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During over three decades of advising and studying CEO transitions in family businesses, we have designed, executed, and witnessed a variety of succession plans and transitions, including some detours. Every family business system’s dynamics, goals and timetable are unique. Still, a process that is well framed and executed with discipline¬–and is unhurried, uninterrupted, principled, fair, and transparent–is the surest way to transition to the right CEO. It is worth the owners’ investment of time and thoughtful planning to ensure that the appropriate individual is chosen to take the company to new heights. It is as important that the ownership group, board of directors, and family are united behind the new leader and his/her mandate. Context Addressed in This Article But of course, sometimes a leadership transition must take place under unfavorable conditions. It may be triggered suddenly, as in the wake of the early death or incapacitation of the current leader, or unexpectedly, such as upon the ousting of a poor-performing CEO. This article addresses succession under favorable circumstances, in order to provide a benchmark. The succession process described here is typical for a first generation, founder-stage business transitioning to the second generation, though its lessons are applicable to later generations under similar circumstances. Our assumptions of these circumstances include that the company:
In addition, this article’s recommendations assume that the:
Succession Planning: The Wrong Way
Starting here is a mistake, for several reasons. First, it assumes that the company should be perpetuated instead of sold, which every departing CEO should question before passing the reigns. On a routine basis, the CEO and board of directors should evaluate the industry’s life cycle, the company’s strengths and opportunities for growth, its market value, and the family’s core competencies and goals in order to evaluate whether the business is still the right fit for the family. Second, it assumes that the next generation is interested in leading, is capable of leading, or is enthusiastic about sharing the leadership role. Sometimes none of these is the reality, nor has it been discussed in any formal way with next generation members. Third, it does not engage the next generation in the conversation or the future visioning process for the business leadership and ownership, which can lead to frustrations, suspicions, and strained relationships. Finally, both these questions tend to imply that the next CEO should have similar views and a similar leadership style, or even be a clone of, the current CEO. These leaders quickly zero-in on a chosen candidate to replace them, and the company has to adjust to fit the candidate, rather than the reverse. In reality, most CEO successors need to have a different profile than the current leader: the competitive environment is evolving quickly; the company has reached, or is moving toward, a different stage of growth; and its business imperatives are changing. Instead of starting in this way, the thorough approach described in this article suggests a dynamic set of steps. If you are not in a position to plan for succession with such a strategic approach, delegate it to an independent board member. If you don’t have a board of directors or an advisory board, appoint an external, unbiased, and trusted advisor in the role of championing and monitoring the succession process. • • • Succession Planning: A Better Way When considered as a whole, it is easy to see that it takes a team of people in different leadership positions to make the family successful for another generation or more. The CEO of the core business is a critical position, since the business often represents the most important source of income and networking relationships for the family; but that leadership position isn’t the only one in the system. If the family wishes to renew entrepreneurship in new areas, or to build social enterprises or a philanthropic foundation, additional kinds of leaders could be needed. If the real estate portfolio is poised to grow, a different need for leadership might emerge. New initiatives and ventures offer new opportunities and call for different skills. When families look together at the total family enterprise, and envision where it is today and where the family wants it to be in the future, members of the next generation often respond to the visioning process with relief: they are able to play an active part in thinking about and designing the future of the family enterprise. They see an array of options where they can contribute in active roles, even if this means that some of them will not enter or lead the core business. When this overall picture becomes more limpid, the future role of CEO of the core business also becomes clearer for many family members and owners. Then the senior generation leader can enter a strategic process for anticipating the future needs of the company and the skill sets required from the next CEO in ways that better respond to future imperatives. When to Begin the CEO Succession Process,
And How Long to Take Therefore, members of the senior generation should take care in how they represent the business to young members of the family, and depict a world where there is room for senior and junior generations to work together. At the same time, it is important to instill a sense of professionalism required for the company’s success in the minds of the next generation. Children should know that the company needs to have the best leader possible to maintain its healthy growth. Start early by engaging the younger generation around both the challenges and the positive benefits of the family business, including the business’ constant need for excellence in people, products, client relationships and so on. This will go a long way toward clarifying some of the fundamentals of the transition process many years down the line. As for the active succession process for CEO renewal, it should start at least three to five years before the current CEO steps down and no longer serves full-time in the CEO role. Exactly how much time is needed depends on many factors, such as:
In less complex contexts, a few years may be sufficient; in larger more complex systems, a minimum of five to ten years is often needed. But the important principle that applies to all family businesses of any size or generation, when aiming to keep ownership and leadership within the family, is the following: The most effective succession transition occurs not when the senior generation is ready to leave, but when the next generation is ready to lead. Importance of the Board of Directors In most situations of leadership succession in the business, the active role of a Board of Directors (or Advisory Board) will be critical to success. This is true in both situations where (i) a family member is selected as CEO, and (ii) a non-family CEO is selected after an era of family member CEO(s). In the first case, it is delicate for the family member CEO to report to one or more family owners; not only does this make accountability difficult, but it also makes substituting the CEO a sensitive family matter. In the latter case, adapting to a non-family CEO (especially if selected from outside the organization, rather than nurtured from within the organization), involves risks of misalignment in: goals, understanding of the family’s critical needs, and leadership roles to be played by the family owners, the board and the CEO. We believe that a well-structured board (which can be fiduciary or advisory in the beginning) can greatly enhance the probability of success in a CEO leadership transition. Having the board involved in defining the desired profile and in the subsequent stages of selecting the CEO candidate will make the process clearer and more objective. In addition, once a CEO candidate is selected, the board will help the onboarding and add credibility to the performance evaluation of the CEO, helping him/her define ambitious goals and objectives and provide support and feedback to the CEO in an objective, constructive manner. And finally, if the CEO ultimately is not performing well and / or is not aligned in terms of cultural fit or goals, the board will have the responsibility of recommending appropriate changes. A significant benefit to this process is that it also forces the family owners to confirm how they, and the board of directors, will partner with the CEO, and what will be the boundaries of everyone’s roles and responsibilities. Succession is a
Dynamic Process In rare situations, the senior generation is of the mindset that the next generation must lead without the oversight of the senior generation, which lends itself to a clean and abrupt transfer of leadership at a given moment in time. But this is more and more uncommon, particularly at the founder or controlling owner stage. Except under extraordinary circumstances, we advise against it. There is profound benefit potential of the two generations leveraging each other’s skill sets and views of the world to make better strategic decisions for the company, as long as each individual’s roles and decision-making allocation are clear. STAGE 1: PREPARATION AND PLANNING Develop the Family’s Vision for the Business Ask yourself:
Develop the Profile for the next CEO
As you ask yourself these questions, begin to create a profile for the leader based on the company’s needs—irrespective of any individual candidates. Develop the Vision for the Family’s Role in the Business This is a wonderful time for family members to talk about their future together. The family owns a common asset – the business – or they will own it together once some ownership is acquired by, or shared with, next generation members. And even if some family members are not owners, they might receive income from working in the company as an employee, or leverage the networks and reputation developed by the company to help their professional career outside of the company. How does the family want to care for that asset collectively? How do they want to nurture it? What do they want from it? Or does the family feel that selling it might be an option that needs further investigation? Initiate important conversations about the family’s highest and best use in the business.
Consider
Potential Candidates If no candidate emerges, the best decision for the perpetuation of the business may be to delegate executive leadership to a non-family member, at least for a certain number of years, and for the family to lead strategically from the board of directors and their ownership roles, partnering closely with the new CEO. In this case, a different process is used to source non-family CEO candidates, either from within the company or externally. This process is not addressed in this article. Plan the Senior Generation’s Next Act Define a Roadmap for the Succession Process Determine who will lead the process and bring some neutrality to it:
Decide what the major milestones will be, and set a timetable. You will likely revise it from time to time, but having a timeline will help to clarify the phases and steps for the current leader and the CEO candidate(s). Set criteria for the successor’s readiness for the job of CEO—it will be your barometer throughout the succession process. With this, you will be ready to assess a successor’s development needs, and begin grooming him or her to ensure success. Determine how and when you will communicate to various stakeholders so they are informed, included, or consulted. STAGE 2: IMPLEMENTATION, ADAPTATION, AND TESTING If there is more than one successor candidate in the next generation, make sure the process of development and assessment of candidates is crystal clear. Surround them with proper mentors and coaches to assist in their positive experience of the process. Make sure that there is a ‘plan B’ for those who will not make the cut: either provide them with career orientation, some other leadership roles in the family enterprise suited to them, or other forms of assistance in finding their own path to a successful life. Conduct Assessments of the Candidate
It is not uncommon to conduct a psychological evaluation of the successor candidate at this time to provide greater insight and assurance that we will later understand their behavior under stress and fatigue, for example. Identify the gaps between what knowledge, abilities and experience the successor candidate has and what he or she needs to succeed. To benchmark, use the leadership profile and list of readiness criteria which you developed in Stage 1. Design a Development Program Every succession plan looks different in this area, but here are examples of some components and stretch assignments for a development program:
Provide the Candidate with Regular Feedback Feedback should not be given by the current CEO, but by objective outsiders, such as the board, a non-family manager, a facilitator, a coach, or a combination of these. These are regular, respectful conversations, but the overall message should be that the family will prioritize the company’s healthy growth in this process, and the successor will be promoted based on merit. A Potential Interim Role Appoint the Incoming CEO The CEO’s mandate from the board or owners, performance measurement system, compensation and incentive package, and all other areas requiring clarity should be addressed at this time. Once finalized, the owners, the family and employees are notified first; then a public announcement is made. Support for the Departing CEO STAGE 3: TRANSITION AND STEADY STATE It is important to note that the role of the Chair of the Board must be clearly defined. This is not a disguised title for hanging on to the CEO position. That would undermine the new CEO, which leads to collateral damage that the organization ought not spend its resources managing. Of course, in some instances, the former CEO may choose to retire and leave the company completely, without serving on the board. If there has been thoughtful partnering throughout, this can be a seamless transition. In this case, having a strong board is even more critical in overseeing and partnering with the new CEO. Common Pitfalls and How to Avoid Them Below are ten typical pitfalls to avoid:
The way to avoid most of these pitfalls is with planning, communication, and a principled approach. Don’t wait to begin. Map out the process, make it transparent, and embrace it. Partnering between the two generations is also vital: it ensures that the planning and implementation process is a team effort with a common goal and shared responsibility for the outcome, and that it is done with respect and empathy. Make sure to celebrate achievements of milestones as you move forward. The succession process takes time. Try not to lose energy and clarity of where you are along the way. Succession planning will be one of the most important processes your family business will undertake. Give it the time and attention it deserves, and it can result in victories for every aspect of the family enterprise system—a thriving business, effective ownership, and stronger family relationships. • • • It is important to note that succession of both leadership and ownership are essential. Leadership succession gets most of the attention of boards of directors, business schools, and the literature—and is the sole focus of this article. But succession involves passing management and at some point ownership to the next generation. In a forthcoming article, we will address ownership succession. How do I take over a family owned business?Tips for Taking Over the Family Businesses. Plan in Advance for Succession.. Understand Core Company Functions.. Make a Mock Business Plan.. Be Flexible and Patient.. Why is management succession a problem for family owned businesses?Without formal succession planning, family-owned businesses run the risk of not being sustainable. Some owners regard succession planning as simply a question of informally handing over the business from one generation to the next. They do not want to plan or think about their withdrawal from the business.
Which of the following is an advantage of hiring professional managers to run family on business?A . Allow them to work in senior management positions and make important decisions . B. Give them a permanent leadership position in the business .
When transferring the ownership of the business an entrepreneur can do which of the following?The three main options are: transferring ownership to a family member, transferring ownership to a non-family member or disposing of the business through a sale, management buy-out, management buy-in or voluntary liquidation.
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