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Spring 2013

April Current Thinking Column

Thursday, April 30, 2015

Transition of Leadership: Where the Rubber Meets the Road in Succession

by Burak Kocer, PhD

A wise father posed three questions to the son selected as his successor:

  1. Are we in the right business?
  2. Are we able to find the right people to run this business?
  3. Do we have effective controls in place to monitor them?

 

This founder of a very successful 50-year-old business had long ago discovered that the knowledge required to answer these three questions was critical to his success.  He was convinced that his successor must also have the relevant knowledge to answer these questions in order for his business to thrive beyond the succession process.

The continuity of a family business refers to its ability to survive across generations. Succession is perceived as complete when the ownership and authority to make the ultimate decisions have been passed to the members of the next generation.  However, transfer of leadership, the final stage in succession, requires more than a mere transfer of shares or leaving board seats and/or executive positions to the successors. Indeed, answers to the father’s three questions, especially the first two, require strong leadership qualities, including intuitive decision-making ability.

Succession as a Mutual Role Adjustment Process

While discussing succession planning, in most cases the focus is on a leader’s willingness to pass on the business or the successor’s readiness to take over the business. It is thought that in the event that any or both of these factors are missing, the ability for a family business to overcome the challenge of succession is limited. While this perception points out two major impediments of effective succession planning, it fails to concentrate on the interrelatedness of the two. Indeed, Wendy Handler defines the succession process as a mutual role adjustment between predecessor and next-generation family members.* This approach aptly shows the parallel stages that face both the leader and successor. The leader moves from sole operator to monarch (having preeminent power over others) to overseer-delegator, from where they finally transition to consultant (who is disengaged from the organization). At the same time, the next-generation family member progresses from no role to helper (to the monarch), manager (under the monitoring of the overseer-delegator) and finally, leader/chief decision-maker (when the owner is disengaged). Thus, in a carefully planned succession process, both the leader and successor advance through these stages simultaneously to maintain a healthy climate that promotes trust and personal development.

Aside from focusing on the interactivity of the processes that the leader and successor embark upon, Handler’s approach places the leadership role at the final stage of the succession, which I find particularly powerful and accurate. This is also where the rubber meets the road. Continuity of many family businesses often unravels. This is not due to a lack of developed shareowners or managers from the members of the next generation, but rather a lack of leaders among them. 

           Inevitable Leadership Tasks Awaiting the Successor

Following disengagement of the former leader, the next generation family member needs to capitalize on value drivers (i.e., factors that provide competitive advantages to the company) and reinventing the most appropriate governance structure to ensure preservation within the organization. Indeed the father’s first question—are we in the right business?–was implicitly pointing out the value drivers. Products or services that the company offers may not necessarily be the appropriate business case for the family in the future. Puzzling over the right business avenue while taking the value drivers into account helps the next generation family member fulfill their leadership responsibility of creating wealth. Limiting the new leader to a “wealth user role” might put the continuity of the family business at risk.

Similarly, as the business evolves, the roles of the family members evolve, too.  A family member’s current position may not be the most efficient role anymore considering various factors such as size of the business, diversity of initiatives or the next generation’s past operational involvement. This refers to the father’s second and third questions—finding the right people and putting effective controls in place. Overcoming these critical tasks requires a well-prepared leader, who knows what to maintain and what to change. Differentiating between these requires a type of knowledge, which is only developed by effective leaders. Thusly, this is why leadership development is the most critical and often overseen element in a well-prepared succession planning. Preparing heirs for the top of the organization through a career path in lower levels does not usually address this need on its own. While this planning approach trains the successor in learning the rules to run the business, it fails to help them develop the wisdom, which is most needed to identify when to apply rules and when to change them.

Therefore, a carefully planned leadership development program with internal and external elements should be the integral part of an effective succession planning. Internal elements can involve periodic strategic discussions led by the successor with a specific agenda and method to unleash the tacit knowledge possessed by the leader and key executives. External elements of leadership development can be established by creating advisory groups, where successors meet regularly with their counterparts, who develop themselves from each other’s experiences.

Concluding Remarks

To ensure that the rubber meets the road safely, the succession process must be managed as a two-dimensional process, the phases of which are to be adapted according to the other. The merit-based promotion as a career path may allow successors to become well-trained managers, yet this will not be sufficient to develop strong leaders. Additional platforms must be created where successors--beyond their formal managerial role definition--regularly meet with the leader, key executives, as well as their counterparts in other organizations. The knowledge and intuitive decision-making ability accumulated throughout this process will present its next leader to the family business.

*Handler, W.C. "Succession in Family Business: A Mutual Role Adjustment Between Entrepreuner and Next-Generation Family Members" Entrepreneurship: Theory and Practice, 1990, 15 (1), 37-51.

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