Effective Succession Management

Board Strategies for Overcoming the Most Common Succession Planning Obstacles

July 2014 

The passage of the Sarbanes-Oxley Act more than a decade ago set in motion a dramatic change in CEO succession planning: While CEO succession had always been in the board’s purview, the board reasserted itself in working on the subject with its passage. This change brought much-needed oversight and additional rigor to the succession planning process at many companies. Nevertheless, many directors still find aspects of the process challenging and feel less confident than they would like to be that the board will be in the position to make the best decision for the business when a transition is imminent.
In our experience, there are four main areas that boards continue to find challenging: 

• Getting started and addressing succession planning with the appropriate regularity. Some boards can be reluctant to broach the topic, particularly with a strong, established CEO or when a transition seems distant, or they may over-focus on certain facets of the process.
• Ensuring that the strategy and criteria for the next CEO is forward-looking enough. When the strategy relies too heavily on status quo assumptions or doesn’t look far enough out, it reduces the chances that the process will produce internal candidates with the right skills for the future business.
• Thoughtfully and effectively assessing internal candidates. Directors often tell us that they lack the insights with which to thoroughly assess potential successors or to understand whether a candidate will be ready in a specific time frame.
• Assuring the development of a robust succession pipeline. When they do not set expectations with the CEO and CHRO that succession planning and talent development are ongoing and shared responsibilities, boards can lack confidence in the succession pipeline.

To increase director confidence in the process, boards may need to take a fresh look at how CEO succession planning is practiced today and consider whether it is time to update their approach. We examine the most common challenges in more detail and consider ways boards can overcome the obstacles they face to establish a rigorous and effective succession planning approach. 

1. Start now and embrace CEO succession planning with the right balance
Most directors and CEOs today recognize that the board has the ultimate responsibility for CEO succession planning and selecting a CEO successor. That doesn’t mean, however, that directors find it easy to initiate discussions about succession, particularly with an entrenched and successful CEO who doesn’t plan on leaving any time soon, but does have a pivotal role to play in the succession process. Overcoming resistance to raising the issue with the CEO — or, in the most difficult situations, forcing the issue with a reluctant CEO — continues to be a challenge for many boards.

One approach that can be helpful in desensitizing the issue is to start early — years before a transition is on the horizon — develop a regular cadence around C-suite succession planning, and encourage the CEO and CHRO to be partners in the process. One of the best ways to achieve this balance is to begin CEO succession planning when a new CEO takes the helm and set expectations about the CEO’s role in the process immediately. Starting early and making succession planning an ongoing activity can help minimize the emotion that often surrounds succession and also allows the board to get to know potential candidates and their performance over time.

The right structure and approach can enable the board to give succession planning the attention it needs, while balancing all the other priorities directors have on their plates. Succession planning is arguably one of the more important responsibilities of the board, and many board members are eager to participate. However, it also is one of the most intensive board responsibilities, requiring significant work between meetings. Many boards establish a smaller working committee — three to four directors who are the most qualified and who have the necessary time — to steer the process and handle the granular work associated with assessment and benchmarking, but involve the board at critical touch points throughout the process. 

2. Ensure that succession planning is rooted in the future needs of the business and base criteria for the role on the levers that will be critical to the future
Most board members today accept that the foundation for CEO succession planning is an agreed-upon strategic direction for the company from which the criteria for the next CEO can be based. Very often, however, the articulated strategy is too rooted in the present or relies too heavily on status quo assumptions, rather than taking a prospective view of where the company needs to be in five to 10 years. When this occurs, the criteria for the next CEO may not be tied to the specific strategic, organizational and operational levers that the next CEO will need to employ, potentially impeding the development of internal candidates with these capabilities.

Wise boards agree on strategic issues up front, since these decisions will influence the kind of future leader or leaders the company will need, and push themselves to go beyond generalities. They identify the very specific effect the next CEO needs to have on the business and define the skills that it will take to accomplish that effect. These could include invigorating the innovation pipeline, applying disciplined cost management, pursuing specific growth targets in emerging markets or building new organizational capabilities or cultural themes to drive organic growth.

Agreeing on a future-looking strategy that informs the criteria for the next CEO is a critical step that helps make the process go smoothly. It also helps boards avoid the trap of choosing an executive who mimics the incumbent’s strengths, instead of selecting the candidate with the qualifications best suited to the company’s strategy for the future 

3. Thoughtfully and effectively assess internal candidates
By definition, internal candidates are not proven CEOs, so how can boards gain better insights into candidates’ ability to succeed in a role that is dramatically different in scope and complexity? Boards tend to see succession candidates through a very narrow window of observation and judge potential based on past performance, both of which can cause bias (positive and negative) when considering successors. To gain the insights they need to understand the capabilities of their company’s rising executives and make the discerning judgments about their readiness for the top role, boards need to embrace an assessment process that is fact-based, rigorous and forward-looking. 

Assess succession candidates with a forward-looking lens
A board’s ability to choose a CEO successor requires a frank view of candidates’ readiness, including an understanding of their development needs based on the future direction of the company and the likelihood of their being able to close any gaps in a reasonable amount of time. Candidate assessments should review candidates’ track records delivering against strategic and operational levers that are similar to what the next CEO will be required to pull, drilling down into the specific contributions individuals have made in the businesses they have run. In addition, boards should strive to gain an understanding of candidates’ ability to stretch into the CEO role. Executives’ analytical capabilities, social intelligence and self-awareness are skills that speak to their Executive Intelligence and ability to navigate more complex, ambiguous and demanding contexts.

A rigorous review of an individual’s competencies, including the observations of others who can validate their performance in current and past roles, can reveal whether candidates have the relevant experience as well as potential gaps. Gaps may include a lack of specific knowledge or “hard skills,” such as experience with regulators or financiers, or a deficiency in certain “soft skills” — behavioral skills such as the ability to navigate complex interactions or to influence, motivate and create followership among others. Boards also will want to consider whether the culture of the company needs to shift or change, and how aligned individual candidate profiles are with the desired company culture. 

Incorporate external benchmarking
Companies that are strong producers of internal talent sometimes lose a sense of how their talent compares to the best-in-class talent externally or overlook how the world has shifted around them. Taking a look at external talent — through research, informal or formal introductions or an executive search — can provide additional insight when assessing the readiness of potential successors. Ideally, benchmarking should happen in tandem with internal assessment, so that the results of the internal assessments and external benchmarking can be compared simultaneously. This process is critical to giving the board a good sense of the relative strength of the internal candidates, as measured against outside talent who have proven themselves as skilled in the operational areas that will be critical for the company’s future success and have demonstrated the values and behaviors that align with the ideal company culture. 

4. Assure the development of a robust succession pipeline
For boards, having confidence in the succession pipeline means ensuring that the CEO is focused on developing a succession-ready team and that directors have the insights about potential CEO contenders they will need to provide the necessary developmental assignments and, ultimately, to choose a successor. This ideally is a broad-based effort that incorporates up-to-date definitions for all the senior team, regular assessments and benchmarking, and thoughtful developmental assignments.

This does not mean that directors must become talent managers. But, it does require boards to take responsibility for ensuring that the right processes for talent management are in place and that they have the appropriate knowledge of potential leadership. Directors should get to know the senior leadership through presentations in the boardroom and regular meetings outside of it. Boards should plan on a deep-dive talent review at least once annually, which includes having the CEO and CHRO lead a discussion about forward-looking leadership requirements against which talent can be evaluated. By being involved on an ongoing basis, the board can observe patterns of performance and develop a more nuanced point of view on executives’ strengths and weaknesses.

Well-governed companies take a longer-term view toward succession. Boards should make sure that there is a process in place to develop talent for all the top positions in the company, and that compensation plans for the CEO and other top executives are linked to their success in developing and retaining talent. By taking these actions, boards can more effectively prepare their companies for succession over the short term, and help build the bench strength that the company needs for stability and success well into the future. 

CEO SUCCESSION: THE CEO'S ROLE

The CEO is both a member of the board and the leader of the management team. As such, the CEO must be an active participant in many aspects of the CEO succession planning process, but then step back as the process progresses toward the selection of the next CEO.

Ideally, the CEO will, early in his or her tenure, emphasize his or her commitment to management development and providing internal succession options for the board to consider on a long-term basis. The CEO should be a proactive, engaged partner with the board and CHRO in a regular C-suite and CEO succession planning process, including planning for emergency succession scenarios. For CEOs, this means ensuring that the board begins succession planning early in their tenure, working closely with the CHRO to develop a robust, forward-looking approach to executive talent management, and being willing to step back to give potential successors room to grow at the right time. Finally, as a transition grows nearer and the attention of the organization begins to turn to the next CEO, CEOs must manage their own emotions regarding the changes. 

Conclusion

Corporate boards have become increasingly sophisticated in CEO succession planning, embracing their ownership of the succession process and adopting thoughtful approaches to identifying and developing potential successors. To further increase their confidence that the succession planning process will produce strong candidates and provide directors with the insights they need to select a successor, boards should start early and work closely with the CEO and CHRO to regularly assess candidates based on the forward-looking requirements of the business.

Posted by: Spencer Stuart one of the world’s leading executive search consulting firms.

The right way to sell a family business

JACOLINE LOEWEN

Contributed to The Globe and Mail

Ms. McNally says her father and uncle decided to bring in an outside adviser and embrace the creation of a family forum to plan for succession. One of the tools introduced was a “three circle” decision-making model that directed three questions: Is this a decision for the family? Is it for the shareholder? Or is it a challenge for management? Each circle involved different stakeholders, which added complexity to the process, but it worked.

Even though the third-generation family employees were not shareholders, it was decided that it would be sensible to include them in ownership transition discussions because they held important positions in the company. As Ms. McNally’s father and uncle started to step back from day-to-day operations, they needed a plan to do it in an orderly way. Ms. McNally played a key role as change agent working closely with other senior managers.

Many owners underestimate the effort needed to prepare a company for ownership succession and the scrutiny of a buyer. They often think a fresh coat of paint is all it takes or that the business will sell itself. “However, this may not get you the best price or the right buyer,” Ms. McNally says.

Based on first-hand experience, the McNally story shows that a team effort is required to prepare a business for sale. Here are key actions to think about:

The classic chestnut – strategy
Regardless of timing, a business will be more attractive to a buyer if there is a defined strategy. Not only did McNally’s senior management understand the segments of the market that were most attractive, they developed a plan to capitalize on these opportunities and they had a proven track record that demonstrated credibility to buyers.

Figure out what drives profitability
Management realized that as the company grew it needed to focus on its systems and processes and bring them to a higher standard. This required them to extract information from Ms. McNally’s father and uncle and to institutionalize their knowledge into procedures and training that would be in place when they were ready to step away.

Hire your experts early
The shareholders wanted all of their advisers – lawyers, tax planners, family succession and investment bankers – to work as a cohesive team. This required all parties to have an understanding of each other’s roles and required effective communication within the team. The advisers were brought in early and they were given ample time to meet management, assess the go-forward leadership team, and become intimately familiar with the business and where it was headed so they could address the key questions that buyers would no doubt have.

“Selling a business and planning for succession is emotional,” Ms. McNally says. “It creates not only work stress, but family stress as well. That’s when you need to lean on your advisers.”

By 2010, the family forum moved into the final stage. All the preparation by management and advisers provided the family and shareholders with the ability to set realistic expectations regarding value and business fit in the event of a sale.

Ms. McNally and her husband Colin Brown now run a consulting practice called McNally Brown Group, which specializes in preparing family businesses for a sale.

Jacoline Loewen is a director at Crosbie, which focuses on succession advice for family businesses and closely held small to medium-sized enterprises. Crosbie develops customized strategies, particularly in relation to M&A, financing and corporate strategy matters. Ms. Loewen is also the author of Money Magnet: How to Attract Investors to Your Business. 

How to make your business more attractive for sale

The dismal financial results for 2009 no longer need to be included in a company’s books. For any business looking to sell, this significant milestone allows for a marked improvement when potential buyers look at the performance of the past three years. The conversation doesn’t have to start with: “We looked at your financial statements. What happened in ’09? Want to talk about that first?” That said, there is still a noticeable gap in valuation expectations between buyers and sellers. “The market downturn stripped out the profits for private companies and the survivors reduced and reinvented their businesses to add to their top line,” says Bob Gorrie, owner of Gorrie Marketing Services. “These owners have put a great deal of sweat equity into their businesses, and unfortunately that extra hard work and planning is not reflected in their financial results.”

But as the markets improve, profits are returning and owners interested in selling are watching their industry cycles like hawks for the upswing, waiting to get the timing right. A more relevant question for these owners is “where is my own business in its life cycle?”

For any business owner contemplating a sale in the next few years, here are a few ways to add to the valuation:

Does your business have solid management?

The owner may be leaving but buyers want to know whether there’s a team in place with big goals to drive the business forward with equal determination.

Having a succession plan is critical, but when Crosbie & Co. recently conducted an owners’ survey, it revealed that fewer than 5 per cent have a written document with a strong operator or family member ready to take over. Owner-operators have built their lives around running their businesses and they do not want to let that go. This reluctance may prevent them from seeing the importance of planning for their own exit and they will get dinged on their company sale price for this omission.

Are your key processes institutionalized?

“There is the risk that the company incurs a fatal loss of knowledge and connections upon the exit of the owner,” the president of a manufacturing business told me. “The earn-out helps, but two to three years does not make up for 30 years experience in a company. One way to mitigate this risk is to bring in a guy like me.” Paying a high-quality CEO for a few years will help the owner of a windows manufacturer convert “in the head” knowledge to written processes. “We preserved the knowledge and demonstrated the existence of a reliable management team to a potential buyer,” the president added.

Do you know good buyers?

The sale price of a business is what buyers offer and when a company is in the growth part of its business cycle, there will be multiple offers and phone calls from all sorts of interested parties. “I know the ‘I’m comfortable with my business’ owners where the offers to buy have made great sense,” says succession planning coach Janice Lahiti. “The owners don’t do it because they think their ability to influence a variety of broader agendas will diminish.” As the business hits the mature stage of its life cycle, which often occurs in tandem with the owner’s life cycle, suddenly the pool of multiple bidders dries up and as Janice says: “The owner can no longer command the multiples they want.”

The owner may also miss the opportunity to sell to a buyer who will structure the sale so that the majority of the company is purchased but the owner can keep 20 per cent to 30 per cent with a fixed medium-term buyout schedule. They can also have limited management or board involvement. This structure keeps the owner involved mentally and financially in his or her ‘baby’ while taking some money off the table to free up time to pursue other interests.

What is your opportunity cost, really?

Melanie Kau exited her successful family business, Mobilia, to take on the challenge of running Le Naturiste. “The ‘what next’ after you have worked for 15 to 20 years in a business prevents people from asking themselves the cost of staying where they are because they are comfortable. I know what that feels like because I have just been through it. Therein lies a great deal of value with the experience the entrepreneur has built up: sometimes the business is more like a cage than a platform.”

Jacoline Loewen is a director at  Crosbie, which focuses on succession advice for family businesses and closely held small to medium-sized enterprises. Crosbie develops customized strategies, particularly in relation to M&A, financing and corporate strategy matters. Ms. Loewen is also the author of Money Magnet: How to Attract Investors to Your Business.