by Mike Morrow
Mar 23 2016
Succession planning. We think about it all the time, right? No? Never? Unfortunately, that’s the reality in many businesses – particularly smaller or family-owned companies.
According to the Society of Human Resource Management (SHRM), “Succession planning is a means for an organization to ensure its continued effective performance through leadership continuity. For an organization to plan for the replacement of key leaders, potential leaders must first be identified and prepared to take on those roles.”
How is succession planning different in a small or family-owned business versus a large company or a publicly traded company? The goals of the owner or ownership group have to be considered. Is there an heir? Does the management team want to buy into the business? Is a sale to a private equity firm or a strategic buyer in the cards?
Before You Begin
In a small/family-owned business, it is often assumed for extended periods of time that an upcoming heir to the company will emerge. That a daughter or son will want to step up and run the business. That’s not always the case.
Some years ago, one small manufacturing client of ours faced such a challenge. The business was founded by two brothers and later joined by a third, who ultimately became CEO after the elder brothers stepped away from day-to-day operations. For many years, they hoped for an heir to emerge from within the family. It never happened, and they hadn’t groomed a successor from within. Their plan shifted to getting a new CEO from the outside who could grow the business and later prepare it for sale. Several years later, they successfully sold to a PE firm.
Having the CEO or owner select a successor independently can be dangerous. Often, the CEO will hire someone in his or her own image, looking in the rearview mirror at what made them successful in the past. Even worse, sometimes the CEO will subconsciously hire someone who is not as strong, so as to preserve their legacy as the Great CEO or Founder of the company. If there is a board of directors or a board of advisors, get them engaged and get them engaged early. As you’re grooming people within the organization, be sure these candidates get enough exposure to the board, so that the board is comfortable in assessing their readiness.
According to SCORE (a nonprofit association dedicated to helping small businesses get off the ground, grow and achieve their goals), succession planning for the top role should begin 15 years before the CEO plans to retire. Choose the successor, develop a formal training plan for the individual, create a timeline, and ultimately install your successor.
Avoiding Six Common Pitfalls
As you’re looking at broader succession planning for your executive leadership team, be mindful of the following potential pitfalls:
- Not doing your homework. Do a thorough analysis of the critical skills and capabilities that you need in your business to be successful, and inventory where those skills currently reside. As you plan for succession, understand what skills and capabilities will need to be replaced by the succession plan should a particular executive depart. Begin developing these skills in others across the organization in anticipation of the departure.
- Always promoting from within/Never promoting from within. Interestingly enough, both can be dangerous extremes. Continually promoting from within can generate a stagnant organization, lacking mavericks who are willing to challenge the status quo, bring external ideas, and drive innovation. Never promoting from within creates a situation where people are not being stretched. If you want to get people developed to the point where ultimately they could be the successor to the CEO, promote them until they reach their limits.
- Not encouraging people to leave the organization. OK, so encouraging might be too strong a word. When people run out of room to grow, room to stretch within an organization, let them move on. Don’t cajole them into staying. We’ve seen many successful executives who have left a small organization to get experience in a bigger role, only to return to the nest with vastly improved experience and perspective. Indeed, if the potential successor is a family member, encourage them to gain outside experience, with a somewhat pre-determined path toward returning to your company in a key leadership role.
- Not investing in your people. Investing in your people can be expensive. But, like any investment, the returns can be great. Modern-day MBA programs do more than give people fancy letters behind their names on a resume. They provide opportunities for leaders to work side by side with very different people from very different industries. Experience on MBA project teams can energize your high potential employees as they bring new perspectives and ideas back into the organization.
- Assuming what works today will work tomorrow. The highly successful CEO, CFO, or VP Operations of today is not likely to be what is needed tomorrow. Keep an eye toward the future demands of the business, and the future opportunities, as you look at developing the skills that will be required in the future.
- Not cross training enough. Not providing developmental roles across functions, or at least significant opportunities to work on cross-functional teams, can be a real succession killer. Of course, it’s natural for the accountant to become the controller, the controller to become the CFO. But getting that person in the trenches of the Operations side of the house can yield tremendous dividends as you’re looking for a well-rounded, well-prepared succession candidate.