WHITEPAPER SERIES 16 Things Family-Run Businesses Must Know About Succession Planning: AN EECUTIVE OVERVIEW By Kayanne Framroze, M.Sc
16 Things Family-Run Businesses Must Know About Succession Planning: An Executive Overview By Kayanne Framroze, M.Sc. The GCC region, on average, identifies 75% of all businesses as family-run (John, 2011). Notwithstanding, and somewhat inexplicably, the importance of Succession Planning remains a critically under-discussed subject area within the context of the United Arab Emirates (U.A.E.). According to Nierada (2010), fewer than 30% of familyrun enterprises survive to the 2nd generation, fewer than 12% to the 3rd, with only a 3% survival rate to the 4th generation. Those that do survive, testify that the power progression from the first generation to the second, or from the second generation to the third, is not the seamlessly smooth transition it should be (John, 2011). Nierada (2010) stipulates that the two major reasons for families not retaining their businesses are as follows: First, uncomplicatedly, there is no qualified successor; Second, and somewhat more unfortunately, the enterprise experiences a lack of planning. Drawing parallels from the financial or estate planning industries, the longer one waits to create and implement an effective Succession Plan, the higher the risk that its goals will not be met. What are some of the key challenges facing family-run enterprises in the U.A.E.? What is Succession Planning, and how does it address Human Resource issues? What are the differences between Succession and Replacement Planning? What are the critical factors enabling and hindering effective Succession Planning? This white paper answers these questions, and in doing so, provides a starting point to assist decision-makers and HR specialists alike, consider the particulars of a practical Succession Plan. Key Challenges Facing Family-Run Enterprises In The U.A.E. Family-run businesses are faced with intimate histories, distinctive cultures, and characteristic hierarchal structures, which together create a unique set of challenges to be overcome (Evans, 2013; O Toole et al., 2013). Evans (2013), identifies generational transition, alignment of the family interests, balancing the financial returns, resolving interfamily disputes, and estate and inheritance issues as the 5 primary challenges within this specific context. As a response, the Middle East and North Africa (MENA) region has witnessed the increasing trend towards the use of specialist consultants, together with legal advisors, to facilitate the processes outlined below (O Toole et al., 2012): { Reducing owner liability to third parties, by introducing limited liability { Assisting with the disposal of the business, when the time comes { Facilitating the continuity of ownership of the business from one generation to the next, by separating holding and operating companies { Improving the corporate governance of the business, particularly as it evolves over generations { Reducing the business tax liability through tax planning { Enhancing the financial rating and credit risk of the business 2
What Is Succession Planning? Why Is It Imperative? Rothwell (2005, p.10) explains that Succession Planning is perhaps best understood as any effort designed to ensure the continued effective performance of an organisation, division, department, or work-group, by making provision for the development, replacement and strategic application of key people over time. Sometimes called succession management, highlighting the active and continuous elements of the effort, the process prepares people to meet an organisation s needs for talent over time: attracting the finest through recruitment, keeping the finest through astute retention systems, and refining the finest through directed talent development efforts. In the case of family-run enterprises, the key document may be a Family Charter, Family Protocol Document or Family Constitution, comprising rules and guidelines previously agreed upon by family members to run the business, segregating family matters (O Toole et al., 2013). How Does Succession Planning Differ From Replacement Planning? If you ask a business owner to define Succession Planning, there is a good chance that the term would be used interchangeably with Replacement Planning; the differences are, in fact, subtle. Replacement Planning assumes that the organisational chart is a static document, impervious to change over time. The process draws to a close with the identification of typically, 3 substitutes for all senior positions, with an indication of readiness for each individual (Rothwell, 2012). Figure 1 illustrates a Replacement Planning Chart. Figure 1: Replacement Planning Chart CEO VP Marketing VP Sales VP Services By contrast, Succession Planning draws its strength from its process-oriented nature, aimed at developing and grooming individuals, so that whenever the opportunity arises, the enterprise has an internal talent pool to choose from. 3
One therefore concludes, that while Replacement Planning fosters promotions within a silo, Succession Planning assists managers at all levels, to consider talent a cross the organisation as potential successors for positions immediately above them. In this way, each level within an organisation has a unique talent pool, unrestricted to specific positions at the next higher level. Figure 2 represents a Succession Planning Chart. Figure 2: VP Services VP Sales VP Marketing Talent Pool A B C D E F G H I > 1 year J > 1 year K > 1 year L > 1 year In the case of family-run enterprises in the U.A.E., it is wise to set one s sights beyond Replacement Planning, and look to Succession Planning, to: build the long-term sustainability and viability of an enterprise, ensure the continuity of the business after the founder s replacement, promote family harmony, enhance longevity and reputation of the family name, and to identify and retain the value of the family business (O Toole et al., 2012). Implementing a Succession Plan must be consultative in nature, and ideally begins from within the family. Transparent, open dialogue between family members is critical to successful negotiation, circumventing potential discord. Succession Planning: A 10-Step Strategy Systematic Succession Planning can be likened to the management of long-term organisational change. An effective plan must be positioned as a committed, long-term, strategic effort, to meet the talent requirements within an enterprise, as opposed to a short-term, panic-driven reaction, filling vacancies as they arise. Step 1: Clarify Expectations It is imperative to clarify, with the senior leadership within an enterprise the expectations and preferences for a Succession Plan; unloading the responsibility on Human Resources is a formula for disaster (Rothwell, 2012). Step 2: Establish A Competency Model A Competency Model provides the enterprise with a roadmap to build present talent for the future, and usually comprises a narrative of the knowledge, skills, attributes and other abilities that lead to exemplary performance. The Model is designed to describe what should be for each hierarchal level within the enterprise (Rothwell, 2012). Step 3: Individual Multi-Rater Assessment The concept behind the Individual Multi-Rater Assessment is to evaluate personalities against the enterprise s success-driving capabilities, with results highlighting the gaps between currently possessed competencies, and those demanded by organisational success (Rothwell, 2012). 4
Step 4: Performance Management Employees are not eligible for promotion or advancement opportunities, if their current performance leaves much to be desired; this is no secret. Objective measurement against current deliverables is only just, for a comparison between current competencies and deliverables demanded from the promotion, presents management with an apples and oranges comparison (Rothwell, 2012). Step 5: On-going Individual Potential Assessment Unlike past or present performance, potential assessment addresses the future. Establishing parameters that examine talent available for the future is critical to this stage of the Succession Planning process. On-going individual potential assessment aims to establish exactly that (Rothwell, 2012). Step 6: On-going Individual Development Planning Performance Management and Individual Potential Assessment, steps 4 and 5 respectively, aim to highlight the present and future gaps that exist for individuals, while On-going Individual Development Planning, step 6, intends to prepare them for the future, by narrowing that gap. Each individual, together with his or her immediate supervisor, is best equipped to create a development plan (Rothwell, 2012). Figure 3: Succession Planning: Step 7: Implement Individual Development Plan A 10-Step Strategy Plans are of little consequence unless implemented. In-house leadership development programs and competency menus provide individuals with specific development suggestions: books to read, classroom courses to attend, online courses to participate in, on-thejob assignments to seek out, and case study projects to analyse, all encouraging of refining existing competencies, while simultaneously building capabilities in new areas (Rothwell, 2012). Step 8: Establish A Talent Inventory Step 10 Continuous Evaluation Step 1 Clarify Expectations Step 2 Competency Model The trend of management having to find quality talent at short notice is ever increasing. To that end, the ease with which that information is readily available for engagement remains critical, whether it be short notice to fight fires, to seize opportunities, to rival the competition, or to fill vacancies (Rothwell, 2012). Step 9: Establish Accountability For The Succession Plan Step 9 Accountability Step 8 Talent Inventory Step 3 Individual Multi-Rater Assessment Step 4 Performance Management Individuals and their immediate supervisor must be held accountable for cultivating their talents over time, and narrowing developmental gaps. While financial incentives are a worthy motivator, an alternative presents itself in the form of periodic meetings between individual and manager, or manager and CEO or Board, to discuss development and implementation of individual plans (Rothwell, 2012; Goldsmith, 2009). Step 10: Continuous Evaluation Step 7 Implement Individual Development Plan Step 6 On-Going Individual Potential Assessment Step 5 On-Going Individual Potential Assessment The time-to-fill metric can be an effective measure of the time taken to fill a position with a qualified applicant. Productivity and opportunities may be lost when vacancies persist, compelling the process follow the ideology of Kaizen, and be evaluated as fluid, rather than static (Rothwell, 2012; Goldsmith, 2009). Following this 10-step committed, long-term, strategic effort, to meet the talent requirements within an enterprise, mitigates industry risk of the short-term, panic-driven reaction, to fill vacancies as they arise. Figure 3 illustrates the 10-Step Plan to effective Succession Planning. 5
The Don ts Of Succession Planning Just as prescriptive strategies are critical to Succession Planning, so too is avoiding potential sources of friction within the process, outlined below: Mistake 1: Current Success Does Not Necessarily Indicate Future Success An individual s success at a particular level is not a guarantee of success at a higher level; the competencies for success at each level of an enterprise, are different. It is important to separate thinking about someone s current performance, and his or her potential performance at a higher level (Rothwell, 2012). Mistake 2: The Boss Does Not Always Know Who To Promote Bosses are often self-interested players in the succession game; they have a stake in the outcome. Some bosses do not want to see their best people promoted for fear of an inability to replace them; others evaluate individuals based on similarity and identification, resulting in candidates unlike the boss being overlooked for promotion (Rothwell, 2012). Mistake 3: ou Are Not Entitled To A Promotion, ou Earn One Business decisions must be made based on the best man for the job, as opposed to greatest seniority; Employees must be reminded that the best way for them to compete, is to prepare for future challenges, rather than encouraging an entitlement mentality (Rothwell, 2012). Mistake 4: Too Much Too Fast Organisations today emphasize the need for quick results. Senior leaders expect the same of a Succession Plan, which is not always realistic. It is recommended to think of the process as phased organisational change, and approach it in much the same way (Rothwell, 2012). Mistake 5: Giving No Thought To The Name Any marketer worth his salt will tell you that product names do matter; it certainly is not necessary to call it as you see it. Leadership Development Program, Human Capital Management Program, Talent Program and the like, are all well-used and well-received euphemisms for Succession Planning (Rothwell, 2012; Goldsmith, 2009). Mistake 6: Not Everyone Wants A Promotion In many enterprises, individuals have witnessed, first hand, the kind of pressure their bosses are challenged with on a daily basis; some want no part of it. Simultaneously launching a top-down Succession Plan, and a bottomup Career Plan to galvanise development efforts, is increasingly the trend within family-run enterprises (Rothwell, 2012). Conclusion The world is faced with a discreet predicament of succession. Due to the fact that most family-run businesses differ in size and make-up, each family s business Succession Plan will vary. A plan tailored to the likes of the Al Tayer Group or the Al Futtaim Group will most assuredly not be effective for the likes of Right Selection or Jacobsons. Nevertheless, the research shows that regardless of the enterprise size or make-up, Succession Planning, by definition, must be a process rather than an event. Specifically within the U.A.E., some elements of Sharia Law require for careful planning. The good news is that there is a practical framework, which must be implemented correctly for organisations to establish and sustain systematic efforts ensuring that the right people are well positioned, to do the appropriate thing, at the appropriate time, so as to achieve optimal results. 6
About the Author Kayanne Framroze, M.Sc in International Business Management and International Marketing, with Distinction, is the Marketing Communications Manager at Right Selection, the Gulf s leading Speaker Bureau and Corporate Learning Entity, and a freelance writer and editor. A feature writer and editor at McGill University, where she graduated with a B.Com degree, Kayanne is a soon-to-be-published author; Her Masters Thesis, A time comes when silence becomes betrayal: The Indian expatriate perspective of Social Marketing, has been chosen to be co-published with Heriot-Watt University, in a peer-reviewed Academic Journal. Right Selection is one of the Gulf s Leading Speaker s Bureaus. Relentlessly providing the Best of the Best in learning experiences, we source revolutionary international business gurus and thought leaders for public seminars, private workshops and keynotes. Our goal is simple: to help you reach yours. www.rightselection.com Tel:04 4205599 The HR Summit and Expo is the Middle East s largest show dedicated to HR professionals in the region. Running for more than a decade, the show has grown to become the ultimate platform to feature the latest innovation, strategies, insights and international best practices by the most influential and respected HR leaders and practitioners from around the globe. Visit for more information. The HR Observer is the region s first of its kind initiative aimed at becoming a platform for HR professionals to exchange insights freely both online and offline in efforts to help develop the profession in the Middle East. Visit www.thehrobserver.com to know more. 7