HR Management: It’s a Mistake to Overlook Succession Planning

December 20, 2009

Bank of America is among many businesses teaching us valuable lessons about leadership in succession planning. From the stakeholders’ point-of-view, B of A took an exasperating long time to name a new CEO. The delay suggested that the B of A board and outgoing CEO Ken Lewis bungled by not succession planning.

Critics point out the significance of the job and why it’s important for a new CEO to get a running start.

But Brian Moynihan walks into his new position facing a barrage of problems: The investigation into B of A’s acquisition of Merrill Lynch, friction with regulators, opponents in Congress who have questioned his leadership, and cultural issues within the company.

Succession planning should be an ongoing strategic process. It’s vital for identifying talent and building a reserve bench for development. However, delays in succession planning result in a perceived lack of competence – image problems in the marketplace, among shareholders and internally with employees.

To empower shareholders as a policy matter, the Securities and Exchange Commission issued a nonbinding legal bulletin calling for transparency in management succession. 

So it isn’t surprising that activist shareholders are going after the likes of B of A, American Express and Whole Foods regarding their succession plans. That includes the 500,000 member Laborers’ International Union of North America. The union is targeting 14 companies and asking them to disclose their succession plans in detail.

More than 1,ooo executives admit their problems with succession planning, according to a study by search firm Egon Zehnder International. It showed none of the responding executives believe they’re good at succession planning. Forty-seven percent admit being mediocre in the process of succession planning and 53 percent disclose their ineffectiveness.

“The global financial crisis has resulted in high CEO turnover. This fact combined with the recent SEC announcement that would allow shareholders to challenge the Board to disclose more information about plans for CEO succession, makes developing a succession plan even more critical,” says George L. Davis, Jr., an executive at Egon Zehnder International.

Responding were 1,092 senior executives in every business sector from a total of nine nations.

While the situation is untenable in the U.S., it’s worse overseas. Seventy-one percent of UK responders believe they’re just so-so in succession planning while 80 percent of French executives say they are unsuccessful.

But it isn’t bleak everywhere abroad. Fifty-seven percent in India believe they’re doing well. Seventy percent in Germany say they’re successful.

For small family businesses, succession planning is complicated by the federal estate tax. Also derisively called the death tax, it’s 45 percent after a $3.5 million threshold on heirs of family estates. The tax won’t be imposed in 2010, but will make its return in 2011.

Not to mention the time-consuming preparation for a business owner who is advanced in age, the estate tax is a nightmare for family businesses with considerable land, such as farms, or manufacturing equipment.

The tax jeopardizes the business. Because of cash flow, many heirs have to sell company assets to pay the tax.

Yes, some business owners incrementally transfer assets before their passing to avoid the harsh tax. But often some find they lose control of the business to their heirs while they’re still alive.

So don’t emulate B of A. You can do better in succession planning. And yes, it’s important in the public sector and nonprofits.

From the Coach’s Corner, some small business owners erroneously believe a will constitutes a succession plan. Not true. They’re not the same thing.

New businesses don’t need a succession plan. They should start thinking about a succession plan when the business starts to grow in value.

Professional guidance should be obtained.

Not to oversimplify, every case is different but here some basic elements to consider:

• If children are involved, first learn if it’s feasible for them to be involved in the family business.
• Get a sense from every family member regarding the business’ future.
• Give summer jobs to children that will expose them to all areas of the business. Not all kids are interested in eventually taking over. That’s disappointing to parents, but the sooner they know the better.
• If you have a partnership, you’ll need to draft a buy/sell document that includes an agreement on the business’ value so one partner can buy from the other. A shareholder agreement is customary for corporations.
• A vision for the business will be needed in case of death. To be decided – what should happen to the business and who will own the firm whether it’s a family member or partner. If the heir is not a relative but there are family members involved, an instrument should be devised in case the partner will buy out the shares of the surviving family members.
• After developing an agreement on the succession plan, then decide on insurance matters for liquidity purposes.
• Review the succession plan on a regular basis and update it as needed.

Finally, a word of caution: More than 90 percent of family businesses typically don’t succeed past the second generation.

Poor planning is often the reason why inherited businesses do not succeed. And unless the children invest or buy the business from their parents, it usually doesn’t work. It’s often better if they don’t receive the business as a gift.

Not to be cruel, but the heirs simply don’t have the passion or ability to successfully operate a business founded by their parents.