Succession planning for SMEs

Introduction

Political history is not short of examples of the succession planning risks of:

• procrastination (Elizabeth I of England’s refusal to succession-plan led to her senior courtiers having to do so ending up appointing the son of the woman Elizabeth had executed)
• appointing unsuitable successors (Edward II (murdered, possibly), James II (exiled))

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

There are substantial risks for businesses in not doing so: risks of positions not being filled for protracted periods, planned successors not being ready, and external replacements proving unsatisfactory.

Equally, there are substantial benefits:

• Organisations with long-term succession plans tend to be more stable than those that don’t plan well, and which make abrupt unplanned changes
• The business’ vision, mission and values are preserved
• Customers’, suppliers’, investors’ and other stakeholders’ trust and confidence is maintained
• High-performing employees are more motivated, loyal – and retained.
• The need to recruit externally or train new hires is avoided, thus saving time and money

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 and so one would want a second choice.
• A better approach then 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 strategy).
• So, what’s needed is a good deal of time spent identifying the positions that will need to be filled over time (including new positions not needed yet, bearing in mind future business goals), and 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, and keeping records of what is planned. It is also worth recording what skills/competencies are provided by each board member / senior executive currently, so as to ensure that a given skill is 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 the mechanical aspect, leading ideally to the pool. But there are things to get right – and to avoid – on the way.

• Nip potential disputes and especially jealousies in the bud.
• Consider diversity and inclusion: homogeneity and groupthink are recipes for long-term disaster.
• Write it down and record it … and keep updating it as matters change.

Nothing is certain in any business, but the above gives greater likelihood to the prospect of stable, long-term success.

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 the wish of people to continue working into older age (and this is increasingly common), and the 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 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.