEO’s gross failure, indeed of the whole board. They should collectively be rapped on the knuckles for failing. India’s private sector banks have been culpable in this regard because successful CEOs behave as though their party will never end. It is good to remember that the prospect of non-executive chairmanship alters the behavior of the current CEO, who is anyway prone to accept the egregious view of flatterers that he or she is difficult to replace.
Many a superb CEO argues that the potential successor requires ‘another two years to be ready’ as though the company is trying to bake a cake! Heaven knows where this two-year magical number comes from, but I have noticed that it is the same in many companies. Independent directors should call the bluff by insisting that, if essential for the superb CEO to continue as an NEC, the NEC role should be for no more than two years. See what hell breaks out!
As I have written through past cases in my book, CRASH: lessons from the rise and exit of CEOs, some successors may well have benefitted if their predecessors had not been around–John Walter at AT&T, Michael Ovitz at Disney, Richard Thoman at Xerox, and Ramesh Sarin at Voltas.
This is a different context from the first case. An MNC may wish to exercise its ownership control by appointing an outgoing CEO as chairman, while a new appointee settles down and earns his or her laurels. In a family business, the major shareholder may well wish to leave the hustle-bustle of company management to an executive, but retain control of the board. Both are understandable, but both require some discipline in execution.
There should be a formal board-level exercise on who does what to determine the line of control (LoC) between the incoming CEO and the former CEO, now the NEC. Further, the independent directors should hold the NEC and the CEO accountable if the LoC is breached. I am aware of one listed company that has creditably drawn the LoC: Harsh Mariwala as Non-Executive Chairman of Marico Limited. There may be more, but I hope that will be many more in the future.