*This blog post is part of a series featured in NCACPA’s quarterly publication, Interim Report.*
By David Peters, CPA
In business, leaders are important. An organization’s ethics, business practices, and culture are often a product of those in charge. The term “tone at the top” is often used to describe this phenomenon. It means that the organization itself is merely an outgrowth of the executives running it. Perhaps this is why succession planning is such a frightening proposition for so many companies. The thought of new leadership shakes the very core of the business. It makes us wonder if even the most fundamental aspects of the company will change.
There can be no doubt that picking a new leader is a vitally important task, and something that we should do the best job possible with. After all, tone at the top is an idea that is alive and well in organizations today. The future of a company is in the hands of its leaders. However, the decision is so big, it is tough to know where to start. While every organization is different, there are some basic questions that nearly all organizations have to deal with. Here are three of them:
Inside or Outside Succession?
Perhaps the first question that any firm needs to answer is whether to look inside or outside the organization for new leadership. Regardless of the industry, it seems that many companies strive to name new leaders from within the organization, rather than to sell the business or bring in someone from the outside. The appeal of promoting from within may be due to an effort by those in charge to try and maintain the corporate identity and culture they have established. They may feel like there is less chance for the business to undergo negative change after the new leader steps in, if a current employee fills the new leadership role.
While this may be a comforting thought, internal succession may only be a viable option for larger organizations with the resources to do it. Older academic research by Dalton & Kesner (1983) showed that incidences of outside succession are nearly twice as high on a percentage basis for smaller non-NYSE traded firms, as opposed to larger NYSE traded firms. While the authors make no specific conclusions as to why this is, they speculate that it may be due to the fact that larger organizations are more complex than smaller ones, and only someone who has come from within the organization can understand all the nuances of it. Also, bigger organizations may simply have the resources necessary to have executive training programs. Similarly, a more recent survey of CPA firms found that only 6% of sole proprietors have practice continuation agreements in place. The same survey found that 25% of multi-owner firms with 3 to 7 full-time employees had succession plans in place, compared with 86% of firms with 101 to 200 employees. This low percentage among smaller organizations would seem to indicate a lack of preparedness and ability to promote from within. If they can’t promote from within, these firms would seem to have no other choice but outside succession.
Why is this important? Regardless of whether an organization chooses to pursue inside or outside succession, it changes the game. With inside succession, the timeframe is generally much longer. The organization has to begin identifying potential leaders and training them. This means investing money in succession now. Outside succession is a shorter time frame, but the concern of maintaining a high price point for the firm comes to the forefront. This can be an especially troubling issue for smaller firms who have much of their reputation and intellectual capital tied up in a departing principal owner. In these cases, the owner is the company’s biggest asset. The question becomes, “How the business can remain attractive in the eyes of potential buyers after its largest asset is gone?” Aside from the intellectual capital leaving, the current owner may also have close ties with customers, vendors, or other business parties. If there is a chance that these valuable partners may sever their relationship with the firm upon the current owner’s departure, this may also cause the firm to lose value. Finally, health issues of the owner can also drive down the price of a firm, as potential buyers will see the sale as one made out of necessity. In short, outside succession necessarily involves a much different corporate strategy than inside succession. For this reason, firms who want to give serious consideration to bringing up a leader from within the organization should consider this question sooner rather than later. If they wait too long, outside succession may be the only option.
Is a Formal Leadership Training Program Really Necessary?
For smaller companies specifically, it may be tempting for businesses to argue that formal leadership training may be unnecessary. Smaller organizations may prefer to simply have the new leader-to-be spend more time with the current owner in an informal shadowing type of relationship. While at first glance this may seem like a viable solution, it largely ignores many of the natural tendencies of a leader that is transitioning out of an organization. A review of research on family business succession by Handler (1994) points to current family business owners’ tendency to feel indispensable to an organization. In other words, smaller business owners often feel that they are the business, and therefore, they are reluctant to train their successors. Furthermore, there may be significant resistance among next generation leaders of family business. A more recent article by Samei & Feyzbakhsh (2016) cites several academic studies which point out that failures in family business succession are often linked to inadequate nurturing of new leadership within the family. Simply put, a formal executive training is necessary to keep current owners from inadvertently sabotaging the overall succession efforts. They help keep the organization moving systematically and deliberately towards succession.
However, while the presence of an executive training program may keep succession on the forefront of a company’s mind, it is not enough. The quality and skill sets that are addressed within the training program are vital to the new leader’s success. A comprehensive study by Hall (1986) suggests that even among bigger companies with formal executive training programs, there is a tendency to focus too heavily on administrative tasks. In other words, we have a tendency to show new leaders only what to do, instead of trying to show them how to think. Therefore, the key to building an effective leadership training program would seem to be integrating a mix of task-oriented and strategic skills—not only showing the new leader how to run the board meeting, but also how to think through the larger problems of the company. One potential way to do this would be to have the current leader of the organization present significant decisions he/she has made recently in case study form to the incoming leader. Such a method would provide the opportunity for discussion, and give the current leader a chance to explain his/her reasoning. It would go beyond shadowing, and more towards developing strategic thinking.
How Do We Communicate the Leadership Change?
It would seem only natural that large scale organizational change would be a time of reflection for employees, as well as the company as a whole. A recent Harvard Business Review (2016) article points out that instances of employee resignation tend to increase during times of reflection, such as annual reviews. While the article does not specifically mention anything about employee reaction to succession, it would seem to make sense that given these results, new leadership could potentially cause significant changes in the employee make-up of the company. In order to avoid a mass exodus of employees, communication of the leadership change would seem to be crucial. If employees are looking at the leadership change as something that is a forward-looking and exciting event, they are more likely to perceive the change positively. It would also seem to be important to communicate the change to employees early in the process. If employees are given the opportunity to ask questions and freely express their feelings in regard to new leadership, they are more likely to react predictably and positively once the change actually takes place. Simply put, people generally don’t like major changes to be a surprise. Since good succession planning takes place over a number of years, there is no reason to make a leadership change a surprise to anyone!
The reason that succession feels so overwhelmingly large is because no other decision that an organization makes so intimately connects and involves all aspects of the business. While there can be no doubt that taking care of the practical aspects of succession, like buy/sell agreements and partner agreements, is important, the strategic questions identified above are fundamental. How an organization answers these questions dictates all the future steps they will take in the succession process. While there are many questions to be answered after these, they set the organization off on the right path for successful transition.
- Amato, N. (2013). Succession Planning: The Challenge of What’s Next. Journal of Accountancy, 215(1), 44-47.
- Dalton, D. R., & Kesner, I. F. (1983). Inside/outside succession and organizational size: The pragmatics of executive replacement. Academy of Management Journal, 26(4), 736-742.
- Hall, D. (1986). Dilemmas in Linking Succession Planning to Individual Executive Learning. Human Resource Management, 235-265.
- Harvard Business Review. (2016, September). Why People Quit Their Jobs. Harvard Business Review, pp. 20-21.
- Handler, W. C. (1994). Succession in family business: A review of the research. Family Business Review, 7(2), 133-157.
- Lansberg, I., & Astrachan, J. H. (1994). Influence of family relationships on succession planning and training: The importance of mediating factors. Family Business Review, 7(1), 39-59.
- Samei, H., & Feyzbakhsh, A. (2016). The Effect of Mentoring on Successor Nurturing in Family Businesses. Journal of Entrepreneurship, 25(2), 211-231.
The information discussed herein is general in nature and provided for informational purposes only. There is no guarantee as to its accuracy or completeness. Nothing in this article constitutes an offer to sell or a solicitation of any offer to buy any type of securities.
Registered Representative of and securities offered through Cetera Advisors Network, LLC, Member SIPC/FINRA. Advisory services offered through Carroll Financial Associates, Inc., a Registered Investment Advisor. Carroll Financial and Cetera Advisors Network, LLC, are not affiliated.
David Peters, CPA, is the Strategic Relationship Manager and Financial Advisor for Carroll Financial Associates, Inc., in Charlotte. Prior to his current role, he was instrumental in establishing two start-up companies—Elephant Insurance Services and Compare.com. David has over ten years of experience in tax preparation, finance, and insurance, and holds four graduate degrees, including an MBA in investments from Virginia Commonwealth University and a master’s degree in taxation from the University of Illinois. He is also an adjunct professor in accounting, insurance, and ethics, and is a doctoral student in financial planning.