Succession Planning for Family Business Continuity

BUSINESS MANAGEMENT

Succession Planning for Family Business Continuity

Succession planning is the most significant issue that faces a family business and is critical to ensure successful transition from one generation to the next. This article examines the advantages and disadvantages of a well laid out succession plan and the role it plays in the growth of the family firm. It also illustrates how the next generation of management can be selected for their role and what can be done to prepare them to take the helm.

Family businesses represent the most lasting type of business. As Professor Willian O'Hara, an expert in family business, says in one of his books: "Before the multinational corporation, there was family business. Before the Industrial Revolution, there was family business. Before the enlightenment of Greece and the empire of Rome, there was family business."

Family businesses have existed since times immemorial. They have contributed to the development of the world economy and created immense wealth for the investors. Succession issues have always plagued family businesses lack of well laid out succession plans have led to the decline and demise of many reputed family business firms. This article looks into the succession issues of family businesses and illustrates how a well laid to succession plan can lead to family business continuity. According to Paul Karofsky:

"Implementing a successful succession plan is the ultimate reward for a family business CEO. For, successful perpetuation of family business is the closest thing that you will ever come to immortality."

Succession is the process of transfer of governance responsibilities and/or ownership from one generation to the other. There are three facets of succession. Leadership succession involves bringing in fresh blood to take over the reins of the business. Ownership succession involves transfer of financial stakes and ownership rights to the new generation. Management succession involves transfer of managerial responsibilities to a new team. This article deals primarily with leadership succession in family business.

Advantages of and Obstacles to Succession Planning

Succession planning in family businesses has several advantages. Planned succession leaves a legacy, achieves business continuity, provides an outlet for creativity, and can revitalize the business, enhancing its value.

Leaving a Legacy: Good leaders leave an indelible stamp on their business. A good succession plan does not allow the leadership legacy and the management acumen of the incumbent leader to be diminished in case of his retirement from business.

Achieving Immortality through Business Continuity: The closest that a business leader could come to immortality is to put in place plans for continuity of the business to the next generation.

Outlet for Individual Creativity: The family business could provide a forum for the younger members to assume entrepreneurial identity.

Revitalization: Changes in technologies and markets enhance business complexity—calling for new business models. The younger generation could bring in the required newness.

Enhancing the Value of the Business: A well-formulated succession plan, when properly communicated to all concerned, makes it clear that the business will not suffer from transition trauma. This enhances the goodwill of the business and its value in financial terms.

In spite of these obvious advantages, businessmen often neglect succession planning. This could be because:

The owner hates to think of giving up the control of the business that he has     built.

Immortality: Nobody enjoys thinking about illness/death.

Children/spouse do not want to bring up the topic since the children could     fear being considered as greedy and the spouse as pushy.

Key managers do not wish to rock the boat.

Friends and advisors hesitate to raise the subject for fear of offending the    owner.

Dodging the issue protects the owner from making tough decisions.

The ease with which succession plan is put in place depends on the personality type of the CEO. The different personality types of the CEO have been profiled in Box 1. Of the different personality types, `Monarchs' are the most reluctant to leave, while `Generals' keep plotting to return. There are more Monarchs in the family business than other types as family members keep the issue of management succession off the agenda to avoid confronting the incumbent with the idea of his own mortality. The Monarch type CEO cannot think beyond himself. For the Monarch, the business is essentially an extension of himself, a medium for his personal gratification and achievement above all. And if at all he ponders on what would happen to his business after him, the concern usually takes the form of thinking of the kind of monument he will leave behind. Even when the succession plan is in place, the actual succession could take place very late when the incumbent is of the Monarch type.

When to Plan for Succession

The right time to plan for succession is when the business is doing well. For then, the CEO could be more open to ideas, can generate more options and evaluate objectively. The time is right when the owner is in his 50's. A well-formulated succession plan is generally in place about 10-15 years prior to the proposed retirement of the owner. For, this allows time to make a choice from multiple candidates. Once the choice is made, the successor can be groomed properly providing for about five years of transition time.

A sensible CEO will identify a successor years before he intends to retire. The choice could be made from amongst the children when they are still young (the oldest being in teens). This could work well when the offspring are noticeably of different capabilities. However, there is a risk of promising ones (who are very young at the time of choice) being left out. If the CEO does not act in time, the task of choosing a successor may devolve on other agents or agencies like:

The Board: The board may design the selection process, create a succession plan and oversee its implementation. There could be a specially constituted group of advisors drawn from the board.

Family Committee: Assemble a task force of siblings to decide the successor or at least to recommend one. This approach promotes harmony and reduces hard feelings. Sometimes, an obvious leader emerges. However, there is a risk of alliances/subgroups and politicking. Also, siblings may decide on more than one person a committee to takeover leadership.

Non-family CEO: The founder retires, nominates a non-family CEO and assigns him the task of choosing and grooming the successor. There is a risk because he may lack an understanding of family values and be more vulnerable to politicking.

Professional Advisor Recruited and Paid to Pick a Successor: Here too, a lack of understanding of family values and the possibilities of influence by vested interests exist.

By Default: When the CEO defers the decision long enough so that only one potential candidate remains in the race, others having given up to seek greener pastures.

Consensus Approach: The family members, senior executives and the board agree on a criterion for selection, the process and the timetable for succession. A leading candidate tends to emerge over a period of time.

Basic Stages of the Succession Process

Whichever be the scenario, whoever chooses the successor, the process of succession has to pass through the following basic stages:

Choosing a successor

Grooming a successor

The transition

Communicating the succession to all stakeholders

Choosing the Successor

The CEO could set the rules for involvement of his children in the family business. He could specify the requirements for the younger family members who are interested in joining the family business on a permanent basis. Craig E Aronoff et al., have suggested three approaches for choosing the successor. The approaches are:

Relay: When there is only one potential candidate, the CEO and the potential successor work together (like a relay race) for some time. Once satisfied, the CEO hands over the mantle to the newcomer. During the grooming phase, the potential successor is to be assigned SMART goals (specific, measurable, achievable, realistic and time bound), be subject to performance appraisal and be provided with objective feedback. He needs to be assigned new tasks, both as a test and as means of broadening his experience. The evaluation and progress of the candidate is to be shared by the CEO with the board and the key stakeholders. What if the potential successor does not measure up to the mark?

Race: If the CEO, board and family members are uncomfortable in identifying a single person as a potential candidate, they may then adopt horse-race approach. This involves identifying several candidates based on specific and stated criteria. The potential successors are informed of the choice and the fact that one of them will assume the leadership role, based on their performance during the induction phase when they will be carefully watched and evaluated. This could go on for one to three years. Towards the end of the specified period, the CEO/board selects one of them.

What about the losers in the race? Will this approach lead to hard feelings? The situation is manageable considering that the candidates have prior information and the final choice is transparent. Those not chosen could continue to occupy prominent positions in the management team.

Rotation: At times, it is nearly impossible to pick a single candidate between two competing siblings. For, the potential candidate could be possessing competencies of a level that is difficult to distinguish or could be backed up by those other family members with substantial stakes in the business. They could be assigned the position of CEO on a rotation basis - say two years at a time. At the end of the rotation period, they could decide for themselves as to who will be the CEO in the long run.

This approach is less desirable for it is fraught with dangers. The one taking charge for the first time may tend to be too cautious and conservative not to upset the applecart, lest there should be a question mark on his performance. In the process, interesting and challenging opportunities for business development could be missed out. Further, the tenure (about two years) may not be long enough to make any impact on the business other than maintaining the status quo.

Grooming the Successor

Parents lay the ground rules for succession when children are young - inculcating values of hard work, savings, sharing, sacrifice and consensus. At times, when parents discuss problems of business every evening, the children may feel discouraged. It is, therefore, necessary to talk of challenges and how they were met.

Being in family business has to be an option, not an obligation for the younger generation. On their part, youngsters need to think of the greatest possible contribution that they can make to the family business, and not reaping the greatest possible benefit. The method of grooming successors has to encompass development of entrepreneurial and managerial skills, as also value systems.

If the chosen successor is not old enough even to work part-time, it is advisable to put in place a formal training program to develop entrepreneurial competencies. One way is to let the chosen successors work part-time or during summers in the family business. If not anything, they will come to know the business better.

If they are old enough, it may be useful to give an option to the chosen successor to work in a company outside the family business. Why should they go and work in another company when there is so much to do in the family business? There are several advantages to cutting their business teeth in outside enterprises.

If they commit mistakes in the process of learning, it is at others' cost. It is not just that they need to learn at someone else's expense. The mistakes made in the family business will be remembered by everyone including non-family employees and the person's acceptability could suffer.

Outside experience builds self-esteem - working beyond the protective atmosphere prevalent in the family business and proving oneself. They learn what they are good at and what they would like to do.

Outside experience might also bring new ideas to the family business, since the successor is likely to have acquired a different perspective while working for someone else.

Non-family employees could be watching the family members enter the business for the first time thinking that it is because of the family name. Coming into business with good skills acquired elsewhere lends a degree of acceptability and respectability.

It is not necessary that the youngsters seek outside experience in companies similar to the family business. For that matter, the competitors may not hire them. Four to seven years of outside work experience is suggested. It is important to let the youngsters find the jobs themselves. If they can't and want to depend on their family name, their suitability is suspected from the beginning.

If the chosen successor has completed formal education, it may be advisable to offer an opportunity to work full-time. They need to be assigned the job that suits their competency and where they can shine quickly. For, they need to taste success and prove their worth. This enhances their self-esteem and acceptability. Once this happens, they can be put on a tougher course but not initially. Otherwise, it will amount to sabotaging their start by making it hard for them to be on the fast track.

If the successor is hired to work in the family business, the following points need to be kept in mind:

Hire the potential successor/s in a position already existing in the organization and allow for relevant pay and perks. This reduces the chances of animosities among the senior managers.

Encourage the development of skills complementary to those that the other family members are working on or intending to work on in the family business.

Assign a mentor: He could be a long time, trusted and capable employee or a family friend or an advisor. The mentor should take pains to teach the person the history, strategy, philosophy and culture of the company.

Put in place a formal program for leadership development when the successor is in 30's and the incumbent in 50's.

Train the potential successor/s in various departments/functional areas of the business.

Give the person an opportunity to run a visible area of business with preset performance criteria, periodic review and feedback.

Let him/them join a peer group of successors.

In all circumstances, the chosen successor has to be helped to develop a personal rationale for being in the family business. Over time, he must find his own answers to the questions: Why do I see joining family business as an opportunity? Why is this important to me? Why this as against other options? Finding answers to these questions provides him with a few compelling reasons to be committed to the business.

The Transition

The Don'ts

The designated successor cannot and should not take over the leadership role of the founder completely and in one stroke. This would mean that the founder will not abdicate the throne in one stroke. For, the successor needs practice. In many cases, a successor is chosen, given the designation of Vice-President or so, asked to learn as much as possible and as quickly and left to drift without assuming any authority. On the day of coronation, the responsibility is suddenly handed over to him.

The Dos

The better method is to assign new responsibility to the successor one at a time in a phased manner. For instance, five years before the takeover, he could work in the marketing division, two years before in production division and so on. In the early stages, each decision of the successor may require involvement of the leader and even an approval. Gradually, it is only a question of concurrence. There comes a point where it is the successor informing the leader about the decision. Finally, the successor seeks parental counsel whenever required.

The CEO has to list key people - advisors, suppliers, customers, government officials, etc., and introduce each to the successor. Take the successor to the meeting of Chambers, internal meetings and allow him to chair some. When the successor takes over as a CEO, the retiring one could become the chairman. If so, the responsibilities and authority of the incoming CEO and that of the chairman have to be clearly demarcated.

Conditions for a Smooth Succession

The above discussion suggests that there are several conditions for a successful succession. Important among these are:

Sensitizing the younger generation about the rights and responsibilities of owning and managing businesses need to start early - say around the dinner table as the children are growing up.

Family culture stressing on care and mutual respect.

Conflict management procedures to be in place and honored by family members.

Children to be allowed to pursue their own natural interest and their success in any field is to be celebrated/recognized.

Conditions to be laid out for the entry of the younger generation into the business.

No one should be forced to join the family business.

Both in-company and external experience of younger generation is valuable.

Family members employed in the business are to be treated like any other employees. They will have to go through performance appraisal, receive feedback and have a career plan like any other manager.

Ideally, a succession should lead to:

The most competent person receiving the baton.

Building consensus among family members and key stakeholders as regards the selection of the successor.

A timely choice of the successor.

Finding a useful and viable role for the retiring CEO.

The successor needs to maximize his educational qualifications, acquire outside experience, anticipate special hurdles, call for honest feedback and build rapport with those who matter for carrying forward the legacy without any hurdles.

Conclusion

Letting go is a complex and difficult process. Planning the finances for post-retirement period helps reduce the pain of parting. Nevertheless, CEOs and organizations have several psychological hurdles to cross before they pass on the leadership. The CEO may face a loss of personal identity, especially if he lacks other interests. In that case, he may find it difficult to derive a sense of self-worth after passing on the baton. Organizations may face hurdles if the founder interferes in the successor's decisions creating confusion (also called the two leader syndrome). The owner needs to develop a personal rationale for retirement like the way a successor needs to develop reasons for entry.

`I'm more or less retired' - is a statement that irritates the successor. This means the founder has the choice to lead a life of leisure when he feels like and make an appearance in the office whimsically. The successor's keenness to be in charge is thus jeopardized. The owner needs to establish a firm deadline for transferring the leadership.

For the family business to survive to the next generation, succession planning is inevitable. Care needs to be taken to consider all the options available to ensure that the right candidate, with the right skills, can lead the family business for the next generation, building on the traditions and family values already created, managing the often complex relationship issues that exist, and remaining focused on running a profitable commercial business at the same time.

-- Dhananjay Singh
Faculty Member, IFEN,
Hyderabad.
The author can be reached at
dhananjaykumar-s@yahoo.com