Poor Succession Planning Is a Major Cause of Problems in Family Companies

The influential founder and chair of a multi-billion family company suddenly falls ill. The CEO, who is a non-family member, recruited a COO as a successor, although the board was divided on their support. Financial performance is deteriorating, and the board is concerned. Without the full support of the board and family, the company needs to find additional CEO options. The new chair of the board is an inexperienced family member. Further complicating matters, a controlling shareholder of the company, who is a family and board member, expects the chair to be the next CEO.

If this story sounds like a rarity, it’s not—particularly in family-owned businesses, where there are far more complexities when it comes to finding a new leader. Issues of founder mortality, the perception that the CEO and brand are inseparable, and assumptions about future roles of family members all intertwine, leading overwhelmed company leaders to delay or ignore succession planning.

Unfortunately, procrastination often leads to devastating consequences for the business. A mere 16 percent of family firms have a discussed and documented succession plan, according to a PwC survey. Additionally, family-owned companies often have the same leaders for 20 years or longer compared to the average public company CEO tenure of about 5 years, making transition planning a low priority until a triggering event occurs.

Why Succession Planning Takes a Backseat

One reason that family CEOs often avoid the topic of succession is that it coincides with thinking about their own mortality. Because they are also owners, they often remain at the helm past the time where they are able to be strong contributors. Furthermore, the board and other owners are often hesitant to ask an iconic leader to step down, which leads to delaying the succession conversation until an emergency occurs.

The family-owned business discussed earlier in this article found itself in an emergency situation. The board and CEO had not prioritized succession planning, instead hoping that good leadership would emerge. While some thought they had a plan—the COO to assume the CEO role—without full support from the board, this was more of a suggestion than a strategy. The new chair, realizing that he needed help, decided to bring us in to assess the CEO options—and we concluded that the best candidate was, in fact, the unsupported COO. However, the controlling shareholder pushed back after our thorough assessment and benchmarking exercise. We explained that if it were our money at stake, we would put the COO into the CEO role based on our research. But we also added, “It’s not our money—it’s yours. If you have any doubts, don’t put the COO into that role.”

In family businesses, the CEO expectations can be more complex. Competencies and skills matter, but culture fit and trust are equally important. In this situation, the shareholder did not trust the COO (despite being the right fit on paper). Given these internal dynamics, it would have been difficult for an external leader to come in and be successful. A deeper talent assessment found a high potential candidate in another part of the business to assume the CEO role. This candidate was not an obvious choice. He had never led a relevant business, but he was highly capable of succeeding with the right support system in place.

As we can see from the example, the family and leadership were not aligned on succession planning – from who owned the decision to how to conduct the process. Another reason family businesses avoid this topic are the difficult conversations that inevitably arise. How does a board or a CEO tell an heir apparent (who they may be related to) they’re not the right person for the job? In most cases, the senior leadership, or the board, or the family know the shortcoming of a potential leader, but they keep quiet because of the emotions involved. This is where a Family Business Advisor can be useful. We can help deliver difficult news and be objective listeners and mediators. The multi-billion dollar company in our example understood that having the right CEO was essential and prudently gathered external data to expand the successor options rather than make a complex and critical business decision based solely on internal perspectives.

The Risks of Solo Planning

A one-sided approach to succession planning can alienate stakeholders and potentially destroy value. Take the following example: A third-generation CEO has anointed his son to be his successor. The current CEO’s cousins, who are also fellow owners and board members, believe the son could be capable of being CEO in the future, but that he is not ready now. Compounding matters, the business is facing a difficult industry environment and is underperforming financially, making the owners highly concerned about an unprepared leader. The CEO has threatened to leave if they make his son wait 10 years until they think he is ready. The CEO also will not allow the board to have a conversation about the succession plan or allow his son to have a voice in the conversation. The owners are considering selling their shares of the business because they feel like they have no control over its future.

When pushed, some family CEOs may develop a succession plan based on what they personally believe is important (e.g., continuing a legacy, bringing in an external candidate, etc.) and expect the rest of the ownership group to accept it without question. When the plan isn’t shared, there is no opportunity to address issues in the plan that could be negotiated. For example, if a CEO selects an heir apparent who is not prepared to fill the role, the board could push for a development plan, coaching, or new team members to supplement missing skills and capabilities the successor lacks.

The Expense of Emergency Planning

Waiting for a triggering event to find a successor is expensive—not just financially but also emotionally. The CEO of a $1 billion company hit retirement age, felt he was not being compensated properly, and was ready to leave the company. Another family member was a vice president who both wanted to be CEO and believed he had the right to be. However, both the board and the current CEO didn’t believe this VP was right for the job, so an outside COO was brought in to be groomed for the top job.

With the clock ticking on the CEO’s retirement, a few issues came to light. A talent analysis confirmed that the VP was not the right for the CEO role but also uncovered some issues with the incoming COO. An outside candidate had to be brought in and both the VP and COO left the company.

Because this succession was prompted by a problem, there were very few options for CEO candidates. Had the company engaged in planning a few years earlier, they could have had a COO in place who had the potential to grow, or the VP could have embarked on a development plan and he could have been ready to assume the CEO role. It was also costly in that two high-level leaders left the company and needed to be replaced.

Navigating Emotions

When it comes to family businesses, there are some specific guiding principles that they can benefit from.

• Start earlier than you think you should. As illustrated in the examples, most companies do not have a perfect candidate within the organization. Advance planning provides time to develop people internally and to also consider external talent that can be brought in and groomed for a higher level position. It also creates the opportunity for external leaders to develop trust within the family ownership group. If you groom an internal successor, the fact that they have gone through all the right steps will engender family trust.

• Articulate what’s important to the family/the business. Given the complex dynamics of a family business, it’s essential to create an environment where everyone feels heard and to facilitate an open dialogue about the future of the company. What is important to the family? Is it perpetuity, long-term employment, the environment, social impact? How important is it to have a leader of the business from the family itself? Does it need to be CEO or can it be chair? Is it important to support next generation involvement in the business? By understanding the parameters, the family can clarify the tradeoffs and their implications in conducting a robust discussion among stakeholders. For example, if it is important that the next CEO is a family member, that triggers a specific set of actions. Having multiple opportunities to discuss these questions will aid family cohesion in the long-run, even if it’s uncomfortable at the time.

• Define the roles and rights of all stakeholders in the succession process. Defining the role of the ownership group, current CEO, and the board will provide the family a voice while also ensuring clarity in the decision-making process. It also ensures you have the right (and most qualified) individuals weighing in and making what is a very critical decision – to whom will you entrust the future of the family business performance

• Proactively communicate with the ownership group about succession planning. Letting the family know the timeline for succession, informing them of the role the board, and process engenders trust that the issue is being handled professionally, with the goal to identify the best leader for the business. While the evaluation of candidates in the process is not appropriate to share with the family, giving them a sense that a fair and objective process is followed can increase the acceptance of the outcome.

Succession planning in family companies is a difficult process—it combines emotional and organizational change and all of the feelings that go with it. Proactive planning alleviates some of the stress, offers more talent options for the CEO role, provides the family a voice in the process, and gives the company a much better chance at surviving for multiple generations.