Founding and growing a business is one thing, but passing the baton is just as important. In private and family enterprises, it’s essential to think of the future first.
Many small-to-medium enterprises and family businesses share a common risk – a lack of succession planning. It is easy for founders or chief executive officers to get so focused on day-to-day operations that they fail to consider future leadership.
KPMG Partner Dominic Pelligana is adamant that a succession plan is vital for a sustainable business model. Presenting his discussion, ‘Private Enterprise: Identifying the Succession Pipeline’, at the Australian Governance Summit 2016 on March 4, he said both owners and boards must face this issue.
“Succession planning is about developing a pool of capable leaders…get people wrong and you put the business’s ability to perform at risk,” he said.
In its simplest form, strategic planning involves setting a clear plan and then aligning an organisation to execute that plan. That is, it requires a plan and capability.
It is also important to understand and align where the owners, the board and management believe the organisation is in its lifecycle, and the leadership style required. Only then can it have a meaningful conversation in relation to strategic planning and developing and/or acquiring the capabilities (succession planning) required to execute the plan at the board and/or management levels.
Pelligana described succession as the orderly transfer of management (the CEO), control (the board) and equity (ownership) to the next generation.
For company founders who have a business in their bones, he recognised that it can “take a bit of humility to step aside and let another CEO take over the business”.
However, getting succession on track can actually help a founder grow their business without fear of losing control and suffering burn out.
He said signs that a business is off track to succession include a lack of awareness of issues and challenges, a lack of goal alignment and trust, and inability to separate from a focus on operations to future management. In family business, another poor sign is blurring the best interests of the business with interests of the owners or family.
Signs that a business is on track include awareness of the issues and challenges, having inside and outside perspectives, and strong alignment on the key issues and context. Clear plans for the transfer of management, control and ownership are essential, along with the trust and commitment to follow the plan.
The key is to build a leadership team that complements the founder’s entrepreneurial strengths, along with professional management capabilities, Pelligana said. Boards need to be active in this process, helping to align activities to the future vision.
Succession in family business can be unique due to the competing expectations of the founders and subsequent generations.
“People say it’s the third generation [that lets a family business down], but I think the first generation hangs on too long,” he said.
Pelligana said the first generation of family business is generally “all about survival”, the second is usually about establishing professional management systems, and the third is often about financial strategy.
“How do we allocate capital…are we all in?” he said.
Following Pellagina’s presentation, he spoke to Claire Mackay and Tim Mackay, siblings who are Principals of Sydney-based family business, Qantum Financial. Their father, Bill Mackay, set it up in 1994 and is now the Chairman.
Fortunately for succession purposes, Claire and Tim shared their father’s passion for financial management, but Bill did not immediately grant them a place in the company.
“He [Bill] wouldn’t let us in the business until we had worked elsewhere – he wanted us to make our mistakes elsewhere,” said Tim Mackay.
They said succession has been a key focus for the family and they have “everything in writing” in regard to future ownership. However, they regularly revisit the plan to ensure their goals remain aligned. The siblings commented that they didn’t want a succession plan that “relied on an 11 year old to run the company”, recognising that the third generation may not be inclined to take on the business.
“It is about embracing the legacy – but taking it forward,” they agreed.
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