William J. Rothwell - Effective Succession Planning (2005)(3-e)(en)

Trend 6: More Software to Support Succession

There is more software available to support SP&M, though it sometimes masquerades under such alternative names as talent management, talent development, or human capital software. That is both a blessing and a curse. It is a blessing because, when well formulated and implemented, software permits individuals and groups that are dispersed geographically to participate. Software can facilitate decision making on competency identification, values clarification, 360-degree assessment, individual development planning, identification of developmental resources to help build competencies (and thereby close developmental gaps), track individual progress (and thus encourage accountability), and even measure individuals’ progress and the support provided by immediate supervisors.

But it can be a curse because some people believe that, when they buy a technology solution, they are also buying the solutions to their succession problems. They think that the software will give them ready-made, off-the- shelf, one-size-fits-all competency models, 360-degree assessments, individual development plans, tracking systems, and developmental methods. Of course, that is not true. Technology is like an empty glass. HR practitioners and senior managers cannot avoid the responsibility of filling the glass with corporate- culture-specific competencies, overseeing individual progress, providing realtime mentoring and coaching, and offering much more than is embedded in the technology. In short, technology can ease the work, but it will not remove it. (Chapter 12 of this book describes unique issues associated with the application of online technology to SP&M.)

Trend 7: The Growing Activism of the Board of Directors

Boards of directors are beginning to take a more active role in SP&M. The evidence clearly points in that direction. One reason has been the SarbanesOxley Act of 2002. (See Exhibit 2-2.) A key effect of that act is to increase board accountability in business operations. And, of course, finding qualified successors for CEOs on down is an important issue that corporate boards must perennially address.22

Trend 8: Growing Awareness of Similarities and Differences in Succession Issues Globally

One size does not fit all—and that is as true of succession planning as it is of anything else. Unfortunately, it is a lesson that some multinational corporations (MNCs) have never learned. An all-too-common scenario is that the corporate headquarters in Europe, the United States, or Japan will establish succession planning guidelines and then roll them out worldwide, forgetting

Exhibit 2-2. The Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act of 2002 has swept the corporate world, leading to widespread change.1 Introduced in the wake of the spate of scandals that began with Enron, the Sarbanes-Oxley Act does have an impact on succession issues. It has prompted corporate boards of directors to take a more active role in succession issues. It has also prohibited practices that were previously regarded as retention strategies for key executives, such as permitting personal loans to executives or allowing CEOs to remain in the room as corporate boards deliberate financial packages.2 Sarbanes-Oxley has also put real teeth in corporate codes of conduct and strengthened ethics programs in corporate settings. One indicator: ‘‘the ethics officer association, a Waltham, Mass.–based organization for managers of ‘ethics, compliance and business conduct programs,’ has seen membership jump more than 25 percent since last year.’’3

Notes

1.Steven C. Hall, ‘‘Sarbanes Oxley Act of 2002,’’ Journal of Financial Service Professionals 57:5 (2003), 14.

2.Dale Buss, ‘‘Corporate Compasses,’’ HR Magazine 49:6 (2004), 127–128, 130, 132; Robert J. Grossman, ‘‘HR on the Board,’’ HR Magazine 49:6 (2004), 56–63.

3.Buss, ‘‘Corporate Compasses,’’ p. 128.

that the world is a big place and national cultural differences do play a role in effective succession planning practices. The result is that, whatever the approach, it is only partly effective. An English-language-only literature search uncovered articles about SP&M in Europe,23 the United States,24 Asia,25 the Middle East,26 and New Zealand.27 As Hickey notes in writing of SP&M in China, ‘‘a continued negligence of a systemic succession plan is seemingly retarding the growth and career development of domestic employees to localize the organization.’’28 The same could, unfortunately, be said of many other locales around the world.

What are some of the problems that a global rollout may uncover? Here is a list of some typical problems and their causes:

▲ U.S. firms will generally prize individualists who can claim credit for what they have done on their own. That is not true in other cultures, where a willingness to ‘‘stick one’s head above the crowd may mean it is cut off.’’ In short, allowances may have to be made for cultural differences in which individual efforts are prized in those cultures where individualism is prized, while an individual’s willingness and skill to influence groups may have to be identified and rewarded in more collectivistic cultures where team efforts are prized.

▲ Some European firms—and some firms in developing nations—will prize ‘‘family heritage.’’ Ultimately, coming from the European tradition of aristocracy, this principle means that ‘‘not all people are created equal.’’ Some people, as George Orwell once noted in Animal Farm, are ‘‘more equal than others’’ by virtue of birth family, socioeconomic status, schools attended, and social networks developed from school and family connections. In short, it means that one’s family may mean that one is destined to be a senior executive no matter what corporate leaders in other nations may want because that is just the way things are done locally.

If a universal approach will not work globally, then what approach will work? The answer is that there is no simple answer. Goals may be established at corporate headquarters. But, if the approach is to be effective, corporate leaders should launch facilitated sessions that bring together regional leaders to have input on the goals, hear about best practices in Western nations (which may have the most advanced approaches), and (most importantly) discover what results are to be achieved by those practices. Then the regional leaders should engage in facilitated discussions where they can ‘‘invent’’ local approaches that will ‘‘work’’ in their home cultures, and will comply with the employment laws of each nation.

It is true that such an approach takes time, resources, patience, and hard work. But in the long run, that approach has the advantage of leading to ‘‘global goals’’ but using ‘‘local approaches to achieve those goals.’’ It will work.

The alternative is to do as many companies do and just ‘‘roll out something’’ from corporate headquarters. Local people will shake their heads in wonderment, amazed that global corporate leaders know so little about the broad differences in local cultures, local realities, and even local labor laws. It just undermines the credibility of corporate leaders. As globalization exerts increasing influence, these ‘‘one size fits all’’ approaches will be increasingly out of step with good business practice. That is especially true when rapidly advancing technology makes it possible to have videoconferenced and realtime online discussions cross-culturally to facilitate ideas and approaches.

Trend 9: Growing Awareness of Similarities and Differences of Succession Programs in Special Venues: Government, Nonprofit, Education, and Small or Family Business

Just as one size of SP&M program may not fit all internationally, one approach to SP&M will not work in all venues. While there are many similarities in effective SP&M programs across business, government, and nonprofit sectors, there are some important differences as well. The same is true in settings such as educational institutions, small business, and family business.

Government

There are two key differences in succession planning programs between business and in governmental settings. (And it is worth pointing out that governmental entities may themselves differ across international, federal, state, municipal, county, and other governmental bodies.)

One difference is that some governmental entities have civil service systems that prohibit (by law) the naming of individuals to fill positions without competitive job searches. In some jurisdictions, all jobs must be posted. Individuals are then ranked according to their qualifications compared to the requirements listed on job descriptions. That approach means, in practical terms, that a government entity can commit to develop anyone who wishes to be developed—a method sometimes called a talent-pool approach. But identifying individual successors in advance may not be possible.

A second difference has to do with who may be regarded as the key customers of the effort. In business, the CEO plays the single most important role as customer. But in some governmental entities, the agency director is a political appointee who carries out the will of an elected official. In practical terms, that means that the most important owners of the SP&M process will be those government civil servants who do not change with the winds of every political election. They possess the collective institutional wisdom of the organization in their heads, and they must be appealed to on the grounds of a legacy if a government-agency SP&M program is to work. In many cases, government succession programs bear different titles and are called workforce planning or human capital management initiatives.29

Nonprofit

Nonprofit entities share characteristics with business and government. For that reason, an effective SP&M program in a nonprofit organization will most likely be a hybrid of what works in the private and public sectors. The senior-most leader must back the effort if it is to succeed, and (in that respect) the nonprofit SP&M program is like the private sector. But dedicated leaders who have made their careers in the organization, and are committed to its worthwhile mission, must also back the effort. And in that respect, the SP&M program in a nonprofit organization is akin to that of a governmental entity.

Education

Educational institutions vary widely in type, just as governmental entities do. One size SP&M program will not fit all. What works in a local school system may not work at a world-famous research university.30 But it is clear that large universities are unique for the simple reason that many people must move to other higher educational institutions if they are to be promoted from department head to dean, dean to provost or chancellor, or chancellor or provost to

president. That makes it difficult for one institution to justify expenditures on identifying and grooming talent for the future, since the beneficiaries of such efforts would most likely be other institutions. (In a school district, on the other hand, it may be possible to groom people to become principals because many such positions may be available.) Having said this, however, some higher-educational institutions have committed to leadership development programs to groom talent, and it is likely to be seen more in the future, for the simple reason that so many college professors and university administrators are at, or near, retirement age.

Small or Family Business

Succession planning in family businesses and succession planning in small businesses are specialized topics. Much has actually been written about them.31 It should be noted that not all family businesses are small businesses and not all small businesses are family businesses. Some large, well-known companies like Ford were originally family businesses. In Europe or Asia, many large companies began—and some still are—essentially family dynasties. That is also true in some companies in the United States. And small businesses may be initiated by individuals without families or in partnerships of otherwise talented but unrelated entrepreneurs.

Family businesses exert an enormously powerful influence on the U.S. economy. Consider the following32:

It has been estimated that family businesses generate approximately nine out of 10 new jobs. But despite the significant role they play in supporting the nation’s economy, only about one in three survives to the second generation. The estimate of successful transfers to the third generation ranges from only 10 to 20%.

Family businesses represent a special succession challenge for the simple reason that many factors come into play. A founding entrepreneur, who is usually a parent and spouse, establishes a business. But what happens when he or she passes from the scene? Who carries on the legacy? In some cultures— and even in some parts of the United States—the principle of primogeniture is still very much apparent. Primogeniture is the view that the eldest son should be the primary inheritor. Based on the way that aristocratic titles have been passed down historically, it poses special problems in family succession, for the simple reason that the eldest son of a founding entrepreneur may (or may not) be the best equipped—by skills, vision, or motivation—to run the business.

Family succession has several issues associated with it. One issue centers on management. A second issue centers on tax and inheritance issues. A third issue centers on legal issues. A fourth issue centers on what might be called family psychology. So, the management issue has to do with answering this question: ‘‘Who is best equipped to run the business when the founder passes from the scene?’’ While founders may feel inclined to leave the business to a spouse or to an eldest son, that person may (in fact) not be the best choice.

The real issue has to do with a conflict between obligation to family and obligation to the business. Savvy founders will not necessarily let the obligation to the family prevail. If they do, they may destroy the business. What happens if, upon the founding entrepreneur’s sudden death or disability, the spouse or eldest child is ill-equipped to manage the business? The answer is likely to be bankruptcy or a sell-off. That may not be best for the business, the employees, or the communities in which that business functions.

The second and third issues have to do with accounting and legal issues. Should the business be handed over before the founder’s demise, in which case it is subject to gift tax, or should the handoff occur after the founder’s demise, in which case it is subject to inheritance tax? Those questions are best addressed by competent financial and tax advisors. At the same time, if the business is handed over, it must be done legally. That requires competent legal advice to write a will that cannot be easily ‘‘broken’’ or a handoff agreement that makes the founder’s relationship to the business clear.

The fourth and final issue has to do with family psychology. If the founder decides to hand over a controlling share of the business to one child in preference to others, for instance, then the reasons for that should be clear before his or her demise and the issue of financial fairness and equity addressed at that time. If the founder decides to hand over a controlling share of the business to a child and ignore the living spouse’s claim on the assets, that is also a problem. The point to be made here is that conflicts should be worked through while all parties are alive. At times that may require the help of a skilled family psychologist. To ignore the problem is to beg trouble—and perhaps beg the dissolution of the business upon the founder’s death or disability as family members squabble bitterly and ceaselessly over money.

Trend 10: Managing a Special Issue: CEO Succession

CEO succession has emerged as a special theme and research topic within the succession literature.33 In that respect it is like other unique succession issues, such as the impact of cultural differences in making succession decisions, small business succession, and family business succession. The special interest in CEO succession should come as no big surprise. It has been a prominent topic for research, discussion, and investor interest. In fact, it has been a focus of attention in much the same way that succession to the throne has preoccu-

pied citizens in those nations where a monarch is the titular head of state. That analogy between monarch in a nation and CEO of a company is particularly apt when thinking about the successors of founding entrepreneurs in small businesses, where a CEO’s unexpected and sudden loss can have particularly devastating effects on the business.34

CEO succession has also become a particular center point for concern recently as CEO turnover globally has increased.35 The findings of a study of CEO turnover,36 reported in The Financial Executive, revealed that:

▲Involuntary CEO successions increased by more than 70 percent from 2001 to 2002.

▲Of all CEO departures globally in 2002, 39 percent were forced—and that compared to 35 percent in 2001.

▲CEO turnover increased 192 percent in Europe and 140 percent in the Asia/Pacific region but only 2 percent in North America since 1995.

▲The Asia/Pacific region accounted for the largest change (19 percent), nearly 1 in 5 CEO departures.

▲North America accounted for only 48 percent of all successions worldwide in 2002 but accounted for a significantly higher 64 percent in 2001.

▲Corporate boards have toughened their stance on CEO performance, since the board dismissed CEOs in 2002 when shareholder returns were only 6.2 percent below median regionally adjusted averages but at 11.9 percent below median regionally adjusted averages in 2001.

One important conclusion that can be drawn from these results is that organizations must pay more attention to ways to select CEOs and assimilate them.37 Indeed, CEO succession is likely to continue to be a focus of attention. Most experts predict that the pace and magnitude of change in the world will continue to increase. As that happens, corporate boards are likely to be more demanding—and less forgiving—of CEO performance. That, in turn, will probably continue the trend of dropping job tenure for CEOs.

What Does All This Mean for Succession Planning and Management?

What will these trends mean for succession planning and management? The answer to that question is that, to be effective in the future, succession planning and management must be based on sensitivity to the need for speed,38 must align organizational needs with individual needs in order to be responsive to a seller’s market for skills, must emphasize a present orientation that will work in business settings where neither individuals nor organizations possess long-term loyalty, must recognize and cultivate the critical importance in

competitive success of the organization’s intellectual capital, must rely on (but not be led by) technology, and must be sensitive to unique needs by culture, industry or economic sector, and level on the chain of command.

Summary

As noted at the opening of this chapter, succession planning and management must be carried out against the backdrop of increasingly dynamic organizations. This chapter examined ten key trends exerting special influence on succession planning and management. The chapter then offered conclusions about what these trends mean for succession planning and management.

The next chapter makes the case for a newer approach to succession planning and management, one that is responsive to—and helps organizations be more proactive to—new competitive realities.

▲Characteristic 4: Dedicated Responsibility. If a goal deserves attention, someone must be held responsible for achieving it and accountable for the consequences of it. That is as true of SP&M as it is of anything else.

▲Characteristic 5: Succession Planning and Management Extends to All Levels. SP&M should extend to all organizational levels. Note that the greatest emphasis is placed in some organizations at the lowest management levels, where the most positions and people exist. In the other cases, attention is devoted to levels where business needs (or risks of loss due to retirement) are greatest.

▲Characteristic 6: A Systematic Approach. In most organizations, continuing processes should be put in place to focus attention on succession planning.

▲Characteristic 7: A Comparison of Present Performance and Future Potential. Management succession should not be a function of personal favoritism, seniority, or even demonstrated track record. Instead, the organization should possess some means by which to compare present job performance and future potential. The organization should identify individual developmental needs for top-level talent.

▲Characteristic 8: Clarification of High-Level Replacement Needs. Organizational leaders should make the effort to determine the retirement plans of key officers. (In this book the term key job incumbent refers to an individual presently occupying a key position.) In that way, the organization is better able to identify developmental time spans for specific key positions.

▲Characteristic 9: An Obligation to Identify and Prepare Successors. Each executive should take responsibility, and be held accountable, for identifying and preparing successors.

▲Characteristic 10: Specific Developmental Programs Established and Conducted. Individuals thought to have high potential should participate in planned developmental programs to prepare them for the future, without necessarily being promised anything. Programs of this kind are often used in large corporations and may extend over many years.1 Such programs may be viewed in three stages, which are based on the level of participants’ experience with the organization. In stage 1, there is a relatively large pool of prospective high potentials. They range from little experience through eight years with the organization. They are taught general management skills. Only 6 percent of those in stage 1 make it to stage 2, where they participate in tailor-made developmental experiences, intensive on-the-job development, and specialized courses, and they occupy important positions. A smaller percentage of those in stage 2 progress to stage 3, where they occupy important positions while they are carefully groomed for more senior positions.

▲Characteristic 11: High Potentials Work While Developing. The organization should not emphasize classroom or online training or off-the-job development to the exclusion of action learning or learning from experience.2 For