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Succession planning is critical for the CFO role. CFOs who have mentored their successors or been part of such programmes, discuss why planning is so important and talk about best practices

WHEN SK JOSHI , the much-respected Director of Finance, Bharat Petroleum

Corporation (BPCL), retired in August 2011, Executive Director, Treasury, S Vardarajan became the new finance chief. As if on cue, his deputy took Mr Varadarajan’s old job. No recruiters were called and no panic button was pressed. In a systematic manner, each executive is groomed for the next job as part of the PSU petroleum giant’s suc-cession plan.

Examples of such seamless transi-tions for the CFO function, however, are few in India Inc. Exceptions such as Larsen & Toubro and Infosys, which have set benchmark standards in suc-cession planning, notwithstanding. Thankfully, the importance of groom-ing internal candidates to succeed the CFO, is dawning on many Indian cor-porations today. Which is why board-rooms are increasingly beginning to pay attention to the guardian of a com-pany’s financial health, who occupies, what has become, the number two posi-tion in the corporate hierarchy.

WHY INTERNAL SUCCESSION PLANNING?CFO succession planning, says S Dur-gashankar, Executive Vice President, M&A, Mahindra and Mahindra, and former CFO at Mahindra Satyam, is crucial to ensure that relationships with the company’s stakeholders are not destabilised. “If you look at the posi-tion of a CFO, various people look up to him – the board, external shareholders and investors, all of them depend on his word and trust him to give a true pic-ture of the company’s financial health. So planning for a successor to the CFO is important to maintain continuity and stability in fiscal management,” he says.

Typically therefore, opine industry leaders, a CFO should be groomed from within the ranks, instead of foisting someone from outside the organisation. As with the evolution of the term, a CFO’s role too has evolved over the years – from being perceived as a glorified cost accountant to a fund manager for the company and a business partner to the CEO. The next logical step was becoming part of the company’s business strategy

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formulation team.“A CFO is directly involved in corporate governance, in the US GAAP certification for instance, two CXOs are asked to certify the financial statement, the CEO and the CFO,” Mr Durgashankar says.

The self-certification, he elaborates, indicates that the CFO takes respon-sibility for wrongdoing if any. Con-sequently, he adds, a CFO needs to demonstrate strong ethics and set the standards – a benchmark which an

internal successor will value and under-stand much better than an outsider.

STILL EVOLVING However, succession planning is generally still an evolving science in India Inc, save for a few large business groups and organisations. Deepraditya Datta, Managing Director of the Mumbai-based executive search firm Venator, says in large business

groups, the sheer abundance of talent means there are usually two to three contenders for any C-suite position. “There are examples like that of L&T, Infosys and the Tata Group where succession planning always seems to be clearly defined. Then there are some large groups where the bench strength is so good that at any point in time there are one or two people who can step into the CFO’s shoes should the incumbent leave,” he says.

But by and large, says Datta, whose firm makes several CXO level hirings for large and midcap companies every year, most Indian companies do not have any clear succession plan in place. “Of course if they all had succession planning programmes in place, search firms would go out of business,” he jokes. The trend however, is catching on even in family-run firms, even if it means an external hire. He cites the example of a recent hire his firm did for a mid-size manufacturing firm. “Their CFO is due to retire early next year. So in May they hired a deputy CFO through us, so that the new joinee gets about eight months to work side by side with the existing CFO and learn not just how the company’s finances are run but why certain decisions were taken and who the important clients and customers are.”

Mr Durgashankar points to another reason why the trend is still evolving in India. Succession planning requires a

certain degree of self-confidence in the incumbent – how secure he

feels to groom his successor. “It took us 15 months to correct all the back accounts at Mahindra Satyam that included 6000 bank reconciliations. My successor (Vasant Krishnan)

was working side by side with me for the last three quarters of my

tenure. We ensured he knew every aspect of the role he would take over

one day, before he actually stepped into my shoes,” he recalls.

When such confidence is lacking, succession planning often runs into

—S DurgaShankar, executive Vice President, M&A, Mahindra and Mahindra, and former Cfo at Mahindra satyam

“Succession planning requires a certain degree of self-confidence in the incumbent – how secure he feels to groom his successor”

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rough weather. “The person in the job is often not interested in talking about succession, because he or she wants to stay there and doesn’t foresee leaving till he retires,” Sharon Allen, Chairman of Deloitte & Touche, USA, recently told the website cfo.com in an interview. An impending CFO job change would obviously jump-start the process. But to formalise succession, says Ms Allen, the first step involves encouraging executives to think about what would happen to their companies if they couldn’t do their jobs for some reason. “People then start thinking about the good of the organisation as a whole, rather than the protection of their own position,” she says.

BEST PRACTICES Mentor the understudy: Ideally, says Gautam Sen, Finance Director at Rash-triya Chemicals and Fertilisers, under-studies should be mentored for at least two years before being elevated to the CFO role. “Succession planning for any post requires identifying the person and putting him through the paces to give

him exposure. A CFO does not just need to know about the company’s financial planning and strategy but also other areas such as marketing, operations, planned shutdowns and how much effect it would have on the company’s profitability,” he says.

Teach him to say no when needed: Potential successors, once identified, should also pass a ‘managerial cour-age test’, says Shailja Dutt, Managing Director of Stellar Search, based on her interactions with several CXOs. This trait is more pronouncedly required in a CFO, she says. “You don’t want the CEO to run a company like a fiefdom,” Ms Dutt says. Even so, more critical than the courage to say no, is the abil-ity to understand the business, feels SK Joshi, former Director, Finance at oil marketing major BPCL. “A CFO needs to remember that he may not be the top guy but he has to work with that per-son (the CEO) and there may be times when a plan may not look feasible on paper but could be imperative for the company’s long-term evolution in the marketplace. He needs to understand the investors’ perspective as well and

act as a balancing partner to the CEO,” he points out.

Check and develop risk-taking ability: This is where, opines Yogesh Dhingra, COO and CFO at Blue Dart, a company’s finance honcho needs to have a calculated risk-taking ability and he or she has to make sure this skill is passed on to the successor over time. “Most CFOs nowadays are also chief risk officers of their companies and that ability can only be honed if the CFO has a commercial sense of the business of the company. When grooming a successor or potential successors, the CFO needs to help them develop a deep understanding of the company’s business,” he says.

It’s a team effort: More than being a purely functional head, a CFO needs to be able to manage people and be an energiser of talent and a business enabler, believes Mr Joshi. “At BPCL, being a public sector company, the task of appointing a successor is carried out by the Public Enterprise Selection Board (PESB). However, there is a corporate leadership pipeline comprising senior staff of General

“Even at RCF, when we are planning for succession,

a person is identified and through the rotation system in

our company, he is provided exposure in other areas to

update his knowledge”—gautam Sen,

Director, finance, Rashtriya Chemicals & fertilisers

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Manager (GM) level and above, each of whom are monitored and reviewed by peers, subordinates and superiors on their leadership style,” he discloses. In the finance department, there are five GMs and two Executive Directors (ED) and the final selection comes down to the EDs, which are below-board level positions. In this case Mr Varadarajan succeeded Mr Joshi.

Use the rotational system: Agrees Mr Sen of RCF (who mentored his successor in his previous assignment as Director of Finance at Gujarat State Fertiliser Corporation). Such planning, he says, is not just left to the incum-bent CFO but is a joint planning by the organisation. “Even at RCF, when we are planning for succession, a person is identified and through the rotation system in our company, he is provided exposure in other areas to update his knowledge,” he reveals. The rotation

Once a successor has been identified, providing him with enough challenges to sustain his interest in the position on offer becomes imperative. “If you pick a talented guy but put him in a job where his intelligence is not fully utilised, he will leave,” Mr Joshi says. Recalling the economic slowdown of 2008-2009, Mr Joshi says they formed a committee headed by his then deputy (and cur-rent Director Finance, S Vardarajan) to manage cash flows and they were able to release funds to the tune of Rs 1500 crore for working capital needs. Involv-ing the understudy in such a challenge, helps him prepare for the job better.

At the same time, succession planning can mean losing talent. As soon as the next CFO is identified, a company may run the risk of creating consternation among the other players one level down. India Inc is full of instances where just after a person had been identified for a CEO or a CFO position, a few of the other contenders left. The example of ICICI bank where the appointment of Chanda Kochhar as MD led to an exo-dus of the other top contenders from the bank, is fairly well documented.

How does one address this chal-lenge? Commitment to communica-tion, says the HR head of one of India’s top manufacturing firms, helps retain talent and defuse the tension that often

“If you pick a talented guy but put him in a job where his intelligence is not fully utilised, he will leave”—Sk JoShi, former Director of finance, Bharat Petroleum Corporation (BPCl)

mechanism is in fact, one of the key ways in which successors are identi-fied in firms across the world. Cen-tral to this way of life is the rotation of high performers through different jobs in and outside finance to broaden their perspective and expand their skill sets. Rotations also help finance chiefs assess whether their instincts about a particular employee are right.

TACKLING EXPECTATIONS While hand-holding may not be required at that level, executives and management consultants agree that mentoring and ensuring that one is transparent with team members about expectations, is definitely needed. Both the CFO and the HR team, they say, need to have their ears to the ground and interact with younger talent within the organisation to spot and nurture potential leaders. Mr Sen cites the instance of a young chartered accoun-tant in his organisation, who despite good reviews for his work, was stagnat-ing in his career. “Since his growth was not up to his recognised potential, we discovered that he was not getting prop-er exposure in different departments. As soon as the problem was rectified, he started progressing,” he recalls.

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have a formal succession plan programme

Identify employees who have potential to handle responsibility and have talent

Assign such managers a mentor such as the Cfo

ensure such employees are posted for some time in another department or function, to

broaden his skill and understanding of the business

Be prepared to manage and tackle the expectations that come once these employees

realise they are being ‘groomed’

have a plan B ready in case a potential successor quits

Communicate to both chosen ones and other candidates often, precisely, and discreetly

THE BLUEPRINT

egates more responsibilities to his staff as necessary, so that if the CFO quits or is on leave, at least the two next-in-commands can jointly handle the job till a replacement is found.

Developing a seamless succession planning system is indeed easier said than done and often is a time consum-ing process. But companies with the know-how and the willingness to imple-ment such a programme, usually end up better-off, not only in orderly tran-sition and avoidance of outside search costs, but also in the retention of their top talent. As Mr Joshi says, having the support of a team of skilled and capable colleagues always makes the CFOs job that much easier. Clearly, there is a lot of wisdom in putting a succession plan in place for the top job in finance.

“Then there are some large groups where the bench strength

is so good that at any point in time there

are one or two people who can step into the

CFO’s shoes should the incumbent leave”

—DeepraDitya Datta,Managing Director, Venator

accompanies succession planning. But such communication, she says, “has to be carefully managed”. The director HR of a private bank, who did not want to be quoted on record, added that one needs to communicate not only with the people who have been identified for rotations, but also with those who have not been included.

EXPECTING THE UNEXPECTEdThere is, of course, a chance that an efficiently run succession plan will go awry. What if the person being mentored as CFO gets a lucrative offer and quits? Tata Motors for instance, was caught off guard when their MD, Carl-Peter Fosters quit suddenly in September 2011. Surprised by the departure, the company is now conducting an internal and external search for his successor.

But because such a surprise can be a problem for a company, many management teams plan for that contingency. At some organisations in India multiple candidates are groomed, so that if one leaves, another can take his or her place. For instance when the finance department at a well-known pharma company began its planning a few years back, they found no one they could identify as a possible successor. Now, after three years of careful planning, there are at least three people in line for the CFO role, should the need arise, according to the HR head at the organisation.

Of course not all finance teams can boast of such bench strength. At most small and mid-sized Indian companies, even rotation programmes can be dif-ficult to achieve simply because they do not have enough senior level talent that they can borrow from one department and put in another for a year.

So what should they do? Mr Sen says in such organisations employee development is more informal. After the CFO assumes new duties, he del-

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