MANAGEMENT SUCCESSIONPLANNINGManagement succession planning is the process of preparing an organization for a transition inleadership. Succession planning is helpful when a management change occurs due tounforeseen circumstances, such as the sudden death of a corporations chief executive officer(CEO). But it is also important in ensuring a smooth transfer of power under normalcircumstances. "Management succession planning will allow an institution to keep movingforward when the inevitable occurs," consultant Rhonda Cooke told Americas CommunityBanker. "Retirement, career mobility, ill health, termination, or death will require theappointment of a new chief executive officer at some point."One important aspect of management succession planning involves evaluating the skills ofpeople in the organization and identifying those employees who have the potential to ascend totop management roles. In this way, succession planning encourages staff development and sendsa message to employees that the organization is serious about developing people. It may alsopersuade talented employees to remain with the company rather than looking elsewhere forgrowth opportunities. Grooming a successor from within the company can save the time andexpense of hiring a new leader from outside. It also aids in continuity, as an insider might bemore likely to follow through with current plans and strategies.The key to management succession planning is preparing a written succession plan. Thisdocument provides for the continued operation of a business in the event that the owner—or akey member of the management team—leaves the company, is terminated, retires, or dies. Itdetails the changes that will take place as leadership is transferred from one generation to thenext. In the case of small businesses, succession plans are often known as continuity plans, sincewithout them the businesses may cease to exist. Succession plans can provide a number ofimportant benefits for companies that develop them. For example, a succession plan may help abusiness retain key employees, reduce its tax burden, and maintain the value of its stock andassets during a management or ownership transition. Succession plans may also prove valuablein allowing a business owner to retire in comfort and continue to provide for family memberswho may be involved with the company.Despite the many benefits of having a succession plan in place, many companies neglect todevelop one. This oversight may occur because the CEO or business owner does not want toconfront his or her own mortality, is reluctant to choose a successor, or does not have manyinterests beyond the business. Although fewer than one-third of family businesses survive thetransition from the first generation to the second—and only 13 percent remain in the family formore than 60 years—just 45 to 50 percent of business owners establish a formal succession plan."Succession and the planning it entails is equivalent to planning ones own wake and funeral," asErnesto J. Poza, president of an Ohio-based family business consulting firm, remarked inIndustrial Distribution. "But the fact is that the transfer of power from the first to the secondgeneration seldom happens while the founder is alive and on the scene. The succession transitionis the most agonizing change I have ever seen CEOs and top management teams confront." Up to
40 percent of American businesses may be facing the management succession issue at any giventime.PREPARING FOR SUCCESSIONExperts claim that management succession planning should ideally begin when the CEO orbusiness owner is between the ages of 45 and 50 if he or she plans to retire at 65. Sincesuccession can be an emotionally charged issue, sometimes the assistance of outsider advisersand mediators is required. Developing a succession plan can take more than two years, andimplementing it can take up to ten years. The plan must be carefully structured to fit thecompanys specific situation and goals. When completed, the plan should be reviewed by thecompanys lawyer, accountant, and bank."One of the main reasons business owners should take the time to create a successful continuityplan is that they should want to get out of the business alive, with as much money as possible,"Joanna R. Turpin noted in Air Conditioning, Heating, and Refrigeration News. To do this, thebusiness owner has three basic options: sell the company to employees, family members, or anoutsider; retain ownership of the company but hire new management; or liquidate the business.An employee stock ownership plan (ESOP) can be a useful tool for the owner of a corporationwho is nearing retirement age. The owner can sell his or her stake in the company to the ESOP inorder to gain tax advantages and provide for the continuation of the business. If, after the stockpurchase, the ESOP holds over 30 percent of the companys shares, then the owner can defercapital-gains taxes by investing the proceeds in a qualified replacement property (QRP). QRPscan include stocks, bonds, and certain retirement accounts. The income stream generated by theQRP can help provide the business owner with income during retirement.FOUR STAGES OF SUCCESSIONIn the Small Business Administration publication Transferring Management in the Family-Owned Business, Nancy Bowman-Upton emphasizes that succession should be viewed as aprocess rather than as an event. She describes four main stages in the management successionplanning process: initiation, selection, education, and transition. In the initiation phase, possiblesuccessors learn about the business. It is important for the CEO or business owner to speakopenly about the business, in a positive but realistic manner, in order to transmit informationabout the companys values, culture, and future direction to the next generation.The selection phase involves actually designating a successor among the candidates for the job.Because rivalry often develops between possible successors—who, in the case of a familybusiness, are likely to be siblings—this can be the most difficult stage of the process. For thisreason, many business owners either avoid the issue or make the selection on the basis of age,gender, or other factors besides merit. Instead, Bowman-Upton recommends that the businessowners develop specific objectives and goals for the next generation of management, including adetailed job description for the successor. Then a candidate can be chosen who best meets thequalifications. This strategy helps remove the emotional aspect from the selection process andalso may help the business owners feel more comfortable with their selection. The decision aboutwhen to announce the successor and the schedule for succession depends upon the business, but
an early announcement can help reassure employees and customers and enable other keyemployees to make alternative career plans as needed.Once a potential successor has been selected, the company then enters the training phase.Ideally, a program is developed through which the successor can meet goals and graduallyincrease his or her level of responsibility. The owner or CEO may want to take a number ofplanned absences so that the successor has a chance to actually run the business for limitedperiods. The training phase also provides the business owner or board of directors with anopportunity to evaluate the successors decision-making processes, leadership abilities,interpersonal skills, and performance under pressure. It is also important for the successor to beintroduced to the business owner or CEOs outside network during this time, includingcustomers, bankers, and business associates.The final stage in the process occurs when the business owner or CEO retires and the successorformally makes the transition to his or her new leadership role. Bowman-Upton stresses that thebusiness owner can make the transition smoother for the company by publicly committing to thesuccession plan, leaving in a timely manner, and eliminating his or her involvement in thecompanys daily activities completely. In order to make the transition as painless as possible forhimself or herself, the business owner should also be sure to have a sound financial plan forretirement and to engage in relationships and activities outside of the business.ALTERNATIVE SUCCESSION MODELSIn their book Family Business Succession: The Final Test of Greatness, Craig E. Aronoff andJohn L. Ward outline a number of steps companies should follow in preparing for succession.These steps include: Establishing a formal policy regarding family participation in the business. Providing solid work experience for all employees, to ensure that succession is based on performance rather than heredity. Creating a family mission statement based on the members beliefs and goals for the business. Designing a leadership development plan with specific job requirements for the successor. Developing a strategic plan for the business. Making plans for the preceding generations financial security. Identifying a successor or determining the selection process. Setting up a succession transition team to keep decision makers informed about their role in the changes. Completing the transfer of ownership and control.Throughout all these stages of preparation, Aronoff and Ward note, communication is key.Turpin described several steps involved in developing a written succession document. Thesesteps include: Gathering information, on both the personnel involved and the company itself. Choosing advisers, including continuity specialists and people who will be involved internally.
Deciding upon the companys objectives, including financial and personal goals, as well as those related to ownership and control. Laying out the components of the plan. Preparing the formal documents and obtaining funding as needed. Reviewing the plan every one to three years or whenever the companys personnel or structure changes.A final consideration in succession planning is for the owner or CEO to decide what he or shewill do after concluding involvement in the business. This step, which is something like apersonal succession plan, is important in helping the business leader make a successfultransition. "Its so much easier to let go of something when you have a new direction in which tomove," psychiatrist Barrie Greiff explained in Industrial Distribution.SUMMARYAlthough management succession planning can be problematic and even painful, it is vital toensuring the continuity—and perhaps even the continued existence—of businesses following thedeparture of the owner or CEO. Many business leaders are reluctant to plan for what will happenwhen they are no longer with the company, usually because they find it unpleasant to confronttheir retirement or mortality. It may be helpful to consider succession planning as an extension ofemployee development programs. "Succession planning," William T. Marshall wrote inAmericas Community Banker, "should reach deeply into an institutions management ranks toprepare managers at all levels for career advancement, perhaps to the very top."SEE ALSO : Employee Stock Options and Ownership ; Family-Owned Businesses[ Laurie Collier Hillstrom ]FURTHER READING:Aronoff, Craig E., and John L. Ward. Family Business Succession: The Final Test of Greatness.Business Owner Resources, 1992.Bowman-Upton, Nancy. Transferring Management in the Family Owned Business. Washington:U.S. Small Business Administration, 1991.Drury, James J. "Looking beyond the CEO for Management Succession." Corporate Board 17,no. 101 (November/December 1996): 6 + .Dutton, Gail. "Future Shock: Who Will Run the Company?" Management Review 85, no. 8(August 1996): 19 + .Frieswick, Kris. "Successful Succession." Industrial Distribution 85, no. 4 (April 1996): 61 +.Lea, James W. "Dad May Not Know Best When Planning Succession." Washington BusinessJournal, 27 March 1998,53.
Leibman, Michael. "Succession Management: The Next Generation of Succession Planning." HRPlanning 19, no. 3 (September 1996): 16 + .Marshall, William T. "How to Succeed with Management Succession Planning." AmericasCommunity Banker 6, no. 6 (June 1997): 20 + .Rothwell, William J. Effective Succession Planning. New York: AMACOM, 1995.Shanney-Saborsky, Regina. "Why It Pays to Use an ESOP in a Business Succession Plan."Practical Accountant 29, no. 9 (September 1996): 73 + .Turpin, Joanna R. "Succession Planning Requires Long-Term Strategy, Implementation." AirConditioning, Heating, and Refrigeration News, 28 April 1997, 8 + .Read more: Management Succession Planning - benefitshttp://www.referenceforbusiness.com/encyclopedia/Man-Mix/Management-Succession-Planning.html#ixzz1rhtZnrrR