You’ve put your time, energy and passion into building a successful business and it is well-established in the community, the region or maybe the world. One reason you keep the business family-owned is that you hope to pass it on to future generations. It’s a significant part of your legacy.
Unfortunately, nearly all family businesses fail within four generations, with a super-majority failing by the first leadership transition. In fact, the Family Business Institute reports that “only about 30 percent of family-owned businesses survive into the second generation, 12 percent are still viable into the third generation, and only about 3 percent of family businesses operate into the fourth generation and beyond.”
Renowned business author John C. Maxwell said, “Everything rises and falls on leadership.” There is no more important factor in the longevity of your business than the selection of its next CEO. And yet, most family businesses are getting it wrong. The significance of this cannot be overstated, and it is a global problem.
In a recent Harvard Business Review article, global consulting firm Egon Zehnder revealed its findings from a study of 50 of the world’s most successful family-owned businesses. Egon Zehnder found that the best businesses brought “discipline to top-level succession.” They also found that a lack of discipline in leadership succession leads to disaster. A study cited by Egon Zehnder found that over 200 family businesses lost, on average, 60 percent of their value within eight years after a CEO change.
Egon Zehnder’s study found that most family businesses fail to follow a “structured selection process” for new leaders. Instead, one leader “intuitively chose” the successor, and the boards merely signed off on that choice. Almost 30 percent of the businesses in the study considered only one candidate to take the helm. Family businesses are, therefore, failing to even consider some of the best talent available. Avoid the one-man selection committee.
The good news: firms that are deliberate and clear about their leadership selection processes energize their workforce and land the best external candidates. To paraphrase the Harvard Business Review article, the following steps constitute a robust CEO succession planning process:
- Family and board members discuss possible succession scenarios
- Stakeholders meet to design the succession process
- All leaders collaborate to create an ideal CEO profile
- Compile a long list of internal and external candidates fitting the profile
- Narrow the list of candidates through interviews, obtain references for finalists
- Make sure all leaders agree on the final candidate
- Appoint one person to conduct contract negotiations with the candidate
- The successor establishes an agenda for the first six to12 months
- The successor selects his or her top management team
- Conduct a 360 degree feedback review of the CEO after 12 months
- Create a development plan to meet business targets within 24 months
- Discuss renewal of the successor’s contract
- If a contract renewal is unlikely, repeat this process
This CEO selection process is not impossible, but it requires focus and discipline.
Once you have a process in place, communicate the relevant details to your candidates, including a hiring timeline and the core competencies of your ideal candidate. An unclear selection process leaves candidates feeling unsure about your company. That will cost you an opportunity for the best talent. Moreover, it leads to disengagement and distrust among your internal candidates. If your business’s emerging leaders see a haze around your leadership selection processes, they will lose motivation, and you might lose them to a more transparent or predictable competitor.
It’s time to put a succession plan in place, and we can help. Several attorneys in Warner’s Trusts and Estates Practice Group have vast experience assisting family businesses with proper succession planning. We produce the necessary documents, facilitate productive meetings and work to build consensus among diverse stakeholders. We stand ready to assist you in preserving and passing along your legacy of success.