Loved The TV Show Succession? Here's What The Succession Laws Are For Indian Companies

Among the many amazing TV shows out there to watch in recent times, the American satirical black comedy-drama television series Succession has been garnering a lot of praise from both critics as well as audience.

Let's first give you a sneak peak into what the show is all about- A wealthy family's patriarch plans to announce one of his four children as the successor of their media and entertainment conglomerate. But a tragic turn of events sees the four power-hungry children fighting for control and scrambling to keep the business afloat.

The show is currently in its 4th season which is also its final one. Succession already has numerous awards to its name too, including Golden Globe for Best Television Series 每 Drama and the Primetime Emmy for Outstanding Drama Series in 2020 and 2022.

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If you too are among those who have been following the TV show Succession or are interested to do so, wouldn't you also be curious to know what succession planning laws are present in India? What rules govern various public and private sector Indian companies?

If yes, then read on as we explain the same for your understanding.

What India's Companies Act Says

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As per Companies Act 2013, a company may be formed for any lawful purpose by〞

(a) seven or more persons, where the company to be formed is to be a public company;

(b) two or more persons, where the company to be formed is to be a private company;

or (c) one person, where the company to be formed is to be One Person Company that is to say, a private company, by subscribing their names or his name to a memorandum and complying with the requirements of this Act in respect of registration:

Provided that the memorandum of of the company shall indicate the name of the other person, with his prior written consent in the prescribed form, who shall, in the event of the person＆s death or his incapacity to contract become the member of the company and the written consent of such person shall also be filed with the Registrar at the time of incorporation of the One Person Company.

As per the Companies Act 2013, the person mentioned in the memorandum of the company shall, with his prior written consent in the prescribed form, succeed in the event of the subscriber＆s death. The written consent of such person nominated to succeed shall also be filed with the Registrar at the time of incorporation of the company.

Also, the name stated in the memorandum shall not〞 (a) be identical with or resemble too nearly to the name of an existing company registered under this Act or any previous company law; or (b) be such that its use by the company〞 (i) will constitute an offence under any law for the time being in force; or (ii) is undesirable in the opinion of the Central Government.

Importance Of Succession Planning

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As per IFC (International Finance Corporation), which is a member of the World Bank Group, framing a succession planning policy was formally included as one of the key responsibilities of the board of a listed company under the market regulator SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 每 such a provision was absent under earlier laws.

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

-Developing the CEO Profile that establishes the specifications and requirements for the CEO.

-Conducting an annual performance review of the CEO, and determining whether he or she should continue in their position.

-Establishing a frank and forthright dialogue with the members of the management by means of periodic sessions to assist in establishing the necessary qualities required for the CEO succession.

-Ensuring that the current CEO has an appropriate talent development process in place to identify, develop and retain high potential individuals who are capable of acting as CEO, engaging the CEO in in-depth discussions about the top talent development process and the actual development of key succession candidates.

-Conducting its own independent assessment of the progress and readiness of the potential CEO succession candidates, by investing time both inside and outside the boardroom with their organization＊s high potential individuals.

Assuming an active role in interviewing and evaluating possible successors, spending the time necessary to make informed judgements about their capabilities, potential and readiness for promotion.

-When needed, seeking external expertise and advice in executive talent assessment and in the succession planning process; also considering bench-marking against outside talent and peers.

-Reviewing CEO＊s planned and emergency succession planning arrangements on annual basis and make relevant amendments as necessary.

-Evaluate the company＊s HR function and its ability to operate as a full partner in the succession process.

-Have actively involved the Nomination Committee (if it is established) in the succession planning process. The fruition of succession planning entails cooperation between the board and the CEO. For this, consultation with the existing CEO by board members is a must since he is aware of the company more than anyone else. The experience garnered by the existing CEO makes should suffice to include the person in the process for the new person＊s selection. Best practice suggests that the board of directors should retain the ultimate authority to lead the process.

Also Read: Asia's Richest Banker Uday Kotak Searching For His Replacement

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Current Scenario In Different Types Of Companies

As per IFC (International Finance Corporation), family discord is the biggest risk to succession planning.

Therefore, several Indian groups have now resorted to creating a family constitution, which will address the issues of transition in a more structural manner. Groups that have a family constitution include Dabur, Godrej, GMR, and Murugappa. Some companies, like Asian Paints Limited and Marico Limited, have professionalized the management 每 the promoters have handed over the day-to-day management of the company to seasoned industry experts.

In family owned businesses, where the dominant shareholding is held by an individual or a family-Traditionally, these companies have seen the next generation of the family taking over the reins from the previous generation. A crucial concern in these cases is the ability of the next generation to steer the company effectively. In several instances, succession has been decided by the bloodline rather than by leadership fitness, which can be detrimental to the company＊s long-term interests.

However, this is changing.

Several large companies and groups 每 Birla,Godrej, Bajaj, Wipro 每 have spent years grooming the next generation for a take over the business. This has resulted in a seamless transition.

As far as multi-nationals where the Indian company is a subsidiary of the foreign parent are concerned, CEOs of multi-national companies (MNCs) in India tend to be pegged at middle or senior management cadres of the global parent. Therefore, succession planning at the CEO level becomes a part of their leadership development and succession, which is managed in a very structured manner by MNCs.

In such circumstances, the board has little control over the succession planning and is, in most cases, only implementing global guidelines.

Next comes the Public Sector Enterprises, where the government is the dominant shareholder. Public Sector Enterprises (PSEs, or state-owned enterprises) have only recently begun to split the role of the Chairperson and the Managing Director. The Chairperson and Managing Directors of PSEs are selected by the Public Enterprises Selection Board (PESB), a government body. Given the large availability of individuals in the bureaucracy, shareholders would have expected a strong succession line-up. However, despite having a pool of individuals to choose from, the process has been slow: this has resulted in leadership vacancies extending over months in some of the PSEs. Changes in government have also resulted in board vacancies in the past. The board has a limited role to play in determining succession planning policies for PSEs.

As far as institutionally-owned companies where there is no dominant shareholder or identifiable promoter are concerned, the lack of a dominant shareholder increases the onus on the board to plan for succession. While boards of institutionally-owned companies have been able to transition the CEO successfully in the past, disclosures around the succession plan and its efficacy continue to remain weak. In a few instances, the CEOs have been at the helm long enough to be considered pseudo-owners, concerns that shareholders and boards need to contend with.

Also Read: Forbes List Of The Highest-Paid Dead Celebrities

Power To Nominate Who Will Succeed

(1) Every holder of securities of a company may, at any time, nominate, in the prescribed manner, any person to whom his securities shall vest in the event of his death.

(2) Where the securities of a company are held by more than one person jointly, the joint holders may together nominate, in the prescribed manner, any person to whom all the rights in the securities shall vest in the event of death of all the joint holders.

(3) Notwithstanding anything contained in any other law for the time being in force or in any disposition, whether testamentary or otherwise, in respect of the securities of a company, where a nomination made in the prescribed manner purports to confer on any person the right to vest the securities of the company, the nominee shall, on the death of the holder of securities or, as the case may be, on the death of the joint holders, become entitled to all the rights in the securities, of the holder or, as the case may be, of all the joint holders, in relation to such securities, to the exclusion of all other persons, unless the nomination is varied or cancelled in the prescribed manner. (4) Where the nominee is a minor, it shall be lawful for the holder of the securities, making the nomination to appoint, in the prescribed manner, any person to become entitled to the securities of the company, in the event of the death of the nominee during his minority .

Also, in the event of the company winding up, every contributory shall be liable to contribute to the assets of the company, in the course of the winding up, all sums due from him in respect of any such liability as aforesaid; and in the event of the death or insolvency of any contributory, the provisions of this Act with respect to the legal representatives of deceased contributories, or with respect to the assignees of insolvent contributories, as the case may be, shall apply.

Transmission Of Shares Upon Death

(i) On the death of a member, the survivor or survivors where the member was a joint holder, and his nominee or nominees or legal representatives where he was a sole holder, shall be the only persons recognised by the company as having any title to his interest in the shares.

(ii) Nothing in clause (i) shall release the estate of a deceased joint holder from any liability in respect of any share which had been jointly held by him with other persons.

(iii) Any person becoming entitled to a share in consequence of the death or insolvency of a member may, upon such evidence being produced as may from time to time properly be required by the Board and subject as hereinafter provided, elect, either〞 (a) to be registered himself as holder of the share; or (b) to make such transfer of the share as the deceased or insolvent member could have made. (ii) The Board shall, in either case, have the same right to decline or suspend registration as it would have had, if the deceased or insolvent member had transferred the share before his death or insolvency.

As per the Companies Act 2013, a person becoming entitled to a share by reason of the death or insolvency of the holder shall be entitled to the same dividends and other advantages to which he would be entitled if he were the registered holder of the share, except that he shall not, before being registered as a member in respect of the share, be entitled in respect of it to exercise any right conferred by membership in relation to meetings of the company: Provided that the Board may, at any time, give notice requiring any such person to elect either to be registered himself or to transfer the share, and if the notice is not complied with within ninety days, the Board may thereafter withhold payment of all dividends, bonuses or other monies payable in respect of the share, until the requirements of the notice have been complied with.

Examples Of Succession Planning Policies

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Let's have a look at the succession planning policy of Central Depository Services (India), which is a listed Indian central securities depository founded in 1999. The main function of CDSL is to facilitate the holding and transacting in securities in the electronic form and facilitates settlement of trades on stock exchanges.

CDSL's Succession Plan for the Board and the senior management:

There are three types of Directors being appointed on the Board of the Company. As per the provisions of Section 203 of the Companies Act, the Company shall have the following Key Managerial Personnel:

i. Managing Director or Chief Executive Officer or Manager and in their absence the Whole-time Director ii. Company Secretary iii. Chief Financial Officer

In terms of Regulation 9A of the SEBI (Depositories and Participants) Regulations, 1996, the governing body of the depository shall include:

i. Shareholder directors; ii. Public interest directors; and, iii. Managing director. The following are some important provisions of SEBI (Depositories and Participants) Regulations, 1996 in terms of the governing body:

Regulation 9A:

-Subject to prior approval of the Board, the chairperson shall be elected by the governing board from amongst the public interest directors.

-The number of public interest directors shall not be less than the number of shareholder directors in a depository.

-The managing director shall be an ex-officio director on the governing board and shall not be included in either the category of public interest directors or shareholder directors.

-Any employee of a depository may be appointed on the governing board in addition to the managing director, and such director shall be deemed to be a shareholder director.

Regulation 9B:

The appointment and re-appointment of all shareholder directors on the governing board of every depository shall be with the prior approval of the SEBI

-The public interest directors on the governing board of a depository shall be nominated by the SEBI

-Public interest directors shall be nominated for a term of three years, or for such extended period, as may be approved by the Board:

-Provided that such term shall be subject to retirement and reappointment.

- If any issue arises as to whether an assignment or position of a public interest director is in conflict with his role, the Board＆s decision shall be final.

-Upon completion of a term of three years as per sub-regulation (3), a public interest director may be renominated after a cooling-off period of one year or such period as the Board may deem fit in the interest of the securities market.

Regulation 9C:

-The appointment, renewal of appointment and termination of service of the managing director of a depository shall be subject to prior approval of the Board.

-Every depository shall, subject to the guidelines issued by the Boar from time to time, determine the qualification, manner of appointment, terms and conditions of appointment and other procedural formalities relating to the selection/ appointment of the managing director.

-The appointment of the managing director shall be for a tenure not less than three years and not exceeding five years.

-The managing director of a depository shall not〞 (a) be a shareholder or an associate of a shareholder of a depository or shareholder of an associate of a depository; (b) be a depository participant, or his associate and agent, or shareholder of a depository participant or shareholder of an associate and agent of a depository participant; or (c) hold any position concurrently in the subsidiary of a depository or in any other entity associated with a depository:

-Provided that the managing director of a depository may be appointed on the governing board, but not as managing director, of the subsidiary or associate of a depository. ? The managing director shall be liable for removal or termination of services by the governing board of the depository with the prior approval of the Board for failure to give effect to the directions, guidelines and other orders issued by the Board, or the rules, instructions, the articles of association and bye-laws of the depository.

-The Board may suomoto remove or terminate the appointment of the managing director if deemed fit in the interest of securities market: Provided that no managing director shall be removed unless he has been given a reasonable opportunity of being heard.

Starbucks

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As per IFC (International Finance Corporation), Starbucks＊ 2017 proxy statement states that the board prepares the CEO succession plan and states that CEO provides an annual report to the board where an assessment of senior leadership is carried out.

-Starbucks 2017 Proxy Statement Extract on CEO succession: Further, the proxy statement also lists out the succession planning process for senior management 每 i.e. providing the board with a recommendation for succession in the event of each senior manager＊s termination of employment. Starbucks 2017 Proxy Statement Extract on senior management succession: Starbucks' CEO provides an annual review to the board of directors assessing the members of the Senior Leadership Team and their potential to succeed him.

-This review, which is developed in consultation with Starbucks' Chief Partner Resources officer, and the chair of Starbucks' Compensation Committee, includes a discussion about development plans for the Company＊s executive officers and senior officers to help prepare them for future succession and contingency plans in the event of Starbucks' CEO＊s termination of employment with Starbucks for any reason (including death or disability) as well as Starbucks' CEO＊s recommendation as to his successor.

-The full board has the primary responsibility to develop succession plans for the CEO position. In light of the critical importance of executive leadership to Starbucks success, we have an annual succession planning process. This process is enterprise wide for managers up to and including Starbucks' chief executive officer. Starbucks' board of directors＊ involvement in Starbucks' annual succession planning process is outlined in Starbucks' Corporate Governance Principles and Practices.

-The Principles provide that each year, the chair of the Compensation Committee, together with the chairman and chief executive officer, will review succession plans with the board, and provide the board with a recommendation as to succession in the event of each senior officer＊s termination of employment with Starbucks for any reason (including death or disability).

-Starbucks' Compensation Committee, pursuant to its charter, annually reviews and discusses with the panel of independent directors of the board the performance of the executive officers and senior officers of the Company and the succession plans for each such officer＊s position including recommendations and evaluations of potential successors to fill these positions. The Compensation Committee also conducts an annual review of, and provides approval for, Starbucks' management development and succession planning practices and strategies.

Also Read: New Starbucks CEO To Get Rs 140 Crore Salary

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