Succession planning for SMEs

Introduction

Political history is not short of examples of succession planning risks.

• Procrastination (Elizabeth I of England’s delay led to the country appointing the son of the woman Elizabeth had executed)
• Appointing unsuitable people (Edward II (murdered, possibly), James II (exiled), Edward VIII (exiled)

Succession planning is not vital just for monarchies: it is a vital part of planning in all companies once business starts to flow. In a family business it is particularly important: Ohio University estimates 30% of family business make it to Generation 2, 10 – 15% to Generation 3, and a mere 3 – 5% to Generation 4.

There are major risks for businesses in not planning: positions not filled for long periods; planned successors not being ready; external replacements proving unsatisfactory.

Equally, there are major benefits in careful planning:

• Organisations with long-term succession plans tend to be more stable than those without, and which make forced and unplanned changes
• They preserve their business vision, mission and values
• They keep the trust and confidence of their customers, suppliers, investors and other stakeholders
• They have less need to recruit externally or train new hires, thus saving time and money, because…
• High-performing employees are more motivated, loyal – and retained.

This note looks at longer-term planning, but it is of course vital to have emergency plans in place too: a business needs to be able to replace or have stand-ins for key staff against the possibility of incapacity or death.

When to start?

The answer is as soon as the business starts to take off – to look like a viable entity for the longer term.  Procrastinating merely increases the risks above.

What is needed?

• At a basic level, having a list of named successors, especially for Board members, is at least a good start, but is no more than that. It limits choice – the favoured choice for a position may change their mind; keep a (confidential) second choice list too.
• A better approach is to develop a pool of people with potential, all of whom might successfully fill a number of different roles on those roles becoming available, in the short-term (sudden / unforeseen departures), the medium (the orderly replacement of current board members and senior executives), and the long-term (matching all current and future positions to the organisation’s strategy).
• So, what’s needed is
  • a strategic time spent identifying the positions that will need to be filled (including new positions not needed yet, bearing in mind future business goals)
  • identifying the competencies required within those positions (a matrix)
  • identifying skilled/competent (or potentially skilled/competent) people who could fill those positions in the future
  • training them with increasingly complex and responsible tasks
  • reviewing their progress with them
  • keeping records of what is planned.

  It is also worth recording what skills/competencies are provided by each board member / senior executive currently, so that their skills are not lost on their departure. It is a long-term steady process, ideally done through internal promotion rather than external buying-in of talent.

The above is mechanical, leading ideally to the pool. Things to get right – and to avoid – on the way include.

• Nipping potential disputes and especially jealousies in the bud.
• Considering diversity and inclusion: homogeneity and groupthink are recipes for long-term disaster.
• Writing it down and recording it… updating it as matters change.

Nothing is certain in any business, but the above makes stable, long-term success far more likely.

Legal bits to get right, and where legal can help

Be careful not to trip over age discrimination: there’s a balance to be struck between employees’ wish of to continue working into older age (increasingly common), and the organisation’s need to bring good staff forward into senior positions (to ensure they won’t just leave, if for no other reason). However, one cannot just forcibly retire people (without good reason and even then the retirement solution must be objectively justifiable). Other possible answers include fixed term contracts, job rotation and flexible working. In all cases, the employment contracts must be carefully drafted.

Think about the powers individuals may possess: A succession plan may be all very well, but it must be reflected in the powers held by the nominated individual. For example, if a consequence of retirement is that the wrong person ends up holding a majority of the shares, it can all go wrong (just as in a monarchy it’s important for the new monarch – not an alternative – to have the loyalty of the military forces).  It is important to make sure that property ends up in the right hands too.

Incentives to stay: Legal can assist here in financial incentivisation, in drafting long term incentive plans, (LTIPs), such as EMI schemes, bonus plans and growth shares.