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Institutional EYE

Commentary on Corporate Governance Issues

ITC’s succession plan: Letting it go

IiAS recommends voting AGAINST ITC’s decision to pay a monthly remuneration to Yogesh Deveshwar, the company’s non-executive chairperson. IiAS believes the board structure, and the proposed remuneration, signal Yogi Deveshwar’s continuing control over the company, which undermines the recently appointed CEO Sanjiv Puri. Once Yogi Deveshwar has stepped down, he must let go.

There is no doubt that Yogesh ‘Yogi’ Deveshwar’s reign over ITC has created tremendous value for its stakeholders. He has been at the company’s helm for over 20 years, during which the company’s revenues grew almost 12x to Rs. 604.9bn and profits grew 40x to Rs.105.2bn in 2016-17. The market capitalization also grew over 70x to the current Rs.3.9 trillion, as investors cheered the company’s reduced dependence on cigarettes. Notwithstanding his astounding accomplishments, now that ITC has a new CEO, Yogi Deveshwar needs to let go and the board of ITC must quickly get used to a new normal.

ITC has been one of the handful professionally-managed and institutionally-owned S&P BSE SENSEX companies where succession planning has been a concern with investors. Driven by the larger-than-life Yogi Deveshwar, there was a sense of nervousness on how the company will transition to a new leadership. Therefore, investors welcomed the board’s announcement of a succession plan in May 2016: Yogi Deveshwar would step down from his executive responsibilities at the end of his term in February 2017, and the mantle would be passed on to his hand-picked successor, Sanjiv Puri. To ensure a smooth transition, Yogi Deveshwar would continue as a non-executive chairperson for a period of three year. It all seemed sorted out, but reality seems to be charting a different path.

IiAS believes the board’s recent decision to pay a monthly remuneration to Yogi Deveshwar undermines the position and responsibilities of the CEO. At an aggregate remuneration estimated at Rs.127.1 million1, his remuneration is higher than 90% of CEO’s and whole-time directors of the S&P BSE 500 companies2. Although Yogi Deveshwar’s proposed remuneration is in the same range as that of the CEO, Sanjiv Puri, IiAS estimates that, based on the past, his remuneration – in actual terms – will be higher than that of Sanjiv Puri.

This apart, the message in paying a monthly remuneration and perks (not just the quantum) suggest that Yogi Deveshwar will be actively involved in running day-to-day operations, and that he will continue to influence key decisions. While we believe a smooth transition is in the best interest of the company and all its stakeholders, the need for Yogi Deveshwar to continue after having relented his executive position raises concerns on whether he provided the appropriate level of mentoring and leadership development while he was in the driver’s seat.

In making this decision, the board seems to remain beholden to Yogi Deveshwar. He remains, after all, a member of the nomination and remuneration committee, which decides director (re)appointments, director removals, and remuneration. They are also leaving the door open for a battle between the existing management and the old guard – something which we are now all too familiar with.

IiAS believes that for succession planning to be effective, Sanjiv Puri must be allowed to step away from Yogi Deveshwar’s shadows. Therefore, instead of relying on Yogi Deveshwar’s continued presence and guidance, the board needs to reduce his involvement. If the board does not have enough faith in Sanjiv Puri’s competence and believes it needs Yogi Deveshwar’s active presence, then perhaps Sanjiv Puri is not the right choice for a successor. If the board believes Sanjiv Puri is indeed the right successor, it must allow him a free rein. In either circumstance, the board needs to make its position clear, rather than send mixed messages to its stakeholders.

You can access the full report by clicking the following link

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