The successor

THE YEAR: 2020. INDIA, THE WORLD'S FASTEST GROWING economy, is well on its way to becoming the third largest after the U.S. and China. Yet, local companies’ share in it is shrinking in the face of a multinational onslaught. The stock markets are deeper and foreign money keeps pouring in. Capital is no constraint, but increased shareholder activism and the fear of hostile takeovers keep Indian promoters wary of the bourses. The country’s fabled demographic bulge is there for all to see: The median age of its billion plus population is 29, compared to China’s 37 and the U.S.’ 38. But as consumers, they are terribly fickle. Meanwhile, rapid advances in technology are forever throwing open new opportunities, though staying on top of them is a nightmare.

In this uncertain, ambiguous, fast-changing, and chaotic world of tomorrow, a new set of leaders will be at the helm of India Inc. Over the next few years, a generation (well, almost) of chieftains who directed their companies in the stormy years immediately after liberalisation and went on to bag the benefits that followed, will be ready to hang up its boots.

The hunt is already on for the person who will lead the Rs 3.25 lakh crore Tata group after Ratan Tata retires in 2012. A.M. Naik, Larsen & Toubro’s feisty chairman will step down the same year, as will ITC’s Y.C. Deveshwar. Infosys Technologies’ chairman and chief mentor N.R. Narayana Murthy is also on the lookout for a person to replace him at the company he co-founded. Others who could be retiring include P.R.S. Oberoi, chairman and CEO of East India Hotels, Azim Premji, chairman of Wipro, and G.V. Krishna Reddy of construction major GVK Group.

A new generation is already shuffling into place. Though Adi Godrej says he doesn’t discuss succession in public, it is almost certain that one of his children—Tanya Dubash, Nisaba Godrej and Pirojsha Godrej—will take charge once he steps down. Elsewhere, the likes of Sidhartha Mallya (son of Vijay Mallya), Shravin Mittal (son of Sunil Mittal), Rishad Premji (son of Azim Premji), and Divya Modi (daughter of B.K. Modi) are being readied for their ascension. In some cases, say, Apollo Tyres, GVK Industries, and Bajaj Auto, the handover has already happened.

Such examples notwithstanding, Indian business starts with a disadvantage. Succession planning is an oxymoron, especially among India’s family-run businesses that comprise between 60% and 70% of industrial activity, according to the Confederation of Indian Industry. Among the public sector units, there is succession planning of sorts, usually based on seniority, not merit. Multinationals stick to their global practices. An August 2010 study published by U.S.-based management consultancy Bain & Company states that “more than 75% of the boards in India do not discuss succession planning at all. This failure renders many family-owned businesses highly vulnerable, especially after the retirement or death of the leader”.

By contrast, more than 60% of boards at the top-ranked Standard & Poor 500 companies in the U.S. discuss chief executive succession at least once a year, while 240 have emergency succession plans in place.

The succession debate here has almost always centred on the issue of appointing a family member (usually a son or daughter) versus a professional (someone outside the family). Discussing the appositeness of an ovarian lottery is really missing the point. Realistically speaking, the probability of a nonfamily member taking charge is low in India’s family-controlled businesses. It’s not an aberration, at least in the region. Many big business houses in Asia (Toyota of Japan, Hyundai of Korea, and the Ayala Group of the Philippines) are led by scions. Analjit Singh, founder and chairman of Max India, himself a second-generation businessman, calls succession planning in India a sham. He prefers shifting the debate to the real issue—what will it take to lead the India of tomorrow—and then weigh the leaders’ very different circumstances.

Vijay Govindarajan, professor of International Business at the Tuck School of Business and founding director of its Center for Global Leadership, says: “The very reasons why Indian companies have succeeded in the past will sow the seeds of failure in the future.” One argument he proffers: Indians won the domestic markets using “homogeneous” management teams. But the future will belong to “heterogeneous” teams that can operate globally.

Such shifts aren’t new. The Japanese, who challenged the Americans in the ’60s and ’70s for economic dominance through export-led growth, found themselves in a bind in the ’80s when they had to deal with companies acquired abroad. “But is anybody even thinking along these lines?” asks Govindarajan.

“If you function on the basis of ‘after me the deluge’ or ‘something will get sorted out’, then you clearly are not being fair to the organisation that you lead, or even to yourself,” says M. Damodaran, former chairman of the Securities and Exchange Board of India who is on the boards of Mahindra Satyam, ING Vysya Bank, and Hero Honda.

One way of interpreting the future is by putting a face to it. We asked the chief executives, consultants and analysts we interviewed to choose the person who best defined India Inc. in the ’80s, ’90s, and 2000s. And who would perhaps define Indian business in 2020. For the past few decades, a medley of honchos was suggested—Mukesh Ambani, Ratan Tata, Anand Mahindra, Narayana Murthy, Sunil Mittal, K.V. Kamath, and Rahul Bajaj, to name a few. But for 2020, no one even wanted to hazard a guess, not even mentioning names like Ambani, Mahindra, and Mittal, who should still be leading active corporate lives. No surprises there: Given how business is continuously reinventing itself, past practices, as Govindrajan argues, cannot ensure future success.

Now imagine leading a corporation in such times. Fortune India spoke to a generation of successors and their fathers (the older generation has had few women business leaders). They are a motley crew. Some, such as Dubash, Aditya Burman, Preetha Reddy, and Ratul Puri, are in their thirties, forties and fifties, while others such as Ashni Biyani, Devita Saraf, Divya Modi, and Sidhartha Mallya are in their twenties. And while many factors distinguish them—age, gender, business, and ethnicity among others—the one thing that unites them is their anxiety about the future. Zahabiya Khorakiwala, executive director, Wockhardt Hospitals, and daughter of group chairman Habil Khorakiwala, perhaps speaks for everybody when she says: “Leaders of tomorrow will have to be comfortable with ambiguity, volatility, and uncertainty, and live in a world where the pace of change is faster than ever before.”

THE FUTURE MAKES RATUL PURI, executive director, Moser Baer, apprehensive. His father, Deepak Puri, who started out as an oil company executive, founded the company in 1983 to make time recorder units. Often seen as the poster child of Indian manufacturing, Moser Baer is looking at businesses such as solar energy and entertainment after digital storage media. Puri Sr. continues as chairman and managing director while Ratul runs the show. “In the future, what you took for granted will no longer be your own.” He is referring to one of the biggest challenges next generation leaders will have to deal with—the inability to take the Indian market for granted.

Already, in industries such as consumer durables and automobiles, once proud companies like BPL, Weston, LML, and Hindustan Motors have silently retreated. But even then, more than 80% of revenues still come from home for India’s top 500 companies. A combination of factors will impact that. Increasing liberalisation (falling tariffs and fewer regulatory obstacles to setting up business) along with the need of overseas companies to be present in a fast growing economy, will make India an extraordinarily competitive market. As incomes rise, the pie will get larger. But that may not offset increased competition.

This is likely to come from the likes of Murali Sivaraman, CEO, Philips India. “Larger consumption in India and China will force most global organisations to shift their headquarters to these countries, or at least set up a third headquarter here, after the U.S. and Europe. The leadership of the health care business of Philips could as well shift to either India or China.” His company, along with Siemens, is locked in battle with Wipro GE Healthcare (a joint venture between Wipro and GE) for control over India’s health care equipment business projected to grow to Rs 29,580 crore by 2012.

Investing in markets outside India and diversifying risk are no-brainers. Indeed, if there’s one trend that runs uniformly across India’s biggest businesses it’s their global play. But, going forward, that comes with its own set of issues. In his book, Shaping the Future: Aspirational Leadership in India and Beyond, Arun Maira, member, Planning Commission, and former chairman, Boston Consulting Group India, talks about the perfect storm caused by three forces coming together—globalisation, individual identity or ‘atomisation’ of the world, and the power of communication. Building from there, he says that “while companies are pushing for dissolution of boundaries so that goods and services can flow seamlessly, governments are getting paranoid about their sovereignty”. This prickliness is already visible. The recent financial meltdown saw many countries resort to tariff and nontariff barriers to protect jobs and shelter local industries from overseas competition. Measures included raising import duties, setting up trade defence mechanisms such as anti-dumping duties, and keeping out foreign goods on grounds of health and environmental concerns.

Govindarajan’s advice for India’s next crop of leaders: build more collaborations abroad. They should divide the world into three distinct geographies—population-rich nations (mostly Asia), which will represent new markets; resource-rich nations (minerals and energy in Africa and the Middle East) where companies will seek raw material; and technology-rich nations (Europe, the U.S., and Japan) which will still drive research and innovation.

Predictably, depending on the destination, the nature of collaboration will change. “In Africa, for example, you might need to enter into strategic partnerships with a government agency, while in the West it may call for tying up with a laboratory or a private company,” says Govindarajan. The irony: If the post ’90s generation of businessmen strove to minimise the influence of government on their lives, their children may have to embrace the state in some markets. Seen another way, the future CEO will need to marry the negotiating skills of a diplomat with the instincts of a businessman to manage the political system without compromising on business needs.

Ratul agrees with this hypothesis. He has set up a Moser Baer R&D lab in Tokyo, Japan, to research photo-voltaic cells—his next big bet. While the unit has three Indian scientists working there, the real gains, he says will come from regular liaising with the local scientific community and labs there. He has also picked up an 81% stake from Philips in another R&D outfit in the Netherlands, Optical Media & Technology. His logic: R&D labs in developed nations will provide raw material for innovator companies in emerging countries. “The sooner I sew up relationships, the greater the edge I gain over competition.”

But what if your market is local and has been shielded from global competition by legislation? A case in point is the Future Group, the Rs 8,000 crore retail conglomerate founded by India’s Sam Walton, Kishore Biyani. His daughter, Ashni, who is a director at Future Ideas, an in-house innovation and incubation cell, is preparing to run the business independently some day.

While India has so far resisted allowing foreigners in retail, except in cash and carry (selling to wholesellers), that may change. Government resistance to foreign investment in retail seems to be diminishing even as the likes of Wal-Mart beat down doors of law makers. Tomorrow, Ashni’s reality may be very different from her father’s. She acknowledges that, but adds that she’ll deal with foreign competition. The bigger challenge, she says, is understanding tomorrow’s consumer. “Retail will become very interesting. Normal consumer segmentation will not work; we will need to decode the consumer.”

Blame it on India’s rapid socioeconomic shifts. India has more mobile phones than bank accounts and more colour televisions than toilets. Rising income levels—per capita income jumped by 10.5% to Rs 44,345 during 2009-2010—are driving up aspiration. Rapid urbanisation—10 of the 30 fastest growing cities in the world are in India—is also adding fuel to consumer spending.

To understand consumer behaviour circa 2015 and beyond, Ashni has put together a team of 11 that includes sociologists, product designers, and anthropologists.

While the project is not yet over, she has already begun taking a few early bets. One has to do with identities. She argues that consumers will increasingly respond to ethnic stimuli. While this will be most visible in food habits, it’ll extend to other areas such as clothing and lifestyle (home furnishings, vacations, houses, and more).

Kishore Biyani built a retail empire segmenting consumers on the basis of income and occupation. Ashni is reading the tea leaves differently. “We are not evolving into a homogeneous society. We are becoming increasingly diverse and that makes my job more complicated,” she says.

BEYOND MARKETS, ONE KEY issue most of these next generation heads are trying to deal with is their role in their own companies, despite the rule of primogeniture holding steady. Maira argues that the idea of the CEO as a hero won’t work in tomorrow’s world. “You don’t a sell company with the CEO as a star: You sell the company with the people who are with the CEO. Since the modern corporation was born, the CEO has always been grandstanding. That’ll need to change.”

This will be the most difficult to achieve. Indian businesses forever equate ownership with management. Though it’s fashionable to claim that the owner-CEO worked up the ranks, in reality it’s mere tokenism. Few patriarchs have the courage, like Godrej or Biyani, to admit that their children have an advantage. To those who say that their professional managers run the business without interference, here’s Damodaran’s response. “Nobody is hands-off. It is pure fiction.”

One approach is to change the governance structure of companies in a way that allows the family to stay on top, but yet allow professionals have their say. Maira says that the federal structure of the Tatas (where he worked for some time) has always struck him as effective. The holding company drives values, group strategy, and capital allocation, while the subsidiaries run the day-to-day businesses.

This has takers. Tanya Dubash says family members are suitable for corporate roles, which involve cross-company synergy and communication, which is what family does best. “The family’s role is to provide vision and direct strategy.” At the Rs 11,479 crore Godrej group, she’s behind an effort to make the 113-year group relevant to young consumers. The key initiative: Gojiyo, a 3D virtual world where members assume different avatars, connect and play games online, similar to Second Life. She’s betting that this will have a halo effect on people who may not go online.

While Dubash prefers a visionary role, Mallya Jr. says he’d like to run the day-to-day operations of his business. Zahabiya Khorakiwala argues that the debate on roles needs to be nuanced better. To see it in terms of being CEO versus not being CEO is limiting. “The issue here is being able to surround yourself with the right kind of people who you will listen to. I am always open to all kinds of suggestions, advice, feedback, and criticism, but the final decision will be mine.”

Kiran Karnik, former president of the National Association of Software and Services Companies suggests that the next generation should reconsider its need to be CEO if it wants to win the war for talent: “When people realise that the corner office is reserved for family, the really talented lot is unlikely to join.”

A few businesses have begun adopting a family constitution. Some of Indian industry’s better known names—the Dalmias, the GMR group, the Dabur group, the Murugappa group—have drawn up a list of responses to possible situations such as ownership disputes, sudden death, and division of wealth. While the primary objective is to prevent disagreements, it also clarifies roles for all. Says Aditya Burman, a sixth-generation successor who is the director of OncQuest Laboratories, a diagnostics firm: “We make a decision and that is passed on for scrutiny by other bodies, like the board of directors.”

If the next crop of CEOs sees the value of boards, that’ll be a significant shift. Traditionally, owners have rarely deferred to their boards. Damodaran says they tend to be extensions of friendships forged over long business careers; owners treat directors as friends they can influence, but won’t take advice from. In this chummy world, directors might disagree, but will never shoot down a damaging proposal for fear of jeopardising the friendship. “It’s the penalty box syndrome: They will take the ball there, but never take a shot at the goal.”

But as Narayana Murthy says, in an increasingly complex world, boards will stand between success and failure. He suggests that boards become multicultural. “The board will have to understand processes that help bring in people from different cultures and make them operate efficiently and effectively.” India Inc. has a long distance to traverse here. Most boards are still populated entirely by Indians.

Murthy adds boards need to reflect the growing role of technology in business. He says organisations should appoint technology committees in addition to those such as audit and compensation. Of course, meetings could well take place virtually, he adds.

“I am surprised that companies don’t use boards more effectively. You have the unique opportunity to hire high quality people—it’ll be difficult to get Steve Jobs as a consultant, but easier to get him on my board,” says Ratul.

It might be difficult for some companies to give boards a bigger role. Indian promoters are paranoid that as financial markets deepen, the probability of hostile takeovers will increase. Over the last two years, promoters of companies such as Apollo Tyres, Max India, Bajaj Auto, and Aditya Birla Nuvo have been raising their levels of ownership. A promoter with limited public shareholding may not care much for the role of outside directors.

TUCK'S GOVINDARAJAN SAYS it’ll be critical for new CEOs to pick up multiple low-intensity innovation signals. “If you wait for the signal to intensify, the innovation will be gone. It’s important to carry out massive low-cost experiments to test a hypothesis.”

Innovation and experimentation mean a lot to Devita Saraf, daughter of Raj Saraf, the owner of Zenith Computers. She takes her role as leader in the making very seriously. Way back in 2003, she attended a course on the Art and Adventure of Leadership, run by management guru Warren Bennis, founding chairman of the Leadership Institute at the University of Southern California.

Saraf sees success as the result of taking multiple bets, even if many fail. She’s set up a 10-member new product development laboratory in Mumbai, along the lines of the MIT Media Lab near Boston, to develop and launch products. “We are trying to create a company that has a core of innovation to keep churning out new things as customers change. It is like shedding your old skin to come up with a new one,” she says. Saraf’s lab has recently launched two products—Intelligent TV, a television-cum-computer, and Vu Telepresence Pro, which allows videoconferencing from five locations.

One attitude that marks out the generation taking centre stage is the willingness to be dispassionate about making money. They see no place for sentiment in business. Ranbaxy Labs’ third generation sell-out to Daiichi Sankyo is a great example. Dabur’s Burman says if someone wants to buy his company, he’ll consider it a “pat on the back”. Along with everything else, that’s a good enough credo for 2020.