We might have witnessed in many 80s’ Bollywood movies how the villain flaps a complex plot through forged Wills or keeps the legal heirs in the dark by embezzling the property papers. The villain may also try to prevent the heirs from fulfilling the conditions of the Will. Such plots have been turned into good suspense, thrillers as well as action movies. And after watching such movies, has it ever occurred to you to write your own Will? Quite likely that it did not trigger the thought. Have you ever imagined who is going to gain from the business empire that you have been building for years after you are dead? All of these efforts are somehow partly aimed at leaving behind a rich legacy for our loved ones? You need to bestow it to someone, preferably through a proper Will. The operational demands of running a family-owned business or other closely held enterprise can be all-consuming, but it is always important that business leaders take the time needed to assess their organization’s business succession planning.
The penalty for failing to get ahead of leadership or ownership changes can be significant, as the coming years may bring substantial transfers of wealth as businesses change hands and adopt new ownership structures. The long-term survival of a business, and the preservation of the wealth that has been built, will likely depend on getting ahead of those changes through strategic succession planning.
For private, sole-managed, or family-owned businesses, a solid succession plan can drive the growth of the business, reduce taxes, and set the stage for retirement. On the same side, family-run businesses may benefit further by focusing on preserving harmony within the family. Succession planning is not only an important and evolving process, but it needs to be an integral part of a company’s business strategy and operations. According to a study by the National Association of Corporate Directors, fewer than one in four private company boards say they have a formal succession plan in place.
There isn’t a good reason to justify the common oversight of not planning for business succession. Some business leaders are too caught up in the challenges of the present, while some have a subconscious aversion to the reality that they won’t be around forever, or assume succession Will work out naturally. Others are aware of the task’s true complexity and find it overwhelming. Ultimately, however, the reasons people avoid succession planning aren’t as important as the reasons they should embrace it.
For a business, working without a succession plan can invite disruption, uncertainty, and conflict, and endangers future competitiveness. For companies that are family-owned or controlled, the issue of succession also introduces deeply emotional personal issues and may widen the circle of stakeholders to include non-employee family members. The next 10 to 15 years are likely to bring substantial transfers of wealth through business ownership handoffs across generations and other new ownership structures. The long-term survival of those businesses, and the preservation of the wealth they have built, will depend upon a clear and early focus on strategic succession planning.
For a business, working without a succession plan can invite disruption, uncertainty, and conflict, and endangers future competitiveness.
Understanding Succession Planning
Succession planning is a process that draws upon many business disciplines. Many privately held businesses display solid professionalism and enviable profits in their daily operations, yet fail to properly plan for and complete the transition to the next generation of leaders. Even the most sophisticated and knowledgeable business professionals can get caught in a web of complicated issues.
In fact, many business owners do not carry out a managed transition to a successor leadership team. In the case of family-owned businesses, only 30 per cent survive into the second generation, around 12 per cent survive into the third, and only about 3 per cent operate into the fourth generation and beyond. A solely-owned company’s owner usually has a personal vision to retire and sell the business ‘someday’, but he or she may not have adequately considered what it will take to make that vision a reality.
Even leaders, who profess they will never retire, have to acknowledge that no one remains at the helm forever. An unprepared new management group, or even a poorly managed transition to competent management, can trigger significant loss in value. If leaders want their businesses’ intrinsic value to remain intact for the benefit of their successors, they should start the planning process sooner rather than putting it on the back burner.
Many leaders choose to embark on a long-term program to identify and then groom the company’s future executives. In some cases, a careful planning process may reveal that selling the business instead of maintaining successor ownership really is the answer for their situation. Not all succession plans are created equal. If your business has a succession plan in place, the questions on the facing page can help determine how effective that plan and your current practices actually are.
However, what goes on in the minds of the promoters to effectively decide the succession planning is driven by various factors, few being, applicable laws, preservation of wealth, limited liability, synergies of thoughts, flexible structures, ring fencing of assets, timing to initiate succession planning, cross-border presence, amenability of structures to tax and other duties. Similarly, the laws governing the succession are critical for any succession planning, but the choice of successors, who may not necessarily be only from the family, is an important factor for the same. Unlike individuals, in case of corporate houses, succession planning is rooted deeper to choose the right structure, who can lead the group companies, and the composition for the board of directors for the group companies and the rights that the promoters, including their successors, should have.
Need of a Succession Planning
Succession planning is a multidisciplinary process. When you engage in succession planning, you are not just focusing on the future, you are preparing for the future. However, without a deep understanding of the present it is impossible to plan for the future. Leaders have to know the current reality of their businesses; how they operate, where the value lies, what their needs are, and who their most vital customers are, in order to prepare for new leadership and new structures that can provide continuity in the ways that matter.
Succession planning is also important for preserving family wealth planning in advance, the future of family’s businesses. Several iconic national and multinational businesses started off as family businesses, and here they are. Think of the companies like NewsCorp, Reliance Industries, Walmart, Ford Motors, Tata Group, Volkswagen, Dell, BMW, Samsung, TVS, Birla Group, Jindal Steel and many more to count on. Around 90 per cent of the worldwide gross domestic product (GDP) is created through family-run businesses. And India is one of the countries, where family-run businesses are predominant. The family-run businesses make up 79 per cent of India’s overall GDP.
The traditional view on succession planning is focused on inheritance through a Will and the wishes of a person after his death. However, this method of estate planning is not necessarily conducive to all kinds of assets. In the past, it has been found that most of the family disputes in relation to ancestral wealth arise out of testamentary dispositions. The most unfortunate thing in such disputes is that they can go on forever and the wishes of the testator often do not materialize.
Be it the country’s biggest conglomerate or small family businesses, everyone is grappling with succession planning to ensure that the wealth is safeguarded. The clear case of entire Raymond group dispute between father Vijaypat Singhania and his son Gautam Singhania is an akin example of the importance of succession planning, especially in a family driven business. The feud between the father-son duo became really ugly, where the Raymond Group promoter and chairman Gautam Hari Singhania made a statement, highlighting the gravity with which the succession planning needs to be looked at:
“Tomorrow morning if I die, god forbid, there are identified people who will take charge of everything. Raymond can run independently and competitively. My children are very young. I have a responsibility to my wife and children, to my employees and shareholders, my banks, institutions and customers”
When you engage in succession planning, you are not just focusing on the future, you are preparing for the future.
Similar is the case between the media scion Rupert Murdoch and his son James Murdoch of News Corp; and Yes Bank. The Bank is also juggling its fate of who will be at the helm of affairs after the erstwhile promoter and managing director Rana Kapoor had to step down after the Reserve Bank of India’s (RBI) directions.
Indian Succession Laws
The origin of Indian succession laws can be traced back in the year 1865, when a draft of the Indian Succession Bill was first submitted by the third law commission in its first report for the year 1854-55. Originally, it was proposed as the Indian Civil Code, a title which was later altered to Indian Succession Act, 1865. A number of legislations relating to succession were passed from the year 1865 to 1925, and all these legislations were consolidated in the year 1925 and the Indian Succession Act, 1925 or Succession Act was enacted.
A separate legislation governing Hindus, including Buddhists, Jains and Sikhs, was enacted in the year 1956, namely the Hindu Succession Act, 1956 or Hindu Succession Act. Accordingly, Hindus are governed by the Hindu Succession Act and certain other provisions of the Succession Act. Muslims have their own textual law of inheritance, while Parsees, Christians and the persons, whose marriage is solemnized under the Special Marriage Act, 1954 are covered under the Succession Act.
This means succession by way of a ‘Will’. A Will is a legal declaration of the intention of the testator, an individual who makes a will, with respect to his property which he desires to be carried into effect after his death. The registration of a Will is not compulsory but if desired it may be registered by the testator during his lifetime.
When a person dies without making a Will, his property devolves as per the provisions of Succession Act and Hindu Succession Act, applicable to Hindus, and it is known as intestate succession. In case of intestate succession, (i) if the deceased was governed by Succession Act, a letter of administration is required to be obtained from the court of competent jurisdiction for administration of the property of the deceased; or (ii) if the deceased was governed by Hindu Succession Act, the property devolves in accordance with the provisions of the Hindu Succession Act, to Class I heirs, Class II heirs, agnates or cognates, as the case may be.
Hence, succession planning should indeed be considered as a must-have for any organization for ensuring continuing management, growth and development of the business without any disruptions.