Information about Succession Planning

Management Succession Planning

In organizational development, succession planning is the process of identifying and preparing suitable employees through mentoring, training and job rotation, to replace key players — such as the chief executive officer (CEO) — within an organization as their terms expire. From the risk management aspect, provisions are made in case no suitable internal candidates are available to replace the loss of any key person. It is usual for an organization to insure the key person so that funds are available if she or he dies and these funds can be used by the business to cope with the problems before a suitable replacement is found or developed.

Succession Planning involves having senior executives periodically review their top executives and those in the next lower level to determine several backups for each senior position. This is important because it often takes years of grooming to develop effective senior managers. There is a critical shortage in companies of middle and top leaders for the next five years. Organizations will need to create pools of candidates with high leadership potential.

A recent example of sound succession planning is the case of how General Electric found a successor to its CEO Jack Welch. The Board of Directors engaged in a lengthy and systematic review of the potential successors prior to his retirement.

With the Sarbanes-Oxley Act of 2002, succession planning in the United States has risen in importance as a corporate governance issue.

A careful and considered plan of action ensures the least possible disruption to the person’s responsibilities and therefore the organization’s effectiveness. Examples include such a person who is:

• suddenly and unexpectedly unable or unwilling to continue their role within the organization;
• accepting an approach from another organization or external opportunity which will terminate or lessen their value to the current organization;
• indicating the conclusion of a contract or time-limited project; or
• moving to another position and different set of responsibilities within the organization.

A succession plan clearly sets out the factors to be taken into account and the process to be followed in relation to retaining or replacing the person.

Business Succession Planning

Business succession planning involves planning for the smooth continuation and success of a business which depends greatly on the availability of competent people. Be it profit or non-profit organization, one of the concerns is there may be no successor to drive it once the leader or key person leaves – either by choice or by circumstances. This concern has been repeatedly expressed in the papers by leaders from the private and government sector. It is people, or more aptly, the right people, that make things happen. But the music will stop one day! If the leader or key person does not retire (whether by old age, disability or choice) he will end his time of service when he dies. And when they do, problems often set in. The day after is often filled with chaos and uncertainty.Business insurance and succession planning are the popular solution package offered by business succession specialists(accBizSS) to resolve issues of business succession.

What is likely to happen to the organization when a key leader is eliminated without succession planning in place? Here are somethings to expect. First, there would be either no able successor or where there is, the successor is often either unprepared to handle the heavy responsibilities placed upon them or he/she simply does not have the ability to manage the organization in the way it used to be. Whatever the case may turn out to be, the situation can be dire for the organization. Profit may be lost. Business can become untenable to continue. In the case of the unplanned death of an owner, the remaining co-owners and the heirs may be embroiled in a relationship crisis that threatens to wreck the business.

In an unplanned situation, ineffective quick-fixed solutions are the only answers left. If no able successor can be found, a temporary replacement is often the only choice left, and the ultimate result may still be the downfall of the organization. It is difficult enough to run an organization with experience and ability. Without the requisite qualities in the new leader, the rot of the organization is almost likely to set in immediately; unless it is lucky to have a replacement who happens to be suitable and motivated. If not, an unmotivated successor is equally bad news for the set-up. Without the drive, the organization will stay stagnant and more than likely, to slide.

Without succession planning, a business that has become successful can just as easily fall. The business grows because there is a leader (probably the owner) with experience, drive and ability. Without proper succession planning, the future success of the business is left to chance once that leader is gone. Under such a circumstance, if it succeeds at all, it is by default rather than planned. That is not all. The passing of the baton from one generation to the next is often clouded by the stakeholders’ differing views and agendas. Without proper planning, the clashes of views and agendas can pull the business in several directions and this may wreck an otherwise viable business.

With so much at stake, business succession planning has to be a priority and should be part of every business planning. There are two main options available to business succession planning, which are:

1.Retention Planning: Retention of the business within the family circle; and

2.Buy-sell Planning: Selling of the establishment to other business owners or key employees or interested outsiders.

It is a norm in many parts of Asia that succession planning is a sensitive issue to discuss amongst partners or shareholders. This is despite the fact that a successful transition minimizes disruption, ensures continuous profitability and guarantee satisfactory returns to the partners and shareholders.

TODAY..... Good joint management and effort among business shareholders have built a successful and profitable business. The business shareholder and his family enjoy a comfortable livelihood and good lifestyle.

TOMORROW..... Suddenly, unexpectedly, a key shareholder dies and the business is disrupted instantly. What will be the outcome of the shareholders' business interest and his family's livelihood and lifestyle?

FUTURE..... The surviving shareholder and the deceased shareholder’s family face a critical decision. What are the options available to the surviving shareholders and the deceased shareholder’s family?

What are the options available AFTER the event has happened?

•The heirs become active in the business - Do they have the experience, skills and expertise to manage the business and be an asset to the company?

•The deceased’s share is sold to an outsider- Can a buyer be found easily, at what price and acceptable to the surviving shareholders?

•The heirs keep their share as inactive shareholders - Can the surviving shareholders accept this arrangement with the extra input of effort and yet share equally in the profits?

•The deceased shareholder’s share is sold to surviving shareholders - Will the surviving shareholders be able to raise the necessary cash for this transaction?

An IDEAL SOLUTION for all concerned could be...

The heirs receive the full value of their share in cash and the surviving shareholders acquire full ownership of the business.

This could be achieved if the following actions are taken BEFORE a shareholder dies:

•Draft a Buy-and-Sell Agreement.

•Use life insurance as an instrument to finance the agreement.

Proper business continuation and succession planning can help prevent a business from being frozen and discontinued. It also helps avoid conflict among family member and between heirs and surviving owners.