SUCCESSION PLANNING:

4 QUESTIONS

by Amelia Renkhert Thomas

Traditionally, succession planning for the founder of a family business has focused on two questions:

 

  • Who will run the business? and 

  • Who will own the shares?  

 

The first question typically is dealt with by the founder, possibly with input from the board. As a result, the first question tends to be answered through the lens of business leadership: who has the skills and experience to run the company? 

The second question is dealt with by the founder and his estate planner and tends to be answered through the lens of tax and estate planning: who will inherit the founder’s wealth and how can the tax cost of transferring that wealth be mitigated?   

 

But those two questions only begin to address the issues that succession entails.

 

Capital succession planning 

 

A founder considering succession planning for the business and the family might instead ask four questions:

​​​​​​1. What is our core capital?  

 

What human and enterprise capital have we created that is most important to us?  What is our vision for the future of all our forms of capital – not just the business?

​​​​​2. Who will follow me in the work of sustaining and growing the core capital as well as the business?  

 

How can I engage the talents, skills, interest and enthusiasm of my entire family in sustaining and growing the core capital and the business?

​​​​​​3. What roles will they play in carrying it forward?  

 

Who has the ability, interest and availability to serve in management? As leader of the Owners Council? As an owner? As trustee? As a director?

​​​​​How can I help prepare them to take over? 

 

4. How can I help them build the governance structures, protocols and practices that they’ll need to operate a more complex power-sharing system?

 

These four questions acknowledge that human and enterprise capital are at the center of the family’s life – there’s more at stake than money. With the four questions, succession planning becomes an exercise in recognising capital in all its forms and matching human capital with the most important needs and opportunities, not just revising an org chart or saving tax. For a founder who has been focused primarily on the day-to-day work of growing a business, for his family, and for the lawyers, accountants, and advisors who stand ready to help him, these questions represent a more holistic way of looking at the future. Because the family and business will become ever more complex over time, they focus on identifying all the capital at stake and developing leaders with the interests, talents, skills, and perspective to steward that capital over time.  

Engaging human capital to make decisions together

 

When a founder transfers his leadership role to a new CEO and his shares to a group – perhaps to children, or to spouse and children, in trust or outright – the transition is transformative, often in ways that he never anticipated. With the transfer, business decisions that were made by one person – the founder – are now the responsibility of many. Following the transfer, management, board and ownership decision-making must all adapt from the old hub-and-spoke system, where the founder sat at the middle of all business decision-making, to a tiered power-sharing system, where decision-making responsibilities are allocated among management, board, owners and family. As a consequence, everyone involved – whether as a family member, one of the management team, a director, or as an owner – will need to adapt how they undertake their work, how they share information, and how they make decisions.  

 

Preparing the successors

 

When the family’s goal is to sustain and grow the human, enterprise and financial capital as well as the business, leadership planning will need to take into consideration all the different governance tasks that may be required to manage the capital and the roles that will exist outside as well as inside the business (executive, manager, director, trustee, protector, chair for forums such as Owners Council or Family Assembly, mentor). Planning must address who might be candidates for those roles, how to prepare them, and – most important – how to create a pipeline of future leaders. Training takes time, and a founder would be wise to recognise the value of starting early.

 

In particular, the founder may recognise the value of shifting away from the hub-and-spoke decision-making system to a new leadership model well in advance of his own departure, so that he can play a role in developing and implementing the new system. This is harder than it sounds. A hub-and-spoke system is nimble – there is no bureaucracy, no layers of checks-and-balances, and decisions get made quickly (unless, of course, the founder prefers to avoid the subject, in which case the decision may languish). The founder makes the decisions or, sometimes, delegates them to trusted individuals on the spokes, and those who operate the spokes carry them out. It’s risky, but as long as the founder is capable of making decisions, the system works.  

From hub-and-spoke to tiered decision-making

 

For the founder, switching to a new, tiered governance system where power is shared among different groups will feel alien. He may find himself instinctively following old habits of decision-making, and those in the inner management circle may be more than happy to revert to the old ways – after all, old habits are hard to break. However, if the succession is going to stand a chance, the successors will all need practice, training, and opportunities to build the new skills required to operate the system. 

 

There are many ways to develop a tiered decision-making system, but the most expeditious and efficient is for the founder to invite the next generation of leaders to join in. The new system is, after all, for them. They are going to have to oversee the business, steward the capital, administer the trusts, operate the foundation, weigh opportunities against available resources. Yes, it’s the founder’s legacy, but it will be the successors’ reality. For a founder used to running the show, bringing the successors into the process may seem messy and even unnerving. More than one founder has been heard to say, “they can figure it out after I’m gone.” But those who acknowledge all the capital at stake, may see the worth of engaging the successors.

 

Succession is going to happen, one way or another. Founders who answer all four succession questions – the ones who take the time to think about all the capital at stake, who recognise the breadth of leadership that will be required going forward, who invite those leaders to join in the process of articulating their shared purpose and vision of the future, and who then work with them to build the system to achieve that vision – are the most likely to achieve success and build capital in the process. 

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