Effective succession planning

May 2013 | COVER STORY | BOARDROOM INTELLIGENCE

Financier Worldwide Magazine

While succession planning is a critical factor in the future success of any organisation, many firms fail to consider the implications of absent or inadequate preparations. Poor planning can result in a loss of strategic momentum and investor confidence, as well as prolonged and expensive executive searches. In the worst cases, firms can be left with a CEO who is out of step with the company’s strategy and culture. With this in mind, how should companies approach succession planning strategy and build a secure supply of future leaders?

Preparing for the future

CEO transitions are risky for all firms and, in recent years, major companies have made headlines when leadership handovers have failed to run smoothly. Take for instance, the examples of Citigroup, Merrill Lynch, and Bank of America. When faced with the unexpected loss of their chief executives, the firms were hard-pushed to find replacements as clear succession plans were not in place. Other large firms, such as Morgan Stanley, Coca-Cola, and Hewlett-Packard have also botched the succession process, making poor leadership choices and suffering the consequences further down the line. Such instances serve to highlight the fact that a formal, well-thought out succession plan is crucial.

Inadequate planning, or none at all, leaves companies open to a wide range of risks, both in the short and long term. “The lack of effective development, delegation and involvement that can often accompany inadequate succession planning can mean that unexpected absence or even illness can leave the business extremely vulnerable in the immediate term should the unthinkable happen to a key player,” says Graham Whiley, chief executive at Sage Green. “Key skills and customer relationships need to be well spread throughout the team, along with a culture that encourages people to assume responsibility for themselves in order to propel the organisation organically. Businesses that do not do this jeopardise longer-term success, but can also stifle ambition and career development which will, over time, effectively drive good quality out of the business.” Good succession planning is therefore as much about preparing for the future of the firm as it is about tackling the immediate departure of senior executives.

A major concern for companies is the fact that the loss of key players can result in a loss of business. Where senior executives are client-facing, poor succession planning may cause a client exodus. If the client has had a close business relationship with only one senior executive, that individual’s exit may sever the relationship for the whole firm. “Timely and effective internal planning for succession is vital not only to ensure that clients are maintained but also to enable others to develop appropriate client handling skills with the assistance of their more senior colleagues,” says Tony Williams, principal at Jomati Consultants LLP. “This is not an overnight process and often requires at least a two or three year period to be achieved successfully. Independent advice can be helpful insofar as developing best practice for succession planning is concerned.”

When it comes to a key player’s departure, being caught by surprise can impact heavily on the reputation of the firm. Those lacking candidates for the top positions are left looking fragile and ill-governed, and shareholders may be quick to punish such mistakes. In 2011, the share price of insurance firm Legal and General plummeted when its chief executive resigned leaving no obvious successor. In such circumstances, companies may also find themselves open to the threat of hostile takeover.

It is clear then, that the risks surrounding succession are multitude, particularly in large, public firms. But while one may imagine that succession planning within family-run businesses is less fraught, the opposite is true. In reality, such firms suffer the same issues, all the while facing heightened emotional entanglement. “Family businesses face the same risks as other businesses as a result of poor succession planning, but also face some additional ones specific to the interplay between family and business,” says Alexandra Sharpe, a partner at Peter Leach & Partners LLP. “What is more, planning ownership succession is as important as management succession. It is absolutely crucial for family business leaders to dedicate time to creating a roadmap for succession and it cannot be done in isolation from the family as it is important that the family develops alongside the business.” Among the major risks, according to Ms Sharpe, are family conflicts over ownership issues, the tax impacts that succession may bring, and the potential of appointing inexperienced leaders. Despite this, the family-business structure does bring some advantages, including the opportunity to address predictable succession issues ahead of time. Again, external help in the planning process is prudent. Non-executive directors who are familiar with the particular issues relating to family business succession planning, or consultants or advisers who specialise in dealing with these issues can be invaluable in offering objective advice and expertise during this critical process.

Prioritising CEO succession

Despite the obvious hazards, succession planning is too often a low priority for senior executives. This can be a result of short-sightedness, ego, or the inability of the board to grasp the weight of the issue. In many cases, the immediate issues of running a business supersede the need for forward-planning, explains Mr Whiley. “Organisations routinely are too busy with the ‘now’, such that these matters only become important following external influences. These could be from a change of circumstance such as illness, resignation, or regulation, and, in larger or-VC backed operations from stakeholders, including banks. Sometimes the looming retirement of a key executive is the first reality check. However, where an exit is genuinely being planned we do see serious effort being given to the subject.”

Human nature may also have a part to play. The failure of some senior executives to plan for their departure could stem from the denial that their useful days may be coming to an end. For some executives, their standing within the firm can be tightly bound to their own sense of self. The idea of handing over responsibility may simply not be an issue they want to consider. “To some extent, senior executives do not wish to address this issue as it makes them realise that their time with the organisation may be limited and there may be a sense of denial in relation to this,” says Mr Williams. “However, as it is a key business risk, organisations need clear plans, and it is the role of the board and the non-executives to ensure that effective programs are in place both in terms of risk management, and the continuity of the business.”

Such sentiment is more prevalent and obstructive in family-run businesses, where the emotional complications that succession planning generates can become too much. While for most family-run firms succession planning is a determining factor in whether the business survives or fails, an astonishing number of founders choose not to act, suggests Ms Sharpe. “Planning for succession involves confronting your own mortality and discussing family taboos, such as money, parental death, and perhaps the competence – or incompetence – of family members. In many cases, failure to address succession is linked to deep-rooted anxieties and traits that will always be common amongst entrepreneurs. However, the owner’s emotional and financial preparation for retirement is an important aspect of succession and, with effective planning, their reduced involvement, and the growth of the next generation into their new roles, can be gradual and well managed for a smooth transition” she adds.

Planning and implementation

Companies that are conscious of the issues will understand that the sooner a succession plan is put in place, the better. However, when structuring and implementing the plan, a number of options are available, along with a raft of challenges. Issues to consider include the management needs of the business and making sure that successors are adequately prepared for leadership; the goals and expectations of the key stakeholders; and the timetable for succession. In addition, Ms Sharpe suggests that family-run businesses bear the following questions in mind: Whatare our goals, both personally and for the business? How can business responsibilities and assets be transferred in a way that allows the business to survive, and preserves family harmony?And, are there appropriate forumsset up for reaching consensus on the key issues? “It is important to maintain a distinction between management and ownership considerations,” she adds. “A successful plan acknowledges the complex interaction of family, ownership, and management issues. The plan must be strategic, comprehensive and feasible. Finally, the plan must be managed and orchestrated by those making the critical decisions – selecting the right individuals and establishing the structures necessary to move a complex system to the next generation takes courage and hard work.”

In an ideal world, the most careful succession planning would groom internal executives for the highest positions. Individuals who are already a member of the firm know the culture of the firm and its employees. Insider succession also has the added benefit of motivating executives to stay with the firm, and encouraging them to excel. That said, even when firms feel they have a great internal candidate, it does not mean they should not look outside the company. Remaining myopically focused on internal staff may mean executives miss more adept individuals who may also bring a breath of fresh air to the firm. Having a viable internal candidate does not excuse the succession planning process from looking outside to source the best candidates for the job. Running inside and outside searches concurrently is simply good governance.

Similarly, succession plans should only have a very general trajectory and not be set in stone. Anointed heirs might fail to live up to expectations and better candidates might emerge as time unfolds. “It is prudent not to go public too early or over commit to individuals,” Mr Whiley asserts. “Equally, a degree of honesty about candidate capabilities and objectivity about timescales for development are fundamental. Key trading relationships need to be transferred with care and increased delegation cannot be achieved by reckless abdication. A reasonably broad assessment of candidate capabilities from a wide cohort of executives and stakeholders is useful to avoid any rose tinted nepotism and should be done in a low key way on an ongoing basis. Finally, if training, coaching, mentoring or other interventions do not deliver the correct skills, be ready to hire,” he adds.

The planning process should be an open one, and honest conversations are essential. Companies must be transparent when opening up the process to internal and external candidates – not doing so can cause damage internally. People also need to be informed upfront about how the process will run. The exact role and expected employment term should be discussed early on, so that neither the firm nor the candidate faces any surprises further down the line. “Although this has been complicated by age discrimination legislation, in relation to senior executives it is essential to have an open conversation about both sides’ expectations regarding the role of the individual executives and the duration of his or her term,” says Mr Williams. “It also provides an opportunity to develop the necessary internal talent rather than be forced to look outside because the organisation has failed to develop that quality internally. It also helps to depersonalise matters if the firm has a clear succession planning strategy in place, and applies this plan consistently. This may also, for example, encourage or commit executives to develop outside interests, such as non-executive directorships, whilst still in the role.”

Finally, while it may be easy to do so, executives must not forget the role of the human resources department in the succession planning process. While HR is regularly pushed to the sidelines in the appointment of high-level executives, it is bad news for the business as a whole if HR is out of line with the board when it comes to talent strategy. Without the input of HR, the process can become more about personality than process, and objectivity will suffer. While it is unarguable that the process is driven by the c-suite, the human resources department should act as a custodian of good practice in any succession decision, and CEOs should respect the value that HR adds to the process. Succession planning is adequate provided it is both objective and honest. If suitable candidates do not exist or a real commitment to team development is needed, then action must follow. In this case, external advice may aid objectivity.

Conclusion

Leadership succession is too important an issue to ignore, and one that is especially compelling in today’s uncertain business environment. Succession planning is about more than filling the CEO post; it is about taking a disciplined approach to identifying the most critical leadership roles across the organisation, finding the people who can fill these roles, and preparing them to do so. It is key to the long-term competitiveness and growth of the firm. Without a systematic approach to identifying and cultivating future leaders, businesses will be caught unaware by anticipated or unanticipated departures. It should be a proactive, rather than a reactive process. Managers must seize the opportunity to make leadership succession a competitive advantage, rather than wait for an outside saviour to appear when the company is paralysed by a management crisis.

Matt Atkins