Many businesspeople are so focused on operating their businesses, they forget about human capital – their most important asset. Organizations from small to large should strategically make a succession plan.
The worldwide global downturn exposed major management lessons starting in 2009.
Firstly, it was Bank of America. Secondly, it was HSBC. Both showed dubious succession planning, and investor and customer relations, according to published reports.
You might recall HSBC CEO Michael Geoghegan threatened to quit if he wasn’t named chairman. His widely publicized threat didn’t work. Instead, HSBC named Stuart Gulliver CEO, replacing Mr. Geoghegan, who retired at the end of 2010. Mr. Gulliver had been in charge of HSBC’s investment banking operations.
Bank of America’s situation was different. From the stakeholders’ point-of-view, B of A took an exasperating long time to name a new CEO. The delay suggested that the B of A board and outgoing CEO Ken Lewis bungled by not succession planning.
It wasn’t surprising that critics pointed out the significance of the job and why it’s important for a new CEO to get a running start.
Brian Moynihan walked into his new position facing a barrage of problems: B of A’s acquisition of Merrill Lynch ended with the bank paying a $2.43 billion settle with investors, friction with regulators, opponents in Congress who have questioned his leadership, and cultural issues within the company.
Succession planning should be an ongoing strategic process. It’s vital for identifying talent and building a reserve bench for development. There’s a link between financial performance and succession planning.
Delays are costly
However, delays in succession planning result in a perceived lack of competence – image problems in the marketplace, among shareholders and internally with employees.
To empower shareholders as a policy matter, the Securities and Exchange Commission issued a nonbinding legal bulletin calling for transparency in management succession.
So it isn’t surprising that activist shareholders went after the likes of B of A, American Express and Whole Foods regarding their succession plans. That included the 500,000 member Laborers’ International Union of North America. The union targeted 14 companies and asked them to disclose their succession plans in detail.
More than 1,ooo executives admit their problems with succession planning, according to a study by search firm Egon Zehnder.
None of the responding executives believed they’re good at succession planning. Forty-seven percent admitted being mediocre in the process of succession planning and 53 percent disclosed their ineffectiveness.
“The global financial crisis has resulted in high CEO turnover. This fact combined with the recent SEC announcement that would allow shareholders to challenge the Board to disclose more information about plans for CEO succession, makes developing a succession plan even more critical,” says George L. Davis, Jr., an executive at Egon Zehnder.
Responding were 1,092 senior executives in every business sector from a total of nine nations.
While the situation was untenable in the U.S., it was worse overseas. Seventy-one percent of UK responders believed they’re just so-so in succession planning while 80 percent of French executives said they are unsuccessful.
But it isn’t bleak everywhere abroad. Fifty-seven percent in India believed they’re doing well and 70 percent in Germany said they were successful.
Small business complications
For small family businesses, succession planning is complicated by the federal estate tax. Also derisively called the death tax; 45 percent after a $3.5 million threshold on heirs of family estates.
Not to mention the time-consuming preparation for a business owner who is advanced in age, the estate tax is a nightmare for family businesses with considerable land, such as farms, or manufacturing equipment.
The tax jeopardizes the business. Because of cash flow, many heirs have to sell company assets to pay the tax.
Yes, some business owners incrementally transfer assets before their passing to avoid the harsh tax. But often some find they lose control of the business to their heirs while they’re still alive.
Will vs. succession planning
Some small business owners erroneously believe a will constitutes a succession plan. Not true. They’re not the same thing.
New businesses don’t need a succession plan. They should start thinking about a succession plan when the business starts to grow in value. Professional guidance should be obtained.
Every case is different but here some basic elements to consider:
- If children are involved, first learn if it’s feasible for them to be involved in the family business.
- Get a sense from every family member regarding the business’ future.
- Give summer jobs to children that will expose them to all areas of the business. Not all kids are interested in eventually taking over. That’s disappointing to parents, but the sooner they know the better.
- If you have a partnership, you’ll need to draft a buy/sell document that includes an agreement on the business’ value so one partner can buy from the other. A shareholder agreement is customary for corporations.
- A vision for the business will be needed in case of death. To be decided – what should happen to the business and who will own the firm whether it’s a family member or partner. If the heir is not a relative but there are family members involved, an instrument should be devised in case the partner will buy out the shares of the surviving family members.
- After developing an agreement on the succession plan, then decide on insurance matters for liquidity purposes.
- Review the succession plan on a regular basis and update it as needed.
Finally, a word of caution: More than 90 percent of family businesses typically don’t succeed past the second generation.
Weak management is often the reason why inherited businesses do not succeed. And unless the children invest or buy the business from their parents, it usually doesn’t work. It’s often better if they don’t receive the business as a gift.
Not to be cruel, but the heirs simply don’t have the passion or ability to manage a business founded by their parents.
From the Coach’s Corner, here are related resources on management and succession planning:
HR — Succession Planning Is Essential for Business Success – To keep growing a business, it’s vital to preserve the trust of customers, employees, partners and investors. No matter how small or large your company is, a strategically written succession plan for the chief executive officer and talented employees is critical for sustainability.
Rules to Successfully Bring Your Kids into the Family Business — Naturally, in bringing your kids into your family business, the key to long-term success is to do it the smart way. Here’s how.
Remove Guesswork for Promoting Talent within Your Business — In baseball to win the World Series, there’s often a correlation among a team’s management, talent and its farm system. That’s true for business.
HR: Overcoming Tech Trends, Boomer Retirements — There are ominous implications for human resources departments — from the same tech trends that have empowered consumers to force businesses into the digital age.
“Management must manage!”
-Harold S. Geneen