Grooming a Successor

Thursday, June 1, 2006 - 15:54

As a large number of business owners are retiring, the lack of real succession planning doesn't augur well for many companies. Few companies are planning for this contingency by identifying and promoting the right talent, writes Darren Baguley

Peter Sheppard, the Founder and Owner of Peter Sheppard Footwear, went into the shoe business when he opened a shop in Little Collins Street, Melbourne , in 1973. He started off targeting the youth market, but in 1981 changed the business focus to service a niche market for non-standard fittings: people with narrow, wide or large feet and for whom comfort is paramount.

With a strong focus on service and stock availability, Peter Sheppard Footwear went from strength to strength, opening stores in Sydney and Brisbane. Sheppard had always intended to hand over the business to his children, and was well aware of the need for an orderly succession. His son-in-law, Kerim Van der Looy, was appointed CEO in 2001 and his daughter, Melanie Van der Looy, was designated Merchandise Director. Nevertheless, when Sheppard's two youngest sons entered the business, conflict started as one son felt he was not progressing.

This situation is only too familiar when it comes to family-owned businesses, but at least Peter Sheppard had an orderly succession planned. More than 60 per cent of all companies in Australia are family owned and they employ over 50 per cent of the workforce, yet 77 per cent have no management succession planning in place, says Professor Kosmas Smyrnios, Director of Research, School of Marketing, RMIT University. Smyrnios's research team's 2003 Family and Private Business Survey shows that we are on the verge of the largest transfer of wealth in Australia's history: 68 per cent of current business owners will retire over the next decade as the baby boomers age.

The situation is not a lot better in public companies, and a paucity of research on the issue doesn't help matters either. A February 2005 Harvard Business Review article says that in the US there is a CEO succession crisis, and more than half the companies there with revenues of greater than $500 million have no succession plan at all. A recent report by the Business Review Weekly suggests that the situation in Australia is not much better. One reason for this lack of awareness and urgency is that the majority of Australian companies refuse to publicly discuss their succession plans. Less than 10 per cent of Australia's top 50 public companies were willing to talk about their succession plans, 60 per cent would go no further than admitting they do have a succession plan in place and 40 per cent are unwilling to say anything.

To be fair, however, succession plans have several inherent difficulties. Very few people, less than 5 per cent of business executives, are capable of succeeding in the top job, says Sally Laughlin, Founder and Executive Chairman of boutique executive search firm Laughlin Executives. Another catch is that a succession plan is only effective if it identifies a suitable candidate, but whether the board has made the right choice or not will only be apparent some time after the appointment of the new CEO.

Additionally, while executives who have been identified as potential CEO material can be told they're on that track, when they will actually succeed to the top job is an unknown. There may well be two or three other candidates, it's not always clear when the incumbent will be leaving, and people sometimes get impatient waiting and accept a job offer elsewhere. Nonetheless, it seems that a large proportion of the boards of top companies in Australia lack commitment to the process of identifying and nurturing potential future CEOs from within the organisation, and many do not have a successor lined up to move into the top job in an emergency.

With private companies, the situation is even more complicated because of the personal, as opposed to business, factors involved. Sometimes the company has been built up by one person who doesn't like to think that he or she is not indispensable, let alone that one day they're going to die or no longer be capable of running the business. Other factors include the practical difficulties of designating one son or daughter as the heir apparent, or splitting up a company amongst a number of descendants, not all of whom may be interested in working in the family business.

Although the reasons for not having an effective succession plan vary greatly between publicly listed and family-owned companies, the consequences can be similar when things go wrong. While the process of initiating a succession plan gives a business the chance to develop an outline of the company's future, failure to do so often affects staff morale and reduces confidence in the company and its leadership. Managers at all levels, but especially those who think they've got what it takes to be CEO, can spend too much time on internal issues and politics rather than focusing on the market, the competition and business strategy. The lack of a clear succession plan makes it almost certain that the transition to a new CEO will disrupt or divert business strategy continuity. It also risks loss of talent as would-be successors within the business may leave because their capabilities are not being recognised and developed.

"Succession planning in successful organisations doesn't just happen at the CEO level, it happens at all management levels, beginning with graduate trainees where outstanding recruits are fast-tracked through pre-management programs; then there is the management fast-track of talent, and then the executive fast-track of talent," says Laughlin. "The goal is always to grow the business, and some of the issues to consider are departure risks, managers retiring and increasing graduate numbers."

Family issues

Succession planning for family-owned companies is very different, but no easier, according to Managing Director of the Family and Private Business Advisors Group, Graham Connolly. "With family-owned businesses, the issues are always personal, never business," he says. "That's why we work with all the stakeholders, family members, spouses and key employees, to find out what concerns, wishes and aspirations people have. I had one client - three brothers running a great little firm - who had tried five times to professionalise the company's management. Each time they failed miserably because they tried to do it without outside help and there were 'human issues' involved, which were too tricky for them to resolve. In this particular instance, the problem was that the three brothers' wives didn't get on and they were sabotaging the process."

It is for reasons like this that the owners of family companies turn to consultants like Connolly to sort things out. To help a family work through the process, Connolly interviews each family member to find out what they actually want to do with the company. He also consults senior non-family company employees.

"It can be hard sometimes. Especially when someone has worked all their lives to build up a business and they want to hand it on to a son or daughter, but then the interviews quickly show that the younger generation is not really interested," he says.

In cases where the next generation doesn't want to take on the family business, the best option is usually to ready the business for sale whether it be to another person, a management buyout or, if it's big enough, an IPO. But if there are members of the family who do want to take over the business, it's good to have a family retreat where family members and their spouses get together on neutral ground to work out a constitution that acts as a form of blueprint on how the company should be run, its future direction, and the rights and responsibilities of the different family members. Once such a document is drawn up, it is then finalised by the company's solicitor.

The younger generation not wanting to take over the business wasn't the situation with Peter Sheppard Footwear, however. "[Once the conflict started] I realised it was difficult to draw the line between business pragmatism and family emotion," says Sheppard. "I then decided to bring in an independent person who could guide us in a more professional way to overcome this conflict."

The independent person was Graham Connolly, and among his many recommendations was that Sheppard completely professionalise the management of the business with formal HR processes and clear delineations of responsibility. After going through the interview process and holding a retreat, where everyone was given a chance to air any grievances, a constitution was formalised so that everyone in the family knew where they stood and "they accepted some rules and protocols for running the business," says Sheppard. "One son who has been in the business for some time made a decision to leave and commence a Masters of Marketing, majoring in retailing, with a view to coming back into the business after he'd got two to three years' experience outside the company."

When it comes to addressing the problem of inadequate succession planning in a public company it is not easy, says Laughlin. Companies, such as GE, that do succession planning very well have inbuilt mechanisms in the corporate culture, and that is not something that can be achieved overnight. While the building blocks of a good succession plan can be put in place in a matter of months, it can take as long as a decade before such plans start to bear fruit.

"Companies need to ensure that they are grooming their talent and are looking at the best way to move talent around the organisation to give them the experience they need in different areas."

A good example of this is Westpac. The bank's CEO, Dr David Morgan, is due to move on soon, and two possible successors, the CFO and the head of institutional banking, have swapped roles as part of the succession process. The announcement late last year that CFO Phil Chronican would take over as head of the institutional bank started the speculation that he was being groomed for the top job. In turn, then institutional banking head Phil Coffey took over as CFO.

As Dr Morgan ran the bank before becoming the CEO it was quickly seen as a guide to succession. This sort of conjecture in itself can be somewhat destablising for any company.

The speculation will continue until Dr Morgan actually names the date. He will be 60 when his contract expires in December 2007 but at present he obviously doesn't want to be seen as a lame duck leader.

According to The Australian however, succession plans have been in place for the last five years with the board reviewing planning across its senior levels every year. This process, which also includes reports from search firms on outside talent, is claimed to be the reason there is such a spread of experience among Westpac's management team. This means there are a number of talented individuals inside the company who could fulfil the role in addition to the external subjects whose names keep coming up such as St.George's Gail Kelly. Interestingly, the ANZ CEO John McFarlane's contract expires in September 2007 when he will be 60, so the succession musical chairs is underway there as well.

According to Sally Laughlin, the other thing to keep in mind is that there is a worldwide shortage of talent, and money alone won't keep people.

"But having the company recognise their talent and ambition levels and have programs in place to fast-track that talent is one way to do it", she says.