The benefits of succession planning

July 2020 | FEATURE | BOARDROOM INTELLIGENCE

Financier Worldwide Magazine

July 2020 Issue

Organisations of all sizes should dedicate time and resources to succession planning, to identify the right individuals to step into leadership positions when the time comes.

Typically, succession plans are used to identify and prepare replacements for when key individuals reach retirement age, as backup for emergencies such as unexpected death, disability or resignation, or following the departure of several key leaders which might occur during an M&A deal, for example. The process can also build a pipeline of talented people who can drive explosive growth.

Conversely, ineffective or even non-existent succession planning can be catastrophic, leaving a company rudderless at a crucial moment. It is important to mitigate any potential damage caused by the sudden loss of a valued team member. “When an ‘irreplaceable employee’ exits a business it can impact staff morale, raise uncertainty among leadership, cause division and lead to additional – and possibly avoidable – departures,” says Melvyna Mumunie, an associate at Brahams Dutt Badrick French LLP.

Effective planning can lay the foundations for a smoother transition, improving employee morale and loyalty. Hiring internally can also boost retention rates and increase productivity and performance. When an organisation is transparent in its approach, and employees know they have a path to advancement, they are more likely to stay.

If there is no suitable internal replacement, companies will need to invest significant time and money into external recruitment. This can lead to project delays and missed deadlines. Of course, no two companies are the same, and firms must weigh up the pros and cons of internal versus external hires.

“Internal hires are known to keep an already thriving business ticking, whereas an external hire might be brought on board to shake things up and assist a business to take a step back from years of introspection during a challenging time,” says Ms Mumunie. “However, hiring someone for what they have achieved in one environment may not necessarily work out well in another.”

Shifting priorities for future leaders

Succession planning is a nuanced issue, highlighted by a new generation of employees who have different values and priorities compared to those who preceded them.

“Deloitte’s ‘Global Millennial Survey 2019’, which studied the new generation of future leaders, shows that the priorities of younger workers entering the workplace have evolved,” points out Ms Mumunie. “Some businesses will need to move away from antiquated ‘cultural fit’ requirements in their hiring process to prepare for strong current and future talent recruitments and retention.”

In a similar vein, companies can no longer afford to accept the ‘old boys’ club’ of the past. Changes in societal and regulatory expectations need to be reflected among senior executives and board members.

Statutory obligations, such as gender pay gap reporting, with attention now on ethnicity pay and representation gaps, will push larger companies to actively diversify their workforce by placing a spotlight on reported disparities and the need for positive action to close gaps. But it needs to be done the right way and go beyond compliance requirements.

“The aim is for businesses is not to feel compelled to embrace diversity solely through the prism of statutory obligations,” says Ms Mumunie. “Diverse companies are found to be 33 percent more likely to outperform industry average profitability than those that lack diversity. Companies in the top 25 percent for ethnic diversity were 33 percent more likely to achieve profit above the industry average earnings before interest and taxes (EBIT) margin than those in the bottom 25 percent. Meanwhile, those in the top 25 percent for gender diversity were 21 percent more likely to exceed the industry average EBIT than the least diverse companies.

“Businesses should also be alive to cognitive diversity in the workplace – that is, the inclusion of people with different viewpoints, ways of thinking, skill sets and other cognitive abilities,” she adds. “Cognitive diversity challenges the concept of ‘cultural fit’, dominance dynamics and echo chambers that promote group thinking and the stagnation of ideas, growth and ultimately the failure of businesses.”

There is no single ‘right’ way to design and implement a succession plan. If companies want to build an effective talent pipeline, senior leaders must have a strong command of the entire succession process, keep their finger on the pulse of new social trends and fresh ideas, observe regulatory compliance, and ensure that work is being done to secure the company’s future.

By nurturing existing employees who are already familiar with the organisation’s operations and inner workings, companies can meet the demands of succession and ensure that future leaders remain within their walls.

Richard Summerfield