Business Succession and Renewal | The Probabilist . com

Business Succession and Renewal November 6, 2006

Posted by The Probabilist in : [Articles], Business, Entrepreneurship, Responsibility, Studies, Vision , trackback

It wasn’t an easy task to figure out a short and precise topic for this article. The presented material is best described in the introduction of this case report, and it’s about the same length as the previous report that discussed entrepreneurship and failure. But without further adue, here’s the full analysis.

Introduction

Focusing on the succession and renewal of family-based firms this case paper will pinpoint and argue the following issues. Firstly, there’s the question of role and obligations that the new leader should or shouldn’t follow considering how the founding leaders have run and developed the business. Secondly, the future of the former CEO is discussed. Should the person be shown the door or still be given a place in the firm with a new leadership shift? Lastly, differences are drawn between leadership shift within a family-based business and leader changes in other companies.

Taking charge, but respecting the heritage?

Before delving into the obligations that the new leader must follow and in which areas there is room for change, certain key facts must be acknowledged about how the transition of power is planned in the first place. According to Lansberg (The Succession Conspiracy) experience and research suggest that leadership succession is seldom planned in family businesses. Therefore we must conclude that there are two alternative perceptions in answering the question about how a new leader is obliged to follow the previous way of running the business - through thorough guiding and rules that are enforced or without guidance and rules.

Additionally Lansberg notes that there are two distinct reasons for the former leader’s ambivalence to participate in succession planning. One common result is that the former leader chooses to pass on the ownership to a younger family member only on paper so to speak, while the founder is still in control of the firm. The other excuse for not thoroughly planning the succession is the conflict of interest between the founder and the next generation, which most often is the older leader’s desire to cling to the status quo and conservatism while the younger potential new leader values change, restructurization and advancement in technology and processing. Both of these views fail to accomplish a complete structural transition where in the end the new leader is able to continue without the need of the previous leader.

So to answer the question, the two scenarios are analyzed separately in the following two paragraphs. First, there is the case of the former leader participating in modelling a specific succession plan and second, there’s the case of the former leader procrastinating the shift of leadership.

The leader who is aware, concerned and constructive about his retirement and the need to organize the leadership shift will be sure to establish rules about at least the following issues:

The mission: As one of the most important factor in a business’ ability to maintain profitability, the mission of the company is under evaluation when a leadership shift is taken place. Is the founding mission still valid today? Is there a need to change it completely or alter it a bit? Will the following leader remain true to it and fulfill it to his or her best ability?

The team: The leading team consists of the Board of Directors, varying advisors and specialist both internal and external as well as the owners. Will the new leader(s) work well as a team for the best interest of the business or for the best interest of themselves? Some individuals may belong to several interest groups and therefore leadership shift can be crucial.

Leadership: Since a leader’s job is to bring out the best in people and not to be the best person, an important issue is what kind of a person the successor is and what kind of differences in the leadership style and decision making the new leader would condone.

There are however, much more issues to take a stance at when the leadership is shifting, including the product line, legal protection and supervision, systems building and development, communication flow and cash flow management. Obviously this case is too short to fully cover all of these issues. They are excerpts of Kiyosaki (Guide to Investing).

In contrast, there is the leader who does not participate in evaluating the importance of maintaining or changing the issues above. When this is the case, the shift in leadership is more likely to be painful, risky and eventually result in failure, (sold or liquidated) which is the case in about 70 % of family businesses’ future. (Lansberg) Accordingly, since the former leader has not documented and strictly outlined critical aspects of the continuing leadership style, previous strenghts, values, drive and know-how are lost.

In conclusion, the obligations of the new leader is dependant on the previous leader’s succession planning. If outlines are drawn, the new leader is bound to them and will choose to take the charge depending on them. In opposite, without rules new rules must be made.

CEO out the door or still on the floor?

Starting off this argument, again preliminary questions must be asked before there is room to give a more accurate answer. These questions include:

How much does the CEO’s influence and work effort reflect on the firm’s current profitability, atmosphere and expected strategy? In other words, when the leader shift is occurring, the business can be profitable, run on financial red line or show negative results. There would have to be some very good reasons to keep a CEO who can’t generate profit as well as firing a CEO who does. Accordingly, the CEO may be liked or disliked in the organization, which impacts the overall atmosphere. Additionally, he or she might cope very well with the outlined strategy given by the BOD, or then knowingly make strategical decisions on his or her own behalf without the consensus of the leaders. Therefore, the leaders need to get the most accurate picture they can on how significant the former CEO’s role in the firm is before the leadership shift takes place.

How likely is it that the current CEO is a good fit in the post-renewed business? Now given the fact that the overall pros and cons of the former CEO is weighed, a better estimate can be given on the usefulness of the person in the future when the new ground rules are established. At this point, it is the magnitude of the changes in the first topic of this paper that plays a big role in defining the former CEO’s potential suitableness in the renewed firm. If the changes are small, one could expect that the CEO will continue working quite similarily as before. However, if the changes are massive, the CEO’s motivation, know-how, self-confidence, demands and expectations are prone to get altered as well.

Would or will the CEO accept the new contract? With a leadership shift, renewal of the business and changes in procedures it is quite obvious that the CEO contract containing the expectations of the person will also be subject to change. Then, it is first up to the leaders to shape the view of what the CEO is expected to do and fulfill. Secondly, the former CEO has the chance to voice his concerns or approval of the position and tasks. And thirdy, the leaders come to the conclusion if the former CEO is wanted, is likely to be able to fulfill the expectations and is unanimously trusted to guarantee the future profitability of the renewed business.

In conclusion, there is no right or wrong answer. The CEO’s future is dependant on many issues which all relate to the different parties’ expectations. No case is the same, there are no given rules of thumb and the CEO certainly has no power to decide. As the leaders are the judges, they are the ones to come to the conclusion of the former CEO’s usefulness.

Differences in family-owned and other businesses’ leadership shift

Lansberg distinguishes that each constituency tends to have the following different goals and expectations: Family members often view the firm both as an important part of the family’s identity and heritage as well as a source of financial security. It provides nurturance, a sense of connectedness and satisfaction in their life-cycle expectations. Other businesses don’t have people with this particular viewpoint, instead mostly consisting of managers who regard the business as a vehicle for professional advancement and owners who primarily want a fair return on the investment.

There are numerous issues to take into account when measuring the degree of willingness of different businesses to change leader. Sonnenfeld (Heroes in Collision) focuses a great deal on the tensions within past and next leaders as well as their interpersonal tensions. The former leaders have different views on when to initiate succession. For instance, in regular businesses if the leader feels that giving up leadership will create a big hole in his or her life and no social, societal, hobby or family activities can fill it, then the leader is very likely to hold on to the business til death do them apart. The other polarity might be a family business where a child of the founder is tremendously keen on continuing the legacy in exactly the same way as it was started, which would result in the founder very easily accepting the succession as a natural step before his or her ability to run the business efficiently starts to fade due to old age. It is important to note however, that both combinations occur in all businesses and in order to prove that some outcome is more likely in family-owned businesses compared to other businesses, statistical polls and investigations are required.

In addition, Sonnenfeld remarks that the relationship between a founder and a new leader can also pertain negative as well as positive tensions. The former leader may at the older age more and more drastically block his vision from new technologies, leadership models and productivity chains. This causes the two parties to fiersely argue with each other only to further strenghten each other’s stubbornness of their own view. On the flip side, many succesful entrepreneurs provide biographies, knowledge and mentoring which the successors greatly appreciate, look up to and even idolize. Again, giving a subjective opinion on which of these scenarios is more likely to appear in family-owned businesses and which is more likely to be part of other businesses is beyond my experience.

However, in conclusion it has greatly arisen awareness, understanding, thoughts and questions about the importance of succession planning. The exit strategy can in fact be the most important aspect to consider when starting and running a business venture. Why? Because no matter how you look at it, it is inevitable.

Reference

Lansberg I. [1988] The Succession Conspiracy
Kiyosaki R. [2000] Rich Dad’s Guide to Investing
Sonnenfeld J. [1986] Heroes in Collision: Chief Executive Retirement and the Parade of Future Leaders