by Ernesto J. Poza
Succession is a Transition in Ownership and Management
Research conducted by Louis Barnes at Harvard indicates that when transition occurs only in management or ownership and not concurrently in both, tensions are amplified. I have experienced these tensions, for example, in successors who have assumed CEO responsibilities, but still do not own significant equity. I have also observed these tensions in families where a younger daughter, for instance, and not the oldest son becomes CEO. This “inverted hierarchy”, as Barnes calls it, means that in the transition, the management and owning family roles are reversed, posing adaptation challenges to the successor, the siblings and other family members.
Successions characterized by a concurrent transition in ownership, management and family systems are prone to be less conflictual and more satisfactory to the business and the family. Succession planning should focus not only on whom the successor will be, but also on the regeneration strategy of the business as it evolves to next generation leadership. Such planning responds to the need of the business for continuity and the need of the family for harmony. The business gets to update its competitive posture vis-a-vis the marketplace and financially prospers. The family then has the opportunity to offer its members a wider range of career choices in and out of the business.
To promote stability during the transition period and beyond, family business advisors often recommend the formation of a family council to promote communications in the owning family. Also recommended are: a board of advisors or directors (to promote higher expectations and accountability in the management of the firm), strategic planning and management team-building to align the interests and direction of owner-managers with those of customers, suppliers and non-family members.
A Brief Roadmap for CEO Succession
- 1. Create a vision for yourself (the departing CEO), the successors and the business
The only way to assure business continuity beyond the founder’s generation is to separate the creator from the creation. You want the succession transition to be pulled by the dreams and desires of the current and next generation, not driven by fear of financial ruin or the loss of a loved one. Talk about this vision with others. In dialogue with others, enrich the vision and enroll them in supporting the vision of business continuity.
- 2. Retain the help of advisors
Succession is a very difficult issue for anyone to successfully address alone. Therefore, the help of a trusted attorney on estate issues, a family business consultant on management and ownership transition issues and perhaps a personal counselor or trusted friend for emotional and family issues can make a difference.
Boards of advisors and owners of other family businesses can also perform some of these functions. Seldom can you obtain competent timely advice on all the relevant disciplines from a single source. Even the selection of the successor can be made easier and more objectively by a group of advisors, directors or influential friends.
They can determine objective performance requirements and criteria for selection, independent of family ties.
- 3. Create a family council to promote open communication within the family about the business and what has made it successful
Educate family members on business and estate matters. Make the family’s commitment to the business and its continuity clear by writing a family mission and values statement. Dedicate significant chunks of time for this activity. This should not be an addendum to a family dinner or social event, but the subject of family business retreats and regularly scheduled, structured meetings.
Council meetings need to provide a “safe harbor” environment for family members to “speak the unspeakable” and consider feelings as facts. Unless you openly talk about feelings too, some data needed to make wise (not just expedient) decisions may be missing.
Also, a priority topic for council meetings (or a committee of this council designated as the family assets board) is a debate on family assets that helps the CEO decide how much of the wealth created by the business should pass on to the family and how much should be retained in the business to promote its continued growth.
- 4. Define roles and responsibilities for each next generation leader
Job descriptions, lists of key responsibilities and performance review mechanisms, in which advisors or directors participate, make objective and constructive feedback possible to a generation that thrives on it. Because differences in managerial style are often the source of sibling friction, role negotiations and joint development of norms or ground rules for next generation relationships is often beneficial.
- 5. Set a date for your departure and begin the succession and business continuity planning process early
Capture thoughts and decisions made throughout this process in a Business Continuity Plan (see next Private Business Advisor for details). Seven to eight years is a respected estimate of the planning/implementation horizon required.
Remember: successful successions include transitions in ownership, management and the family. Besides picking a successor, the business has to engage in a strategic planning process. This will allow it to decide: whether to “gun the engines” and begin a process of regeneration through new products and markets; whether to stay the course for the time being; or whether to create the organizational architecture (structure and systems infrastructure) that will enhance alternate forms of future growth. The new architecture may argue for splitting the business into separate, smaller enterprises or divisions and implementing new financial reporting and information systems to compensate for increased decentralization.
During this transitional phase, successors are also learning and empowering themselves for the leadership demands that lie ahead. The CEO can further promote the empowerment of the next generation by giving them responsibility (and accountability) for the management of key people, relationships with key customers and suppliers, or the ongoing contact with relevant community and government leaders and agencies. Several CEOs’ intent on passing on the baton, have also retained organizational consultants during this phase to help the successor(s) build their own team of executives (both other owners and key non-family executives) among the next generation of leaders.
Succession is successful to the extent that it promotes or insures business continuity. Owners, key managers, advisors and bankers need to know what to do in order to safeguard the business and the family’s estate. The kind of thinking and communicating prompted by continuity planning is a real asset to all who are involved in a succession transition.
A business continuity plan should include: a vision for the business and the family, a family mission statement, a summary statement of the business’ strategy (its strengths, weaknesses, opportunities and threats). Also, a listing of critical transition structures such as an Advisory Board or a Succession Planning Task Force and their responsibilities, a list of key employees and their responsibilities (now and into the future) and a succession plan as approved by the appropriate parties (approval from a primary supplier/manufacturer/customer is sometimes necessary).
Arriving at all of the details appropriate for such a plan is emotionally hard work. Much dialogue and documentation is required. The assistance of company advisors is necessary. So begin early, allow several years for its total design and implementation and make it a living document, updating it as people and conditions change.
Entrepreneurial and family-owned businesses enjoy an inherent competitive advantage in the marketplace of the nineties. But this advantage can, and often is, squandered during the succession transition.
Succession planning and implementation is one of the toughest things you will ever do as the CEO of a private enterprise.
Succession is not an event but a process. It does not happen in a vacuum but rather in the context of regeneration challenges posed by fast-changing competitive environments. Succession planning, when linked to strategic thinking, can insure business continuity.