Texas Business Dispute Blog

Wednesday, October 5, 2016

Business Succession Planning Part 2 – Putting Your All-Stars in Play

By: Ladd Hirsch

The successful business owner needs to be able to multi-task, including in the area of succession planning. As noted in the previous post, business owners need to develop and then implement two different succession plans, one for crisis management that applies in the event of an emergency, and a second one that transitions the company’s management and its ownership to new hands. This second post focuses on management succession planning, and the final post in this series will review the steps involved in transitioning to new ownership.

The Goals of Succession Planning

According to Wikipedia, “Succession planning is a process for identifying and developing new leaders who can replace old leaders when they retire or die. . . . In business, it entails developing internal people with the potential to fill key business leadership positions in the company. Succession planning increases the availability of experienced and capable employees that are prepared to assume these roles as they become available.”

As is often the case in business, defining the goals is easier than achieving them.  In succession planning, the business owner’s objective is transitioning to a new group of excellent leaders at the company.  This post reviews helpful pointers for business owners to consider in succession planning to the next generation of leadership.

Build From Within If Possible

Years ago, a study from Booz Allen Hamilton concluded that “over their entire tenures, CEOs appointed from the inside tend to outperform outsiders” when it comes to returns to shareholders. A succession plan helps to identify new leaders for the company and then provides for mentoring these new leaders. This type of internal succession can only be achieved, however, when owners identify the best leaders in the company and carefully groom them for additional responsibility.

If leaders are not developed within the company and are not prepared to assume control, there may be a leadership vacuum when the business owner is ready to retire or to step back from a full-time role.  When the company does not have capable leaders to promote, the owner may need bring in outsiders to take on leadership positions.  This influx of new leadership may be positive in providing fresh ideas, renewed enthusiasm and a broader perspective.  Yet, injecting  new leaders in a company is also fraught with risk, because they may not be readily accepted, they may alter the company’s culture and create internal conflict.

The process for identifying and developing new leaders starts at the top with the business owner, but the owner should also obtain input from others.  Specifically, the owner should: (i) consult with board members to identify the best and brightest employees within the Company, (ii) make the identification and development of new leaders a subject in the company’s advisory board and strategic planning meetings, and (iii) consider conducting surveys to determine what key clients have concluded regarding the company’s senior employees and their leadership abilities.

The Mentoring Process

Just as important as identifying new leaders within the company is the process of preparing them for success. The succession plan therefore needs to outline a training program for leaders.  This process should include guidance, mentoring and team building by the owner and other senior leaders, as well as external input, such as management training programs, leadership development seminars and industry specific overviews.

In short, the company needs to make an investment in developing its leaders.  The goal is to help these leaders become both well-equipped with substantive knowledge and also well-respected by others on the company’s management team.  As leaders devote the time to this process, they will develop both leadership and motivational skills, and respect will happen naturally.

Put Leaders to Work and Course Correct, If Necessary

The succession plan needs to be road tested by providing emerging leaders with opportunities to demonstrate their leadership abilities.  This can be accomplished by giving them special projects, initiatives or programs to handle for the company. An article by Stephen A. Miles that appeared in Forbes points out that the most neglected step in succession planning for a CEO is preparing for what happens after the successor is named.  According to Mr. Miles, there is no such thing as a “ready now” candidate, because anyone who is named as a successor CEO has learning to do, and mistakes to recover from.  

Mr. Miles encourages owners to take advantage of the time between announcing the new CEO and his or her start date so that leadership can address as many needs as possible.  At that point, Mr. Miles states that, “Crucial support must be provided–a good team, wise and accessible mentors, executive coaching and a feedback-rich environment–to create a setting in which the new CEO can be the most effective.”

I would add a couple of points to those of Mr. Miles.  First, he correctly points out that no CEO can be expected to be error free from Day 1.  Nevertheless, it is also important to note that the succession plan does not kick into gear the day that the CEO takes over.  The plan that we have been discussing has been in place for years, and the person who is appointed as CEO from within the company will have received extensive training before assuming the reins.  Second, the owner needs to be prepared to make a course correction as necessary if, despite the best laid succession plan, it turns out that the new CEO cannot maintain the company’s success.  The appointment of a new CEO is a vote of confidence in his or her ability to guide the company into the future, but it should not be viewed by either the CEO or the company as a permanent installation.

Conclusion

A well-conceived succession plan helps to identify the company’s best new leaders, provides for their training and mentoring before promotion and gives them the support they need after they move to positions of greater power.  The plan also has an assessment component to make sure that these leaders perform well in their new position and, if not, to allow for a further transition to take place that ensures the company’s continued success.


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