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Strategy of Succession Planning

April 25, 2016

Keys to Effective Succession Planning

The key goal of effective succession planning is to continue the legacies of successful businesses: privately owned, family owned, big or small.
Business owners, visionaries of these businesses, spend their maximum time on investing on the growth, expansion of their businesses. They strive to gain their market share, retain and motivate employees, deal with competitions. But effective time is not given to succession planning. Neither they invest time in the same nor do they hire professionals to process it.

Why succession planning suffers in organisation is for the following reasons:

  • Being a complex an vast subject, it involves major time involvement.
  • It is a daunting task. Hence, avoided or postponded
  • If potential successors are family member employees than the current management dreads the succession planning process.
  • Businesses lack knowledge as to how to approach a succession planning.
 

Why an effective succession plan is beneficial?

  • It removes uncertainty of the succession planning
  • It helps the successor step in while the owner reaches old age.
  • In cases, when owner dies a sudden death then the organisation reaches a crisis stage. It may result in making hasty decisions, uninformed decisions leading to a incapable successor.
  • Stable and sustainable succession planning proved a platforms which helps lenders, vendors, business associates, investors & customers trust.
  • Succession planning helps to evaluate the most important asset of any business i.e. human resources – potential successors are evaluated with their knowledge, experience, intellect, relations with internal and external parties. It helps the organisation to give an unbiased recognition and reward to the deserving ones in various roles.
 

Succession Plan Components

  • A succession plan would clearly communicate on how ownership, management of the organisation will be governed when a certain event happens.
  • Ownership and management are usually termed as synonymous. But the owners can treat it separately and distinct too.
  • Key succession components include creating equity or equity based incentives to key personnel; incorporation of independent directors for corporate governance also provides an holistic approach to the process.
  • The plan should be flexible as the business grows.
 

The Succession Planning Process

  • Evaluation of current management is key which determines the abilities of the potential successor. To retain such talent an incentive process in needed. It is important to know that the future leader for the organisation is in place.
  • A successor with news skills & ideas which would contribute to the business. Not necessarily that the successor is like the owner.
  • The company board should identify such talent within & outside their organisation. A promising successor can be identified through a professional agency too.
  • A rigourous examination, assessment to analyse the strengths weakness, potentials and opportunities the organisation can get through the potential candidate.
  • Owner needs to make a decision finally after the process. Usually the owner fails to decide and this in turn demoralizes the employees.
  • The succession decision needs to be communicated across the organisation in the most effective manner.
  • Addressing the ownership succession, management succession jointly or distinctly.
  • Emergent situations like death, departure of the successor should also be planned to avoid chaos
 

Who to Involve in the Succession Planning Process

Trusted relationships of business owners with financial advisors, bankers, legal counsels, accountants & colleagues should be utilised to govern the succession plan. Key process involves the Board of Directors who create, exercise & implement the succession plan. People with different perceptions are needed to result into a comprehensive succession plan.

A methodology should be followed defining the vision, mission, goals, objectives of the process. A detailed monitoring & evaluation with defined timelines should be exercised.

Succession Planning and Incentives

  • Succession planning process often leads to areas which need stronger hold in the organisation which is often not known earlier.
  • This may generate need for incentives to retain key talent of the company.
  • Successful incentive system is important to execute an effective succession plan.
  • Cash & equity incentives both are considered. ESOP, stock options, restricted stock options are used to retain employees who are potential successors.
  • Other techniques used by owner can shift ownership to designated successor, could be a family member or a key executive. In such cases, the owner sells equity at appropriate schedules which result in earnings.
  • In case of estate-planning, techniques of transferring of ownership to grantor trusts
  • All these above plans can be independent or in combination. A wide spectrum is created through equity based options for employees which helps combining various strategies.
  • Professionals legal & tax consultants should be hired to execute these plans in the most cost effective manner.
 

Evaluation and Documentation

  • A succession plan should be written and implemented with reference to this document while in implementation stage.
  • The document helps the responsible stakeholders for the plan implementation, processes become sustainable and the success of the plan is determined through effective evaluation
  • The board has to measure the success of the plan with constant reviews. Revision to the plan, flexibility to the plan should be allowed as the business grows and the future needs of the enterprise.
  • Ancillary aspects of the succession plan should also be documented which helps further beneficiaries & successors to understand the terms, conditions, components, expectations & mandate of the enterprise. These ancillary documentation also helps govern performance criteria.
  • Documents relating to management, governance, equity transferability should be in place.
  • An effective human resource talent evaluation policy should be in place in the enterprise
  • To conclude, A succession plan, creates a roadmap for the organisation. Successful employees are motivated through these processes. Business owners can create a lasting legacies for their businesses. Comprehensive, structured planning helps transfer management role & equity ownership to deserving successors.
  • An effective succession plan can guide a business owner, creating a roadmap for success. It can also help owners attract and motivate successful employees. When owners commit to creating and implementing effective succession plans that embrace comprehensive programs for transferring management responsibility and equity ownership, they can experience the rewards of creating lasting legacies for their businesses. Moreover, in emergency situations, an effective succession plan can literally save the company’s life.
 

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