L&T Faces Leadership Vacuum

Finally, the time is up.” When he speaks, the air of resignation is palpable in A.M. Naik’s voice. For a man who has always believed in competing hard — and winning every battle — this is an unusual admission.

And by the age of 67, the chairman and CEO of the country’s biggest engineering and construction conglomerate, has fought many battles. Under him, L&T has warded off two take-over threats from two most powerful business families in the country, the Reliance group and the A.V. Birla group. Ever since he took charge in 1999, he has fought off entrenched bureaucracy inside his own firm to grow his company five-fold to nearly a $10 billion turnover.

But there’s one unfinished battle that Naik is fighting now and in which the odds are stacked against him. Starting September and over the next two years, half a dozen senior professionals, including Naik himself, will retire and step down from the company’s board.

The two remaining executive directors, who will continue on the board, aren’t serious contenders for the top job. In short, L&T has currently no one in the board who can lead the company after Naik steps down. Even if a new person is drafted in by September this year, he would have less than two years to absorb the complex task of running a behemoth like L&T. That’s a bit like asking a 19-year-old cricketer to debut as the captain of the Indian test side.

The problem runs deeper. A couple of years ago, when Naik looked to bolster his management cadre, he couldn’t even find 40 engineers in a 10,000-strong company who could be groomed to take over the mantle as business head. “The search for senior leadership talent was disappointing,” he admits. He eventually cast his net wider to about 100 people in the hope that he would find the elusive talent. Today, as L&T suddenly stares at a leadership vacuum, Naik is scrambling to send his star performers to Harvard, Wharton, London Business School and INSEAD. “I tell my colleagues on the board that there is fire under their feet now and they have to move fast,” says Naik.

That’s also why he’s been forced to break tradition and hire from outside, risking a backlash from within his own ranks. Over the next few months, one of these lateral entrants could become the first senior executive from outside the system to make it to the company’s board in recent times.

Speculation is rife that Ravi Uppal, L&T’s head of power business whom Naik snagged from power equipment company ABB, is slated to join its board. In a space of 12 months, the 58-year old Uppal has built an order book of $2 billion. The number could grow to about one-third of L&T’s total order book in about two years.

The timing of the crisis could not have been worse. By April, Naik, with help from strategy consultants McKinsey and Bain Consulting, will present the blueprint for growth for the next five years to the board. Codenamed Lakshya 2015, it is predicated on the fact that L&T will grow at a compounded rate of 25 percent on the back of a huge surge in the number of large infrastructure and power projects.

This is the day that Naik has clearly been waiting for. As India cranks up its infrastructure spends, there will be a slew of large orders flowing in. Two years ago, he had issued a fiat to his managers — they could no longer sign contracts of less than Rs. 250 crore each. Now, as new metro rail networks and new power plants get commissioned, there’s one big question that is looming large: Who will direct L&T and harness its growing diversity in power, defense, nuclear and financial services?

Realising the Indian Dream
General Electric, one of the most admired corporations in the world, grew on the back of the American dream. It was the same story in Europe as a period of rapid industrialisation turned Siemens into a giant behemoth. By all indications, today, L&T has a similar tryst with destiny. And it needs a new person with guts of steel — and foresight to lead the charge.

Now, here’s the catch: it isn’t as if the L&T board hasn’t been exercising its mind on the issue of CEO succession. About five years ago, a senior management consultant says, some of the board members sought his opinion on how to handle this sensitive issue. “At that time, they couldn’t locate an insider of similar stature because there was nobody else. And so, they decided to wait.” The result: Today, Naik’s stature has gone up significantly but all the reins have ended up in his hands.

And it is now even more difficult to find a successor from within, he says.

S. Rajgopal, former cabinet secretary and head of the nominations committee on the L&T board, also acknowledges the board’s dilemma. “His shoes are too big to fill. But we will surely find a solution.” Hiring from the outside remains a possibility but also brings the risk of alienating internal candidates and making the task of integration even more complex.

Naik, too, remains non-committal about how a successor will be found by April, 2012. Unlike in GE, where Jack Welch shortlisted his possible successors two years prior to his retirement and
put them through a battery of assignments, there is no such process yet evident in L&T.

(A former director, who retired in 2008, talking on the condition of anonymity, says the current human resources head and chief financial officer, Y.M. Deosthalee, was the only one in the reckoning when he attended board meetings two years ago. For having run a tight ship, Deosthalee could be the forerunner when Naik retires, as he will be just 65 when Naik retires. On the other hand, the fact that he isn’t an engineer and hasn’t played the CEO’s role either, could work against him.)

So Naik is now doing the next best thing: Creating a structure that is a lot easier to manage. That means culling businesses that are either sub-scale or unrelated — and below the internal benchmark of at least a billion dollar top-line. “There are a lot of cobwebs that need to be cleaned and I intend to finish it before I leave,” says Naik.

Some of these cobwebs are Naik’s own creation. Like the software business. In 1999, L&T Infotech was created as a separate operating company in the group to keep a lock on the engineering talent that was leaving the company in droves. For the start-up phase, despite the fact that an executive director, V.K. Magapu, was at the helm, Naik has given it special attention. By his own admission, he has personally pitched and won nearly 60 percent of the firm’s software business. Yet today, the software services business has just about reached the half way mark.

Last year, Naik made a much published attempt to grow the business by acquiring the beleaguered Satyam Computer, but the plan fell flat on its face. Today, L&T is expected to find a way to extract value — and a full-scale merger or a joint venture with another strategic partner could well be on the cards.

Similarly, the financial services arm, already a large non-banking financial company, will need loads of capital. It will also need to attract the best talent by paying salaries that are far higher than the other businesses in the group. And separating it from the parent and listing the subsidiary is one of the options being discussed.

The streamlining of businesses into operating companies within L&T’s fold will not only make the job of the new managers simpler, but also firewall it against potential takeover bids in the future. Each of these business clusters will need a managing director to help the growth momentum along.
In all, Naik will need four or five MDs. These heads will then report to a group CEO, who will in turn report to the chairman of the board. This also means that the roles of the chairman and group CEO will be split after the restructuring is done.

Naik also has to get L&T’s consolidated balance sheet in shape. Last year, in August, ratings agency Moody’s downgraded the company to negative from stable. It did so as the debt on its books increased to Rs. 18,600 crore, three times the level two years earlier, as it created special purpose vehicles for road and power projects. As L&T plans more such projects, a better rating is an immediate imperative to get cheaper loans. So, hiving off India Infrastructure Developers Ltd. as a separate entity and listing it could be another option.

Back to Basics
Throughout the Nineties, L&T entered into 50-odd JVs ranging from tractors to heavy commercial vehicles, from industrial valves to shipbuilding. Naik is now prodding his managers to get rid of fringe businesses so that it frees up leadership bandwidth. He says his executive directors haven’t been quick enough to shutter non-core businesses. “I’ve told my colleagues that if they don’t act, I will do it myself. And I’ve demonstrated it several times,” says Naik.

A few months ago, Naik was on his way from Paris to London. He met the CEO of German paper machinery firm Voith near the railway station. In the course of 45 minutes, he managed to sell his 50 percent stake to Voith for Rs. 75 crore and agree on a five-year contract manufacturing deal for $15 million. Till then, the Voith JV had generated a profit before tax of Rs. 1.2 crore.

Infographics: Malay Karmakar

And he’s stepping on the gas in trying to grow L&T’s next big thing: Power projects business. His big, hairy, audacious goal: In four years, L&T aims to build the same scale that the state-owned Bharat Heavy Electricals has done in 50 years. Eleven new factories will go on stream by September next year and he hopes to get contracts worth $3 billion in the next three years from the business. There is
also a chance that the power business could be spun off separately, essentially to raise capital.

Now, let’s pause here and consider a critical issue: Despite all the clean-up that’s planned, managing L&T in the future will require a distributed leadership model. And under Naik, the powers have been hugely centralised. “You can say that he is a one-man army when it comes to taking business calls,” says a retired board member, who did not wish to be named.

Naik has been the driving force behind all the key business decisions in the company. And though the executive directors have operational freedom to do their job, he is very much at the centre of all the activity inside the company. Living quarters have been created inside both the Powai and Ballard Estate offices in Mumbai so that the chief is able to take some rest in between his grueling schedules.
Also, attracting more diversity through lateral hires at a senior level hasn’t been easy. Too much premium was placed on the ability to win and execute large projects — that became the desired criterion to chose lateral recruits, says the head of a leading search firm. And the new generations of managers aren’t willing to sacrifice their holidays and a decent work-life balance. “It will be tough to expect them to work 18 hours a day, without holidays, like I used to,” says Naik.

And therefore, this very same vision of a charismatic, all-powerful leader may well have unwittingly created a situation where there are no other tall leaders inside the group. Says a senior manager: “Since the chairman still micro manages large orders, it gives the feeling that there are not enough leaders inside the company.”

Some of this goes back to Naik’s first term as CEO. When he took over, until about 2003, the company grew a little over 7 percent a year on the back of slow economic growth. At that time, Naik was close to the then retirement age. Similar questions were asked about the CEO succession issue even then. The board, then headed by a non-executive chairman S.S. Marathe, did not have ready answers. Naik is said to have argued that he needed an extension as a mass exodus from all levels of the company to IT companies, coupled with lucrative offers from engineering companies in the Gulf, had left it bereft of leaders.

Besides, Naik’s presence also seemed indispensable. In 2001, the Ambanis, after their failed attempt to takeover L&T, sold off their stake to Kumar Mangalam Birla, chairman of Aditya Birla group. In 2003, Birla launched a takeover battle for L&T’s cement business. By then, Naik had won kudos for smartly warding off the Ambanis with his chutzpah, including proxy forms collected from thousands of individual shareholders.

At L&T’s annual general meeting in July 2003, irate shareholders demanded that a company of its size should have a full-fledged executive chairman. They argued that things had gone on for far too long without one. And to harness the full potential of L&T, they needed a full-time chairman.

Their demand presented another opportunity for Naik, whose term was coming to an end by April 2004. In December 2003, Naik got his dream job, even as the Birla deal was being sewn up. He was made the executive chairman, the first one to occupy the seat after N.M. Desai vacated the seat in 1989. The board also granted him a five year extension, to allow him to remain in his post until April 2009.

Infographics: Malay Karmakar

This second stint as chairman and managing director proved to be L&T’s golden era. The economy perked up dramatically during that time. L&T began to provide guidance that its biggest businesses would grow 25-35 percent. Sales growth tripled and business margins started improving dramatically. During this period, Naik’s own consolidated salary, including commission, grew from Rs. 74 lakh in 2003-04 to Rs. 1.75 crore by 2006-07. It further increased to Rs. 12.50 crore in 2008-09.

Simultaneously, the composition of the L&T board also underwent radical change. Naik elevated a pack of executive directors whom he had carefully hand-picked during his tenure at the top. By 2005, there were now as many as eight executive directors, bringing them on par with the number of independent directors on the board. The board also increased the retirement age of all directors to 67. The normal retirement age of an L&T staffer is 58, which is extended to 60 for general managers and above.

While it provided continuity and stability, it also slowed down the process of new entrants making it to the board. L&T has not had a new board member for the past five years and won’t have any for two more years, if the existing directors are allowed to continue till their retirement. So while salaries across the group were relatively low, the board seats carried enormous perks in the form of stock options. The shares of the eight directors are worth over Rs. 800 crore, of which Naik’s alone account for Rs. 250 crore. “An entire generation of senior managers in their early 50s has retired, as the current board members have held to their seats for so long,” says a retired board member.

Over the last year, stock analysts have also raised the issue of succession planning in the company. An analyst at an MNC brokerage says, “This is certainly a grey area that will have to be addressed quickly but we have been getting confusing signals.” Analysts say that Naik has so far been non-committal or has hinted that a successor is already in place. L&T’s share price was battered during the slowdown to a low of Rs. 557 in March 2009 before recovering and trebling in the subsequent months.

New Blood
Yet change is in the air. Naik is personally hiring lateral hires at a senior level. Recently, he snagged a 40 year old as a general manager from outside in one of his divisions. Another 39-year-old executive is on the verge of joining. Says Naik: “Even his would-be boss is worried if the move will be well received without any backlash.”

As is normal practice, Naik is also accompanying Uppal, his power business head, to negotiate deals with entrepreneurs who are setting up huge power plants. He says he wants to hand hold a
bit as even a small percentage in discounts in these projects could run into hundreds of crores.
Uppal, in his earlier stint at Swiss giant ABB in India, proved his mettle in selling products in power and automation. He did not have much experience in pitching for large projects, his job brief when he was recruited to head L&T’s power business. Says Naik, “Uppal is a fast learner but negotiating with top notch industrialists can be a tricky business.”

There are whispers within the company that Naik is grooming Uppal for the big job, though both have denied the rumours in the past. According to the head of an L&T group company, Uppal has recently demanded that he be given a board seat by March or else he would look out. When asked, Naik chose to down play the demand. “It is a very normal expectation.”

McKinsey has been given charge of a leadership development process. It will first work out the new evolving roles that will emerge as the company grows and map the existing talent and put them through a process to fit those roles. “McKinsey is now in the second year of the process and we have had reasonable success so far,” says Deosthalee.

 

The programme will identify 40-odd senior managers eventually who will then be mentored continuously by board members. Already, each board member has been assigned two-three candidates.

The leadership development process works in tandem with a fast-track programme, where younger managers are trained to assume leadership roles. These young achievers have to demonstrate operational success in executing projects or in sales and will be put through accelerated programme to take on bigger projects.

At the same time, each operating company within the group will now have its own virtual board consisting of outside experts and internal business leaders. These new internal boards will come in handy for another reason. L&T plans to hive off some of its large businesses into independent entities. During the current year, the financial services business will be the first to go public and then maybe the power business, to raise capital for its fast expansion. “We have operational leaders for many of our businesses, but I am not sure we have business leaders within the company,” says Naik. Hopefully, before the chairman steps down two years later, the process of creating business leaders will have been put in motion.

A. M. NAIK'S Unfinished Business

1.Cull businesses that aren’t core and strategic
In the next one year, software/IT business will find a strategic partner, while the finance arms will be hived off and be listed. The power business may also be spun off as a separate company. Infrastructure will become a core business. The government concessions business may be spun off separately to address its risks. He will exit small businesses like petrol pumps.

2.Devise a structure that is more manageable

3.Help groom the next set of leaders
There are two programmes that have been initiated within the company. One programme started two years ago by McKinsey will analyse performance of senior managers (SVP and above) and suggest a career path for them. The programme in the second year running will isolate performers and give them leadership roles to run either SBUs or operational divisions. Each director on the board would be assigned a few of these fast trackers to be mentored. Another programme will draw younger star performers for a broader canvas and these executives will be put on fast track programmes to first show their performance capability in operation. Every year a handful of them would be sent to Harvard Business School and London Business School to hone their management skills.