Management Succession Planning

Many privately held companies were started by a founder who possessed a great deal of technical knowledge about the industry, product or service. Their entrepreneurial enthusiasm most likely allowed them to overcome the lack of business management experience normally required to succeed in business. Today, businesses that have survived and grown sometimes find themselves with an aging founder and/or senior managers and are faced with the task of their eventual replacement.

Since most founders and owners want the business to grow and continue in their absence, a plan must be developed to identify, train and mentor replacements or successors. In most small to medium size companies, this planning does not occur in a way that allows for the proper identification, training and transition of new management. Attempt by founders and owners to promote unprepared family members or younger, inexperienced staff into key management roles many times prove unsuccessful and those trying to retire must stay longer than they want or should.

Management succession planning is defined as the replacement, whether by promotion from the inside or hiring from the outside, over time, of old managers with new. It is a fact that successful managers provide the necessary training for subordinate staff to assume their positions. Successful staff acquire the necessary skills and experience to graduate to higher positions. Successful companies plan ahead for these significant promotions to senior management.

A management succession plan does several things:

• Identifies the future management needs of the company
• Identifies candidates to fill those positions and their skill levels
• Identifies the skills needed to perform in the targeted positions
• Establishes the appropriate training to prepare the individual for the positions.

Preparation
The initial task for owners is to identify the key senior managers in the company and determine their time schedule for retirement or replacement. Ideally, this can be accomplished so that the scheduled date of retirement is years away and not weeks or days. In addition, because many companies have built positions around the personalities and skills of people, rather than the differentiated functions they perform, it may be necessary to consider reorganizing the company prior to the founder or key manager's exit.

The primary functions of most companies fall into three departments:

• Sales - marketing, sales, contracts
• Operations - production, delivery of goods or service
• Finance - treasury, accounting, purchasing, administration.

With proper organizational systems in place, departmental managers will be solely in charge of each department and each reports to the president. The department managers will manage the company in a team-like manner with the president having final authority. Eventually, one of the department managers will assume the position of president. The same structure allows managers to identify individuals within their own departments to replace them when they decide to retire, they get promoted, or they leave the company. The process is intended to provide opportunities for outstanding employees to be promoted rather than hiring from the “outside.”

Having a system to identify talent, train successors and promote from within provides a tremendous boost in company morale and creates a very healthy professional competition within the ranks. For those driven individuals who want to move “up the ladder,” knowing the company maintains a management succession plan certainly helps in retaining and rewarding outstanding people. Although most of this discussion is related to the replacement of retired managers, such a program also allows for the temporary replacement in the absence of the key manager.

Take Inventory
On an annual basis, the president needs to discuss retirement plans with those managers advancing in age. The process to develop and update the management succession plan is as follows:

1. Make a list of the top management positions in the company and the current person filling that position. Indicate their age and expected retirement or replacement date.
2. List the qualifications and skills required of the individual filling this position. It is most helpful to use a written job description to document this information.
3. Make a list of the possible candidates for the listed positions. Add the skills inventory of each candidate with other attributes the candidate might possess.
4. Match the candidate's skill inventory to the job requirements. All differences between the candidate's skill inventory and job requirements are training needs.
5. Keep an open mind to the fact that additional skill sets required for growth and profit may require bringing in an outsider.

With the help of other shareholders and/or your executive staff, identify candidates who will be a successor to the retiring senior manager. Due to the sensitive nature of this process, the inventory process and discussion related to possible candidates needs to be confidential. The expected retirement date or replacement date is the target date to complete the training of the successor. This will enable a much smoother transition. As topics are identified, the training should be scheduled. Training can take many forms, such as:

• One-on-one training with the retiring senior manager discussing operational practices, company routines, management styles and dealing with other functional areas of the company
• Formal courses at local colleges
• Management seminars
• Attendance at appropriate industry-specific seminars
• Attendance at trade shows
• Job rotation
• On-the-job-training
• Mentoring or coaching.

Owners and senior managers possess a wealth of knowledge related to the company, its operations and customers. Most store this wisdom in their memories. This works fine as long as the person is involved with the everyday operation of the company. It doesn't work when the knowledge walks out the door at the time the individual retires. It is essential to document critical information that the successor will need. With a formal management succession process, there needs to be sufficient time allocated to document critical procedures, systems and other information before the retiring executive departs.

Consideration should be given to the timing in announcing the successor. Except in unusual circumstances, this is normally accomplished prior to the retiring executive's departure to allow for a smooth transition and a period of mentoring.

Replacing the President
The plan and training to replace the president of the company requires some special consideration. The president requires basic knowledge about all the functional areas of the company if he/she is expected to manage the people heading those departments. He or she does not have to be an expert in all areas, but there are some knowledge and skills required to be able to manage those areas. If a department manager is identified to replace a departing president, additional training must be provided in the functional areas where he/she has had little or no actual job experience. This means, for example, the operations manager identified to succeed the president may need to take a course in basic accounting to better understand balance sheets and profit/loss statements. There might be a need to schedule this person to accompany the sales manager on sales calls to see how that process works and to meet key customers. In addition, there is a definite need for the retiring president to mentor his/her successor.

Family Members
It should not be a surprise to anyone in a privately held company that the president/owner may want a son or daughter to be a successor. The same skills and knowledge required of a non-family member are required of the son or daughter. The advantage, however, is the president has an opportunity and latitude to allow the family to work in all the functional areas of the company to get a broader awareness of business issues and a better feel of what actually happens on a daily basis prior to assuming additional responsibilities in management. If a family member is identified early enough, the training period can be expanded to provide the best opportunity for this son or daughter to gain knowledge, experience and confidence.

Who Is Heir To Your Throne? Bart A. Basi's exclusive online-only article teaches you how to identify your successor and become a mentor. In a replay from Fall 2002, Jim Devine explains Business Valuation, and John H. Brown takes on Exit Planning.

Key Performance Information
Shareholders making a decision to leave the everyday management of the company should still be interested in knowing, on a timely basis, what's going on in the company. Set up a system to receive, on a weekly basis, brief (one page) reports identifying the key performance indicators of the company compared to the previous week, month or a similar period of time the previous year. This could take the form of a current position, operations and/or sales report that would be updated each week and forwarded to the non-operational owners of the company so that they can easily monitor the progress of their successor and the “new” management team.

Problems related to management succession are not solved easily. Deciding who leads a department or the company may be the most important planning activity performed by owners and executives. Those decisions are made easier with time and a written plan. The development of a management succession plan provides for the continuity of the business and its leadership.

Shareholders and senior managers of the business have, over time, grown the business and created jobs that now provide for the wages and salaries that support a number of employees and their families. It is an awesome responsibility for the shareholders to plan for the continued growth of the business and life beyond that of the founder.