10 Thoughts on CEO Management Succession for Private Companies

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Marshall Goldsmith, the author and executive coach, wrote a little (in size only) book entitled Succession: Are You Ready? (Cambridge, Harvard Business Press, 2009).  In it, he talks about letting go and moving on.  His words should be taken to heart by many, if not most of us:

Almost all of the leaders who I have met assure me that they will be different.  They confidently assert that they will have no problems letting go. You are probably delusional enough to believe that you too will be different.  Take my word for it: while your desire for uniqueness may be theoretically possible, it is statistically unlikely.

How business owners address this question is vital to the success of business transitions, and it is one that too often receives scant attention.

One of the most difficult things to realize is that we all have to let go.  We have to let go of things throughout our lives in order to make room for newer and better things.

Management transitions are difficult for many baby boomer business owners.  It is just difficult to imagine your company without you in charge.  But life is better on the other side.  You will transition and, as Marshall Goldsmith notes, you will likely have problems letting go.

Ownership transitions are also difficult for many business owners.  Things like control, image, lifestyle, and ego get in the way.

Public Companies Should But Don’t Always Get CEO Succession Right

There is a great deal of news about management succession for public companies.  Every change is recorded publicly and the changes are analyzed in a variety of ways.  In a typical year, 8-10% of public company CEOs in the United States change.  Over half of the incoming CEOs are from outside the company where change is occurring.  This means that more than half of the companies  failed to develop a workable succession plan.

Warren Buffet and Berkshire Hathaway don’t need a succession plan because Mr. Buffet is going to live forever.  I say that facetiously.  Mr. Buffet is now 84 years old and Berkshire Hathaway has a succession plan, as reported in the Wall Street Journal last year.

Mr. Buffett believes that Berkshire’s managers are loyal to the company and not to him. However he does acknowledge that things will change in the future when he is no longer in charge. The article notes that significant management transition efforts have already occurred.

At the May 2013 annual meeting, Mr. Buffett said he expected his successor to reorganize the company &modestly,& such as grouping the smaller businesses together. However, he added that the CEOs of the largest subsidiaries would likely continue operating their businesses as they do now.  Mr. Buffett has said his job will be divided into three when he leaves. The role of nonexecutive chairman will go to his son Howard Buffett , and his role as chief stock picker for Berkshire will be shared by two investment managers, Ted Weschler and Todd Combs, hired a couple of years ago. A third person will take the CEO mantle. Mr. Buffett has said Berkshire’s board picked a candidate, but the name hasn’t been revealed.

Whether you think this management succession plan is perfect or not, or whether you think that anyone or three or ten people can replace Mr. Buffett’s unique management style and investment acumen, he and the Berkshire board are working on the issue.

Contrast this with what happened last year at Microsoft with Steve Balmer’s surprise announcement of his “retirement” in August, 2013, with no successor in place.  In February, 2014, Satya Nadella, an insider, was finally named as Microsoft’s third CEO.

Some public companies try to get it right and others put off the decision until everyone looks bad and everyone loses.

Private Companies are Somewhat Different

Unlike public companies, closely held and family businesses do not typically have an external mandate (i.e., public shareholders, bond holders and other stakeholders) to plan for CEO and key management succession.  Granted, there is responsibility there, but it is, for the most part, internally based.  Take this a step further and consider many businesses founded by or inherited by baby boomers.  Many baby boomers have been CEO for so long they cannot imagine life not being the person in charge.

Many of the companies I am talking about have never had a change in the CEO, so there is no history and no model to follow.  In most instances, there is no immediate pressure for change, since things are running along fairly smoothly.  So nothing happens, and no one says anything.

The problem is exacerbated because many business founders/owners find it difficult to step outside themselves and look at their businesses objectively.  If they could, they would see the need (or past due need) to initiate a workable plan for management and ownership succession.

Poor CEO succession planning can erode value in public companies, but, at least they have “bench depth” in managers running their various subsidiaries or operating divisions.  They also have boards of directors who will step in and take charge when forced to do so by circumstances.

Private companies tend to be somewhat different.  They may lack bench depth in their management structure.  Their boards may be weak and controlled by the owner/CEOs, who may not be interested in planning. Value can be eroded, perhaps quickly, if something happens to the existing CEO in the absence of an existing plan for succession.

10 Thoughts on Private Company Management Succession

I am not a management succession consultant, although I’ve worked with a small handful of companies over the years to assist with management transition planning.  What follows are a series of thoughts based on my personal reading and personal experiences as they relate to successful management succession planning and implementation.  I am writing this directly to CEOs who need to think about the necessary management transition processes for themselves and for their companies.

  1. Transition before it is necessary.  Over the years, I’ve seen many, many successful closely held and family businesses where the founder and/or CEO simply would not yield the title and function to capable younger managers. I could tell many stories of CEOs who hang on too long who fail to provide growth opportunities for their children in the business or their younger managers.  In a number of cases, the CEO has died in the saddle, leaving the company without strong leadership and without an organized plan for succession.  The results range from disruption to disaster.
  2. Transition before you are ready.  If you wait for that magic moment when you are “ready” to make a transition, the moment may never come.  There are always things to be done and reasons to procrastinate.   My title remains CEO at Mercer Capital, but I have not been the person running the business for many years.  My former partner was President and COO for years before his retirement and was responsible for day-to-day running of the business, although I was involved in strategic decisions.  Since 2009, when he retired, Matt Crow has been Mercer Capital’s President and COO. He runs the business and, while he consults me on strategic matters, is responsible for them, as well. I was not ready to give up overall management of the business years ago, but I finally had the realization that the business would perform better and I would have a better life if I made that decision.  Do you need to let go, or to begin to let go now?
  3. Link leadership development into succession planning.  Over time, leadership skills are gained or emerge.  In many companies, natural leaders emerge for a variety of reasons.  The long-range process of leadership development for key persons in any company provides valuable input into the management succession process.
  4. Share knowledge with your senior team.  Call it coaching or leadership development, it is a good idea to be in an active process of sharing knowledge and experience with the senior members of management from which will likely come the new CEO.  Travel together, meet with clients together, go to meetings together, and so on.  As CEO, you may be older than most of the members of your team.  They need to learn from your experiences, and you need to learn from theirs.  It is through this process that you become comfortable with each other and with your ultimate decision for successor CEO.
  5. Consider potential successors.  Most private companies tend to look within for successors, so it is good to be evaluating potential candidates for the new CEO.  If you are in a process of evaluating, you can give special projects or assignments to the various candidates along the way.  At some point, hopefully, the choice becomes clear.  At some point, hopefully, you and your board of directors must decide on one candidate to lead the business.  When you feel the time is right, then make the decision.
  6. Set an emergency plan into place.  While an owner/CEO may be healthy, happy and productive, bad things happen to healthy, happy and productive people.  Every business owner needs to have a will that specifies what will happen to his or her estate upon death.  And every business should have an emergency succession plan, even if it is acknowledged to be temporary in nature, in the event of the untimely death or disability of the CEO. It is easier on everyone if there is a temporary plan already in place.
  7. Succession planning is a risk management function. From the points outlined above, it should be clear that succession planning is a way to anticipate and to reduce the impact of the risks to an organization that can damage it based on untimely or emergency succession requirements.  And remember from the basic valuation equation that lower risk (in the denominator of V = CF / (R – G), other things being equal, tends to increase value.
  8. Avoid the “just like me” trap.  There are a number of reasons to avoid looking for a successor CEO that is just like the older one.  First, you might just not get along if you are too much alike.  Second, if he or she is just like you, he or she will have the same weaknesses and issues that you have.  In all likelihood, your company needs a change.  Third, you are the CEO that has brought the company from startup or from wherever when you came on board, to its present situation.  Does someone just like you have the skills and attitudes necessary to take the company to its expected better future?  Using Marshall Goldsmith’s line, that may be theoretically possible, but it is statistically unlikely.
  9. Develop a succession plan and don’t wait on events.  An event-driven CEO succession in a public company is often an unsuccessful process, even with active boards of directors, bench strength in management, and perhaps a history of working through such events in the past.  In a private company, an event-driven change, such as the death or disability of the owner/CEO, can be disastrous.  Most private companies don’t have active boards, excess management depth or experience with succession.  If your board, management team, other owners and employees are faced with such an event, no one knows how or how quickly or effectively they will respond.  It is far better to have a succession plan in place, even an emergency plan as noted above.
  10. Figure out the ongoing role for the old CEO.  In many public companies, when the now CEO is named, the former CEO rides off into the proverbial sunset.  If my experience, in closely held and family businesses, the old CEO is highly likely to stay around.  If he stays and meddles, then the likelihood of success is lowered.  If he stays and performs an agreed-upon role for the company that does not involve micromanaging the new CEO (!), then good things can happen.

Management transitions can be difficult.  Most aging baby boomers simply don’t want to think about management transitions.  But we have to do this for our own good and for the good of our companies and all of our stakeholders.

As always, please feel free to comment on this post.  Or call me (901-579-9700) if you have questions or want to talk about this post on management succession or any other business or valuation-related topic.

Until next time,

Chris

Please note: I reserve the right to delete comments that are offensive or off-topic.

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