MUMBAI: All listed Indian companies will need to put a succession plan in place if the capital market regulator implements a proposal that’s under consideration as part of efforts to ensure that an organisation is not caught unawares by the death, departure or poor performance of a leader, all of which could hurt investors.

The proposal comes against the backdrop of most Indian companies not having a formal succession programme for appointments to the board and senior management positions, the lack of which can have an adverse impact on strategic direction, financial performance and productivity.

The Securities and Exchange Board of India, or Sebi, is likely to discuss this along with other corporate governance proposals at its board meeting in the second week of February. The proposal is in line with best global practices prevalent in developed countries, especially the UK, where the Corporate Governance Code requires boards to have an orderly succession plan in place, and acquires significance amid recent developments, including the death of Tata Motors MD Karl Slym.

“The incident brings to the fore the importance of succession planning. It gives the message to the board the need to be prepared… rather than wait for events to overtake them,” said Amit Tandon, founder and MD of proxy advisory firm IIAS. Shares of Tata Motors fell about 6% on January 27, a day after news of Slym’s death broke.

Sebi wants to ensure that investors don’t suffer due to a sudden unplanned gap in leadership, by mandating boards to develop an action plan for a successful transition, with the programme being reviewed periodically.

The proposal would mean companies having to state in their annual reports whether they have a succession plan in place. This won’t mean that companies need to reveal details of the plan, since this might mean critical information would be available to competitors and may lead to poaching of key employees. Also, people who don’t find their names in the successors’ list could quit.

Tata Motors, which brought Slym on board 16 months ago, is looking for a new boss. One of India’s leading mutual fund houses, Unit Trust of India Asset Management Company, was rudderless for three years after chairman and managing director UK Sinha left to join, ironically enough, Sebi.

Engineering giant Larsen Toubro and consumer goods enterprise ITC are among India’s biggest companies that have leaders who have been at the helm for a long time.

Governance experts said companies should keep in mind that succession planning is not just about the leadership development process but also a riskmanagement exercise as it impacts the stock price. About 112 executive directors died between 2006 and now while holding board positions in 116 NSE-listed companies. Of these, about half were chairmen or managing directors at the time of their death, according to data from researcher Indianboards. A 2012 Stanford study showed that more than 160 American CEOs died from heart failure (39), cancer/tumors (30), strokes (28) and accidents (14), among other causes.