By Karen E. Klein Most CEOs running fast-growing privately held companies plan to step down within a decade, but nearly half of them admit to having put little or no thought into succession planning, according to a new survey by PricewaterhouseCoopers. The PWC Trendsetter Barometer questioned 364 CEOs of companies generating revenue between $5 million and $150 million and found that 65% expect to move on in 10 years, but 24% of those say they have made few preparations for the transition (and 19% have done virtually nothing).
Are they too busy? Too wedded to their companies to confront the reality of retirement? And what should business owners be doing to prepare their companies for the inevitable? Smart Answers columnist Karen E. Klein put those questions and others to Warren Cinnick, a retirement-planning guru with the San Jose (Calif.)-based Saratoga Institute, a subsidiary of PricewaterhouseCoopers. Edited excerpts of their conversation follow:
Q: The PWC survey found that only 22% of CEOs have performed a great deal of succession planning, while 26% say they've done some planning. Are we seeing a major case of denial here?
A: There's clearly an emotional bond between these CEOs and their companies. The passage of leadership includes letting go and also thinking about letting go, and that can be difficult for many people to do. The other thing going on is that all companies struggle with identifying talent in the pool of potential successors. The larger corporations might identify three candidates, but the smaller companies don't have that many people around who could take over one day.
Q: The survey also showed that more CEOs say they're prepared for disability than for voluntary succession. Why is that?
A: Well, preparing for disability or death basically involves buying an insurance policy or making out a will. It's much easier than identifying a successor and developing that person over three to five years. After all, assessing a human being, whether it's a family member or a business associate, is a tough thing to do. And in a small company setting, it can also be a kind of scary thing to do.
Q: What should business owners start doing now?
A: It's important for them to come up with a target date for passing leadership. If they're going to retire a year from now, the chance of developing someone in-house to take over as CEO is slim. You're better off hiring someone from outside the company to take your place.
If you're talking about retiring five years out, you do have time to do the training, shaping, and testing of an in-house replacement. And by the way, even that step isn't easy. For some people, picking a retirement date is a little like putting a number on their tombstone.
Q: Once you have a date in mind, what's next?
A: This is where you have to get into some forward thinking. For instance, what will the position require at that target date you've set? How will the economy and the marketplace have changed by then? How will your company change by then?
You may be planning to launch two more products or open a new factory by that time. Your strategic plan may show that the company will grow 50%. What kind of competency and character will your replacement need to handle this future company in this future environment?
These are complicated questions, so I'd recommend that you get objective help in answering them. If you're trying to think of all of this yourself, emotion often gets in the way of a good decision-making process.
Q: Once your plan is in place, how do you go about choosing someone to begin grooming?
A: Start thinking about whether you have someone currently in your employ or perhaps in your family who could rise to this task. Again, outside input is very important here. Talk to your family members and your loyal employees about it, and ask for suggestions. The scary part for entrepreneurs is when they don't see any likely candidates emerging and start to panic. That really heightens the urgency, and they start to wonder how they are ever going to exit the company. Most of them don't want to hang in too long and watch their own skills erode over the years.
Another thing to consider: Entrepreneurs are often fundamentally different personality types than ongoing managers. The successful ongoing manager tends to be more analytical and probably a bit more of a consensus-builder than the founder.
Q: It's interesting that you'd mention talking about the process to employees and family members. Is it smart to discuss this before it happens?
A: Yes. It's a good idea to announce that you're going to go through a process of systematically thinking about succession. That lets the people in the company and your vendors and customers and others know that you're moving forward and starting the process. You don't want to sneak up on everybody with this decision. You want them to know that a thoughtful process is taking place.
Q: Once you have a candidate in mind, what else needs to be done?
A: You need to decide what kind of development this person needs before she or he can take over. What gaps exist in their education or experience? Do they need schooling or training? Is there an assignment you can give them that will familiarize them with an aspect of the company or the market that they don't know well enough now?
Establishing a mentoring relationship with this person is highly recommended, and you can find coaching clinics, networks, and techniques to follow quite easily. I'd recommend that you give a little rope to your successor.
Q: When you get close to the target date, what are the priorities?
A: You need to decide exactly how the transfer of leadership will take place. That involves a lot of details best handled by professionals who can draw up contracts and handle the financial relationships. You also need to decide how to announce the transfer and what your role will be post-transfer. All those details should be worked out well ahead of time.
My recommendation, generally, is that if you're exiting the company, it's best to make a clean break. Hanging on doesn't necessarily help the new leaders assert themselves, so make sure you really give them the reins and let them take over. Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues