Succession planning
Pramodita Sharma, Jess H. Chua, and James J. Chrisman
Succession planning refers to the deliberate and formal processes, decisions, and actions that fa cilitate the organizational transfer of manage ment control from one individual to another (Sharma, Chrisman, and Chua, 2003a). As a topic of study, executive succession has received the most attention because of the centrality of CEOs in determining the strategic direction of a firm. Our focus herein is on succession planning in family firms where management control is to be passed from one family member to another (see family business). Kesner and Sebora (1994) and Yeung (1998) provide overviews of succession in large, mature non family firms. (For information on succession in young, entre preneurial firms, see executive succession in entrepreneurial business.)
The antecedents and processes of succession planning in family and non family firms are in most respects similar (Bagby, 2004). However, there are several important differences that should be kept in mind. First, in family firms, a leader’s tenure is longer because succession cannot occur until potential successors from the next generation reach professional maturity. Thus, the event occurs less frequently than in non family firms, and the process can span a greater length of time. Second, succession is rarely planned in family firms because to do so forces incumbents to confront their own mortal ity. This natural reluctance of family firm leaders to ‘‘let go’’ is exacerbated by the fact that they are usually in command of the succes sion process through their control of the domin ant coalition. Third, the ready made shortlist of successors in family firms makes it less likely that selection criteria, candidate evaluation, and even candidate preparation will be formalized. Fourth, family business succession is further complicated by the age and experience gaps be tween incumbents and successors. In the typical North American family, the parent–child age gap is more than two decades. This is much wider than what would be typical between in cumbents and successors in non family firms. Experience gaps will, consequently, also usually be wider in family firms than in non family firms.
The succession planning process in family firms may be directed by the incumbent leader alone, the incumbent leader and members of the owning family, including next generation family members, or a task force or committee of insiders and outside advisors. Each option has its strengths and limitations; therefore, the altern ative chosen will depend on the characteristics of the family, society, business, and industry (Le Breton Miller, Miller, and Steier, 2004).
Similar to succession planning in non family firms, the process in family firms is iterative rather than strictly linear and may require re thinking and recalibration at different stages (Le Breton et al., 2004). It is recommended that succession planning be preceded by a careful examination of the key stakeholders’ shared vision. This entails consideration of both how the family can continue to add value to the business and how the business can do likewise for the family. This exercise should determine the firm’s desired strategic direction and the family’s role as a collective unit in its ownership, management, and governance. After such deter mination is made, the following steps are sug gested to increase the odds of an effective leadership succession in family firms (Chrisman, Chua, and Sharma, 1998b).
Develop Selection Criteria
A firm’s shared vision and strategic direction should guide its development of selection cri teria. In addition, cultural factors may have a bearing. For example, family structure and pre vailing societal norms may stipulate a predeter mined heir (as in primogeniture), a short list of possible successors (all male children or all inter ested family members), or a broader list (a com bination of family and non family members).
Research by Chrisman, Chua, and Sharma (1998a) indicates that integrity and commit ment are the most important successor attributes sought by family firms. Competence ranks lower because competence without integrity succession planning 231 and commitment is unlikely to help most fam ilies realize their visions for the business and the family. In fact, without a potential family suc cessor committed to take over, succession plan ning will simply not start (Sharma, Chrisman, and Chua, 2003a).
In terms of competence and business re lated background, significant variations in selec tion criteria should be expected. For example, while family firms in stable industries may consider within firm experience to be critical, those in emerging or changing industries may prefer entrepreneurial orientation and abilities (see entrepreneurial leader ship).
Evaluate the Potential of Available Candidates
Mechanisms must be developed for evaluating family members who are being considered as potential successors. These can include such disparate processes as hiring external parties to perform psychological and attitudinal tests, to informal multi stakeholder assessments of the leadership potential of available candidates. In cases where the shared vision suggests an already available shortlist of family members, this step involves evaluating their current readiness for leadership positions and determining training and developmental needs. Where there is a sig nificant mismatch between the needs of a the family firm and the readiness of available candi dates, innovative solutions, such as installing bridge managers to fill in until a family succes sor is ready, may become necessary (Le Breton Miller, Miller, and Steier, 2004). Due to altru ism and self control problems, families may have special difficulties with this step in the succes sion planning process because of an inability to evaluate family members objectively (Schulze, Lubatkin, and Dino, 2003).
Prepare the Potential Successors
Appropriate methods of training and develop ment will vary depending on the abilities and interests of potential successors and a family firm’s needs. A clear path of apprenticeship in terms of both the type and timing of training for family members should be established. A mile stone approach is useful to evaluate the effect iveness of the training program, as well as the progress of potential successors in completing the program.
Aside from education and general manage ment experience, development programs for po tential successors should also focus on cultivating tacit knowledge and social capital, as these can provide a family firm with a basis for sustainable competitive advantage (Sirmon and Hitt, 2003). Tacit knowledge is knowledge that is difficult to codify and can be gained only through direct exposure and experience. This argues for the early involvement of potential successors in the business to develop deeper levels of firm specific tacit knowledge. Its suc cess requires a harmonious and positive relation ship between a family firm’s incumbent leader and potential successors in the family (Cabrera Sua´rez, De Saa´ Pe´rez, and Garcia Almeida, 2001).
Social capital in the form of network ties, shared language and narratives, trust, norms, and obligations allows a family business leader to build more effective relationships with em ployees, suppliers, customers, and financial in stitutions and to garner resources through these relationships (Sirmon and Hitt, 2003). This may explain why family business leaders rated ‘‘re spect from employees’’ as the third most import ant successor attribute (Chrisman, Chua, and Sharma, 1998a). Similar to tacit knowledge, social capital is developed through direct expos ure to, and positive interactions with, the social network within which a family business func tions.
Select and Install the Successor
This step involves deciding who will be the next CEO of a firm. In a family firm the best time to install a leader is when the designated successor is ready experientially to take over, and the exiting leader is ready emotionally to let go of the job. The timing is analogous to passing the baton between two runners: either too early or too late can result in disaster (Dyck et al., 2002). The decision should also be communicated to all stakeholders once it is made in order to smooth the transition.
Clarify the Post-Succession Roles
An important, yet often neglected step in the family firm succession planning process is deter mining the post succession roles of the prede cessor and the family members not selected. The most important difference in this respect be tween family and non family firms is that in family firms the predecessor and the other can didates will continue to be at least indirectly involved as family members for the rest of their lives and frequently directly as co owners and managers. The predecessor who is a parent will continue to have a very significant legitimate influence on the family and the firm, and the other candidates can form powerful family coali tions. This is quite different from the situation in non family firms where a predecessor’s con tinued involvement will either end or be of a much more limited duration (e.g., serving a term as chairman of the board). Likewise, the other candidates in non family firms must either accept the implications of the decision for their positions or leave. This is because none of them will normally have significant ownership stakes in the firm.
Develop Performance Evaluation and Feedback Mechanisms
A final step in the succession planning process is to develop clear mechanisms to regularly evalu ate successor performance and provide con structive feedback. Because of the gap between the time a succession decision is made and the performance outcomes of that decision, it is useful to set strategic as well as financial per formance goals.
As noted above, research shows that most family firms do not plan for succession (Leon Guerrero, McCann, and Haley, 1998). Researchers have also found that succes sion planning appears to contribute more to the family’s satisfaction with the succession process (Sharma, Chrisman, and Chua, 2003b) than to firm performance (Morris et al., 1997).
Bibliography
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