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Why investors must evaluate succession plan of companies before investing

Last week I touched upon the topic of the power of corporate management. The quality of management is the secret sauce to a company’s success. However, how is the management chosen?

We check for current management and how they run the business. But who will take forward the legacy? This question is of utmost importance when key managers are close to retirement.

Recently, the market regulator Sebi made succession plans compulsory. The pandemic claimed the lives of reputed businessmen last year. This left the firms in a vulnerable place.

The replacement appears to be more difficult, especially for bigger companies. The competitive and volatile business environment has emphasized the role of top executives. Delayed replacement can indirectly cost the business dearly.

Most Indian businesses are family-run. Usually, an entrepreneurial mind starts a business offering distinguished services. As the business grows, the next generation operates the business, modifying it as per the new age requirement. The underlying problem here is whether the next gen is interested enough to run the company.

Then there are companies where the business is run by professionals.

remains a classic example of a professionally run business. Bajaj Group is an instance of a well-operated family business handed down by generations.
Each type of change in management has its pros and cons. Professional management is ready to take more risks while family members become conservative to protect their family reputation.

On the other hand, internal family disputes are a common occurrence. As a result, the business ends up being divided. Amongst all this, the investors are the ones suffering due to the impact on the business. Professionals charge a huge amount as salary which often weighs on a company’s profits.

An investor needs to be watchful if any key management personnel is close to retirement. If so, what is their succession plan? Do they expect to hire professionals to run the business or do they intend to hand it down to their trusted family members?

Technical Outlook
The Nifty50 index, started the week with a big gap down, taking negative cues from global indices, but recovered most of the losses and closed mildly negative. The benchmark index is now consolidating after posting a steep rally from 15,200 to 18,000 levels. The other global indices also seem to be following a similar structure, however, Indian markets are relatively outperforming. At the current juncture, the level of 17,150 is likely to act as a crucial support zone. As long as the said support remains protected, we suggest traders maintain a bullish bias and follow a buy-on-dips approach.

Expectations for the week
Given the lack of major domestic events, Indian markets’ sentiment will be influenced by its global counterparts to determine its movement. Across the globe, investors will be keeping a close watch on China’s Inflation numbers. The volatility in oil prices and USDINR will be other important factors that may affect the market. Investors need to watch out for stock-specific news. Nifty50 closed the week at 17,539.45, down 0.11 per cent.