Why Succession Planning Matters

Viacom Chairman Sumner Redstone, 84, isn't the only corporate leader who's not ready to designate an heir apparent

Few would say Sumner Redstone is an ineffective business leader. But Redstone, who is chairman of both Viacom (VIA) and CBS (CBS), and presides over his family company National Amusements, which owns a controlling stake in both companies, is struggling—some would say spectacularly—with one critical component of family business leadership. With the recent news that he is reportedly asking his daughter and longtime heir apparent, Shari, to leave Viacom, it seems that even the famously shrewd Redstone has once again been outdone by the demands of succession planning.

Redstone has already driven his son from the business, a conflict that was settled in 2007 when he paid his offspring $240 million to relinquish his claims. And now the 84-year-old appears ready to force out his last, carefully cultivated candidate for keeping the family business in the family (see BusinessWeek, 8/6/07, "Redstone: 'Legacies Are for Dead People'").

There are good reasons why succession planning is one of the most challenging to-dos on a family business owner's checklist. To begin with, the stakes are high—so high in fact, that most family businesses fail to negotiate the transition and are sold either to pay taxes or because no one in the family is willing or able to take over. Additionally, the communities of stakeholders involved in the process can be numerous and are often in conflict.

It's Not Just a CEO Thing

To adequately prepare for succession, you should evaluate the skills and attitudes of everyone in the organization who is a candidate for a leadership position. Everyone? Yes, because the CEO isn't the only position that requires succession planning. If a company suddenly loses its chief information officer, chief financial officer, or another key player, it can be nearly as drastic as an unexpected vacancy in the president's office. That's because typically staffers are required to maintain their previous responsibilities in addition to taking on jobs delegated from their bosses, in a chain of cascading delegation that may directly affect everyone in an organization, even through only one position has been replaced.

And this look at the complexity of succession planning hasn't mentioned the matter of family dynamics. Planning for succession has to take into consideration family members' personal conflicts that can date back decades. For instance, the Redstones' falling-out may have started when Sumner divorced his wife of 50 years, a move that reportedly did not please his daughter.

Finally, succession planning isn't something you can do once and forget. To be a conscientious family business leader, you have to continually revisit your plan, reviewing and updating it to reflect changes in company value, market conditions, and your own health as well as the abilities and passion of the people you plan to pass it on to. To return to the Redstone example, planning for succession at one time appeared to be a completed project at Viacom, with Redstone visibly grooming his daughter to take over. But circumstances changed, and now so must the succession plan.

Too Many Offspring May Want the Job

Small wonder, then, that the vast majority of family businesses do not have written succession plans at all. Even when it comes to companies with current leaders nearing retirement, most haven't formally addressed succession.

Family business advisers have developed a reliable and workable strategy for succession planning. It starts by insisting that you start planning early—even if the leader doesn't anticipate retiring for a decade. Begin by realizing that succession entails three aspects: management, ownership, and taxes.

Owners need to plan for who's going to run the company, who's going to own it, and how taxes will be kept in check. Each will require different planning techniques, and trade-offs are inevitable.

Management succession planning frequently faces the problem of too many offspring wanting the top job. When that happens, current leadership often has to dispense with the ideal of giving everyone equal power and offer controlling interest to the person or persons best prepared. On the other hand, it is possible that no one from the next generation is interested in or capable of leading. In that case, you may have to go outside and find the best-matched candidate—which requires a very different skill set.

Saving the Life of a Business

Ownership succession is usually split from management succession because next-generation members may want to retain their equity in the business, but not take on significant operating roles at the company. You may want to give exactly equal shares to everyone, but those who work in the business may feel they are entitled to more. Likewise, those who don't work in the business may feel the same way about their own shares. After all, they may reason, they're not drawing salaries, so they should get a bigger share of dividends and profit-sharing.

Tax planning means dealing with technicalities. Various documents and structures, ranging from trusts to buy-sell agreements to appropriate insurance, will likely reduce taxes or provide resources to pay them or both. While it may seem macabre to plan so carefully for what may turn out to be the founder's unexpected death, the importance of tax planning cannot be understated. A few dollars and a few hours drawing up the right documents today can literally save your business' life later (see BusinessWeek SmallBiz, June/July 2007, "Creating a Legacy").

Upon gaining an appreciation for the complexities and significance of succession planning, you are ready for the next step: involving others. Bring the family into the planning. Getting the heirs in now will reduce the likelihood of problems later. Moreover, consider talking to key nonfamily employees, important stakeholders, and professional advisers. Getting broad support will make all the difference during the unsettled period surrounding a business transition.

Having a Clear Leader Is Key

When talking to others about succession, realism must be your foundation. This is no time for wishful thinking, hoping that an uninterested or incapable son or daughter will suddenly become full of passion and business skills. Objectively evaluate—ideally with the help of knowledgeable outsiders—candidates for their experience and potential. After this tough decision, take the systematic steps to pass the reins of leadership. This may take some time, but remember, the best successions are those that end with a clean and certain break. In other words, after you give up the reins, get off the wagon.

Don't get too caught up in fairness and equity. Sometimes the best thing for everyone is to have a clear leader in whom the most power is vested. As part of your realistic evaluation, decide whether it's best to have equal shares of ownership and influence for everyone, or whether the potential for conflict will make it better to have someone who can make decisions without waiting for consensus.

Now it's time to develop the next generation. Set objective standards for the skills and experience the job will require, then promote the candidates' education and work experience, both inside and outside the family business. This step in particular may require several years, which is why it's important to start planning now.

Get Professional Help

Finally, seek outside help. Even if you would never use an outside adviser for any other decision, consider the value that an experienced professional can bring to this important event. In case you balk at the possible expense or the distraction on top of your other duties, consider that poor succession planning is more likely to sink your company than any other risk. And just by doing it you'll place yourself in an elite group. Unlike the vast majority of those who ignore succession planning, you'll be working to reap the rewards of succession in a different and smarter way.

Unlike Sumner Redstone, you may never preside over an $8 billion empire. But your business life does share one common element with Redstone and all other leaders of family businesses: the puzzle of planning for your own succession. And, as Redstone's latest troubles illustrate, no time is too early to start considering this issue and building your skills, because you may be doing it—again and again—even when you're nearly 20 years past traditional retirement age.

Before it's here, it's on the Bloomberg Terminal.