Whether it is due to a sale of the company, a changing of the guard between generations or a major corporation looking toward its next CEO, leadership succession can present a challenge to even the most stable of businesses.
General counsel often play a key role in advising leaders of their companies on the best ways to craft that transition strategy.
“It is like doing a will,” said Charles E. Hoffman, dean of the College of Business Administration at the University of Missouri-St. Louis. “Everyone is like, ‘Yeah, I’ll get to that someday.’”
But someday can approach sooner than one expects. Organizations that don’t have a blueprint in place when confronted with a sudden death, an unplanned departure or an unwelcome transition are likely to find that creating one on the fly isn’t as easy as their leaders might think.
In recent months, executives of several major corporations departed hastily due to conflicts with consumers, regulators, shareholders or boards of directors — among them the CEOs of Uber, eBay, the shared-workspace firm WeWork and the electronic cigarette company Juul.
And even when a transition isn’t so abrupt or controversial, a company is still more likely to execute it smoothly when its leaders and counsel have given it ample consideration in advance.
“Some companies think this is an HR function,” Hoffman said of selecting top leaders. “I disagree with that. HR typically doesn’t know details of how an executive is doing. It is the CEO who is accountable. Certainly he consults with HR, but the CEO and the board are the ones who decide who it is going to be if something unexpected happens.”
Hoffman, whose experience ranges from the halls of AT&T to the world of a Silicon Valley startup, said no single answer exists.
“There is no cookie-cutter approach to this,” he said. “It just takes the discipline to be thinking about it and put it in writing.”
Time is always of the essence, said Bennett S. Keller, partner in charge of Lathrop GPM’s St. Louis office, whose legal practice includes helping businesses with succession planning.
“You can never start the process too soon,” he said. “You can’t give a call on Monday and say, ‘I’d like to have my succession/transition plan by Friday.’ It just doesn’t work like that.”
Keller, who also is an associate professor at Washington University, said a good first step involves taking an inventory of staff and plans already in place and whether an executive exists to handle leadership on either an interim or long-term basis.
The process requires that certain basic questions must be asked. Is there an organizational chart? What about a job description? Is a review process set up? It is all about what Keller calls “corporate hygiene.”
A well-organized business with a process in place for replacing personnel is valued in the marketplace.
“The reason why this management-transition stuff is so important is because if in fact the company is to be sold to third parties, in my experience, the premium buyers attribute to having that stuff in place can be as high as 25 percent,” he said.
A company’s legal department should take part in succession planning, Keller said.
“It is helpful to have in-house counsel,” he said. “One, they can gather the documents. Two, they know the dynamics among the owners.”
A normal transition can take up to two years or more, he said, and even an emergency plan will likely take six months to integrate so that everyone has settled in.
Meanwhile, the company structure may look very different at the end of the process. A particularly active leader could be wearing a number of different hats.
“We had a situation where I had one guy running the company and when I looked at the org chart, his box needed to be filled by three people,” Keller said.
A stone in the bucket
Finding a CEO or company founder who is doing far more than just one job isn’t unusual — especially in smaller organizations.
“If your leader is your head sales guy, and he’s got all the connections, he’s got the silver tongue, he can go out and make the deal happen and there is no one who can do that same job when he retires, dies or moves on to something else, the business is in serious trouble because it is not a business,” said David Steffes. “It is this one guy.”
Steffes, regional director of the Columbia-based Small Business Development Center for Central Missouri, said a leader who wants to see the company continue will need to make an effort to keep it independent from himself or herself in some respects.
“As you are separating yourself from that business, you are also preparing the next person to take on that role that is so critical,” he said.
Steffes also advises good corporate hygiene, including making sure that all documents, contracts and tax information are kept in their proper places.
“Processes within organizations should be documented within manuals because once you are gone, you aren’t going to be there to say, ‘Oh, you skipped step seven of this process. You need to go back and take care of this,’” he said.
Having a new leader “shadow” the movements of the outgoing CEO can be one way to ensure that the transfer of critical knowledge is occurring, Steffes said. He warns, however, that the goal isn’t to create a carbon copy.
“The shadowing of another leader is useful. It helps provide a lot of insight into the way the company has been led previously,” he said. “[But] it is important even during the shadowing period for the new leader to have a voice, to be able to start imparting some of their practices or their leadership style into the situation.”
That can help staff acclimate to their new boss — a process important for those outside the organization as well.
“It is best to be introducing the clients or vendors to them and showing both the new owner and the clients what has been expected of that relationship and what that relationship can look like going forward,” Steffes said. “A client list isn’t worth a dime to the new owner if the new owner cannot build that same level of trust with those clients.”
He also advises that a new leader be made to spend time with each aspect of the business to develop a holistic comprehension of its moving parts.
“Let them learn intimately about each of the departments by spending time in those departments, understanding what processes are in place, what challenges exist in that department and building their business acumen to a level where they truly understand that when you drop a stone in the bucket, the ripples are going to reach all the way out to the edges,” he said.
The best candidates
Learning about the company and the job can be done through mentoring, which is helpful in advancing good candidates. David Kaplan, chair of the Management Department at Saint Louis University, said mentoring should have a formal component and processes behind it to ensure diverse voices are brought to the fore.
“If you just rely on informal networks and informal mentoring, you could be leaving out women and people of color, people who don’t necessarily demographically resemble the current C-suite setup,” he said.
But finding the right people for the top spots in the company can still be a daunting process. Kaplan notes that simple performance evaluations may tell you how someone is doing where they are, but he recommends thinking in terms of “promotability ratings” instead. A good leader in a given department won’t necessarily make the best CEO based solely on technical or creative skill in his or her present job.
“If you move those people out of their current position, potentially you are hurting the organization and the individual because you took someone who was really successful in a role and moved them to a place where they are not going to be successful,” he said.
Once a new leader is selected, that person can be given “stretch assignments” — tasks that push them to take on more responsibility, Kaplan said. Not only is this good training for an incoming leader, it also builds that person’s profile, allowing others in the company to get used to viewing that person in a position of authority.
“People start seeing and recognizing them as, ‘Oh, this person would be a good CEO,’” he said. “That way, when it is time for that person to be moved up, the organization is already seeing that individual as someone who has potential, as opposed to if you’ve kept someone behind the scenes, they can be like, ‘Wait, why did that person get promoted?’”
Whatever method a company chooses, a good succession plan doesn’t put all of its eggs in one basket, Kaplan said. You don’t just need one successor but a primary and a backup choice representing “the heir and the spare.”
“Things always happen,” he said. “Someone might choose to leave. There are various reasons why someone might not eventually move on to that role as CEO.”
A valuable part of the company
UMSL’s Hoffman also believes in the idea of multiple candidates. He said a big organization might want to think in terms of three people — a “train wreck” candidate who could take over right now if needed, a “ready in six months” candidate who is nearly in position and a “long-term” person who might represent the company’s future if given enough time.
Hoffman said this idea is important to consider for many senior positions across the company, not just the CEO.
“Normally, as part of the annual review process, you have this discussion with people,” he said. “‘What are your plans? What do you hope to be someday?’ From that, you start formulating, ‘OK, who are the people that would be ready to step up?’ In some cases, that might mean a relocation, so you have to know who might be ready to move to Minneapolis or wherever headquarters is.”
Of course, any eventual blueprint should be kept secret, Hoffman said.
“You don’t want somebody who is not in the succession plan to find out and be discouraged,” he said.
Discouragement from rejected applicants is a common worry. Lathrop GPM’s Keller said you might need certain incentives such as phantom stock or equity compensation plans to keep people in place if they aren’t going to make it to the top spot. A better option, however, is just showing they are valued.
“Not everything is based on money,” Keller said. “You’ve got to make everyone feel as if they belong in the organization, that they have an important role in the organization.”
Steffes notes that any rejected contenders for a job should be given feedback on how they can improve and why a choice was made.
“You don’t want to burn that bridge with them by just leaving them hanging,” he said. “Employees are picking companies more than companies are picking employees, so when you have a good one, you definitely want to double back with them and make sure they understand that you are there for their support and you want to help them move though the process to continue to be a valuable part of the company.”
While Steffes believes that promoting from within can be good, he notes that outside candidates can bring diversity. He also warns that you don’t want to limit succession plan options, sacrificing quality in the bargain.
“Promoting from within is really great for employee morale as long as you don’t get to a point where you’ve promoted someone into a position where they’ve become incompetent,” he said.