Family business leaders often neglect and avoid the issue of succession in their family company, particularly if they are the entrepreneurial founders. Some fear giving the impression that the patriarch or matriarch will be leaving the company. Others are concerned they'll lose power or become a “lame duck.” What's at stake, however, is much greater than individual reputation. Failing to plan for succession implies planning to fail as a business (Hakan Hillerstrom, “What, me worry about family business succession?” i-Biz Resources, September 2008).
Problems of succession are indeed the greatest threats to the survival of family businesses, yet the threat is easily mitigated by planning—something all businesses have time to do today, but may not have tomorrow.
The reality is, no matter how healthy and invincible the founder thinks he or she is, disaster could strike at any minute. I recently read an unfortunate anecdote about two brothers lost in a plane crash (Richard L. Narva, “Creating effective corporate governance in family businesses”). Together, they owned 100% of the stock in the family business. The brothers' death left not only grieving -widows and children, but also a total vacuum of authority at the company. The absence of an emergency succession plan magnified the problems faced by surviving family members—it wasn't even clear who was authorized to perform routine tasks such as signing checks, let alone who would set the strategy, or even whether the family should keep or sell the business. Critical decisions had to be made at a time when emotions ran high and objectivity seemed -impossible.
Unplanned succession is an issue faced by businesses of every size—even the giant McDonald's Corp. While the corporation isn't family-owned, what happened there in 2004-05 serves as a cautionary tale, and successful transition model, for any family company. When McDonald's Corp. chairman Jim Cantalupo died of a sudden heart attack in 2004, the board positioned well-chosen successor Charlie Bell within six hours. Only a few months later, Bell was diagnosed with cancer and again the board was able to transition quickly to another successful CEO, Jim Skinner (currently McDonald's vice chairman and CEO). The swift transaction allowed McDonald's to continue business as usual, sustaining both its business and its trading performance. How? An emergency succession plan had been a board priority and was in place.
Your company may not be as big as McDon-ald's Corp.—at least not yet—but regardless of size, your business faces the same potential scenarios. They are diverse, dire and unpredictable: temporary illness, early retirement, death or even immediate dismissal for cause, to name a few. Any or all of these occurrences require a well-developed emergency succession plan.
Simply stated, planning is a crucial board responsibility. Should an emergency occur, it's essential that operational confidence be restored as quickly and effectively as possible. Boards that have a solid plan in place engender confidence—both within and outside the company—that the business and its continuity are well in hand, heading off potential damage due to either poor decision making or lack thereof, and protecting the interests of all shareholders.
Successful planning ensures short-term continuity and sustained long-term vision and insulates your company from financial and operational risk during a period of crisis. Having recently completed such a plan for one of my family business corporate boards, I can assure you that the family, management and shareholders feel a new sense of confidence that, should an emergency take place, the interruption to the company will be minimal.
A board responsibility
The entire board is responsible for the emergency succession plan. A subset or committee—as part of either the governance committee or the continuity committee—can be given the assignment of developing a plan, along with the CEO, that will be reviewed and approved by the entire board. This plan should be reviewed with the board at least annually. In the event of death or disability of the CEO, either the chairman (if separate from the CEO) or the chair of the governance or continuity committee should call a special meeting to discuss the board's response.
Some key questions as a starting point:
• How would the members of the executive team lead the company in the event of a sudden loss of the CEO? Is there an obvious choice to serve as the interim CEO and, if so, do the current board members agree on who that is and why he or she is the best choice? If not, what would/should the board do?
• If the CEO is the chairman as well, which board member could/should serve as the interim chair? How should this person be chosen?
• Has the board effectively communicated the plan to the family shareholders and gained their full support?
• How might this emergency succession plan be broadened to apply to a circumstance involving the loss of the top three officers? What if, for example, the corporate plane were to crash? (By the way, have you checked your senior officer travel policy lately? Is it being adhered to?)
Successor selection
Often the chairman will appoint himself or herself as interim CEO, or the family may lobby for one of its preferred members to take charge. While this may be a quick solution, it may not permit the thoroughness of thought and alternative assessment that can lead to a better transition. More often than not, the goals and objectives of the senior generation are different from those of the successors. Successor candidates' plans must be vetted and taken into full consideration before the chairman/CEO succession decision is made. Proper planning requires early assessment of business and family needs with a focus on ensuring a positive leadership outcome.
Also, the choice should depend on whether the situation calls for an interim CEO or a permanent one. This assessment is usually led by the continuity or governance committee, frequently supported by an independent specialist consultant.
• An interim CEO should be a strong leader within the board or the company who will be dedicated to fulfilling the complete requirements and responsibilities of the CEO during a temporary period of absence. (A temporary absence is one of less than three months, with the CEO expected return to his or her position once the events precipitating the absence are resolved.) The person named as interim CEO must have a solid understanding of the business and its needs, the respect and trust of the family and a proven managerial track record; he or she must demonstrate excellent leadership abilities. If the business has a lead director, he or she is often asked to take on this responsibility. If a person from within the company is appointed as interim CEO, the assignment must not disrupt the ongoing business. Importantly, the individual should be identified in the plan, rather than selected hastily at the time of emergency. It is essential to try to determine how long the company's CEO will be absent and whether his or her responsibilities can be carried out effectively by an interim CEO.
• A permanent replacement for the CEO requires a somewhat different strategy. If there is clear successor who is supported by both the board and the family, that person should be named as the new CEO as quickly as possible. However, if a permanent successor still must be vetted, an interim CEO should be named. (Just as a ship in a storm should never be left without a captain, a company should not be left without a leader in a time of crisis.) In either case, an interim CEO should be identified in the plan.
Executive transition committee
Whether a permanent or an interim CEO is needed, an executive transition committee (ETC) should be identified as part of the planning process. This committee should consist of at least one member of the executive or governance committee and two members of the board and is often the same team that prepared the emergency succession plan. The role of the ETC is as follows:
1. To communicate with key stakeholders regarding actions taken by the board to name an interim or replacement CEO, appoint a transition team and implement the succession policy.
2. To consider the need for consulting support in areas such as law, tax accounting and executive recruiting.
3. To review the company's business plan and assess the organizational strengths, weaknesses, opportunities, threats and priorities that need to be addressed during the transition process. This is also a time to review or identify attributes and characteristics that are important to consider in the selection of a new leader. The key is to have an ETC that is objective, keenly aware of the business needs and forward-focused.
4. To establish a time frame for recruitment, selection or assignment of the permanent CEO. (Time may be needed to either clear or reassign the successor's duties.)
Time is of the essence
Stabilizing the organization and getting everyone focused on future needs is the imperative. Here are a few key milestones:
• Within five business days of an unplanned and perceived temporary CEO absence, the board should meet and appoint an interim CEO according to an agreed-upon line of succession (usually a minimum of three candidates ranked in order of qualification).
• As soon as possible, the interim CEO and the executive committee should communicate the temporary leadership to key customers, prospects, vendors/suppliers, financial institutions and others as specified by the executive committee or the board.
• As soon as possible, the length of the CEO's absence should be determined, as well as the acting CEO's responsibilities. The CEO's date of return should be mutually determined by the CEO and the board.
• If a permanent replacement is needed, the executive transition committee (ETC) should be appointed within 15 days and begin the “emergency succession plan implementation process” (see below).
• The family and key stakeholders should be educated in the process early on and be kept informed during the transition process whether it is temporary or permanent. (It is also advised to have both executive and non-executive family members participate in a short education and training session devoted to family business planning.)
The emergency succession plan
It's not enough to merely discuss your plan. In times of crisis, that kind of planning often evaporates. Successful planning involves putting the plan in print and making it readily accessible when it matters most. The core elements of the physical plan include the following items:
1. Successors. List the most viable successors in order of priority, with the appropriate supporting material.
2. Signatories. The board chair, CEO, chief human resource officer, interim CEO, and chair of the continuity committee or executive transition committee should all sign off on the plan.
3. Organization charts. These should reflect how the organization will change in the event of an emergency or the unplanned absence of the CEO.
4. Important organization information. Provide current contact information for all board members, executive committee members, senior management, financial institutions, legal representatives, key shareholders and family members, key vendors, key customers, and other important individuals.
5. Copies. The emergency succession plan, along with the corresponding documentation, should be maintained by the board chair, CEO, interim CEO, H.R. chief and legal counsel.
6. Emergency succession plan binder. The following documents should be included:
a. Current job description for the CEO.
b. Succession plan material as listed above.
c. Current board roster with committee assignments and chair identification.
d. Summaries and inventories of: the CEO's current priorities; annual business plan; current work plan and calendar; personal passwords, security codes, etc.; location of vital documents (key contracts, facility and real estate agreements, corporate trusts, financial obligations, etc., including contact person).
Planning for success
Needless to say, the most successful family-owned businesses take succession seriously. A recent Hay Group study of governance practices of 150 of the world's largest firms found that of those on the “Most Admired” list, 90% had emergency CEO succession plans in place. Only 66% of the boards of the other companies (not most admired) had such a plan. Likewise, according to Hewitt Associates, 85% of the 20 companies named as “Most Recognized for Leadership” had an emergency succession plan, vs. 59% of the rest.
The shared dreams of a family business are never more compromised than in times of crisis. Without planning, they can quickly become shattered dreams instead. Effective emergency succession planning can substantially increase the odds of a successful transition and the long-term financial and operational health of the family business—even when those odds seem stacked against you.
Keith L. Alm is the retired president and CEO of Hallmark Cards International. He currently serves on the boards of Follett Corp., McKee Foods Corp., and O-Sage Power Equipment LLC (klalmone@aol.com). He is a principal with The Family Business Boardroom LLC.